U.S. International Taxation of Telecoms analyzes the U.S. federal income tax treatment of entities engaged in providing telecommunications infrastructure and services, services provided by both traditional telecommunications companies and by newly emerging technologies, including Internet Service Providers and Internet Telephony Providers.
Written by Marc D. Ganz, Esq., Ernst & Young, this Portfolio provides an overview of the various types of telecommunications service providers, the services they provide, and the main regulatory bodies responsible for shaping global telecommunications policy.
This Portfolio also provides a historical discussion of the U.S. telecommunications industry and a summary of the recent trends in international deregulation of the telecommunications industry, including the Telecommunications Act of 1996 and the World Trade Organization's Basic Agreement on Telecommunications.
U.S. International Taxation of Telecoms examines the telecommunications tax issues surrounding permanent establishments and U.S. trade or business concepts, particularly the U.S. sourcing rules on Space and Ocean Income and International Communications Income under §863(d) and (e) respectively. This Portfolio also analyzes the depreciation issues surrounding both wireline and wireless assets, the excise tax on “communications services” as defined by §4251, and the qualification of certain telecommunications assets as real or personal property.
In addition, this Portfolio provides a general discussion on the application of basic provisions of income tax treaties between the United States and foreign jurisdictions to telecommunications businesses, and it identifies some federal income tax provisions that may raise interesting interpretative issues for telecommunications companies. Where interpretations of foreign law suggest possible interpretations of the provisions of U.S. federal income tax law or income tax treaties between the United States and a foreign jurisdiction, reference to the foreign law interpretations may be made.
This Portfolio concludes with a discussion of the taxation of Indefeasible Rights of Use on dark and lit fiber and an examination of the Subpart F consequences of income from Indefeasible Rights of Use Agreements on dark and lit fiber owned by controlled foreign corporations.
U.S. International Taxation of Telecoms allows you to benefit from:
This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.
Detailed Analysis
I. Introduction
Introductory Material
A. Topics Covered in this Portfolio
1. Telecommunications Services or Infrastructure Providers
a. Telecommunication Services
b. Types of Entities
c. Converging Businesses
2. Taxes Discussed in this Portfolio
a. Federal Income Taxes and Income Tax Treaties
b. The Federal Communications Excise Tax
c. State and Local Taxes and Telephone Fees
B. General
1. Interplay of Complex, Technological and Rapidly Evolving Business and Tax Rules
2. Necessity of Understanding Nature of Business
3. Telecommunications Terminology
4. General Sources of Information on Telecommunications Industry
C. Issues for Telecommunications Companies
1. Code and Income Tax Treaties Predate Rapid Technological and Operational Changes in Telecommunications Business
2. Income Derived from Several Categories of Activities
3. Communications Services Provided in Jurisdiction in Which Facilities and Personnel Are Not Located
4. Difficulty in Determining Location of Facilities over Which Telecommunications Are Transmitted
II. Overview of the Telecommunications Industry
A. Telecommunications Service Providers
1. Traditional Telephone Companies
a. Domestic
(1) Long Distance
(2) Regional Bell Operating Companies
(3) Competitive Local Exchange Carriers
b. Foreign
c. Wireless Service Providers
(1) Mobile Telephone Users
(2) Cellular Telecommunications Technology
(3) Cellular System Assets
(a) Wireline to Mobile Telephone Call
(b) Mobile-to-Mobile Telephone Call
(4) Description of a Cell Site
2. Resellers, Switchless Resellers and Agents
a. Resellers
b. Switchless Resellers
c. Agents
3. The Internet and Internet Service Providers
a. The Internet
b. Internet Service Provider
(1) Gateways
(2) PC-to-Telephone Services
(3) Telephone-to-Telephone Gateway Services
4. Cable Companies
III. Types of Services
A. Telecommunications Services
1. Telecommunications Services Defined
2. Voice Services
3. Wireless Services
a. Advanced Mobile Phone Services
b. Digital-Advanced Mobile Phone Services
c. Personal Communications Services
d. Smart Devices for Internet and Remote Access
e. Wireless Local Loop
f. Paging
g. Low Earth-Orbiting Satellite Networks and Middle Earth-Orbiting Satellites
h. Time Division Multiple Access and Code Division Multiple Access
B. Data
C. Broadband
D. Video
E. Videoconferencing
IV. Overview of the History of the U.S. Telecom Industry
A. The Communications Act of 1934
B. The Break-Up of AT& T
1. The Modification of Final Judgment
2. Approval of the MFJ
C. The U.S. Telecommunications Industry - 1984 to 1996
D. International Telecommunications Services Licensing
1. Licensing Before the Market Entry Order
2. The Market Entry Order
3. International 214 Streamlining Order
4. The Foreign Participation Order
5. 1999 Licensing Reform Order
E. International Settlements Process
1. Background
2. Tromboning
3. Regulation of International Accounting Rates
V. Telecom Regulatory Organizations
A. The FCC
B. The WTO
2. Telecommunications Regulatory Policy
C. The ITU
3. Telecommunications Tax Policy
a. The Melbourne Agreement
b. Application of the Melbourne Agreement
(1) The United States
(2) The United Kingdom
(3) Australia
(4) Switzerland
(5) France
D. The OECD
VI. Trends in International Deregulation
A. Introduction
B. The Telecommunications Act of 1996
1. Telephone Service
2. Telecommunications Equipment Manufacturing
3. Cable Television
4. Radio and Television Broadcasting
5. The Internet and Online Computer Services
C. The Basic Agreement on Telecommunications
2. Overview of the BAT
3. U.S. Response to the BAT
VII. Taxation of Internet Providers & E-Commerce
A. The Treasury White Paper
1. Neutrality
2. Residence-Based Taxation
3. U.S. Trade or Business & Permanent Establishments
B. The Clinton Administration
C. The OECD
1. In General
2. The Technical Advisory Groups
D. The WTO
E. The European Union
VIII. Overview of Certain International Joint Ventures
A. Wireline Alliances
1. Concert Communications Company
2. Equant
3. Infonet Service Corporation
4. Unisource
5. WorldPartners
B. Infrastructure Consortia for Submarine Cables
C. Satellite Communications Services
1. Intelsat
2. Inmarsat
3. COMSAT
IX. Permanent Establishment and U.S. Trade or Business
A. Permanent Establishment
1. The Debate
2. The Definition of Permanent Establishment
a. The OECD Model Treaty
(1) Pre-Commentary Changes
(2) The Commentary Changes
b. The United States
(1) In General
(2) The U.S. Model Treaty
(a) Telecom Equipment
(b) Fiber Optics and Copper Wire Cables
(i) Lit Fiber
(ii) Dark Fiber & Copper Wire Cables
(c) Automated Equipment
c. Non-U.S. Definitions
(1) Germany - the "German Pipeline" Case
(2) Switzerland
3. Attribution of Profits
B. U.S. Trade or Business
X. Source of Income
A. Importance of Source of Income Rules
1. Domestic Corporations
2. Foreign Corporations
3. Controlled Foreign Corporations
B. Characterization of Income
1. General
2. Services Income
a. General
b. Distinguishing Personal Service Income from Other Types of Income
(1) Service Income vs. Income from Sale or License of Property
(2) Service Income vs. Transportation Income
(3) Service Income vs. International Communications Income
(4) Service Income vs. Income from Space or Ocean Activities
3. Rental and Royalty Income
4. Sales of Property
a. Personal Property
(1) Non-Depreciable/Non-Amortizable Tangible Personal Property
(2) Depreciable/Amortizable Tangible Personal Property
(a) Gain Not Exceeding Depreciation Adjustments
(b) Gain Exceeding Depreciation Adjustments
b. Real Property
5. Sales of Inventory
6. Space and Ocean Income
a. Background
b. Space and Ocean Income in General
(1) Taxpayer Must Conduct Activity Directly
(2) United States Persons
(3) Foreign Persons
(a) Foreign Persons Engaged in a U.S. Trade or Business
(b) Controlled Foreign Corporations
(c) Partnerships
c. Source Rules for Sales of Certain Property
(1) Purchased Property
(2) Produced Property
(a) Production Only in Space or International Water
(b) Production Within and Without Space or International Water
(c) Property Produced Outside Space and International Waters
d. Source Rules for Income from Services
e. Taxable Income
f. Definition of Space and Ocean Activity
(1) General Rules
(a) Space Activity Defined
(b) Ocean Activity Defined
(2) Activities Not Considered Space or Ocean Activity
(3) Special Rules in Determining Space or Ocean Activity
g. Reporting and Documentation Requirements
7. Communications Income
b. Statutory Language
c. Legislative History
d. Treasury Regulations
e. Detailed Analysis of § 863(e) and Regs. § 1.863-9
(1) International Communications Income
(a) Definition of "International Communications Income"
(i) General
(ii) Transmission
(iii) Communications
(b) Source Rules for International Communications Income
(i) U.S. Persons
(ii) Foreign Persons
(A) Controlled Foreign Corporations
(B) U.S. Fixed Place of Business
(C) U.S. Trade or Business
(2) Other Communications Income
(a) U.S. Communications Activity
(b) Foreign Communications Activity
(c) Space/Ocean Communications Activity
(3) Taxable Income
(4) Definition of Communications Activity and Income Derived from Communications Activity
(a) Communications Activity
(b) Non-De Minimis Communications Activity and the Separate Transaction Rule
(c) Income Derived from Communications Activity
(d) The Paid-to-Do Rule
(5) Partnerships
(6) Reporting Rules and Documentation Requirements
(7) Overlap of Space and Ocean and Communications Activity
(8) Source and Other Consequences of Communications Income Involving Space and Ocean Activity
C. United States
XI. Federal Tax Treatment of Assets Used in the Telecom Industry
B. Tangible Personal Property
1. Overview
2. Telephone Communications Assets
a. In General
b. Telephone Central Office Buildings - Asset Class 48.11
c. Telephone Central Office Equipment - Asset Class 48.12
d. Computer-Based Telephone Central Office Switching Equipment - Asset Class 48.121
e. Telephone Station Equipment - Asset Class 48.13
f. Telephone Distribution Plant -Asset Class 48.14
3. Certain Property Used in Wireless Telecommunications
a. Introduction
b. Asset Class 48.121 - Computer-Based Telephone Central Office Equipment
c. IRS Approach
C. Conclusion
XII. Communications Excise Tax
A. Overview
1. Taxable Persons
2. Amounts Paid
3. Payment of the Communications Excise Tax
B. Communications Services
1. Local Telephone Service
a. Telephonic Quality Communication
b. Services
(1) Radio-Telephone Systems
(2) Telephone Directory Listings
(3) Public Announcement Services
(4) Payments for Services
c. Equipment
(1) Telephones
(2) Miscellaneous Types of Equipment
d. Exempt Local Telephone Services
2. Toll Telephone Service
a. Time and Distance Requirement of § 4252(b)(1)
b. Payments Within or Without United States
c. International Call Back Services
d. Wide Area Telecommunications Services
e. Virtual Private Networks
3. Teletypewriter Exchange Service
4. Private Communications Services
a. Separate Billing and Records Requirement
b. Particular Private Communications Services
c. Particular Equipment
C. Prepaid Phone Cards
1. Introduction
2. Dollar Cards
3. Tariffed Unit Cards
4. Untariffed Unit Cards
5. Examples
D. Codified Exemptions to the Communications Excise Tax
1. Coin-Operated Service
2. News Services
a. Generally
b. Radio Programs
c. News Ticker Services
d. Other News Services
3. International Organizations
a. Specified International Organizations
b. Exemption Certificate
4. Servicemen in Combat Zones
5. Previously Taxed Income
6. Common Carriers and Communications Companies
a. Common Carriers Defined
b. Communications Companies Defined
c. Broadcasting Companies
7. Installation Charges
8. Nonprofit Hospitals
a. Nonprofit and Profit Making Entities Sharing Service
b. Psychiatric Care Facilities
c. Organizations with Facilities Outside the United States
d. Other Organizations and Programs
9. State and Local Government
b. Educational Agencies
c. Fire and Ambulance Services
d. Municipal Associations
e. Poverty and Housing Agencies
f. Other Governmental Agencies
10. Nonprofit Educational Organizations
a. Universities
b. Religious Institutions
c. Day Care Centers
d. Theater Groups
e. Miscellaneous
11. Foreign Diplomatic Officers
12. United States Government and U.S. Possessions
E. Internet Services
F. Internet Telephony
2. Computer-to-Phone and Computer-to-Computer
3. Phone-to-Phone
XIII. Real Property and Telecommunications
A. FIRPTA
1. U.S. Real Property
a. Land
b. Personal Property Associated with the Use of Real Property
c. Improvements
2. USRPHCs
3. Partnerships and FIRPTA
B. Dark Fiber IRUs May Be Real Property
1. The Tax Definition of Real and Personal Property
(1) Regs. § 1.48-1(c)
(2) Regs. § 1.1245-3(b)(1)
(1) Regs. § 1.856-3(d)
(2) Regs. § 1.897-1(b)(1)
(3) Regs. § 1.263A-8(c)
2. Interpreting the Definitions of Real and Personal Property
b. Elements of Classifying Real and Personal Property
(1) "Inherently Permanent Structures"
(a) In General
(b) Capable of Movement
(c) Designed to Remain Permanently in Place
(d) Length of Affixation
(e) Moveability
(f) Damage Upon Removal
(g) Manner Affixed to Land
(2) "Accessory to the Operation of Business"
(3) "Nature of Machinery"
C. Comparison with Accounting Treatment
D. Applying the Real Estate Tax Rules to Dark-Fiber IRUs
XIV. Tax Treatment of Indefeasible Rights of Use
A. Background
B. Taxation
1. Sale Treatment
2. Service Treatment
3. Sale v. Services
4. Lease
5. Service v. Lease
C. Subpart F issues Associated with IRUs
1. Overview of Subpart F
2. Subpart F Implications
a. Rental Income
b. Certain Space & Ocean Activities
c. Sales of Property
d. Services Income
(1) General
(2) Foreign Base Company Services Income
(a) Principal Element
(b) 50% of Cost
(c) Equipment Provided by a Related Party
(d) Totality of Assistance
XV. Taxation of Certain Government-Owned Telcoms
A. Earnings Derived From Certain Satellite Systems
B. Foreign Governments and International Organizations
Working Papers
Table of Worksheets
Worksheet 1 Description of LATAs
Worksheet 2 Description of POPs
Worksheet 3 Overview of the RBOCs
Worksheet 4 Breakup of AT& T
Worksheet 5 The Melbourne Agreement - International Telecommunication Regulations
Worksheet 6 Telecom Regulators
Worksheet 7 German "Pipeline" Decision
Worksheet 8 Illustration of Accounting Rates
Worksheet 9 The World Trade Organization BATS Agreement - Annex on Telecommunications
Worksheet 10 Illustration of Tromboning
Worksheet 11 Sample Dark Fiber IRU Agreement
Worksheet 12 Sample Capacity IRU Agreement
Worksheet 13 The Treasury White Paper
Worksheet 14 Sample Exemption Certificate for Communications Excise Tax
Worksheet 15 Glossary of Common Terms Used in the Telecommunications Industry
Bibliography
OFFICIAL
Statutes
Regulations
Legislative History
Treasury Rulings
Cases
UNOFFICIAL
Books, Treatises, Misc.
Periodicals
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1986
1987
1991
1995
1996
1997
1998
1999
2000
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2002
2004
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