PORTFOLIO

U.S. International Taxation of Telecoms (Portfolio 6760)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors analyze the U.S. federal income tax treatment of entities engaged in providing telecommunications services. 

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DESCRIPTION

The U.S. International Taxation of Telecoms 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. The 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.

The Portfolio then examines the telecommunications tax issues surrounding permanent establishments and U.S. trade or business concepts; the U.S. sourcing rules on Space and Ocean Income and International Communications Income under §863(d) and (e) respectively. The Portfolio also analyzes the depreciation issues surrounding both wireline and wireless assets, the excise tax on “communications services” as defined by §4251, and whether certain telecommunications assets constitute real or personal property, including FIRPTA issues involved in owning telephone cables and Indefeasible Rights of Use in dark fiber.

The 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.


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AUTHORS

Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The U.S. International Taxation of Telecoms Portfolio was authored by the following attorneys.  

MARC D. GANZ, ESQ.

Marc D. Ganz, Esq. is a practitioner with Ernst & Young LLP.

 

Credentials / Marc received his B.A., University of Wisconsin — Madison (1991); J.D., A.C. in International Affairs, Washington University (1994); LL.M. in Taxation, New York University (1995); formerly Attorney-Advisor to the Honorable William M. Fay, U.S. Tax Court, Washington, D.C.; Member of the New York Bar; Member of the Telecommunications Tax Forum.


TABLE OF CONTENTS

Portfolio 6760-1st: U.S. International Taxation of Telecoms

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Introduction

Introductory Material

A. Topics Covered in this Portfolio

1. Telecommunications Services or Infrastructure Providers

a. Telecommunications 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

3. Universal Service Fund and Related Tax Issues

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. References to General Sources of Information on the Telecommunications Industry

C. Issues for Telecommunications Companies

1. The Code and Income Tax Treaties Predate Rapid Technological and Operational Changes in Telecommunications Business

2. Income May Be Derived from Several Categories of Activities

3. Communications Services May Be Provided in a Jurisdiction in Which Facilities and Personnel Are Not Located

4. Difficulty in Determining the Location of Facilities over Which Telecommunications Are Transmitted

II. Overview of the Telecommunications Industry

Introductory Material

A. In General

B. Traditional Telephone Companies

1. Domestic

a. Long Distance

b. Regional Bell Operating Companies

c. Competitive Local Exchange Carriers

2. Foreign

3. Wireless Service Providers

a. Mobile Telephone Users

b. Cellular Telecommunications Technology

c. Cellular System Assets

(1) Wireline to Mobile Telephone Call

(2) Mobile-to-Mobile Telephone Call

d. Description of a Cell Site

C. Resellers, Switchless Resellers, and Agents

1. Resellers

2. Switchless Resellers

3. Agents

D. The Internet and Internet Service Providers

1. The Internet

2. Internet Service Provider

(a) Gateways

(b) PC-to-Telephone Services

(c) Telephone-to-Telephone Gateway Services

E. 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. Personal Communications Services

c. Smart Devices for Internet and Remote Access

d. Wireless Local Loop

e. Paging

f. Low Earth Orbiting Satellite Networks and Middle Earth Orbiting Satellites

g. Time Division Multiple Access and Code Division Multiple Access

B. Data

C. Broadband

D. Video

E. Videoconferencing

F. Cloud Computing

1. In General

2. International Tax Issues Relating to Cloud Computing

a. Character

b. Source

c. U.S. Trade or Business and Permanent Establishments

IV. Overview of the History of the U.S. Telecommunications Industry

Introductory Material

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. The U.S. Telecommunications Industry — After 1996

E. International Telecommunications Services Licensing

1. Licensing Prior to the Market Entry Order

2. The Market Entry Order

3. International 214 Streamlining Order

4. The Foreign Participation Order

5. 1999 Licensing Reform Order

F. International Settlements Process

1. Background

2. Regulation of International Accounting Rates

V. Telecom Regulatory Organizations

Introductory Material

A. The FCC

B. The WTO

1. Background

2. Telecommunications Regulatory Policy

C. The ITU

1. Background

2. Telecommunications Regulatory Policy

3. Telecommunications Tax Policy

a. Application of Melbourne Agreement to VoIP

b. Specific Countries' Application of the Melbourne Agreement

(1) The United States

(2) Australia

(3) Croatia

(4) France

(5) Mexico

(6) Russia

(7) Sri Lanka

(8) The United Kingdom

(9) Others

c. The Dubai Agreement

(1) In General

(2) Comments to Article 6.1.3

(a) Overview of Comment Process

(b) Final Draft ITRs

(c) Comments to Council Working Group

(d) Comments from African Nations

D. The OECD

1. Background

2. Telecommunications Regulatory Policy

3. Telecommunications Tax Policy

VI. Trends in International Deregulation

Introductory Material

A. 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

B. The Basic Agreement on Telecommunications

1. Background

2. Overview of the BAT

3. U.S. Response to the BAT

VII. Taxation of Internet Providers and E-Commerce

Introductory Material

A. The Treasury White Paper

1. Neutrality

2. Residence-Based Taxation

3. U.S. Trade or Business and Permanent Establishments

B. The Internet Tax Freedom Act

C. Internet Tax Freedom Act Amendments Act of 2007

D. The OECD

E. The WTO

F. The European Union

VIII. Overview of Certain International Joint Ventures

A. Wireline Alliances

1. Concert Communications Company

2. Global One

3. Infonet Service Corporation

4. Unisource

5. WorldPartners

6. Verizon Wireless

7. New Technology Joint Ventures

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

Introductory Material

A. Permanent Establishment

1. The Current Debate

2. The Definition of Permanent Establishment

a. The OECD Model Treaty

(1) The Commentary Changes

(2) The Final Report

(a) Summary of the Final Report

(b) New Business Models

(c) Current Treaty Rules for Taxing Business Profits

(d) Changes that Would Not Require a Fundamental Modification of the Existing Rules

(i) Modification of the Permanent Establishment Definition to Provide that a Fixed Place Lacking All Human Intervention/Presence Cannot Constitute a Permanent Establishment

(ii) Modification of the Permanent Establishment Definition to Provide that a Server Cannot, in Itself, Constitute a Permanent Establishment

(iii) Modification of the Permanent Establishment Definition to Exclude Functions Attributable to Software when Applying the Preparatory or Auxiliary Exception

(iv) Elimination of Paragraph 4 of Article 5 in its Entirety from the Treaty (i.e., the Preparatory or Auxiliary Exception to the Establishment of a PE) or Requiring the Exception to be Subject to the Overall Condition of Preparatory or Auxiliary in Nature on a Case-by-Case Basis

(v) Elimination of the Existing Exceptions for Storage, Display, or Delivery in Paragraph 4 of Article 5

(vi) Modification of the Existing Rules to Add a Force of Attraction Rule Dealing with E-Commerce

(vii) Adopting Supplementary Nexus Rules for Purposes of Taxing Profits Arising from the Provision of Services

(e) Changes that Would Require a Fundamental Modification of the Existing Rules

(i) Adopting Rules Similar to those Concerning Taxation of Passive Income to Allow Source Taxation of Payments Related to Some Forms of E-Commerce

(ii) Adopting a New Nexus Rule: Base Eroding Payments Arising in a Country

(iii) Replacing Separate Accounting and Arm's-Length Principles by Formulary Apportionment of Profits of a Common Group

(iv) Adding a New Nexus of “Electronic (Virtual) Permanent Establishment”

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 and Copper Wire Cables

(c) Automated Equipment

c. Non-U.S. Definitions

(1) Germany

(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) U.S. Persons

(2) Foreign Persons

(a) Foreign Persons Engaged in a U.S. Trade or Business

(b) Controlled Foreign Corporations

c. Source Rules for Sales of Certain Property

(1) Purchased Property

(2) Produced Property

(3) Source of Income Allocated to the Sales Activity of Produced Property

(4) Source of Income Allocated to Production Activities

(a) Production Activities Only Inside Space or International Water

(b) Production Activities Only Outside Space and International Water

(c) Production Activities Both Inside and Outside Space or International Water

(5) Determining the Source of Communications Income

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) Commissioner's Authority to Recharacterize a Taxpayer's Activities into a Single Transaction or Multiple Transactions

(4) Special Rules for Determining Space or Ocean Activity

g. Reporting and Documentation Requirements

7. Communications Income

a. General

b. Legislative History

c. Treasury Regulations

d. 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) Income Derived from Communications Activity

(c) The Paid-to-Do Rule

e. Reporting and Documentation Requirements

C. United States

XI. U.S. Federal Tax Depreciation of Assets Used in the Telecommunications Industry

A. Introduction

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 the United States

c. International Callback 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. Dollar Cards

2. Tariffed Unit Cards

3. Untariffed Unit Cards

4. Examples

a. Dollar Cards

b. Tariffed Unit Card

c. Definition of a PTC

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

a. Generally

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. U.S. Government and U.S. Possessions

E. Internet Services

F. Internet Telephony

1. Overview

2. Computer-to-Phone and Computer-to-Computer

3. Phone-to-Phone

XIII. Real Property and Telecommunications

Introductory Material

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

a. Personal Property

(1) Regs. § 1.48-1(c)

(2) Regs. § 1.1245-3(b)(1)

b. Real Property

(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

a. In General

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. Indefeasible Rights of Use

Introductory Material

A. Background

B. Taxation

1. Sale Treatment

2. Service Treatment

3. Lease

C. Subpart F Issues Associated with IRUs

1. Brief Overview of Subpart F

2. Subpart F Implications

a. Rental Income

b. Certain Space and Ocean Activities

c. Sales of Property

d. Services Income

(1) General

(2) Foreign Base Company Services Income

(a) Cost Test

(b) Equipment Provided by a Related Party

(c) Totality of Assistance

D. Tax Treatment of IRUs in Other Countries

1. Australia

2. Singapore

a. Pre-2004

b. Post-2003

3. United Kingdom

XV. Taxation of Certain Government-Owned Telecoms

Introductory Material

A. Earnings Derived from Certain Satellite Systems

B. Foreign Governments and International Organizations


WORKING PAPERS

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 Listing of Telecom Regulators

Worksheet 6 German “Pipeline” Decision

Worksheet 7 Illustration of Accounting Rates

Worksheet 8 The World Trade Organization BATS Agreement — Annex on Telecommunications

Worksheet 9 Illustration of Tromboning

Worksheet 10 Sample Dark Fiber IRU Agreement

Worksheet 11 Sample Capacity IRU Agreement

Worksheet 12 The 1996 Treasury White Paper

Worksheet 13 Sample Exemption Certificate for Communications Excise Tax

Worksheet 14 Glossary of Common Terms Used in the Telecommunications Industry

Bibliography

Books, Treatises, Misc.

Periodicals

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