Is Ireland a tax haven? Will the Indian government kill off the aviation sector’s return to growth?

Eleanor Steed
By Eleanor Steed September 21, 2016 10:02

Is Ireland a tax haven? Will the Indian government kill off the aviation sector’s return to growth?

Has a precedent been set in Brazil? Brazilian airline management have accused the government there of losing the plot after a decision by Brazil’s tax authority to list Ireland as a tax haven, which will equate to about 1 billion reais (€273.7million) in new taxes on aircraft leases over ten years. In Brazil some 60% of aircraft on lease are registered in Ireland. Brazilian carriers will now have to pay 25% tax on transactions – the move wiped 12% off of Gol shares.

Make no mistake, this is a hammer blow to Brazilian airlines and it is a blow to Ireland and its aircraft leasing sector. We have to ask whether other countries will look at this move and follow suit. Will the EU, the French and German governments use this move as further evidence that a tax crackdown on Ireland has to take place? If it does then Ireland might just be joining the UK on the road out of the EU before too long.

Is it too soon to invest in an Indian airline? Indian airlines are doing well at the moment; a price war continues as always but airlines are making money partially because fuel is lower than it was but primarily it is because the airlines are better run. They now stick to core routes where they can run a profit with utilization rates that make the aircraft pay as it should. But on the horizon there is a possible problem and airline management are as one voice on the matter. Airlines in India have asked the government to cap the proposed goods and service tax (GST) on primary costs (aircraft lease payments, import/export of aircraft and aircraft parts and MRO) at 15%. GST is the proposed new universal tax that should come into effect in 2017 across all India to replace indirect taxes levied by both central government and the various states including service tax, excise duty, value-added tax, entertainment tax and luxury tax. So GST is a big deal that could eventually make the airline sector within India far stronger than it is now – but the initial rate has to be right.

The problem is, if GST comes into effect without the Indian government abolishing ATF duty, the airlines will effectively pay double tax on fuel. So is that legal? Most legal contacts suggest it is not and as such the Indian government will have to abolish/outlaw ATF duty or they will have to exempt fuel from GST. The government is looking to start GST off at 14% but it has not mentioned if airlines will have current exceptions continued or not. This is key because aircraft lease payments, import/export of aircraft and aircraft parts and MRO, loyalty programs/air miles are all exempt from service tax right now. So this could be a huge hit to airlines. All investors should be watching very carefully indeed to see how the government is going to proceed. If it gets it wrong, airline profits will be damaged significantly and the current aviation boom will be slowed to a crawl once again.

Aviation 100 Asia & Pacific 2016 Awards Survey:
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Philip Tozer-Pennington
philipt@aviationnews-online.com

Eleanor Steed
By Eleanor Steed September 21, 2016 10:02