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Shipping and Aviation Tax

By Lowtax Editorial
02 May, 2013

Our latest feature on tax developments in the world of aviation and shipping picks up where the last one left off – in the European Union (EU), where the Emissions Trading Scheme is continuing to generate friction between the world’s major trading partners. Ticket taxes are also an ongoing source of controversy in Europe, with opposition building against the UK’s Air Passenger Duty (APD), although Germany has decided against raising its version of the tax this year.

Elsewhere, there was some good news for the aviation industry in the Philippines after the Government finally repealed two unpopular taxes that had caused long-haul carriers to avoid the country altogether.

There have also been a number of interesting developments offshore, with the Channel Islands set to launch a joint aircraft registry, and the British Virgin Islands expanding its aircraft registry offering.

There have also been some noteworthy developments offshore in the area of shipping, with the Isle of Man Shipping Registry going from strength to strength, the Hong Kong Shipping Registry announcing a strong rise in gross tonnage, and Gibraltar to offer tax concessions for vessels adhering to certain environmental standards.

EU ‘Stops the Clock’ on Aviation Carbon Tax

Last November, the European Union's (EU) Commissioner for Climate Action, Connie Hedegaard,  announced a landmark decision to defer the international aspects of the Emissions Trading Scheme (ETS) for aviation for one year to allow the International Civil Aviation Organization (ICAO) to develop a globally-agreed market-based mechanism (MBM) to tax the emissions of the aviation sector.

Hedegaard told a press conference that the decision had been made following substantial progress on the agenda at the ICAO Council's latest meeting on November 9, 2012.

The ETS was extended to aviation activities from or to European soil on January 1, 2012, to provide a solution to taxing aviation emissions, which were excluded from the Kyoto Protocol. Under the ETS, airlines operating into and out of the EU, regardless of how long that flight is in EU airspace, are required to surrender varying emission allowances, and are required to purchase any additional permits outside of their free allowance.

The European Union's decision will mean that airlines not complying with the scheme will not be subject to penalties of up to EUR100 per tonne of carbon dioxide emitted without the payment of a permit, until April 2014. The decision will not impact flights inside Europe, where the ETS requirements will continue to apply. The Commission explained the decision would allow time, until the ICAO's 2013 Assembly in September/October, for substantive progress to be made towards a global deal on taxing aviation sector carbon emissions.

The Commission added: "As a gesture of good faith the EU will 'stop the clock' on the implementation of the international aspects of its ETS aviation by deferring the obligation to surrender emissions allowances from air traffic to and from the EU by one year. This means that the EU would not require allowances to be surrendered in April 2013 for emissions from such flights during the whole of 2012. The monitoring and reporting obligations will also be deferred for such flights. [However], the obligations relating to all operators' activities within EU will remain intact and compliance with the EU law will be enforced in this respect."

Hedegaard stated: "The EU has always been very clear: nobody wants an international framework tackling CO2-emissions from aviation more than we do. Our EU legislation is not standing in the way of this. On the contrary, our regulatory scheme was adopted after having waited many years for ICAO to progress. Now it seems that because of some countries' dislike of our scheme many countries are prepared to move in ICAO, and even to move towards a MBM at global level."

However, she added: "Let me be very clear: if this exercise does not deliver – and I hope it does, then needless to say we are back to where we are today with the EU ETS. Automatically".

"So we are creating this window of opportunity, this great chance," Hedegaard explained. "I can only recommend to all parties to engage urgently in taking this issue forward. Now it is the time for paving the way for strong decisions to be taken by the next ICAO General Assembly. The European Union will engage fully and will work closely with the ICAO leadership. We are convinced others will do as well."

US Airlines Banned From ETS

Despite the European Commission’s decision on November 12 to defer the international aspects of ETS for aviation for one year, the very next day the United States House of Representatives completed its approval of a bipartisan bill to ban United States airlines from complying with the scheme at any time in the future.

John Thune (R – South Dakota), the sponsor of the bill in the Senate and Ranking Member of its Commerce Committee’s Aviation Operations, Safety and Security Subcommittee, said that he introduced the European Union Emission Trading Scheme Prohibition Act (EUETSPA) to protect US air carriers and passengers from the potential for an unprecedented tax levied on them in American and international airspace by the EU.

“It is far past time for this assault on American sovereignty to end,” he commented. “Action taken by the House helps ensure that the Administration will see to it that the EU will no longer be able to impose this illegitimate and disingenuous ‘environmental’ tax on our country.”

“While I was pleased,” he added, “with the announcement that the EU decided to temporarily suspend its unilateral emissions tax on US air carriers, the EU’s announcement does not rule out future efforts on their behalf to tax foreign carriers. My legislation is critical to protecting American sovereignty as we wait for ICAO to reach an acceptable agreement.”

While the EUETSPA would prohibit operators of US civil aircraft from participating in the EU ETS, the US government has already announced it would reject any unilateral European scheme on airlines kicking in before 2020, and would also hope that a global agreement can be reached through the ICAO.

The Act, therefore, also provides that the US Secretary of Transportation and the Administrator of the Federal Aviation Administration should “use their authority to conduct international negotiations... to pursue a worldwide approach to address aircraft emissions.”

In addition, the Secretary of Transportation would have to hold a public hearing at least 30 days before imposing any prohibition determined to be in the public interest, and may reassess that determination after any amendment of the EU ETS, the adoption of any subsequent international agreement, or the enactment of legislation or the issuance of a final rule in the US to address aircraft emissions.

The EUETSPA was signed into law by President Obama on November 27.

A total of 17 non-EU countries have opposed the ETS, a list which includes China. However, despite this opposition, the European Commission said last May that 99% of airlines had complied with the requirements. Ten aircraft, from India and China, were said by the Commission to be boycotting the scheme.

It remains to be seen if a consensus on taxing global aviation emissions emerges after the ICAO General Assembly, which is set to take place in the autumn of 2013. However, the short time-frame allowed by the EU’s pause of the ETS for aviation suggests that this will be very difficult to achieve.

Opposition Grows To UK Ticket Tax

Popular support for a review of the United Kingdom's Air Passenger Duty (APD) is building, with further lobbying recently spearheaded by a group of 1,300 tourism executives in support of a quantitative impact assessment of the air travel levy on the UK economy.

The business leaders have joined countless other parties in petitioning the UK government, all calling for the government to commission an independent report to investigate whether the tax is worth the damage being caused to the local economy and the UK's competitiveness.

UK APD is the most draconian tax of its type worldwide, and critics have said that the Government has transformed the environmental levy into a crisis-time “cash cow.” APD on fares has risen markedly since the levy was first introduced in 1994, from rates of between GBP5-10, to GBP13-376 at present. On April 1, 2013, business jets were also to be brought into the tax net.

The UK Office for Budget Responsibility projects that tax revenues will increase from USD2.8bn in 2011-12 to GBP3.9bn by 2016-17. However, new research by the British Chamber of Commerce estimates that APD will cost the UK economy GBP10bn in lost growth and up to 250,000 fewer jobs over the next 20 years, and cause the UK's competitiveness to fall and the UK aviation industry to contract.

A recent survey undertaken at Stansted Airport, in support of the 'A Fair Tax on Flying' campaign, found that over half of 1,000 fliers surveyed are to limit their travel where possible to short-haul destinations, to avoid the prohibitively high taxes in place on long-haul destinations.

The campaign against APD has seen 100,000 air travellers contact their local Member of Parliament, and representations from countless tourism and business organizations.

The industry's campaign appears to be gaining support among policy makers too. The Scottish Government is considering abandoning APD in favour of lower aviation taxes after a study by York Aviation found that the territory had lost 1.7 million air passengers in recent years as a direct result of the levy, costing the local economy some GBP210m annually.

UK lawmakers are also backing the cause. A survey undertaken during May-June 2012, found that 51% of 150 lawmakers supported a reduction in APD rates to increase the UK's international competitiveness and encourage economic growth; and the All-Party Parliamentary Group on Aviation has urged the government that it must immediately rethink the nation's aviation strategy.

Evidence of the impact of the levy on the aviation industry in the UK was highlighted in January, when budget airline Flybe announced that it was scaling back its UK operations in favour of an increased presence in mainland Europe. The move will involve the loss of 300 jobs in the UK.

Despite its business-friendly and tax-cutting credentials, the Government has shown little inclination to scrap or reform this unpopular and economically-damaging levy. There is also not a shred of evidence that it has achieved its professed goal of cutting aviation emissions.

Germany Defers Ticket Tax Hike

The German Government has at least decided against a planned rise in its ticket tax, which was due to take place on January 1, 2013, marking a small victory for airline companies.

The decision is expected to result in savings for German airline companies of an estimated EUR40m (USD51m) in 2013.

Consequently, the tax will continue to be imposed at a rate of EUR7.50, EUR23.43, or EUR42.18 on flights departing from German airports, depending on the destination.

Introduced in Germany at the beginning of 2011 to ensure that the aviation industry contributes to fiscal consolidation, the levy serves to generate around EUR1bn annually for the state. The tax was initially imposed at a rate of EUR8, EUR25, or EUR45 per passenger. Revised annually, these original rates were lowered at the beginning of 2012.

Opinion in Germany on the unpopular tax is very much divided. Environmental organizations insist that the measure does not go far enough and are calling for the tax rates to vary according to the type of ticket purchased, as well as to the destination.

German Transport Minister Peter Ramsauer supports the view of German airline companies and has called for an immediate end to the tax, while German Finance Minister Wolfgang Schäuble has ruled out the idea of abolishing the levy.

Germany’s aviation industry fiercely criticized the levy from the outset, arguing that the tax costs airline companies around EUR500m a year.

Klaus-Peter Siegloch, President of the German Aviation Federation BDL, warned in the summer of 2012 in Berlin that the plane ticket tax is much too expensive and is driving airline companies into the red. The country’s four largest airline companies paid 60% of the EUR1bn levy in 2011, Siegloch explained.

According to Siegloch, the government’s decision to proceed unilaterally and to impose the tax at national level has served to distort competition and to severely disadvantage domestic airline companies and airports.

Passengers are electing to fly from airports in neighbouring countries, such as Zurich, Strasbourg, and Amsterdam, and are even changing their booking patterns to avoid the levy, for example by purchasing two tickets instead of one long-haul ticket, BDL argues, insisting that without the tax, passenger numbers would be up by around five million.

Philippines Finally Removes Aviation Taxes

The aviation industry has long complained that it is an easy target for Government revenue grabs, as evidenced by taxes like APD. However, the Philippines has bucked the trend by removing the 3% common carrier’s tax (CCT) on foreign airlines operating in the Philippines, in order to reduce the prices of tickets, bring more tourists to the country and generate significant job-creating activity for the tourism industry.

The Government had been under pressure for some time from the airline, tourism and foreign trade sectors to abolish the CCT, which has been levied on all revenues, passengers, cargoes and excess baggage leaving the Philippines. International airlines will also be exempt from value-added tax when carrying passengers.

The Philippines’ taxes have caused a total withdrawal of foreign airlines, one by one, from providing direct flights to Manila. Air France-KLM dropped the only remaining direct flight from Manila to Amsterdam in March 2012, due to the high taxes it paid for loading passengers in the Philippines.

It had been calculated that the taxes imposed by the Philippines increased air travel costs significantly for the marginally-profitable airline industry and for the highly price-sensitive leisure traveller, especially for a country where 98% of tourists arrive by air. It is said that the benefits of the tax removal could be measured in thousands of new jobs, increased revenue from more foreign tourists, and lower cargo transport costs for its exports.

A statement by the Presidential spokesperson Edwin Lacierda said that the removal of the tax came “on the heels” of ICAO’s lifting of the Significant Safety Concerns imposed on the country in 2008, in recognition of Philippine efforts to comply with international aviation safety standards, and the news that the Philippines jumped 12-notches in the Travel and Tourism Competitiveness Report 2013 of the World Economic Forum due to “policy improvements supporting the industry.”

The Government has deemed tourism a priority in national development, as it creates jobs, particularly in the service sector. While the abolition of the CCT will reduce tax revenue in the short-term, it is hoped that increased funds brought in by additional tourists will lead to a rise in other tax collections.

The Department of Tourism (DOT) welcomed the CCT’s abolition that “will certainly help improve and enhance the country’s competitiveness in the international travel arena. May this enhancement serve as an invitation to international air carriers, especially those covering long-haul routes, to make the Philippines a part of their primary route offering to the world.”

“This,” it was added, “is just one of the reform measures being undertaken by the Aquino Administration and the DOT, in coordination with other agencies, in improving market access and connectivity to the Philippines towards the achievement of 10m foreign visitor arrivals by 2016.”

Channel Islands Aircraft Registry Takes Shape

In January, responding to the findings of a Scrutiny Panel review of progress towards the new joint Channel Islands Aircraft Registry, Jersey's Minister for Economic Development, Alan Maclean has begun to address the unique selling points the Registry will offer in tax terms.

In discussing the proposed registry, the Scrutiny Panel, which acts as an independent government oversight panel, noted that companies that register aircraft in the Isle of Man can become registered for value-added tax (VAT), and this enables them through corporate ownership structures to claim back VAT on purchases.

However, as Jersey is not in such a position it will need to determine its own unique selling proposition.

Maclean observed in his response that: "The issue of competitive disadvantage to the Isle of Man and other Registries presented by VAT is a challenge, but does not appear to be insurmountable."

He pointed out that the Channel Islands Strategic Case report established that, due to the different VAT regimes, it was likely that different clients would be attracted to the Channel Islands Registry than those using the Isle of Man, depending upon their place of business and planned base of activity for their aircraft.

"Discussions are currently ongoing with Economic Development and Guernsey’s Commerce and Employment Department,” Maclean added. “Officials from both islands are working together to seek to identify the best way to proceed and hope to be able to make an announcement on a final decision very shortly."

He agreed with the Panel's suggestion that allowing the registration of aircraft under fractional ownership could present a viable unique selling point for the Registry and said the governments are considering the option.

Reviewing progress towards the registry, which is expected to be launched this year, Maclean confirmed that it had been agreed between the two governments that due to Guernsey's pro-active leadership in spearheading the development of the necessary legislation, the Registry will be based in Guernsey.

Jersey will benefit from its establishment through an increase in retail sales, and associated financial services and wealth management business, Maclean said.

It was pointed out by the Scrutiny Panel that the announcement of the new partnership agreement between SGI Aviation and the States of Guernsey in May 2012 marked a significant point in the Aircraft Registry project, and the context of Jersey’s role within it. Maclean said that: "Discussions have concluded that it is not insurmountable for Jersey to get up to speed on the project, as much of the legislative changes are the same in both jurisdictions."

Responding to additional feedback from the Scrutiny Panel on the competitive disadvantage Jersey faces in terms of the island's 5% Goods and Services Tax, Maclean said the government was looking at measures to mitigate the potential impact of the island's sales tax on visitor numbers and associated business flows.

BVI Expands Aircraft Registry

New legislation in the British Virgin Islands (BVI) - the Mortgaging of Aircraft and Aircraft Engines Act, 2011, and the Mortgaging of Aircraft and Aircraft Engines Regulations, 2012, has entered into force, and will support the expansion of the island's aircraft registry by enabling locally-registered operators to secure aircraft financing.

The laws will enable aircraft operators to register ownership of aircraft and aircraft engines in the British Virgin Islands under three separate registries, for aircraft, their engines, and their mortgages. Lending institutions require that entities demonstrate legal ownership of assets before providing financing, to achieve legal certainty that they may retain a debtor's assets in the case of a credit default. The new law will enable local operators to register ownership of aircraft and aircraft engines, unlocking credit opportunities for fleet expansion.

While the British Virgin Islands has been operating in the aviation sphere for several decades, the territory until lately has been known only as an tax-efficient aircraft holding company domicile, and less than a handful of aircraft have been registered with the islands' Aircraft Register.

However, in 2011 the government progressed plans to develop the local registry, and in June 2011 the aforementioned legislation was approved by the jurisdiction's legislative assembly, in recognition that in order to secure business from international operators the islands needed a supportive regulatory environment. The government anticipates that following the entry into force of the legislation, on October 15, 2012, the BVI will be able to leverage its position as a holding company domicile to lure international operators to register their aircraft and engines in the islands. Similar legislation has long been in place in Bermuda and the Cayman Islands.

Law firm Harney's commented: "The new law complements the jurisdiction’s status as a US Federal Aviation Authority Category One aircraft register under the International Aviation Safety Assessment programme by creating a framework for registration in the British Virgin Islands of security over aircraft, and separately, aircraft engines."

"Lenders in particular will be comforted by provision in the legislation for the filing of priority notices (which reserve and protect a particular priority position for a prospective mortgagee, for fourteen days), and clear provisions on enforcement, transfer, transmission... and discharge of mortgages. This development paves the way for new business opportunities which complement and support the British Virgin Islands’ position as the premier offshore corporate domicile with over 850,000 companies incorporated to date."

Isle of Man Shipping Registry Surpasses another Milestone

Moving to the shipping industry but staying offshore, the Isle of Man's Shipping Registry has confirmed that Gross Registered Tonnage surpassed fifteen million for the first time in its history following the registration of one of the world's largest vessels, ore carrier Berge Neblina in the early hours of January 4, 2013.

The Registrar at the Ship Registry, Muriel Sweetman, worked late into the evening to allow the registration of the vessel, at a minute past midnight, to coincide with a ceremony being held in the Far East. "This is a service we offer, which very few of our competitors can match but is really appreciated by our clients," she said.

The Chinese-made vessel is some 361 meters long, with a Gross Tonnage of 184,000 and Deadweight Tonnage of 388,000, representing a major addition to the registry.

The addition of the Berge Neblina comes following a marketing push by the Registry kicked off in 2010 to target emerging markets in Asia. During 2010, the Registry attended a number of events to expand its network of contacts in the region and create awareness of the Registry. Following a substantial increase in business received from Asian clients, the Registry appointed local surveyors to represent the Registry in 2011, and trained and appointed third-party auditors in 2012.

The Manx Shipping Registry is among the world's fastest growing, with double-digit growth seen in tonnage terms in both 2010 and 2011, rising from 12m in 2010 to the current level of 15m.

The Isle of Man passed the Merchant Shipping (Registration) Act 1984 in order to encourage registration of ships on the island. There is a zero-tax regime for ship management companies based on the Isle of Man.

However, in March 2009, the Isle of Man Ship Registry announced its intention to introduce an annual registration fee for the first time in its history. For merchant vessels, the initial registration fee has been set at GBP730 (USD1,180), and the ongoing annual re-registration fee is GBP1,000. Unlike other registries, the fee is not to be dependent upon ship size or type. In addition the IoM Registry grants discounts for multi-vessel owners registering with the flag.

Hong Kong Gross Tonnage Up 20%

Although not offshore, Hong Kong can comfortably be classified as a low-tax jurisdiction, and the Government’s pro-business policies combined with a concentration of shipping industry expertise helped produce strong growth in tonnage registered on the Hong Kong Shipping Registry last year. In the 12 months to the end of August 2012, gross tonnage had risen by 21% to reach 78m, some 12 times more than 15 years ago.

The announcement was made at the Ningbo-Hong Kong Economic Cooperation Forum, held in Ningbo on September 18, 2012, at which Hong Kong's Permanent Secretary for Transport and Housing, Joseph Lai discussed ways to build upon maritime sector synergies between authorities in mainland China and Hong Kong.

Lai said it is estimated that ships from Mainland enterprises make up 39% of the Hong Kong-registered fleet in terms of gross tonnage (30.69m) and 34% in terms of number of ships (748). He said it reflects the support Mainland enterprises give to Hong Kong and the amount of services Hong Kong provides to the Mainland maritime industry. He invited Ningbo Port, one of the busiest terminals in mainland China, to make more use of Hong Kong's professional maritime services and international networks to expand its business overseas.

The forum is an annual event co-organized by the Ningbo government and the Hong Kong Trade Development Council to promote trade and economic co-operation between the two cities. As part of its recent efforts in the maritime field, the Hong Kong government launched a consultancy study last November on how to consolidate and enhance Hong Kong's position as an international maritime centre, and set up scholarships for Hong Kong and Mainland university graduates to receive training in maritime law, ship management, and shipbroking.

Gibraltar Announces Tax Breaks for Green Shipping

Another low-tax jurisdiction seeking to use its tax advantages to attract a larger slice of the global shipping industry is Gibraltar, where the new “Green Award Scheme,” announced at an official ceremony on March 27, 2013, will award sustainable ships that have been certified by Green Award with a 5% reduction in tonnage tax dues from April 1, 2013.

Speaking at the ceremony, Green Award’s managing director Jan Fransen said: “The Port of Gibraltar’s view fits very well with the Green Award’s philosophy. When such a major bunker port as Gibraltar practices its Corporate Social Responsibility through participating in the Green Award scheme, it does make a difference and motivates safe and environmentally-conscious shipping.”

The Port of Gibraltar is the second port this year to begin offering new incentives to seagoing vessels holding the Green Award certificate.

Gibraltar's Minister for Tourism, Commercial Affairs, Public Transport & the Port, Neil Costa stated: "This award is an important landmark and demonstrates the Government of Gibraltar's commitment to the protection of the environment and to the improvement in the quality of shipping visiting the Port, both of which are interconnected." With the port of Gibraltar being a major bunker port and the gateway to the Mediterranean, the port’s decision to grant incentives to ships with the highest safety standards will motivate more ships owners to invest in improvements on board, he said.

Green Award is a global, independent, not-for-profit quality-assurance organization that works by certifying ship managers and vessels that go beyond industry standards in terms of safety, quality and environmental performance. The Green Award certification scheme is open to oil and chemical tankers, bulk carriers, liquefied natural gas carrying vessels and inland navigation barges. Currently there are 225 sea-going ships and 440 inland barges certified. With the addition of Gibraltar, nineteen maritime service providers and banks and 31 ports now provide incentives to ships with a Green Award certificate.

Gibraltar's Annual Tonnage Tax (ATT) is due before January 1 each year in respect of every ship registered under the Gibraltar Administration, other than a ship of less than 24 meters registered length or under 150 gross registered tons, which is plying from the Port of Gibraltar and licensed by the port authority under the Port Act.

Rates range between:

  • GBP600 plus GBP0.07 per Gross Registered Ton (GRT), for vessels of up to and including 50,000 gross tons;
  • GBP600 plus GBP0.07 per GRT up to and including 50,000 GRT, plus GBP0.04 per GRT in excess of 50,000 GRT, for vessels up to 100,000 GRT;

For vessels of 100,001 tons or more, the tax is GBP6,000 plus GBP0.07 per GRT up to and including 50,000 GRT, GBP0.04 between 50,001 GRT and 100,000 GRT, and GBP0.02 per GRT in excess of 100,000 GRT, subject to a maximum annual tonnage tax payable in the sum of GBP9,000.


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