As taxes on travelers continue to rise, are governments now waking up to their negative impact?

Taxes continue to dilute the social and economic benefits of global connectivity.

There have been some encouraging signs. The Austrian air travel tax will be halved from 1 January 2018, for example.

The Austrian Ministers Council confirmed that the decision was taken to increase the attractiveness of Austria as a business and tourism destination, to secure the future of Vienna airport as an international aviation hub, and to create jobs and increase economic development.

The Scottish Government has similar plans over the longer term for the UK’s Air Passenger Duty (APD), now that the responsibility for the tax has been devolved to the regions.

A Scottish Air Departure Tax will take the place of APD from 1 April 2018 but be charged at 50% of the APD rate, with the goal to scrap the tax completely in due course.

A simple sum

But despite these positive moves, the overall trend sees air travel taxation increasing. Charlotte Fantoli, IATA’s Assistant Director, Industry Taxation, says it is a symptom of governments’ perpetual short-sightedness.

The long-term negative impact on not only the travel and tourism industry but also on the national economy is often not considered

They only look at the immediate revenue a tax will bring, operating on a simple sum of the tax figure multiplied by the number of departing (or arriving, depending on the application rules) passengers.

It is much harder for governments to recognize the benefits they are missing out on through the presence of the tax.

“The long-term negative impact on not only the travel and tourism industry but also on the national economy is often not considered,” Fantoli says.

“This is where IATA steps in to advocate for the value and benefits of aviation.

"With respect to analyzing the impact of a new tax or an increase to an existing tax, IATA typically undertakes a passenger impact analysis, followed by an economic impact analysis to model the long-term impact.”

The problem is that States regard their ability to impose taxes as a sovereign right, and, as such, rarely share future plans or run public consultations when introducing a new tax.

“It means we can’t fight a tax until it’s already a done deal,” confirms Fantoli. “Obviously, once a tax is in the law, it is difficult to get it removed.”

Fantoli explains that taxes that single out aviation or that are imposed contrary to ICAO and standard international principles is the principal concern.

All airlines pay for the total cost of infrastructure through airport, passenger, and air traffic control charges

Jet fuel is the obvious example here. It is exempted from taxes or levies when used in international traffic under Article 24 of the Chicago Convention.

As it stands, international airlines pay corporate income tax on revenues from their international operations in their home jurisdiction.

Meanwhile, domestic air transport wholly within the borders of one country is subject to corporate income tax in that jurisdiction, as well as value-added tax, other consumption taxes, and any existing taxes on fuel.

And all airlines pay for the total cost of infrastructure through airport, passenger, and air traffic control charges.

As Fantoli puts it, airlines already “pay their fair share.” 

Tax disguise

Nevertheless, additional taxes remain prevalent. Germany introduced a departure tax in 2011 that costs air travelers an estimated €1 billion annually.

Lufthansa alone pays €330 million every year, according to Christian Lehmann, Lufthansa’s Director, Corporate Tax Policies and Procedural Law.

He says that although this is a per passenger tax, the reality is that the cost cannot be transferred in its entirety to the passengers in such a fiercely competitive market.

Airline fares are reduced to absorb part of the tax and it therefore remains an additional financial burden for the airline.

“Above all, the internal Lufthansa tax department is doing the job for the German revenue authorities to get in money for the German Finance Minister,” he says.

Sweden is the latest country to propose an aviation passenger tax.

Even the Swedish Government’s Inquiry Committee acknowledges the climate change impact of the tax would be negligible

It’s disguised as an environmental charge. But even the Swedish Government’s Inquiry Committee acknowledges that the climate change impact of the tax would be negligible.

The proposal also ignores Sweden’s commitment to the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), and that flights within Sweden and to European States are already subject to the European Union Emissions Trading Scheme.

Perhaps most surprising is a Reuters report that suggests the Swedish Government has noted that the tax revenues generated from the green tax will be used to lower taxes on smaller businesses.

The proposed SEK430 per ticket would reduce Swedish GDP by SEK5 billion, according to IATA. This equates to 1 million fewer passengers and 7,500 fewer jobs in the aviation industry and the wider economy.

Sweden’s position in the World Economic Forum Price Competitiveness Index (Ticket Taxes and Airport Charges) would drop from 22nd to 78th as a result.

It is reported that, in a hearing answer, Scandinavian Airlines (SAS) suggested the tax would cost the airline SEK35 million, and is therefore considering moving all intercontinental flights from Stockholm to Copenhagen and Helsinki. It added that some local flights within Sweden could also be affected.

Emerging trends

Looking ahead, additional taxation is rearing its head in several ways. Geographically, a plethora of tourism taxes are appearing in Latin America.

"The theory is that the money raised will be used to promote tourism even though the existence of the tax reduces tourist numbers in the first place.

"And in India, a number of Indian taxes will be replaced by a Goods and Services Tax, including the existing Service Tax that applies to international air tickets contrary to best practise.

Instead of naming taxes as taxes on income, many states are calling them social contribution levies

“We are still hopeful that the application rules will be workable for international airlines but the situation is very complicated and also the lead time up to implementation is extremely short, and as a result, pricing systems will not be ready due to the fact that the rules are not finalized,” says Fantoli.

There are also subtle changes in the way taxes are being imposed.

“Instead of naming taxes as taxes on income, we see that many states are calling them social contribution levies,” Fantoli explains. "This circumvents the reciprocal exemption that exists and protects income derived from international air transport, which is generally covered under double tax treaties or similar agreements.