New global tax rules are set to have a significant impact on airlines.

At a WFS session on the OECD’s (Organisation for Economic Co-operation and Development) Base Erosion and Profit Shifting initiative, Mark Costa of Deloitte called them “the most seismic tax changes for decades.”

Although the OECD only has 38 members, some 100 more countries are signed up to frameworks that OECD introduce.

There are two pillars to consider. Pillar One establishes new revenue sourcing rules. As it stands, airlines mostly pay tax in the countries in which they are based. Although there is always an element of country-by-country reports and tax filings, it is a straightforward and established process. Pillar One, however, will redistribute profits to their source countries. Airlines must pay tax where they earn it.

Pillar Two establishes a global, minimum corporate income tax rate of 15%. This was due to come into effect in January 2023, but it has been postponed until January 2024 due to various fine details.

Even so, airlines need to begin preparing now as compliance is likely to be a complex undertaking that will doubtless increase costs and require new software. There are some 180 data points to cover, many of which will be unfamiliar to even the most experienced professional, so there really is devil in the detail.

Pillar Two rules only apply to multinationals with $750 million in revenues. But the corporate structure will obviously play a role, so working out what falls under Pillar Two rules won’t be easy.

If there is a “constituent entity” in a particular jurisdiction, then an airline falling under the qualifying criteria will need to calculate and pay tax in that country at a minimum of 15%. If the tax due is less than 15%, the airline must pay a “top-up” tax. But does having a station in a country count as a constituent entity? Ancillaries are another murky area.

For a few airlines, there is no doubt that Pillar Two will mean a huge increase in the tax bill. Others won’t be so affected in terms of the end number, but they will still have to deal with the complexity of the calculation. A Deloitte study showed that up to 45% of respondents were not confident that they ready to handle Pillar Two requirements.

Airlines need to begin assessments immediately so they can prepare and comply.


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