Tax havens in the sky

This article was first published, in abridged form, by Ethical Consumer

If global aviation emissions were a country, it would be ranked 7th in the list of global emitters, between Germany and South Korea. Yet aviation is the only means of transportation that doesn't pay a penny of tax on the fuel it burns. This is an unfair advantage that airlines have over trains, coaches and cars, making it the fastest growing form of transport while also being the most carbon intensive. All of this is to the benefit of rich chaps, as, contrary to common public myth about low cost flights, air travel is one of the least democratic forms of moving from A to B. 

A report from August 2011 shows that the average household income of UK leisure passengers travelling from Stansted in 2009 was £47,452 - more than a third higher than the UK average. A quarter of these travellers even had household income of £80,500 or more. This is despite the fact that Stansted is completely dominated by low cost airlines. It is clear that these aviation customers are the least in need of subsidies across the general population – ‘low cost’ fares have not led to the poor taking flights, it has enabled those who fly, to fly more.

Meanwhile, the aviation industry benefits from huge subsidies, even while austerity is forced upon the general population. Transport & Environment commissioned a report to look into how much of a shortfall government coffers suffer because aviation does not pay two types of basic EU taxes. Firstly, though consumers pay an average of 40p per litre on fuel when they fill up their cars, the big aviation bosses pay nothing when they fill up their 747s – leading to a shortfall of up to €32 (£27) billion a year across the EU! In addition, aviation doesn’t pay any value added tax (VAT), the basic tax placed on all other consumer goods across the EU. Even expecting a big number, we were appalled by the additional shortfall this creates: every year the EU misses out on over €10 (£8.5) billion – the equivalent of the Cyprus bailout! 

However, these figures do not tell the whole story in the industry. Not only is there no VAT on airline tickets, but actually the entire industry is completely exempt from VAT, allowing it to gain huge cash flow advantages from not having to account for input VAT. This is not to mention the direct subsidies that tax payers give the industry through infrastructure supports. In the UK, to name one example, road users directly pay for the road infrastructure through the fuel tax and the annual car tax that every car owner has to pay. Not so in the aviation industry. Airlines often use complicated leasing arrangements for their airplanes so that they can benefit from low tax jurisdictions across the world. Furthermore, in the EU the airline industry also receives an average of €3 (£2.5) billion a year to build airports and open new air routes, hardly a good use of tax payer’s money in the current economic climate. 

On the other hand, while it must be acknowledged that aviation does create a number of jobs, from air stewards to aerospace engineers, the advent of low cost travel means that even as more and more flights are taken, employment in the industry has actually shrunk, as a report by the Transport Department of the European Commission showed. Meanwhile, the increase in passengers actually hurts the UK economy in a very significant way by discouraging the purchase of local goods and services: for every £1 spent by an overseas resident in the UK, a UK resident visiting overseas spends £2.32! While I enjoy a nice holiday in the sun myself (though my Irish skin simply won’t take a tan), it is clear that by granting such a climate damaging activity the advantage of a tax-free status, we are simply encouraging flights that do not need to be taken and worsening climate conditions that are already pushed to their limit. 

The historical contribution of aviation to climate change is almost equivalent to the historical emissions of Germany since the industrial revolution, and this figure is growing rapidly every year. This is one of the reasons the European Union proposed limiting these emissions by including the sector in the Emissions Trading System (ETS), an international system to cap and trade greenhouse gas emissions. However, this policy is under sustained and vicious attack from opponent airlines and countries, and it is not clear whether the inclusion of aviation in the ETS will survive this year. Meanwhile, all other industrial sectors of the EU economy are included in the ETS, meaning they will have to work harder in order for the EU to reach its climate goals while the aviation sector gets an easy ride. 

So where does this leave us? Should we ground airplanes and all holiday in rainy Britain? No – there are many solutions that will allow aviation to become a sustainable industry. They require governments to step up and take on the aviation lobby – not any easy task! Firstly, the EU and the individual member states need to stop subsidising the industry and agree that airline tickets should be subject to the same taxes as any other consumer good e.g. fuel taxes and VAT. In addition to these basic taxes, the environmental impact of aviation must be accounted for by ensuring that its inclusion in the ETS is defended – our (not very ambitious) climate goals cannot be reached otherwise. 

The UK government  noticed that aviation does not pay its fair share and in 1994 imposed a tax - the Air Passenger Duty (APD) on every airline ticket. This raises £3-4 billion per year for the British exchequer, equivalent to a third of the UK foreign aid budget. And while this sounds like a lot of money, it is much less than aviation would pay even if only VAT were imposed on airline tickets. Unfortunately, only a handful of EU countries have similar ticket taxes and they do not come close to the level charged in the UK. 

No prizes for guessing that the aviation industry objected to even the modest APD. The huge accountancy firm, Price Waterhouse Coopers, recently released a study concluding that abolishing the APD would benefit the UK economy. Perhaps, the most telling part of this report is the overview – it highlights the airlines who commissioned the report and addresses the reader to let them know that the “report was prepared at the direction of our addressee clients and may not include all procedures deemed necessary for the purposes of the reader.” This is a clear acknowledgement that the report does not contain a fair assessment of the full effects of abolishing the minimal tax that the entire aviation industry pays. Luckily, the UK government are not the fools the aviation industry takes them for and on the day the report was released, a spokesperson for the UK Treasury stated that they did “not recognise the figures in this report or agree with the assumptions behind it.” 

So, to try and end on a more positive note: well done to the UK Treasury for being the most courageous government in the EU to begin to tackle the tax havens in the sky. There is much more that can be done, however. Aviation, the most climate-damaging form of mass transportation, must do its fair share in these tough times. Paying the same taxes as everyone else would be a good start.

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About the author

Aoife O&#039;Leary's picture

Policy Officer