T&E: EU-wide taxes on jet fuel + VAT on plane tickets could help plug EU budget gap & address aviation CO2 impact

Date added: 12 March, 2018

Subjecting domestic, intra and extra-EU aviation tickets to even a low rate of VAT would generate huge revenues for governments. Bill Hemmings, from European transport NGO T&E, estimates that taxing aviation fuel for domestic and intra-EU flights at the EU minimum rate of 33 cents/litre set by the Energy Tax Directive could generate about €9.5 billion in additional revenues each year. Abolishing the exemptions and applying a 15% VAT to all passenger transport could generate a further €17 billion. Even the European Commission calls these exemptions subsidies. A common ticket tax on EU departures could generate around €11 billion – or more. The Commission has now proposed reforms to VAT rates across Europe which, if agreed, will become the basis for the long-awaited definitive VAT regime in 2022. But instead of abolishing VAT breaks for airline tickets, the EU plan will treat even frivolous trips like a flight for a weekend break the same, in terms of VAT, as “necessities” such as foodstuffs, or pharmaceutical products. Transport is Europe’s biggest CO2 emitter and journeys by plane form a significant part. One reason in the past why there was no VAT on international air trips was the difficulty in collecting it. However, it is now clear VAT could be charged at the rate of the country the plane departed from, for the whole cost of the ticket.

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To help fix EU budget, end aviation’s tax break

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.com PLC.

By Bill Hemmings (Aviation director at sustainable transport group Transport & Environment (T&E).)

Feb 26, 2018

Subjecting domestic, intra and extra-EU aviation tickets to VAT at, say, a rate of 15% would generate revenues of some €17 billion per year, writes Bill Hemmings.

The European Commission’s move to make it administratively easier to calculate and charge VAT on passenger transport is welcome and long overdue, writes Bill Hemmings. But instead of abolishing VAT breaks for airline tickets, the EU plan will make a weekend trip treated the same as “necessities” such as foodstuffs, or pharmaceutical products, he warns.

Transport is Europe’s biggest CO2 emitter and journeys by plane form a significant part. Many member states exempt tickets for domestic trips from value added tax (VAT) and all states exempt intra-EU airline tickets. The exemption for aviation costs governments some €17 billion annually. Even the European Commission calls these exemptions subsidies.

The Commission has now proposed reforms to VAT rates across Europe which, if agreed, will become the basis for the long-awaited definitive VAT regime in 2022.

One of the reasons most international trips are VAT-exempt is that the current rules make it very complex and difficult to raise VAT on trips that cross borders.

Under the proposal that was issued in January, rules for calculating and collecting VAT on passenger transport will be simplified. The Commission proposes to change the way of calculating passenger transport VAT from 2022 – so that those tickets subject to VAT will be charged the VAT rate of the country of departure and for the entire cost of the ticket. This move to make it administratively easier to calculate and charge VAT on passenger transport is welcome and long overdue.

But instead of abolishing the long standing VAT exemptions for airline tickets – which were supposed to be “temporary” – passenger transport services will be eligible for reduced or zero VAT rates. That means the weekend flying break to Berlin will be treated the same as “necessities” such as foodstuffs, pharmaceutical products, medical equipment, children’s books, water supplies and undertakers.

While the administrative simplification may incentivise some member states to start charging aviation VAT, the Commission already recognises the clear danger that its proposal could lead to two unwelcome outcomes: member states are now potentially free to extend aviation tax subsidies by reducing existing VAT rates on domestic flights to zero (Germany currently taxes these flights at 19%); and pressure is likely to grow to zero-rate intra-EU bus and rail VAT which currently brings in half a billion euro in tax revenues. While the proposal contains safeguards on overall VAT revenue erosion, the danger of these downward moves is clearly acknowledged.

The Commission proposal is a missed opportunity. Both to make passenger transport VAT mandatory under much simplified rules and to boost tax revenues just when the EU is struggling to make its next seven-year budget add up.

Under the definitive VAT regime in 2022, a negative list will be drawn up of goods and services which must be subject to standard VAT rates. This is to prevent revenue erosion under the new flexible rates regime. Passenger transport and aviation in particular should be added to that list.

‘Better regulation’ should be about more than equating aviation with baby clothes, children’s books and other necessities, especially since aviation emissions are out of control – growing 8% in Europe alone in 2016.

The ETS aims to tackle aviation climate change and costs about €150 million per annum yet the Commission’s proposal potentially gives the sector a VAT subsidy of well over a hundred times this figure.

Subjecting domestic, intra and extra-EU aviation tickets to VAT at, say, a rate of 15% would generate revenues of some €17 billion per year which would make a major contribution to solving the EU’s budget problem as well as addressing aviation’s enormous unpaid external costs.

The discussion about reforming VAT comes at a time when several EU governments are discussing or introducing ticket taxes for aviation. For example, the new Dutch government has announced it wants to tax aviation, but preferably at EU level. There is, of course, no reason for them to wait for the EU VAT reform. The UK has levied a passenger charge since the early 1990s, Germany since 2011 and, more recently, Sweden and Norway have introduced theirs.

But if EU governments such as the Netherlands want to address the issue of tax-free plane tickets at European level, the EU’s VAT rules are the right place to start, and with the discussion about the next EU budget in full swing, the time for action is now.

https://www.euractiv.com/section/aviation/opinion/to-help-fix-eu-budget-end-aviations-tax-break/

https://www.transportenvironment.org/publications/how-undertaxed-polluting-aviation-sector-can-help-fix-eu-budget

EU-wide taxes on jet fuel and plane tickets could help plug budget gap and address transport climate impact, says T&E

7.3.2018 (GreenAir online)

Fri 2 Mar 2018 – Taxing jet kerosene and applying a value added tax to plane tickets within Europe could raise €26.5 billion ($32bn) a year that could be used to plug an EU budget gap, reduce labour taxes and help meet climate targets, says a position paper by campaign group Transport & Environment.

With the EU currently drafting its post-2020 budget and looking for alternative sources of revenue to make up for the UK’s Brexit departure, this is an opportunity to raise revenue from transport for both EU and national budgets while helping to tackle rising emissions from the sector, argues T&E. It calls for reforms of the 2003 Energy Taxation Directive (ETD) and rescinding of the exemption for the taxation of aviation and marine fuels, and require jet fuels on domestic and intra-EU routes to be subject at least to the EU minimum rate of fuel tax, which is currently 33 euro cents per litre. Value added tax (VAT) should also be levied on airline tickets for domestic, intra-EU and even extra-EU flights, says the Brussels-based NGO.

The ETD sets the minimum level of taxation legally permissible across Europe for certain fuels, a key reason being to reduce the ability of member states to lower fuel taxes to encourage ‘fuel tourism’. However, it also includes provisions for states to continue historical exemptions on aviation fuel taxation. The exemption is not mandatory and member states are free to tax aviation fuel for domestic aviation or on a bilateral basis with other member states for aviation fuel uplifted for flights between them. To date, says the paper, few member states have availed themselves of this provision except the Netherlands for the period when there were domestic flights operating.

Potential annual revenues in the largest five EU states are €6.5 billion ($8bn) alone at the minimum ETD rate for their combined domestic and intra-EU flights, while the total across the EU is estimated by T&E at €9.5 billion ($11.7bn). If the cost was to be passed on to the consumer, it calculates this would add €14 ($17) to the average ticket price of an average intra-EU flight. If VAT at 15% was applied to domestic, intra and extra EU air tickets and the cost fully passed through, this would raise revenues of €17 billion ($21bn) per year, with the average one-way intra-EU ticket price of €80 increasing by €12.

“Considering that average ticket prices have fallen dramatically from hundreds of euros over the past decade or so, and by 16% in the past five years alone, these measures are manageable and politically defensible as a means to fund budgets and cover aviation’s unmet external costs, such as climate change and noise and air pollution,” says the paper.

“The VAT and fuel exemptions cause distortions with rail, artificially stimulate demand, drive uncontrolled growth in aviation emissions and constitute unjustifiable subsidies.”

The €150 million ($185m) annual cost of complying with the EU Emissions Trading System does little to address this imbalance, it argues, and points out the ETS directive does not say the scheme can be the only charge on carbon emissions of covered entities. A kerosene tax would also send a price signal to airlines and aircraft manufacturers to increase efficiency, something it says is not being sent by the ETS. “Taxes also can encourage companies to utilise cleaner technologies, promote smarter transport behaviour amongst users and help bridge the price gap with cleaner future fuels,” it adds.

The paper acknowledges tax is a sensitive subject within the EU context and defining tax rates is considered a pillar of sovereignty for many member states. However, the perspective changes when it relates to a European-wide area of interest. “Climate change is a clear example of an issue that requires international action in order to be meaningfully addressed,” it says.

T&E says its position is aligned with 17 eminent European economists – including former Italian prime minister Enrico Letta, ex-WTO head Pascal Lamy and former German finance minister Hans Eichel – who signed an open letter to EU leaders and finance ministers calling for a carbon tax on fossil fuels as well as a kerosene tax and an application of a minimum level of VAT on all airline tickets to help with the post-Brexit EU budget.

T&E’s Freight Policy Officer, Samuel Kenny, commented: “Taxing airline fuel and flight tickets makes sense. Aviation is the quickest and cheapest way to heat the planet while at the same time the transport mode most heavily subsidised by governments. Plugging these tax gaps can both accelerate the fight against climate change and solve the EU’s budget problems in one fell swoop.”

T&E believes the current VAT exemptions could become entrenched as the European Commission wants to give member states greater flexibility on VAT rates. It fears this would effectively mean that for tax purposes, “weekend flying breaks in Europe be treated the same as necessities such as foodstuffs, baby items or pharmaceutical products.”

Said T&E Aviation Director Bill Hemmings: “The Commission proposal is a missed opportunity. Under the definitive VAT regime in 2022, a negative list will be drawn up of goods and services which must be subject to standard VAT rates. Passenger transport and aviation in particular should be added to that list.”

Meanwhile, US airlines are fighting a Senate subcommittee proposal to double the $4.50 Passenger Facility Charge cap, an airport tax paid by passengers through their airline ticket.

“Contrary to the Administration’s historic tax reform package that provided tax relief to all Americans, the average traveller still pays 21% of the total cost of a roundtrip airline ticket to the federal government – the same tax bracket designed to discourage use of so-called ‘sin products’,” wrote six airline CEOs in a letter to Transportation Secretary Elaine Chao.

http://www.greenaironline.com/news.php?viewStory=2453

See also

Response by T&E to EU consultation on VAT – there is no logical reason why air travel is exempt

March 23, 2017

The EU held a consultation recently, about VAT and changes to the European Directive on it. The consultation closed on 20th March 2017. Some of objectives of the consultation were to ask if there should be greater freedom for Member States to fix VAT rates; the proper balance between harmonisation and Member States autonomy in setting VAT rates; problems of differentiation of VAT rates within the Single Market etc. Air travel is zero rated for VAT across the EU. The group “Transport & Environment” responded to the consultation, and a couple of their points were that: having no VAT on air travel means the most carbon intensive transport mode, aviation, has ticket prices which are artificially lowered, creating distortions between rail/bus and aviation/ferry. … all Member States must impose VAT on all passenger transport, especially aviation … where this cannot be agreed, it should be easy for some Member States to impose VAT on passenger transport … for things that benefit society such as medicines there is a very strong argument to allow for super-reduced rates, however, climate intensive travel by air or cruise vacations are not among them. There is currently also no VAT on cruises – which are most definitely not essential items.

https://www.airportwatch.org.uk/2017/03/response-by-te-to-eu-consultation-on-vat-there-is-no-logical-reason-why-air-travel-is-exempt/

German air passenger tax (now €7 – 40) under threat as negotiations continue to form new German government

February 12, 2018

Negotiators for a new grand coalition between Chancellor Angela Merkel’s conservatives and Social Democrats may drop a proposal to progressively abolish Germany’s air transport tax (the Luftverkehrssteuer). The tax is levied on air ticket prices and costs between €7 and 40 euros depending on the distance flown, and generates about €1 billion per year. The airlines, of course, want the tax abolished, and claim it harms “competitiveness.” Aviation in Germany already pays no VAT (except on domestic flights) and no fuel duty. The CDU (Merkel) and SPD negotiating teams were discussing abolishing the ticket tax, but so far the tax seems to have survived the talks. It would be crazy to allow aviation to pay even tax than it does now, bearing in mind its massive CO2 emissions. Aviation is on its way to eating up all of what remains of our chances to limit global warming to below 2°C as agreed in Paris. Aviation emissions are growing fast (up 8% in the EU in 2016), billions of people are waiting to catch their first flight (just 3% of India’s population have ever boarded a plane). Efficiency improvements in the sector are slow and shrinking. What’s more, by ignoring non-CO2 effects we’re underestimating aviation’s contribution to global warming by a factor of at least two.

Click here to view full story…

Time to upgrade Europe’s aviation pollution rules – it should not be allowed to risk the Paris agreement

July 20, 2017

The European Parliament’s environment committee (ENVI) has voted on how the aviation sector should be treated under the EU’s Emissions Trading System (EU ETS), in response to a decision by the International Civil Aviation Organisation (ICAO) to set up a global offsetting mechanism. The ongoing revision of Europe’s carbon market rules for aviation is a critical opportunity to ensure that one of the biggest global polluters starts to contribute its fair share to EU climate action. While the term ‘sustainable aviation’ seems to be spreading, the reality is that the sector’s emissions are growing unsustainably and will continue to do so. Even if the global aviation deal is fully implemented and enforced, it will not curb the industry’s rising emissions. Though just intra-EU flights are included in the EU ETS, unlike other sectors – aviation is not expected to annually reduce its emissions. Add the fact that the industry is exempt from fuel taxes, VAT or legally-binding fuel efficiency requirements, and it becomes clear aviation enjoys very special treatment. While greenhouse gas emissions from all other sectors in the EU carbon market fell in 2016, those from aviation grew by 8%. This risks putting the goals of the Paris climate agreement out of reach. With no quick solutions in sight, the sector needs to pay a real price for its pollution. A high enough carbon price would help.

https://www.airportwatch.org.uk/2017/07/time-to-upgrade-europes-aviation-pollution-rules-it-should-not-be-allowed-to-risk-the-paris-agreement/

Ending aviation’s tax holiday

February 7th, 2018 (T&E – Transport and Environment)

One billion. That’s how much in euro that Germany’s tax on airline tickets generates every year. A billion is about a quarter of what trucks pay in Maut every year, or about 35 times less than the motor fuel tax.

So it is not very high. Particularly when you remember that aviation benefits from a preferential tax regime. As the EU’s own environment agency recently highlighted, airlines pay no fuel taxes, and VAT is only charged on domestic flights.

The German ticket tax adds around €7 to a short-haul flight ticket. That’s the cost of a beer and a Bretzel in the Berlin airport. It is a cost that airlines’ customers can easily afford. And in light of aviation’s extremely negative climate and environmental impacts, the German ticket tax is a bargain.

But despite all of this the future of the Luftverkehrssteuer was hanging in the balance in recent days. Following pressure from Germany’s aviation industry – which claims the ticket tax harms its ‘competitiveness’ – the CDU and SPD negotiating teams were discussing abolishing the ticket tax. As this article goes to press it looks like it may have survived, which would be good.

But a €7 ticket tax is only a small piece of the aviation puzzle. Two weeks ago we brought together the world’s top aviation environmental experts. The picture they painted was sobering: aviation is on its way to eating up all of what remains of our chances to limit global warming to below 2°C as agreed in Paris. Aviation emissions are growing incredibly fast (up 8% in the EU in 2016), billions of people are waiting to catch their first flight (just 3% of India’s population have ever boarded a plane) and efficiency improvements in the sector are slow and shrinking. What’s more, by ignoring non-CO2 effects we’re underestimating aviation’s contribution to global warming by a factor of at least two. What’s to be done?

Perhaps it is useful to compare aviation to passenger cars. On the one hand the comparison reflects badly on aviation. We’re making real progress on light vehicles, with EVs charged with wind and solar electricity acting as the poster child of a zero emissions future. On the other hand, the fight against car pollution started decades ago. Carmakers are not inherently more innovative (although there is more competition than between the Airbus-Boeing duopoly). But over the past 30-40 years we have progressively tightened the screws on car pollution. That pressure, be it fiscal or technological, has led to innovation, often beyond our imagination. And because we have all these instruments (taxes, standards) we also have the means to make the transition go faster. Just imagine Tesla trying to enter the heavy-duty market in a world without diesel excise duties!

Taxation clearly plays a major role and here Europe has a big opportunity. The EU’s €1 trillion budget (over seven years) is up for review and the Commission is due to make a proposal for a post-2020 budget in May. Because of Brexit there’s a €12 billion hole in the budget and that at a time when there are a number of new priorities (migration and security top Juncker’s list). The two options to balance the budget – cutting spending or increasing member state contributions – are unpopular for understandable reasons. One way forward which was proposed by former Italian prime minister Mario Monti is to increase the EU’s so-called own resources. These aren’t EU taxes but rather national taxes or levies where the EU gets a cut, the prime examples being VAT and import duties.

We have run the numbers and if all EU countries would agree a fixed VAT rate of, say, 15% on air tickets, this would generate €11 billion in new revenues from intra-EU flights and €17 billion from both intra and extra-EU flights. A small kerosene tax on intra-EU flights of 10 cents a litre would generate €3 billion whereas a level equivalent to the EU’s minimum diesel taxes (33 cent/litre) would generate €9.5 billion. We also looked at motor fuel taxation where a new carbon tax equivalent to €30/tonne (roughly 7.5 cent/litre) could generate up to €26 billion in additional revenue. (These are EU-28 numbers.) Some of these revenues could be directed into helping to fill the EU’s “Brexit funding gap”.

Of course, taxation is challenging because it normally requires unanimous approval. But that’s also true for the EU budget where a deal will need to be found. So if ever there was an opportunity for a grand bargain which helps spare the member states’ and the EU’s budget while tackling our toughest climate problem, now would be the time. Of course, it wouldn’t be “easy”. But then again, nothing worthwhile ever is.

https://www.transportenvironment.org/newsroom/blog/ending-aviation%E2%80%99s-tax-holiday