Still in February, the federal government should issue a provisional measure that suspends the collection of income tax withheld at source (IRRF) on aircraft and engine leasing. The commitment was signed at a meeting of members of the Ministries of Economy and Tourism with ABEAR (Brazilian Association of Airline Companies) in early January and resolves – once again temporarily – an old claim of the sector. Wanted by EXAM, the Ministry of Economy declined to comment.
The IRRF on aircraft leasing is a “jabuticaba” tax, which only exists in Brazil, and strongly impacts the finances of airlines, since half of the fleet of national companies (Latam, Gol and Azul) are leased. As they are not part of the standard international order, the contracts pass this cost on to the airlines – which, in turn, pass it on to passengers, making tickets more expensive. In 2019, when an MP reinstituted the collection, ABEAR estimated an extra cost of R $ 79 million with the tax for the following year.
Aircraft leasing is a common practice in the aviation market, since acquiring own aircraft, in addition to being very expensive, also removes flexibility in fleet and network management in times of fluctuating demand, as in the crisis caused by the pandemic. Most leasing companies are located in Ireland, which offers low or no impact tax legislation for this type of business.
“The USA, China and Italy, for example, have a similar taxation provided for in their tax legislation, but it is mitigated by the existence of bilateral agreements to avoid double taxation”, explains Giovani Ceccon, partner at Silveiro Advogados and specialist in contracts with a focus in global transportation. “Brazil has no such agreement with Ireland, other than considering the country as ‘favored taxation’, which raises the IRRF to the maximum rate.”
As in the past, the government should exempt the collection of IRRF via MP because it is the shortest way to meet the demand of airlines. According to Ceccon, the negotiation of a bilateral agreement with Ireland, for example, would take too long, as well as creating specific legislation to end taxation once and for all. “An interim measure, therefore, is the best instrument, because it has immediate effect and a period of validity that would allow Congress to consider the issue calmly,” says the lawyer.
The best, however, does not mean the ideal. Despite resolving the issue for now, the MP promised by the government does not remove the matter from the industry’s agenda, since it suspends the collection of the tax for a specified period of time. “Never is [o ideal], but that’s what we have for today, right. Then we will negotiate… ”, laments Sanovicz, pointing out that, despite good dialogue with the government, sector bottlenecks persist. “2023 [quando o imposto supostamente voltaria a ser cobrado] it’s another planet. It would be ideal to have definitive legislation on the subject, but that is what we have achieved for now. ”
Understand the comings and goings of the IRRF on aircraft leasing
In Brazil, IRRF on aircraft leasing has a standard rate of 15%. As it is a “jabuticaba” tribute, which only exists in Brazil, the contracts of the “lessores” (companies that own the aircraft and lease them to the airlines) pass this cost on to the companies. In 1997, the FHC government suspended charging to make the national airline sector more competitive – since the extra cost of Brazilian companies gives foreign companies an advantage.
The legal provision that extinguished the charge, however, needed to be renewed from time to time. And so it was for more than two decades, through different mechanisms. Until, in 2019, the Michel Temer government, by revoking a series of tax benefits, gradually reinstated the collection in a gradual and staggered manner: from 2020, the tax would be 1.5%; in 2021, 3%; and, from 2022, 4.5%.
In 2020, Temer’s provisional measure was considered in Congress and became law – but the sector’s strong lobby made deputies veto the new configuration of the tax – with the exception of the 1.5% rate in 2021, which already was provided for in the LDO and could not be changed. The law was then enacted by President Bolsonaro.
“The problem is that the legislation was changed without specifying what would happen from 2021 on. Thus, this year, the general rule of Revenue, of 15% of tax, once again applied”, explains lawyer Ceccon. “At that time, the government was undecided on what to do. He needed to accommodate a need, a pressure from the industry, but it was unclear what would be done, so the issue was not addressed again. It was the fastest, palliative solution. But now the problem comes up, since it hasn’t been dealt with more than once. ”