Monday, March 1, 2021

Government promises MP to ease taxation of the airline sector

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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.

Not having this tax is important because, in aviation, competition is international. This tax would be another cost that American and European competitors do not have, in addition to the other taxes that only exist here, such as the ICMS on aviation kerosene. That is what we have explained to the executive branch. And also that this is not a tax waiver, after all, this tax was never actually charged.

Eduardo Sanovicz, president of the Brazilian Association of Airlines (ABEAR)

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. ”

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Government promises MP to ease taxation of the airline sector