Taxing aviation
fuels in the EU
Taxing aviation
fuels in the EU
This report is prepared by
Jasper Faber
Aoife OLeary
With a contribution by Pablo Mendes de Leon
Delft, CE Delft, November 2018
Publication code 18.7R09.036
Aviation Taxation Duties Fuels European legislation Market Effects
Client Transport and Environment
Publications of CE Delft are available from www.cedelft.eu
Further information on this study can be obtained from the contact person Jasper Faber CE Delft
copyright, CE Delft, Delft
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7.R09 - Taxing aviation fuels in the EU November 2018
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Content
Summary
Introduction
2.1 General subject and nature of the report
2.2 Problem definition
2.3 Outline of the report
Possibilities for and constraints to taxing aviation fuels in Europe
3.1 Subject and nature of this chapter
3.2 Legal analysis of possibilities to tax aviation fuels
3.3 Remaining issues
3.4 Conclusion
Possible revenues of aviation fuel excise
Conclusion
Preliminary legal analysis of taxation of aviation fuels in Europe
Executive Summary
Table of contents
A.1 The position of carriers under European LAW
A.2 The position of air carriers under the International framework
A.3 The Chicago Convention on international civil aviation 1944
A.4 Conclusions and possible solutions
Legal Analysis of Domestic and Intra-EU Aviation Fuel Taxation
B.1 Introduction
B.2 The Energy Taxation Directive
B.3 2002 Open Skies Case
B.4 Excise Duty Directive
B.5 The Emissions Trading System
B.6 The Chicago Convention
B.7 Bilateral Aviation Agreements
B.8 Reciprocal Exemptions
B.9 Exempting US carriers
B.10 De Minimis
B.11 Conclusion
C
List of non-EEA aircraft operators active on intra-EEA routes
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1 Summary
This paper analyses the taxation of aviation fuels in EU Member States on intra-EU flights. Its main focus is the legality of these taxes and it also provides estimates of the potential
revenues. Fuels used in commercial aviation are exempt from excise duties in the EU, in contrast to
fuels used on road and rail transport. However, the Energy Taxation Directive permits
EU Member States to impose a tax on aviation fuel used in domestic flights without
limitation as well as on intra-EEA flights between Member States on the condition that the
affected States have entered into a bilateral agreement to do so. If Member States were to enter into a bilateral agreement to tax fuel on flights between
them, such a measure could also affect aircraft operators registered in a non-EU Member
State, as they sometimes operate on intra-EEA routes. In that case, it is possible that some
of these airlines would be subject to separate bilateral air service agreements that
prohibits both States from taxing fuels. Such a situation could potentially distort the competitive market. This report explores
whether, and if so how, such a market distortion could be limited or avoided altogether. The legal analysis shows that it appears to be possible for EU Member States to tax aviation
fuels on flights between them even when non-EU carriers are enjoying a mutual exemption
from fuel tax operate on those routes. There are several ways to minimise the chances that
a legal challenge by these carriers would be successful.
The most promising option seems to
be the introduction of a
de minimis threshold. The potential revenues of an excise duty on aviation taxes is several billions of euros per
year. 3
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2
Introduction
2.1
General subject and nature of the report
This paper analyses the taxation of aviation fuels in EU Member States on intra-EU flights. Its main focus is the legality of these taxes and it also provides estimates of the potential
revenues. The paper is primarily intended to draw attention to the possibility of taxing
aviation fuels on domestic and
intra-EEA flights and to identify some remaining issues which need to be clarified.
A full
legal and economic analysis was beyond the scope. 2.2
Problem definition
Fuels used in commercial aviation are exempt from excise duties in the EU, in contrast to
fuels used on road and rail transport1. However, the Energy Taxation Directive permits
EU Member States to impose a tax on aviation fuel used in domestic flights without
limitation as well as on intra-EEA flights between Member States on the condition that the
affected States have entered into a bilateral agreement to do so2. Currently, all EEA Member States exempt aviation fuels sold to aircraft on international
voyages from taxation both for intra-EEA and extra-EEA flights, but some levy excise duty
on domestic flights. If Member States were to enter into a bilateral agreement to tax fuel on flights between
them, such a measure could also affect aircraft operators registered in a non-EU Member
State, as they sometimes operate on intra-EEA routes. In that case, it is possible that some
of these airlines would be subject to separate bilateral air service agreements that
prohibits both States from taxing fuels. Such a situation could potentially distort the competitive market Suppose two EU Member
States agree to tax aviation fuels on flights between those states, and that an airline from a
non-EU country operates one or more flights between those countries. This airline could
argue that it would not have to pay the tax due to the bilateral air service agreement
between either of the EU Member States and the non-EU country in which the airline is
registered. If this argument is justified, the non-EU airline would have lower costs and could
gain a competitive advantage relative to EU carriers operating on the same route. This report explores whether, and if so how, such a market distortion could be limited or
avoided altogether. It especially analyses the potential of de minimis provisions in fuel
taxation as a way to limit the distortion. ________________________________
1 Energy Tax Directive 200396EC Article 141b Member States shall exempt the following from taxation
energy products supplied for use as fuel for the purpose of air navigation other than in private pleasure-
flying. 2 Energy Tax Directive 200396EC Article 142 Member States may limit the scope of the exemptions ... to
international and intra-Community transport. In addition, where a Member State has entered into a bilateral
agreement with another Member State, it may also waive the exemptions provided for in Paragraph 1b. 4
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2.3
Outline of the report
Chapter 3 summarises the legal analysis of a de minimis threshold in an agreement between
Member States to tax aviation fuels. Chapter 4 presents an estimate of the potential
revenues. Chapter 5 provides conclusions.
Annex A contains the full text of the legal analysis. Annex B is a list of non-EU aircraft
operators active on intra-EEA routes. 5
7.R09 - Taxing aviation fuels in the EU November 2018
3 Possibilities for and constraints to
taxing aviation fuels in Europe
3.1
Subject and nature of this chapter
This chapter contains a summary of two legal analyses of the possibilities for EU Member
States to impose excise duties on fuel used for on intra-EEA flights. It is based on more
elaborate analyses that are reproduced in Annexes A and B. 3.2
Legal analysis of possibilities to tax aviation fuels
EU Member States wishing to tax aviation fuel on flights between those states can enter into
a bilateral agreement to do so. This was explicitly allowed for under the Energy Taxation
Directive ETD from 2003. Even though such a bilateral agreement would subject aviation
to a new tax, the chances of successful legal action of EU carriers operating routes between
those states against that tax would be small because the ETD specifically allows for such a
bilateral agreement and the law governing the EU internal air transport market does not
address fuel taxation. There are a number of non-EU aircraft operators that are offering commercial services
between airports in EEA Member States see Annex C. Most of these consume limited
amounts of fuel on
intra-EEA routes, with three exemptions a Swiss low cost carrier and two American Express
Airlines. Many of these foreign airlines operate under bilateral air service agreements or
under the EU-US Open Skies Agreement which exempt them from fuel taxes3. This means that if EU Member States were to conclude a bilateral agreement to tax aviation
fuel on flights between those states, non-EU airlines could oppose such a tax with a
reference to the air service agreement. If this opposition would be successful, a situation
could emerge in which EU carriers would be taxed, whereas their foreign competitors would
not. This would distort the competitive market. The issue of distorting the competitive market does not arise with regard to taxing fuel
used on domestic flights. The only foreign carriers that have the right to operate domestic
flights in
EU Member States are members of the European Common Aviation Area ECAA. In addition
to being granted the rights to operate domestic EU flights under the ECAA, they must agree
to abide by additional EU aviation legislation, including the Energy Taxation Directive. Therefore any domestic fuel tax in an EU Member State can be imposed the same on that
countries domestic carriers and any other EU or ECAA carriers operating domestically within
that country.
There are several places around the world e.g. in the US, Brazil, India and
________________________________
3 Article 112 There shall also be exempt, on the basis of reciprocity, from the taxes, levies, duties, fees and
charges referred to in Paragraph 1 of this Article, with the exception of charges based on the cost of the service
provided c fuel, lubricants and consumable technical supplies introduced into or supplied in the territory
of a Party for use in an aircraft of an airline of the other Party engaged in international air transportation, even
when these supplies are to be used on a part of the journey performed over the territory of the Party in which
they are taken on board. 6
7.R09 - Taxing aviation fuels in the EU November 2018
Japan which impose taxation on domestic but not international flights without any issues
arising. However, EU Member States have several recourses to legal action against fuel taxes
1. A de minimis provision could be introduced exempting non-EU carriers in practice. Whether this provision is on the basis of the amount of fuel used, the number of flights,
or yet another basis is not a legal case. There is a legal precedent in the EU ETS
directive, which introduced an exemption on the basis of the number of flights and the
total quantity of emissions. In case of a fuel tax, the de minimis threshold could for
example be based on the amount of fuel, on the number of flights, or on the total tax
receipt. 2. Several recent air service agreements allow for the taxation of fuels. This means that
foreign aircraft operators from these countries could not bring a case on the basis that
there is a bilateral agreement which has been breached. The Member States and the EU
could renegotiate the agreements with the other countries involved. The EU-Swiss
bilateral for example, already does not provide a fuel tax exemption and thus does not
need to be renegotiated4.
3. In the case of American carriers, the EU-US Open Skies Agreement foresees in referral of
tax cases to the Joint Committee, which should decide on the basis of consensus. If
consensus is not reached, the EU and the US may seek arbitration. The outcome of such
a procedure is by nature unpredictable but the guidance provides for the suspension of
comparable benefits which would presumably including the US imposing fuel taxation
in the US, which, in fact, is already being imposed. 4. Finally, most bilateral air service agreements exempt fuel used from taxation on the
basis of reciprocity. While the question has not been tested in court, this could be
interpreted to mean that either party to the agreement can terminate the reciprocity. If this interpretation holds up in court, it would allow for the taxation of fuel used by
foreign airlines. A question that will arise is how a possible taxation ties into the Emissions Trading System
ETS which places a cap on the amount of CO2 intra-EU aviation can emit. However, the
ETS was not designed to be the only measure mitigating aviations climate impact. The ETS
Directive states itself that it is part of a wider comprehensive and coherent package of
policies and measures implemented at Member State and Community level. And the ETS
was designed as a Directive in order to be a minimum harmonising measure. 3.3
Remaining issues
The legal analyses conclude that a de minimis threshold could be a way to facilitate the
introduction of taxation of aircraft fuel on intra-EEA flights and circumvent obstacles
pertaining to mandatory exemptions regarding taxation of aircraft fuel raised by air services
agreements. Another way to facilitate the introduction of intra-EU fuel taxation would be for the EU to
abrogate its exemption of fuel taxation in the international agreements. Both legal analyses
conclude that while not tested in court, since the EU-US Open Skies Agreement only
exempts fuel from taxation on the basis of reciprocity, that reciprocity can be withdrawn
at any time to allow either side to impose taxation. The legal analysis in Annex B considers
________________________________
4 See the text of the Agreement here ec.europa.eutransportmodesairinternational_aviationcountry_index
switzerland_en
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the procedure under the EU-US Open Skies Agreement to conclude that US agreement to
withdrawing that reciprocal exemption would not necessarily be required. And in the event
that it was and arbitration under the agreement resulted, the end result would be the
withdrawal of comparable benefits by the other side, i.e.
the US could begin to tax EU
carrier fuel on flights departing the US there are no intra-US flights by EU carriers. Still, several issues remain to be analysed in more detail, such as
At which legislative level would the de minimis threshold be set? The legal analysis
suggests that the threshold should preferably be set at the EU level, potentially as an
amendment of the Energy Taxation Directive, rather than at the bilateral or national
level, in order to prevent distortion of competition. However, taxes would be levied by
Member States, and an EU-wide de minimis threshold would require them to exchange
information on the amount of fuel taxes. A threshold per Member State would
circumvent this problem. If non-EU carriers benefitting from a mutual fuel tax exemption were to exceed the
threshold in the future due to an increase in their activities or otherwise, would they
then become liable for a tax? Would any de minimis provision be deemed to act as a cap on activity and as such be at
odds with other provisions of the air service agreement? Should the threshold be based on the amount of fuel uploaded, the number of flights or
another parameter? How the threshold would be implemented in practice. A tax rebate would probably have
the lowest administrative costs and the lowest potential for fraud, but would a tax
rebate be the same as an exemption? 3.4
Conclusion
Aviation fuel used on flights between Member States can be taxed if Member States enter
into a bilateral agreement or a series of bilateral agreements to do so. In order to minimise
the risk of successful legal action by non-EU carriers operating between these Member
States and enjoying a mutual exemption from fuel tax, a de minimis threshold for the tax
appears to be a good instrument, although there are also other options. How the tax and
the threshold would best be designed, requires more analysis. 8
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4 Possible revenues of aviation fuel
excise
The potential revenues of an aviation fuel excise duty are about 6 billion euros for
international
intra-EEA flights and approximately 50 higher when domestic aviation is also included, as
shown in Table 1. Table 1 - Calculation of potential revenues of an aviation excise duty
Item
Quantity Source
Verified aviation CO2 emissions in the EU ETS,
2016 million tonnes5
Calculated fuel use in EU ETS scope
61 European Environmental Agency ETS Data
Viewer
20
IPCC emission factor for jet kerosene is 3.15
Amount of jet fuel supplied in EEA for domestic
6 Eurostat, Supply, transformation and
flights, 2016 million tonnes
consumption of oil - annual data nrg_102a,
Calculated fuel use on international flights in EU
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version 1-2-2018
ETS scope million tonnes
Calculated fuel use on international flights in EU
ETS scope billion litres
17 Exxon Mobile fuel specifications Jet kerosene
energy density is 775-840 kgm3. Here, the
value 800 kgm3 is used. Potential tax revenue when taxed at 330 per
5.6 Energy Taxation Directive minimum rate
1,000 litres billion
This amount does not take a de minimis threshold into account. According to the EU ETS Transaction Log, emissions of non-EEA airlines in the scope of the
EU ETS amounted to 0.9 Mt, or about 1.5 of total emissions. The largest airline consumed
about 74 million litres of fuel on intra-EEA routes. Exempting airlines the first 100 million
litres from taxation for each airline would suffice to ensure that these airlines do not have
to pay tax. A tax revenue of 5 billion would, if passed on to the passengers, amount to a little over
10 per passenger. ________________________________
5 Note that flights to and from outermost regions are exempt from the EU ETS. As a result, the total emissions on
inter-EEA flights are higher than the verified emissions under the EU ETS. Flight data analysis suggests that the
different amounts to 5.5 Mt CO2 per year. 9
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5 Conclusion
Is appears to be possible for EU Member States to tax aviation fuels on flights between them
even when non-EU carriers and enjoying a mutual exemption from fuel tax operate on those
routes. There are several ways to minimise the chances that a legal challenge by these carriers
would be successful. The most promising option seems to be the introduction of a de
minimis threshold.
The potential revenues of an excise duty on aviation taxes is several billions of euros per
year. 10
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A Preliminary legal analysis of
taxation of aviation fuels in
Europe
By Pablo Mendes de Leon
February 2018
Executive Summary
Directive 200396EC mandatorily exempts aircraft fuel consumed on commercial flights
between EU States from taxation. Taxes are levied on energy products as defined in this
Directive. At the same time it allows EUEEA Member States to waive this exemption
pertaining to taxation of aircraft fuel through bilateral agreements, and for other purposes
as detailed below. So far, no examples of such bilateral agreements are known. The present brief report
endeavours to contextualise this option in light of European and international law. From an
international air law point of view, aircraft fuel used on transit flights is not taxable. The same is generally true for aircraft fuel introduced in foreign territory and used on
international flights. However, multilateral air services agreements such as the EU-US agreement on air transport
and certain bilateral air services agreements all of which have been concluded in the 21st
century open the door for a waiver of this exemption on intra-EUEEA flights when two, or
more, European States engage into an agreement on taxation of aircraft fuel, or when they
refer to a waiver pursuant to domestic law. Thus, they provide a legal basis for the
introduction of taxation of aircraft fuel. A revision of Directive 200396EC ought to address these recent developments, and explain
the term international conventions justifying, in the views of the EU policymakers, a
continuation of the aircraft fuel tax exemption. In order to facilitate the introduction of taxation of aircraft fuel and circumvent obstacles
pertaining to mandatory exemptions regarding taxation of aircraft fuel raised by air services
agreements, thought could be given to include a de minimis measure in a revised version of
Directive 200396EC. Such a measure should preferably be taken at the EU rather than at
any other level, whether bilateral or national, in order to harmonise conditions for the
introduction of a partial or total waiver of the exemption. However, the establishment of
such a measure requires a very careful assessment of its legal and economic implications. A de minimis measure has been used in, for instance, the EU ETS Directive 2008101. When the EU considers the introduction of an aircraft fuel tax, preferably in conjunction
with a de minimis measure, regard must be had to general principals of EU law. They
include the non-discrimination principle, the fiscal neutrality of the proposed tax measure,
a prohibition of infringement of free movement of air services and compliance with
European competition and State aid rules. 11
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Table of contents
The position of carriers under European LAW
A.1
A.1.1 The scope of EU Energy Taxation Directive 200396
A.1.2 The EUEEA internal market
A.1.3 The regime of the European Common Aviation Area ECAA
A.1.4 The de minimis measure
A.2
The position of air carriers under the International framework
A.2.1 The Chicago Convention on international civil aviation 1944
A.2.2 Air Services Agreements
A.2.3 The EU-US agreement on air transport of 2007 as amended in 2010
A.2.4
ICAO resolutions
A.3
Conclusions and possible solutions
A.1
The position of carriers under European LAW
A.1.1 The scope of the EU Energy Taxation Directive 200396
EU Council Directive 200396, henceforth also referred to as the Directive, is the principal
directive addressing the taxation of energy products including aircraft fuel. It obliges EU
States to impose taxes on energy products in accordance with the Directive. That said, it
proceeds from the fiscal autonomy of the EU States which is evidenced by the large number
of exemptions and derogations laid down the Directive.
Moreover, EU States must take into
account their relations with non-EU States as to which see Section A.2. Among others the Directive is designed to enhance the level playing field in the internal
market by establishing minimum levels of taxation at an EU level. At the same time, it
endeavours to promote the competitiveness of EU undertakings internationally. The last mentioned objective plays an important role in relation to international air
transport as commercial air transport between EUEEA States is mandatorily exempted from
taxation of aircraft fuel. However, fuel consumed for the performance of air transport can
be taxed in the event of
a Private pleasure flying in which case fuel must be taxed, following which provision
France, Portugal, the United Kingdom, Malta and Sweden attempted to disregard the
concerned exemption in which effort they did not succeed because the EU Commission
wished to strictly apply the Directive. b Commercial air traffic using fuel which is not jet fuel CN code 2710 1921. c Domestic air traffic, that is, carriage by air within an EU State. d
Intra-EU traffic in case two EU States have entered into a bilateral agreement, in which
case the concerned Member States are allowed to apply a level of taxation below the
minimum level set out in the Directive. As far as we can see, the last mentioned event has not been put in practice but it is
referred to in the EU-US agreement on air transport of 2007 as amended in 2010 as to which
see Section A.4. While the Directive speaks of a bilateral agreement between two EU States, it does not
specify the form, let alone does it give indications for the substance of such an agreement. Thus, at first sight, it would seem that EU States are free to choose the form and substance
of such an agreement. 12
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The question is whether a bilateral agreement means
A new bilateral agreement between two EU States, focussing exclusively on taxation of
aircraft fuel to be applied by the EU air carriers flying the routes covered by the new
bilateral agreement, in which case it may be critical to apply the new bilateral
agreement to non-EU air carriers because they are subject to another regime, for
instance the EU-US agreement on air transport of 2007 as amended in 2010 as to which
see Section A.3.2, or exempted by virtue of a de minimis measure as to which see
Section A.1.4. An amendment of an existing air services agreement as to which see Section A.3.1. An amendment of a tax agreement between two EU States which is not the most likely
option as it covers subjects which are different from the current one, that is,
principally, the avoidance of double taxation of companies and persons working in the
two States. Remarkably, Article 116 of the EU-US Agreement on air transport see Section A.3.2
speaks of a waiver to be granted by two or more Member States pursuant to Directive
200396 whereas 142 of this Directive refers to bilateral agreements between EU States.
Reference is made to the remarks on this point made in Section A.4. A.1.2 The EUEEA internal market
The EU internal air transport market is governed by EU Regulation 10082008. Its
geographical scope is extended to the territories of the European Economic Area EEA, that
is, Norway, Iceland and Liechtenstein. Special arrangements are made with Switzerland in a
treaty with the EU. While EU Regulation 10082008 principally aims to create a level playing field in the EU
internal air transport market by harmonising conditions for the operation of air services
within that market,
it does not address taxation of aircraft fuel. At various instances, Regulation 10082008 refers to bilateral agreements between
Member States notably in the context of access to intra-EU routes pricing freedom of EU
air carriers. This Regulation stipulates that restrictions on access to routes and pricing are
abolished and that provisions in such bilateral agreements between Member States are
hereby superseded. The bilateral agreements in question are bilateral air services
agreements. It follows that Regulation 10082008 supersedes the relevant provisions of bilateral air
services agreements between EU States but that such agreements are not cancelled in toto
by this regulation as such bilateral agreements contain provisions which are not covered by
it, for instance, the taxation of aircraft fuel. Reportedly, Spain has cancelled all its
bilateral air services agreements with other
EU States whereas the Swedish website, listing all of its bilateral air services agreements,
does not mention the intra-EU agreements.
From a legal perspective it would seem that the bilateral air services agreements between
EU States ought to stay in force as not all matters covered by these agreements are
superseded by EU law, as exemplified by taxation of aircraft fuel, cooperation in the
context of aviation security conventions and transportation between EU States who have
overseas territories and such overseas territories as such territories fall outside the scope of
Regulation 10082008 and EU law generally. A.1.3 The regime of the European Common Aviation Area ECAA
In December 2005 the EU concluded a Multilateral Agreement on the establishment of a
European Common Aviation Area ECAA with eight South-East European partners, namely,
Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of
Macedonia, Romania, Serbia and Montenegro and the U.N. Mission in Kosovo.
The objective
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of this agreement is to integrate the said neighbouring South-East European countries with
the EUs internal aviation market which, at the time, consisted of 25 EU Member States as
well as Norway and Iceland. The eight South-East European countries agreed to the full application of the EUs aviation
law also referred to as the EU acquis. They will do so in a step by step procedure which is
supervised by the EU Commission. Once they fully implement the EUs aviation acquis,
airlines from the South East European countries will have open access to the enlarged EU
internal air transport market. The acquis of the EU encompasses the implementation of the above Directive 200396. The
only applicable provisions applying to the accession countries are those laid down in
Article 141b and 2 pertaining to the exemptions in air transport. Reference is made to
the discussion in Section 1.1. A.1.4 The de minimis option under EU law
In Section A.1.1 it was concluded that EU States are permitted to engage into bilateral
agreements, however framed, with the purpose of taxing aircraft fuel on intra-EU flights
covered by that agreement. In that context, it must be examined how to deal with non-EU
air carriers operating the same intra-EU flights as they are flying under other agreements. For instance, US cargo carriers operate intra-European services under the EU-US agreement
of 2007 as amended in 2010 as to which see Section A.3.2. It may be critical to subject non-
EU air carriers to bilateral agreements concluded between EU States because, for instance,
other agreements such as the mentioned anterior EU-US agreement, may conflict with the
provisions of the intra-EU bilateral agreement. The application of the de minimis threshold could be adopted as an exemption measure for
carriers who do not meet the criteria drawn up in the measure. This option would legally
circumvent the obstacle referred to above, that is, that it may be critical to subject non-EU
air carriers to a bilateral agreement between EU States in light of existing arrangements. While the EU Court of Justice has observed that, among others, the freedom to provide
services, including the provision of air services, is so fundamental that restrictions ought
not be permitted, the same court has, in other decisions, expressed the view that, if the
effect of the measure is too remote and it lacks a significant effect on the market access,
it is not caught by EU Treaty provisions. These decisions regarded EU undertakings, whereas
the current scenario would principally and practically be designed to affect non-EU
undertakings, that is, non-EU airlines. However, it will be shown below, in relation to the
EU ETS Directive, that non-EU airlines may also be exempted from environmental measures
pursuant to the de minimis measure. Regulation 10082008 does not provide quantitative thresholds for accessing the air
transport market governing the operation of intra-EUEEA air services. All EUEEA carriers
meeting the quality standards mentioned there are permitted to operate these services,
and must comply with all of the conditions drawn up in that regulation. The same regime
applies to air carriers operating their air services under bilateral and multilateral air
services agreements as to which see Sections A.3.1 and A.3.2. De minimis provisions, do, however, occur in European regulations affecting air transport. For instance, EU environmental law provides examples of de minimis andor quantitative
measures exempting operators of aircraft from compliance with the concerned obligations. In the first place, reference is made to EU Directive 2008101 on the establishment of the
EU Emission Trading System ETS. It comprises de minimis exemptions for airlines, whether
EUEEA or non-EUEEA airlines, operating either fewer than 243 flights per period for three
consecutive four months periods or flights with total annual emissions lower than 10,000
tonnes CO2 per year. Thus, the provisions drawn up in Annex I of EU ETS Directive 2008101
could serve as an example for a proposal pertaining to the introduction of an aircraft fuel
taxation measure. 14
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Secondly, there are other examples of EU regulations providing for quantitative thresholds. However, the situation envisaged in those regulations is different from the present
scenario. The establishment of a de minimis measure must be diligently scrutinised because of its
legal and economic impact.
It may affect the competitive conditions of the performance of
intra-European air transport, and thus, the level playing field, raising also air policy and
legal questions. A.2
The position of air carriers under the International framework
A.3
The Chicago Convention on international civil aviation 1944
The Chicago Convention of 1944 forms the constitution of international civil aviation. It is
adhered to by 192 States per February 2018, that is, practically all States in the world,
including all EUEEA States. The EU is not a party to it as only States can accede to this
convention. It would seem that the proposal for an amendment of Directive 200396 when
referring to international conventions preventing the EU from abolishing these
exemptions has this convention in mind. The Chicago Convention contains one provision which directly affects the subject of this
study, namely, Article 24a which reads as follows
Fuel, lubricating oils, spare parts, regular equipment and aircraft stores on board an
aircraft of a contracting State, on arrival in the territory of another contracting State
and retained on board on leaving the territory of that State shall be exempt from
customs duty, inspection fees or similar national or local duties and charges. This
exemption shall not apply to any quantities or articles unloaded, except in accordance
with the customs regulations of the State, which may require that they shall be kept
under customs supervision.
While it may be too early to speak of a trend, the cited clause may be seen as a
sign on the wall to begin with. A.3.2 The EU-US agreement on air transport of 2007 as amended in 2010
This agreement merits special attention because of the large amount of air traffic
representing around 14 per cent of global air traffic. Moreover, some of the largest non-EU
carriers that operate on intra-EU routes are US carriers see Section A.1.4. As such, they
could be affected by a bilateral agreement between EU Member States regarding the
taxation of aviation fuel. The EU-US agreement on air transport proceeds from the traditional model exempting
aircraft fuel used on international flights, and this on the basis of reciprocity. However, the
same article opens the door for taxation of fuel used by US airlines on intra-EU flights
covered by an agreement concluded between two or more EU States envisaging to apply a
waiver of the exemption contained in Article 14.1b of EU Council Directive 200396. In
such cases, the Joint Committee established under this agreement must consider the
matter. 16
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These provisions have not been modified in the Protocol of 2010 amending the agreement of
2007. However, the Protocol articulates the importance of protecting the environment
and stimulates Parties to discuss environmental, including noise and emission related
measures, to the greatest extent possible, through the Joint Committee. During the nineteenth meeting of the U.S.-EU Joint Committee Meeting of the Joint
Committee which took place on 16 November 2016 in Berlin, the US delegation raised
concerns about environmental taxes imposed by EU Member States and had reached out
to EU States to address any adverse effects on international aviation and to ensure
compliance with Article 15 of the EU-US agreement on air transport. The records of this
meeting do not refer to taxation of aircraft fuel, or to the application of Directive 200396.
Hence it is presumed that the US concerns expressed above do not directly affect the
present subject. A.3.3 ICAO resolutions
ICAO continues to promote the imposition of charges benefitting international civil aviation
rather than taxes which serve the national budget generally. Moreover, ICAO also supports
tax exemption clauses pertaining to exemption of aircraft fuel used on international flights. A.4
Conclusions and possible solutions
The above report is designed to analyse provisions of Directive 200396 with particular
reference to the exemption of taxation of aircraft fuel. Following that analysis, it has
indicated ways and means to address this exemption. For intra-EUEEA commercial air traffic, the Directive provides for a principal avenue, that
is,
the conclusion of bilateral agreements between EUEEA States. Such agreements must pave
the way for partial or total waivers of the exemption in question. That solution raises the
question as to how free EU States are to conclude a new bilateral agreement or to amend
an existing air services agreement in light of the current European, and international
aviation law regime. The above sections contextualise this avenue by looking at various branches of law. The
interaction between various branches of law, that is, principally environmental law, air
transport law, international law and European law, create a rather complicated picture of
the legal state of affairs. It is concluded that the legal status of bilateral air services agreements between EUEEA
States is unclear. According to European law, provisions of such agreements which are
governed by European law are superseded by European law but this is not the case for the
present subject which is not
re-regulated by European law. Thus, the clauses on taxation of aircraft fuel laid down in
such
intra-EUEEA air services agreements should still be in place but it is questionable whether
the EUEEA States still manage their intra-EUEEA air services agreements and consider
them as a basis for the intra-EUEEA operations. An amendment of the Directive with the aim of introducing the taxation of aircraft fuel on
intra-EUEEA flights through Article 14 is apparently not on the agenda. The document
laying down a proposal for an amendment explains that this position is caused by the
presence of international conventions preventing the EU from abolishing these
exemptions. The term international conventions is not specified in the said document. 17
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Also, attention could be paid to the formulation of Article 142 of the Directive where it
refers to bilateral agreements between EU States whereas Article 116 of the EU-US
Agreement speaks of a waiver to be granted by two or more Member States. This
provision, with special reference to the words or more appears to be a more logical
option. The EU-US Agreement appears to provide the more logical option because it creates
flexibility and enhances the geographical scope of the measure from a bilateral to a
plurilateral regime. Importantly, the de minimis threshold for emission trading ought to be regulated at the EU
level rather than in a bilateral agreement between EU States. The threshold should be set
at such a level that non-EU air carriers are not subject to the application of aircraft fuel
taxation, thus avoiding prohibitions laid down in existing bilateral air services agreements
to that effect, as to which see Section A.3.1. The advantage of regulation of a de minimis
threshold at the EUEEA level would harmonise the conditions of such bilateral agreements
on the taxation of aircraft fuel. It would not only exclude non-EUEEA air carriers from the
application of taxation of aircraft fuel but also EUEEA air carriers operating air services
below the threshold set by the EU measure. Harmonisation at the EU level may be relevant
in light of the applicability of general EU principles such as
non-discrimination, compliance with competition law provisions and the maintenance of a
level playing field in the internal air transport market. Thus, thought could be given to propose an amendment of Article 14 of Directive 200396
by adding a provision to the effect that, while EU States are permitted to enter into
bilateral agreements on the taxation of aircraft fuel, they should take into account the de
minimis measure as defined by the same amended Directive. EU Directive 2008101 could
serve as an example for this. At the same time, the consequences of the establishment of
such a measure in the present context should be cautiously checked in light of economic,
legal and air policy considerations. 18
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B Legal Analysis of Domestic and
Intra-EU Aviation Fuel Taxation
By Aoife OLeary, December 2017
CONTENTS
Introduction
The Energy Taxation Directive
2002 Open Skies Case
Excise Duty Directive
The Emissions Trading System
The Chicago Convention
Bilateral Aviation Agreements
B.1
B.2
B.3
B.4
B.5
B.6
B.7. B.7.1 Agreements between the EU Member States
B.7.2 The European Common Aviation Area
B.7.3 The EU-US Open Skies Agreement
B.8
B.9
B.10
B.11
Reciprocal Exemptions
Exempting US carriers
De Minimis
Conclusion
B.1
Introduction
This annex considers consider the legal possibilities for imposing a tax upon the fuel used in
EU member state domestic and intra-EU aviation. It will consider the relevant treaties and
laws
the Chicago Convention, the EU-US Open Skies Agreement, the Energy Taxation Directive,
and the Excise Duty Directive. It reaches the conclusion that taxation can be imposed on
fuel used in domestic aviation without legal impediment. But for intra-EU aviation, in order
to comply with the bilateral agreements the EU has signed with third countries, the EU must
ensure that fuel uplifted by foreign carriers is not taxed until these constraints are
removed. A de minimis exemption from intra-EU fuel taxation can achieve this. The
Netherlands and Norway a member of the European Common Aviation Area - detailed
below have domestic aviation fuel taxes although domestic flights in the Netherlands have
been phased out. Internationally, the US, Japan, India and Brazil, amongst others, have
domestic fuel taxes.
There are no intra-EU aviation fuel taxes. It should be noted at the outset that the question of taxing domestic fuel in the EU has
been considered before by the UK Parliament and by Prof. Eckhard Pache for the German
Federal Environment Agency, both of which came to the conclusion that taxing domestic
aviation fuel in the EU presented no legal difficulties. 19
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B.2
The Energy Taxation Directive
The Energy Taxation Directive ETD 200396EC allows Member States to tax fuel used in
domestic aviation and to agree bi-laterally to tax flights between two Member States. Article 14 in relevant part states
1...Member States shall exempt the following from taxationbenergy products supplied
for use as fuel for the purpose of air navigation other than in private pleasure-flying2
Member States may limit the scope of the exemptions provided for in Paragraph 1b and c
to international and intra-Community transport. In addition, where a Member State has
entered into a bilateral agreement with another Member State, it may also waive the
exemptions provided for in Paragraph 1b and c. In such cases, Member States may apply
a level of taxation below the minimum level set out in this Directive. This allows Member States to place a tax on fuel supplied for domestic aviation, i.e. to limit
the tax exemption to just intra-EU and international flights without requiring any change to
EU law or any agreement with any other Member State. It further allows Member States to impose taxation on flights between one Member State
and another where the two Member States have signed a bilateral agreement. Under this
wording, for a tax to be applied to all intra-EU flights it would require all Member States to
sign a bilateral agreement with every other Member State. However, if all Member States
agreed to tax intra-EU aviation fuel, then amending the Directive to remove the need for
bilateral agreements would be a more appropriate procedure. The ETD allows Member States to agree bilaterally to impose taxation on all flights between
those Member States agreeing to do so. However, there are other bilateral and horizontal
agreements between Member States or the EU and third countries which exempt fuel used
in international flights from taxation. If, for example, Germany and France agreed
bilaterally to tax fuel on all flights between the two countries but a US carrier also
operated flights between these two countries, and therefore was subject to the fuel tax,
this could be a violation of the exemption from fuel taxation in the US-EU Open Skies
Agreement detailed below. Exemptions from fuel taxation in agreements with third
countries are not compatible with two Member States being able to agree bilaterally to tax
fuel uplifted for flights between them unless some sort of an exemption for international
carriers is provided for. Therefore, the EU must expedite the renegotiation of those
agreements with third countries in order to allow Member States to implement intra-EU fuel
taxation as envisaged in the ETD. B.3
2002 Open Skies Case
Where the EU does not have a bilateral agreement in place with a third country, there are
often bilateral agreements between the individual EU Member States and the third country. However, it is probable that any exemption from fuel tax included in a such a bilateral
agreement between an individual Member State and a third country would not be valid as
far as intra-EU fuel taxation is concerned. This is because in the 2002 Open Skies case6 the
Court of Justice of the European Union CJEU ruled that provisions of such bilateral
agreements breached EU law where it was not in the competency of the Member State to
grant exemptions to third countries. The exemptions in that case related to the right of
establishment for air carriers.
However, a similar argument could be made in relation to
________________________________
6 Commission v United Kingdom, Denmark, Sweden, Finland, Belgium, Luxembourg, Austria, Germany, Cases C-
46698,
C-46798, C-46898, C-46998, C-47198, C-47298, C-47598 and C-47698. 20
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fuel taxation, as the EU now has established competence through the Energy Taxation
Directive. B.4
Excise Duty Directive
Council Directive 2008118EC of 16 December 2008 concerning the general arrangements
for excise duty the Excise Duty Directive sets out when and how excise duty can be
placed on aviation fuel. Article 1 of the Directive states that it applies to excise duty
which is levied directly or indirectly on the consumption of the following goods hereinafter
excise goods a energy products and electricity covered by Directive 200396EC. Directive 200396EC covers aviation fuel and it thus comes under the provisions of the
Excise Duty Directive. The Excise Duty Directive states in article 71 that Excise duty shall become chargeable at
the time, and in the Member State, of release for consumption. Aviation fuel is released
for consumption at the airport as the aircraft is fuelling. This would mean that the tax
should be charged at that point. Therefore, a domestic fuel tax system cannot require
airlines to submit all their domestic flight information once a year for example and pay
the tax at that point, but rather the tax must be imposed as the aircraft fuels. Aircraft may
take on fuel for more than just a domestic flight, while the tax is to be imposed on fuel
used in domestic flight. The Excise Duty Directive does contemplate reimbursements under
Article 11 for the purpose of preventing any possible evasion or abuse.
Tax paid on fuel
use for non-domestic flights could be reimbursed this way, for example if an airline uplifted
fuel for safety purposes that was not ultimately used in the flight, but tax had been paid
thereon, that tax could be reimbursed later. B.5
The Emissions Trading System
The Emissions Trading System ETS seeks to account for the CO2 emissions of aviation. Therefore, a question could be asked whether it would be permissible to impose a fuel tax
as it could be primarily an environmental measure and thus seen as duplicating the work of
the ETS. There is nothing in the ETS Directive 200387EC which says it can be the only charge on
the carbon emissions from entities covered by the ETS. Indeed, Recital 23 of the ETS
Directive situates the ETS within the wider context of a comprehensive and coherent
package of policies and measures implemented at Member State and Community level. And
recital 26 of the ETS states that further measures at EU, Member State and international
level will be needed notwithstanding the multifaceted potential of market-based
mechanisms, the European Union strategy for climate change mitigation should be built on
a balance between the Community scheme and other types of Community, domestic and
international action. These recitals clearly contemplate additional measures imposed as
well as the ETS. 21
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In general EU law, Directives such as the ETS are intended to be minimum harmonisation
measures only, i.e. Member States have the possibility to enact further or more stringent
measures in addition to the legislation in the Directive. This is especially so with regard to
environmental measures where the right for Member States of maintaining or introducing
more stringent protective measures for the environment is explicitly retained in Article 193
of the Treaty on the Functioning of the European Union. However, it must be noted that
there are certain conditions attached to enacting policies under Article 193
1. The additional measures must result in a level of protection of the environment that is
higher than the one pursued by the EU measure. 2. It must fall within the field of application of the EU measure by following the same
objectives. 3. It must not frustrate the secondary objectives of the EU measure. 4. Where such an additional measure would affect other EU provisions, it must not violate
the principle of proportionality. 5.
And it must be notified to the European Commission. None of these conditions should present a problem for any Member State wishing to impose
a fuel tax on its domestic flights. Importantly the Netherlands and Norway already tax
domestic aviation fuel and Norway even labels its fuel tax as a CO2-tax. In three cases the CJEU has looked at the objectives of the ETS and found that the
protection of the environment by reducing GHGs is the principal, overarching objective of
the ETS. The secondary objectives found were cost-effectiveness and economic efficiency. The imposition of a fuel tax should not interfere with these objectives other than that it
could be argued that to the extent that the fuel tax lowered emissions, it would also then
lower the ETS price. This could be seen as reducing the economic efficiency for other
sectors under the ETS as it would incentivise less emissions reductions.
However, as a fuel
tax would accord with the primary objective of the ETS, it is unlikely a challenge to a fuel
tax based on distorting the economic efficiency of the ETS could succeed. B.6
The Chicago Convention
The Chicago Convention provides no obstacle to placing a tax on domestic or intra-EU
aviation fuel. The Convention bans parties from imposing taxes on fuel already on board an
aircraft when it lands in another country but it contains no prohibition on taxing the fuel
sold to aircraft in a country. Further, the Chicago Convention is not applicable to domestic
aviation. It is often suggested that the Chicago Convention exempts aviation fuel from taxation. However, the Chicago Convention only exempts fuels already on-board aircraft when
landing, and retained on board when leaving, from taxation. Article 24 states Fuel ... on
board an aircraft of a contracting State, on arrival in the territory of another contracting
State and retained on board on leaving the territory of that State shall be exempt from
customs duty, inspection fees or similar national or local duties and charges. Therefore, Article 24 does not prohibit the taxing of fuel taken on board in a particular
country but rather prohibits the taxation of fuel that was already on board the aircraft
when it landed, i.e. Member States cannot tax aviation fuel purchased in another country
that arrives on board the aircraft.
The purpose of this Article is to prevent double taxation. 22
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Another article of the Chicago Convention that is sometimes said to ban fuel taxes is
Article 15. This article states No fees, dues or other charges shall be imposed by any
contracting State in respect solely of the right of transit over or entry into or exit from its
territory of any aircraft of a contracting State or persons or property thereon. Therefore, it prohibits only those charges which are levied solely for transit, entry into or
exit from a particular country. A domestic fuel tax would not be levied to grant transit
rights but rather for general revenue raising reasons, along probably with an
environmental component, meaning that the tax would not be based on transit, entry into
or exit from a country and so not fall foul of the Article 15 ban. Second, the tax would not be a charge - a charge is a levy based on a service rendered as
opposed to a tax which is levied without any service given in return. It could be questioned
whether a tax would come under the definition of fee or due but the wording makes
clear that fee and due are simply types of charges. Indeed, ICAO itself has distinguished
between taxes and charges in numerous policy documents, for example in the 5th recital of
the Council Resolution on Environmental Charges and Taxes of 9 December 1996
Noting that ICAO policies make a distinction between a charge and a tax, in that they
regard charges as levies to defray the costs of providing facilities and services for civil
aviation, whereas taxes are levies to raise general national and local governmental
revenues that are applied for non-aviation purposes. Therefore, Article 15 does not prohibit the levying of general taxation without a service
provided, i.e. it does not prohibit the imposition of a tax on fuel for domestic aviation or
intra-EU aviation either to raise general revenues or for environmental purposes. ICAO has produced various policy documents that suggest that no taxes should be placed on
aviation fuel. However, none of these are legally binding and thus will not be examined
here. Finally, even if Article 24 or 15 of the Chicago Convention banned fuel taxation - which they
do not - the Chicago Convention is not applicable to domestic air transport. Therefore,
regarding the case of a domestic fuel tax, the Chicago Convention is not relevant. The Chicago Convention is an international treaty designed to promote and facilitate
international civil aviation. This is clear from its official title - Convention on International
Civil Aviation and from the wording of the preamble which consistently refers to
developing international aviation. Therefore, only where specific provisions refer to
domestic aviation should they be made applicable to domestic flights. Neither of the
articles referred to in this note do so and therefore it must be assumed that they apply only
in relation to international aviation. B.7
Bilateral Aviation Agreements
The EU and its member states have many bilateral aviation agreements with third countries. As such it is beyond the scope of this paper to detail all the agreements. Instead, this
section shall look at the agreements involving the EU Member States themselves, the
European Common Aviation Area Agreement and the Open Skies EU-US bilateral agreement. 23
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B.7.1 Agreements between EU Member States
All EU Member States have had unlimited cabotage rights in all other Member States since
1996 Regulation EEC 922408. However, the Energy Taxation Directive was agreed in
2003, after the unlimited cabotage rights were granted. If a member state had needed the
permission of another Member State to impose a fuel tax on domestic aviation this would
have been reflected in the Energy Taxation Directive. Indeed, it is clear from Article 142
of the Directive that bilateral agreements are needed to tax fuel used in flights between
Member States but no such bilateral agreements are needed for the taxation of fuel used on
domestic flights. This makes clear that the Member State can place a tax on the fuel of the
aircraft of another Member State operating domestic flights in its territory without the
explicit consent of the other Member State. With regard to imposing an intra-EU fuel tax, again, as the Energy Taxation Directive was
agreed after unlimited cabotage rights were granted, the ETD must be assumed to have
taken the unlimited cabotage rights into account. As discussed above, the ETD clearly
allows Member States to sign bilateral agreements to tax the fuel used on flights between
the Member States signing the bilateral agreement.
This will include the flights between
those two Member States that are flown by aircraft of another Member State due to the
unlimited cabotage rights being granted before the ETD was signed. B.7.2 The European Common Aviation Area
The European Common Aviation Area ECAA grants all members all nine freedoms of the
air. This means that each of the ECAA countries has the right to fly domestically in every other
member of the ECAA, i.e. it grants cabotage rights to all ECAA members. In terms of a
domestic fuel tax, it could mean fuel taxes being placed not just on aircraft operated by EU
registered airlines, but ECAA airlines as well. Therefore, it must be questioned whether it
would violate any legal agreements to tax fuel used by ECAA member airlines for a domestic
flight in another ECAA member. Article 1 of the ECAA Agreement applies the Energy Taxation Directive ETD to all the
members of ECAA. As discussed, the ETD expressly allows all Member States to apply
taxation to domestic aviation fuel. By adopting the ETD into the list of EU laws by which all
the members of ECAA must apply, it means that the members of ECAA must also agree that
each member is entitled to impose a domestic aviation fuel tax.
Further, as mentioned
above, both the Netherlands and Norway both ECAA members have taxes on domestic
fuel, applied without legal challenge. Further, there is a Joint Committee established by
Article 17 of the ECAA Agreement which monitors the implementation of the Agreement. There have been no reports of any objections to domestic fuel taxation in the ECAA Joint
Committee. Therefore, it can be concluded that applying a domestic fuel tax does not
violate the ECAA agreement. No other bilateral agreements have been signed with countries outside the EU which grant
traffic rights within Member States. There are agreements notably the EU-US bilateral
which allow other countries traffic rights between Member States but not domestically
within a single Member State.
Therefore, bilateral agreements with countries outside of the
EU do not preclude taxation of aviation fuel for domestic flights as no foreign airlines have
the right to operate domestic flights on which they would have to pay the tax. In considering an intra-EU fuel tax, the members of ECAA must abide by the ETD. Therefore,
to impose a fuel tax on flights between an EU member state and an ECAA member state, a
bilateral agreement must be signed. Once a bilateral agreement is signed then the carriers
24
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from that ECAA state could be taxed the same as any other EU Member State carriers flying
between those two countries - no specific exemption would need to be made for the ECAA
members. B.7.3 The EU-US Open Skies Agreement
Article 11 of the EU-US Open Skies Agreement concerns fuel taxation among other things. Article 111 repeats the ban from the Chicago Convention on taxing fuel already on board
an aircraft when it lands in another country Article 24 of the Chicago Convention discussed
above. Article 112 then goes on to state
2. There shall also be exempt, on the basis of reciprocity, from the taxes, levies, duties,
fees and charges referred to in Paragraph 1 of this Article all import restrictions, property
taxes and capital levies, customs duties, excise taxes, and similar fees and charges that are
a imposed by the national authorities or the European Community, and b not based on
the cost of services provided, provided that such equipment and supplies remain on board
the aircraft, with the exception of charges based on the cost of the service provided
c fuel, lubricants and consumable technical supplies introduced into or supplied in the
territory of a Party for use in an aircraft of an airline of the other Party engaged in
international air transportation, even when these supplies are to be used on a part of
the journey performed over the territory of the Party in which they are taken on
board. Therefore, this fuel exemption throws up three interesting points
Fuel is exempted from taxation based on reciprocity discussed below. The only exempt taxation is that imposed by the national authorities or the EU, i.e. US
States, German Länder, French Departments, etc. can impose a fuel tax without
violating the agreement US States already do. The Agreement only exempts fuel used in international flights, not domestic flights -
therefore EU Member States can place a tax on all domestic flights without violating the
Open Skies Agreement. B.8
Reciprocal Exemptions
As stated above, fuel used in international flights under the EU-US Open Skies Agreement, is
exempt from taxation on the basis of reciprocity. It is important to understand what
reciprocity means. There is no definition in the Agreement. One explanation is suggested by
a 1999 report written for the European Commission by a consortium including the
International Institute of Air and Space Law where it was stated
It is noted that the words on the basis of reciprocity could be understood to mean that
only as long as the two concerned countries exempt aircraft fuel from taxation, such
exemption falls under the scope of the cited provision. Thus, the quoted words would leave
the door open for one of the two bilateral partners to go its own way as to tax exemption,
because such exemption is subject to the condition of reciprocity. This interpretation has
however never put to a legal test. Under this interpretation, then either side the US or EU can begin to tax fuel used in
international aviation without violating the agreement. The wording of Article 11 is not a
ban on fuel taxation, rather an agreement that if one party begins to tax fuel, the other
party may too. There are some further articles of the Open Skies Agreement that assist with
understanding what reciprocity was intended to mean. 25
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Article 18 of the Open Skies on the Joint Committee reads
1. A Joint Committee consisting of representatives of the Parties shall meet at least once
a year to conduct consultations relating to this Agreement and to review its
implementation. 2. A Party may also request a meeting of the Joint Committee to seek to resolve questions
relating to the interpretation or application of this Agreement
4.
The Joint Committee shall also develop cooperation by e making decisions, on the
basis of consensus, concerning any matters with respect to application of Paragraph 6 of
Article 11. Article 116 states In the event that two or more Member States envisage applying to the
fuel supplied to aircraft of U.S. airlines in the territories of such Member States for flights
between such Member States any waiver of the exemption contained in Article 14 b of
Council Directive 200396EC of 27 October 2003, the Joint Committee shall consider that
issue, in accordance with Paragraph 4e of Article 18. Thus, the Open Skies Agreement sets up a Joint Committee to review implementation and
resolve questions relating to the Agreement. Article 116 and 184 require consensus
decision making if any Member States wished to come to a bilateral agreement to tax the
fuel used on all flights between the Member States as foreseen in Article 14 of Council
Directive 200396EC the Energy Taxation Directive ETD. It is important to note that Article 18 detailing the purpose of the Joint Committee only
refers to consensus decision making in two places. One is Article 184 above where two
or more Member States agree bilaterally to impose fuel taxes under the current ETD
wording and the other is related to Annex 4 ownership of airlines. This suggests that
nothing else in the Open Skies Agreement must be decided by consensus. If you specifically
state that consensus is required for two types of issues that could arise under the
agreement, then the assumption must be that consensus is not required for other types of
issues arising under the agreement. Therefore, if the EU imposed a fuel tax in any manner
which was not that of Article 14b of the ETD, the agreement of the US would not be
required. Where fuel tax is imposed in a manner that is not via a bilateral agreement as
foreseen in Article 14b of the ETD, there is no requirement for consensus. The Open Skies
Agreement very clearly only refers to consensus in two situations and while one is the
bilateral imposition of a fuel tax in accordance with Article 14b of the ETD, the other is
not the imposition of a fuel tax in any other manner it relates to the ownership of airlines. While there is no reason given for the imposition of a requirement for consensus for the
case of a bilateral agreement to tax fuel, as opposed to a decision to tax fuel agreed in any
manner outside of Article 14b of the ETD, it could be supposed it would be because the
imposition of a fuel tax in only two countries and only for the flights that travel between
those two countries could be seen as a breaking up of the common aviation market in the
EU and so require a higher level of agreement, compared to the imposition of a fuel tax
across all intra-EU flights. In such a situation - where the ETD was amended to require aviation fuel tax on all intra-EU
flights - then there are still two reasons to involve the Joint Committee as set out in Article
18 1 to review implementation and 2 if there was a request for interpretation resolving,
but neither of these reasons to involve the Joint Committee require the Joint Committee to
come to a consensus decision. 26
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If the reciprocity clause is interpreted to allow the EU to impose fuel taxes under Article 11
as it currently stands then this would be a matter for discussion at the Joint Committee
under Article 181 but anything referred to the Joint Committee under Article 181 does
not require approval by the US before it can go ahead - as stated above, consensus between
the EU and US is only required for two reasons where bilaterals under the ETD are agreed
or where the ownership of airlines is in question. The EU could also present an intra-EU tax to the Joint Committee for interpretation
because the EU is unsure of whether they are allowed under Article 11 to impose intra-EU
fuel taxation without amending the Open Skies Agreement. Under Article 18 they can seek
an agreed interpretation of Article 11. Under Article 182 the parties are to seek to
resolve questions of interpretation. Therefore, while the EU should seek to resolve any
question of interpretation in good faith, the agreement of the US would not be required
before the EU could unilaterally impose a fuel tax. Regardless of how the EU approaches the Joint Committee, if an intra-EU fuel tax was to be
imposed, and a consensus was not reached even if not required, the dispute can be
referred to any person or body agreed by the parties, or failing that to arbitration under
Article 19. The arbitration would consist of one judge appointed by each of the parties and
one appointed by agreement of the judges already appointed. If the third judge cannot be
agreed by consensus, then ICAO appoints the third judge. If something is not resolved by the arbitration or one of the parties does not comply with
the decision of the arbitration then under Article 197, the other Party may suspend the
application of comparable benefits arising under this Agreement until such time as the
Parties have reached agreement on a resolution of the dispute. Nothing in this paragraph
shall be construed as limiting the right of either Party to take proportional measures in
accordance with international law.
There is no definition of what exactly comparable
benefits are under the agreement. But it could be assumed that it would be the imposition
of taxes on EU carriers extra-US as no EU carriers fly intra-US. However, all of this is moot if the EU can find a way to impose intra-EU fuel taxes the
Open Skies does not concern itself with domestic taxes as explained above without any
incidence on US carriers. B.9
Exempting US carriers
The Open Skies agreement sets outs the rights of both EU and US carriers to operate in both
places. For the purposes of this paper, the important question is if an intra-EU fuel tax was
imposed, would any US carriers conducting international flights be caught by it. The answer
is that US cargo carriers have as much as 90 flights a week between EU Member States. If an
intra-EU fuel tax is imposed and the US carriers paid fuel tax on those intra-EU flights and
the definition of reciprocity under Article 11 did not mean either party could unilaterally
impose a fuel tax, then this would violate the Open Skies Agreement. B.10 De Minimis
Either to exempt the US carriers entirely or avoid any disagreement over the interpretation
of reciprocity in Article 11, the EU should consider a de minimis arrangement for all airlines
operating intra-EU flights. 27
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There are various EU laws which allow for de minimis exemptions from otherwise binding
requirements. Therefore, in considering how to impose a de minimis on intra-EU aviation,
looking at other areas where the EU has granted de minimis exemptions from EU law is
illustrative. Without going into detail on EU competition law or State aid law, there are exemptions that
provide a basis for a fuel tax de minimis. First, under general competition law, market
distortions that affect less than 10 of the market do not raise concern. Second, the EU is
generally not concerned with small aid to businesses i.e.
up to 200,000 over three years. Third, under the ETS Directive, carriers operating a limited number of flights into the EU
are entirely exempt from having to report their emissions or surrender allowances. Based on
these existing de minimis exemptions, the following are options which create no legal
obstacles and could be employed to ensure that US carriers or other foreign carriers would
be entirely exempt from an intra-EU fuel tax
a De minimis based on the amount of fuel tax paid Under this de minimis provision, all
airlines would pay tax on all intra-EU fuel but if in any year an airline pays less than
66,000 i.e. 200,000 over 3 years then they could apply to get a full rebate of tax
paid. It is possible to look on this as a subsidy similar to a State aid and so 200,000
over 3 years is a precedent for a similar type of subsidy the EU allows. The tax would
have to be set at a rate where the US carriers would never pay more than 66,000 a
year. b De minimis based on the number of flights All airlines would have a certain amount of
flights exempt per week or month, e.g. all airlines are allowed up to 90 tax-free flights
a week before they must begin to pay fuel tax on the rest of their flights. c De minimis based on CO2 emitted or fuel used Small emitters under the ETS are granted
an exemption based on emitting less CO2 than a certain threshold. As an intra-EU fuel
tax would be an environmental measure, two thresholds could be set rather than
currently where there is just one. This would mean all emitters below the lowest
threshold dont have to worry about the ETS or pay fuel tax. Those between this
threshold and the higher threshold would have to comply with the ETS and then those
above the second threshold would have to comply with the ETS and pay fuel tax. d De minimis based on city or airport pairs A 2005 Commission Working Paper suggested
that a fuel tax on intra-EU and domestic flights could be implemented by making it
mandatory while allowing for the possibility to exempt all carriers on specific routes
where non-EU carriers operate and benefit from exemptions under unchanged ASAs
bilateral agreements. Ongoing renegotiation of ASAs would then gradually allow for
the taxation of third country carriers on intra-EU flights7. If US airlines were entirely exempt from any intra-EU fuel tax then no issues under the
Open Skies Agreement arise. The Agreement exempts carriers from paying tax but imposes
no restriction on the EU imposing a tax on all other carriers. US carriers might attempt to argue that a de minimis arrangement would essentially cap
their growth but as long as the de minimis was periodically reviewed to ensure that no US
carrier had to pay fuel tax, such an argument could not succeed. A fuel tax de minimis
would not restrict traffic volume or the type of aircraft that could be used by US carriers. No restriction on traffic volumes or type of aircraft follows even indirectly from a fuel tax. The subject of regulation would solely be the environmental externalities caused by
aviation or the raising of general tax revenue. ________________________________
7 Staff Working doc SWD 7 final of COM 2018.20 2018 20 final.
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7.R09 - Taxing aviation fuels in the EU November 2018
In summary, Article 11 ensures that if one party imposes a fuel tax, both sides will be
free to tax fuel on a reciprocal basis but does not ban the imposition of taxation. The requirement to consult with the Joint Committee is simply to seek to resolve, i.e. a
soft arrangement which doesnt prevent unilateralism on tax or for the parties to go to
arbitration if they desire. There is no reason why an intra-EU fuel tax cannot exist with a de
minimis to ensure that US carriers do not pay any tax and thereby avoid any non-EU carriers
entirely. B.11 Conclusion
The Energy Taxation Directive permits EU Member States to impose a tax on aviation fuel
used in domestic flights and via bilateral agreements, on intra-EU flights. Nothing in the
Chicago Convention prevents the imposition of domestic or intra-EU fuel tax. All ECAA
members have unlimited cabotage rights in all other EU Member States. This does not
prohibit fuel taxation as the Energy Taxation Directive is included in the ECAA Agreement
and clearly contemplates Member States imposing a tax on domestic and intra-EU aviation. Both the Netherlands and Norway have domestic aviation fuel taxes. The Excise Duty
Directive requires a fuel tax to be imposed at the time of release for consumption, which
would be as the aircraft fuels at the airport and this could result in the situation where
airlines pay tax on fuel that is used in extra-EU flights. However, as long as a rebate system
is established potentially by using the data from the ETS to refund any tax paid on fuel
used internationally, this does not pose a problem. There is no reason why a fuel tax and
the ETS cannot cover the same domestic and intra-EU flights. The Open Skies agreement
only exempts fuel used in international, not domestic, flights from taxation. It can be argued that the Open Skies Agreement allows for each side to unilaterally impose
fuel taxation as the exemption is only on the basis of reciprocity and can be withdrawn at
any time. In addition, there are several ways that US airlines could be exempted from any
intra-EU fuel taxation including a de minimis based on the amount of tax paid, the number
of flights or the routes. In conclusion, a domestic fuel tax can be imposed without any legal
concerns arising. As long as a de minimis is established for intra-EU fuel taxation to ensure
foreign carriers are exempt, that too can be imposed, and no legal issues prevent it. 29
7.R09 - Taxing aviation fuels in the EU November 2018
C List of non-EEA aircraft operators
active on intra-EEA routes
Aircraft operators flying on routes between EEA airports have to report their emissions to
the competent authority and surrender allowances in order to comply with the EU ETS. The EU Transaction Log contains the names of these operators as well as the verified
amount of emissions on intra-EEA routes. Based on information from the Transaction Log,
we have compiled the list in Table 2. Most non-EEA operators have just a few flights on intra-EEA routes and consequently use
little fuel. EasyJet Switzerland is the largest non-EEA aircraft operator in terms of fuel use
and emissions, followed by UPS and FedEx. Table 2 - Non-EEA aircraft operators active on intra-EEA routes in 2016
Aircraft operator
Amount of fuel used on intra-EEA routes in 2016
tonnes
8,030
6,556
3,543
2,664
11,950
1,696
3,924
3,947
7,635
4,964
3,237
7,080
4,487
8,180
9,987
66,789
111
12,805
5,933
51,689
56,891
Latam Airlines Group, S.A.
Air China Limited
Cathay Pacific Airways Limited
China Southern Airlines
ETHIOPIAN AIRLINES
Iran Air, The Airline of the Islamic Republic of Iran
CAL CARGO AIRLINES
Nippon Cargo Airlines
EU ETS trading account for KOREANAIR
Asiana Airlines
Kuwait Airways Corporation
Qatar Airways
VDA_Operator
Air Bridge Cargo
Singapore Airlines Limited
EASYJET SWITZERLAND
SWISS INTERNATIONAL AIR LINES LTD
Emirates
Atlas Air, Inc. United Parcel Service Co
FEDERAL EXPRESS CORPORATION
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7.R09 - Taxing aviation fuels in the EU November 2018