Working paper: I05-E001

Tax Flight An Investigation into the Origins and Developments of the Exemption from various kinds of Taxation of International Aviation

The responsibility for the contents of this paper lies with its author.

ICIS, Universiteit Maastricht P.O. Box 616, 6200 MD Maastricht, The Netherlands Tel: ++ 31 43 3882662, Fax: ++ 31 43 3210541 E-mail: [email protected], Website: http://www.icis.unimaas.nl

Universiteit Maastricht International Centre for Integrative Studies & Faculteit der Cultuurwetenschappen

© ICIS FEBRUARY 2005

This working paper has been written by: Daniël Meijers

Supervisors: Drs. Bas Amelung Prof. dr. Ernst Homburg

Front cover: private photo Summary International aviation is excluded from many kinds of taxation. These exemptions originate from the United States’ pre-Second World War-policy to stimulate pioneering aviation companies and from the fact that at that time tax policies were not yet designed to deal with aviation. In the aftermath of the Second World War, following the American example, the internat ional community agreed to partly liberalise the aviation sector. A liberalised aviation sector would benefit from equal tax rates. In 1950 the International Civil Aviation Organisation (I CAO) called upon its member states to set their tax rates to zero. Although not legally binding, the most ICAO members chose to adhere to the ICAO’s call. This resulted in the almost total tax exemption for international aviation that is prevailing today. In 1992 the US introduced the Open Skies agreement, which further liberalised aviation. The deadlock, which prevented the international community from taxing aviation, became less secure when in 2002 the European Court of Justice ruled that Open Skies had to be replaced. In the modern EU, only the European Commission has the authority to negotiate with other countries about treaties, such as Open Skies agreements. Being unbound by historical treaties, the EC has the freedom (and intention) to strive for the introduction of taxation. Given the dominant position of the United States and the EU in global aviation, the upcoming agreement between these two blocks might well be the beginning of the end of the widespread exemptions for international aviation. Table of contents

1. Introduction...... 3

1.1 Outline...... 5

2. The United States...... 6

2.1 ‘Road’ tax...... 6

2.2 Airmail...... 8

2.3 International Aspirations ...... 9

3. International Development...... 11

3.1 The Interbellum Period...... 11

3.2 The Chicago Civil Aviation Conference of 1944...... 12

3.3 The ICAO...... 14

3.4 Bilateral Air Service Agreements...... 16

3.4.1 The Bermuda Agreement...... 16

3.4.2 The Open Skies Treaty ...... 18

3.5 Double Taxation...... 20

4. The Netherlands...... 23

5. Discussion ...... 26

6. Conclusion ...... 28

7. References...... 29

Appendix: Tentative Calculation on Aviation Fuel Tax in The Netherlands ...... 31

- 2 - 1. Introduction The 1997 Kyoto Protocol is in the process of being ratified, and many governments are implementing measures to reduce their CO2 emissions back to 1992-levels. They stimulate their national greenhouse gas-emitting industries to comply with strict emission standards and oblige these companies to participate in emission trading schemes. Strangely enough, besides all these efforts, there is one fast growing industry, showing an average annual growth of 10% and currently emitting 6% of the world’s greenhouse gasses (Penner, Lister & Griggs, 1999)1, whose emissions are largely ignored by governments around the world: aviation. At a second glance, this governmental ignorance is not very peculiar, when one considers that the emissions of international aviation are not included in the Kyoto-1992-targets, to which governments have committed themselves. Only a highly conscientious government would voluntarily harm its national aviation industry by holding back its growth through imposing levies and taxes, in order to address the emissions. This would make their own sector an easy prey for foreign competition. Nevertheless, aviation taxation in relation to the Kyoto process is a hot issue: this fall, the Dutch government decided to charge national flights with a small fuel charge (although only for budget complementary reasons; NRC Handelsblad, 28 September 2004), and the upcoming British EU presidency in the second half of 2005 intends to prepare a European-wide fuel charge-scheme (Jet Fuel Intelligence, 20 September 2004). On top of this, in November 2002, the European Court of Justice decided that a particular type of bilateral air-treaty, regulating air-traffic between states, is not in accordance with EU law. Therefore the current treaties should be re-negotiated (see Chapter 3.4.2 and NRC, 5 November 2002). The court ruling creates a golden opportunity for change in the field of aviation policy. The story of exemptions for aviation extends beyond climate policy: international aviation is not significantly burdened by taxes at all. Whereas operators of competing modes of transport, like trains or coaches, collect value added taxes (VAT) on their sales2 and pay levies and taxes over their fuel consumption, and road tax for their road usage, airline operators are largely exempt from these kinds of governmental impediments. It is obvious why airlines are not obliged to pay the road tax, but the other exemptions are less self-evident. When investigating the above-mentioned issues, it quickly became apparent that the two omissions – the emission and the tax – have much in common, even though the tax exemption on aviation turned out to be originating from the early days of aviation, whereas the Kyoto-exemption

1 See http://www.grida.no/climate/ipcc/aviation 2 Mr. W. Schmid of the Platform Nederlandse Luchtvaart brought to my attention that international trains and busses are exempt. The customer departments of bus operator Eurolines and railway company Nederlandse Spoorwegen confirmed this verbally on 7 December 2004. - 3 - is of more recent date. It appears that almost the same mechanism safeguarding aviation from taxation is hindering the international community in taking adequate measures to address the issue. It is illustrative to review a comment of an airline representative in 1938 to get an impression of the way fuel tax was conceived of in those days:

The unfairness of requiring the same amount of tax on aircraft fuel as on motor fuel can best be illustrated by comparing the performance data of an average transport plane with that of an average passenger bus. The illustration is made between a thirty-passenger highway bus, powered with a 150 horsepower engine, reputed to travel about ten miles for each gallon of fuel consumed, and a fourteen passenger air liner powered with engines developing two thousand and two hundred horsepower and flying about two miles for each gallon of fuel consumed. Thus, the airliner consumes five times as much fuel as the highway bus to transport 7/15ths as many passengers an equal distance. Or, look at it this way: assuming both transportation units were loaded to capacity, the bus operator can carry thirty passengers ten miles on one gallon of fuel, while the air transport operator would have to use three planes and burn fifteen gallons of gasoline to carry the same number of passengers the same number of miles. Hence, we have tax load ratio of 15 to 1 unfavorable to the air line operator. (Hinshaw, 1938, pg. 84)

Mr. Hinshaw, assistant to the president of the Chicago based United Airlines3, spoke his text in a passionate speech before a convention of state aviation officials, whom he wanted to encourage putting their best efforts into protecting aviation from “inequitable taxation”. Today, his argument is, at best, not complete anymore. This paper is going to investigate in what way the ideas of 1938 are still resounding in today’s aviation policies. It is likely that in the near future some sort of (international) mechanism will be created to address the emissions of planes. Because the emissions-issue and the current exemptions of aviation bear resemblance, it is interesting to look at the backgrounds of the tax exemption. When we know why aviation is exempted from taxation, and which factors played a role for the aviation industry to achieve its exceptional position, it will be easier to understand the current situation. We might recognise some present and future obstacles for effective policy in this field, and suggest ways to circumvent or overcome these obstacles. This paper has been written at the International Centre for Integrative Studies (ICIS). Within ICIS there is a research program on the two-way relationship between climate change and tourism. Climate change is expected to cause shifts in global tourist flows, and the aviation sector will also be affected by these shifts. However, besides being affected, aviation is also one of the causes of the expected shifts. Given the large amount of greenhouse-gasses emitted by the industry, flying itself will affect tourist flows: on one hand because global warming will change the destination preferences of tourists, and on the other hand because governments will introduce policies to curb

3 See http://www.rawbw.com/~hinshaw/cgi-bin/id?a1447 - 4 - emissions. Air travel will probably become more expensive because of these policies, and as a result a less self-evident means of travel for tourists. Therefore it is relevant within the ICIS research program to investigate the background of aviation and its emissions. The development of the tax exemption for aviation is one of these backgrounds.

1.1 Outline This paper discusses the origins and development of the exemption of aviation from taxes and charges. When speaking of taxation for aviation, it will follow the tax-classification for airlines as used by Gazdik (1950, pg. 64). It will not discuss aviation as such in the Kyoto process; rather it attempts to draw lessons from experience and guide aviation towards effective climate policy. In Chapter 2 we will discuss the origins of aviation in connection with the origins of the tax exemption in the US, for the United States played – and is still playing – a major role in the development of aviation and of aviation policy. The post-war developments in the international context are discussed in the third chapter. Although exemptions originated in US domestic policy, they became the international standard. In Chapter 4 we will discuss the developments in the Netherlands – the home country of the author. The Dutch government always played an active role in international aviation policy-making. Moreover, the Dutch situation is probably a good example of the current state of affairs in many countries.

- 5 - 2. The United States In 1903, the Wright brothers made the first motorised flight. At that time, airplanes were manually designed and built, there were no companies running air services, and airtime and the related fuel consumption were negligible. Therefore, taxation was a non-issue. After the first flight, it took air pioneers more than one and a half decade to develop more reliable and durable planes. In the second decade of the twentieth century the first private aviation companies emerged. When reviewing aviation taxation issues, it is very informative to review the US’ emerging aviation policy. Because of the entrepreneurial spirit within the US, the stimulating government policy and the American-led victory in the Second World War, the Americans would have a major influence on the yet-to-be-developed international aviation standards, i.e. taxation. Also the American federal state, with its many separate states and its relative big size, formed an ideal model for the international situation in which airlines would come to operate in the future. The issues that the Americans would deal with in their own country, like fuel tax, double taxation of income, etc, were sooner or later also to be dealt with in the international arena. The international community would then take the lessons learnt inside the US. Taxation is a government issue. To understand the way the attitude of the American government towards the emerging aviation companies evolved, we will review some developments at the beginning of commercial aviation in the US.

2.1 ‘Road’ tax The first tax exemption for aviation was an obvious one; it was the exemption from road-financing taxes on fuel. The exemption was bargained for after the introduction of this tax, which was introduced to meet the increased demand of roads:

[…][The] advent of the automobile and a consequent greater usage of the highways brought demands for better roads. The general revenues of the state being inadequate to meet these increased costs of construction, operation, maintenance and control of highways, it was considered by various legislatures throughout the United States that it was only just that those who used the roads, and thereby received benefits from the improvements, should be required to pay for them. The result of this was the general automobile license tax. But, as the number of people owning automobiles increased, so in direct ratio the demands upon the legislatures increased for more and better roads. The revenue which the states were receiving from the licensing of these automobiles being inadequate to meet the increased costs of highways, it was logical that the legislatures in looking for another source of revenue should turn to the gasoline consumed by these vehicles and tax it. (Tell, 1931, pg. 342)

So in February 1919 the first 1 ct/gallon gasoline tax was adopted in Oregon (Cooper, 1933, pg. 17), after which fuel-levies quickly spread and increased throughout the United States. In 1929 an

- 6 - average of 3,8 ct per gallon of fuel was levied in 49 States (Crawford, 1930, pg. 8) on an average gallon fuel price of 21,4 ct (Energy Information Administration, 2004). Since state fuel tax was established to finance roads, non-car fuel consumers, like airlines, were inappropriately taxed with this general fuel taxation. The aviation sector protested fiercely against the fuel taxation, naming it “The Number One Aviation Enemy Tax” (Hinshaw, 1938, pg. 83). Apart from being a tax primarily introduced to finance roads, there were also legal arguments not to tax aviation fuel: the fourteenth amendment of the U.S. Constitution asserts that “a state must have potential jurisdiction over a taxpayer in order to enforce a sales or use tax” (White, 1980, pg. 517). From this amendment it follows that “a state’s jurisdiction to levy a use tax on an out-of-state seller, and to require him to collect and remit the proceeds of the sale to the taxing state is not so obvious.” (pg. 517-518). Together with the Dormant Commerce Clause which ‘rules’4 “that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation” (Hood & Sons vs. Du Mond, 1949)5 it seemed airlines would be in the clear. According to the US Supreme Court it was not allowed for individual states to place a burden onto interstate commerce. No state-imposed measure might have caused a business, operated in a remote state, to be more burdened than a comparable business operated in the home state. In the case of an airline, this meant that while flying from the East to the West of the United States, making fuel stops along the way, it would not need to pay fuel-levies in the different states ‘en route’, because this would obstruct the interstate commerce the airline was conducting. In 1931, of the 46 reported states, 33 had a standing exemption or refund arrangement for airlines, 11 states did not, and 2 states were unclear (Tell, 1931, pg. 343-347). As discussed above, the individual US states were largely moving towards tax exemption on aviation fuel. Today there is, however, not a total exemption, in particular not for international airlines. This is caused by the dichotomy between the federal and the local level: while the federal US government agrees not to tax international aviation (see Chapter 3 on international developments), this does not prohibit individual states to tax international airlines for the fuel consumed within the borders of their territory, which some of them do. See Fucci (1987) for an elaborate account of this issue.

4 Dormant Commerce Clause. This is not a ‘real’ in-force law. However, the US Congress can make it a real law and the Supreme Court anticipates on this. 5 Although this is a Court Ruling from 1949, it states communis opinio in US Law, which evolved after the Commerce Clause of the Constitution. - 7 - 2.2 Airmail The first airmail was delivered in the United States in 1910 by a stunt pilot (Mola, 2003a). He won a prize of 10,000 dollars for the roundtrip New York – Philadelphia – New York. However, not until 1918 technical and navigational progress allowed the Post Office Department, in cooperation with the US Army, to start a scheduled airmail service. But from 1918 onwards, progress went swift; the Post Office took the airmail delivery over from the army (Mola, 2003c), and single- handedly flew the mail until 1924. As technology advanced and planes were able to fly faster, longer and with heavier payloads, airmail was starting to be competitive with railmail, despite the higher costs. Because the Post Office, which flew the mail, was a state run enterprise, and considerable amounts of government funds went into it, private railroad companies had to counter unfair competition. In 1925 they signed an appeal on the matter at the Congress’ House Post Office Committee. The committee agreed with the railroad companies’ complaints, after which the Congress passed the Kelly Act on airmail. This law (named after the chair of the House Post Office Committee, Congressman Clyde Kelly) compelled the Post Office to subcontract airmail delivery to private aviation firms (Mola, 2003b). However, unfortunately for the railroad companies, changing the law did not stop the unfair competition. The new law set fixed tariffs for airmail, which still were considerably lower than the real cost price of airmail. The Post Office would make up for the difference between the tariffs set by law, and the prices charged by airlines. As a result, airmail became even more competitive. Eventually, the government fees in fact stimulated the aviation companies’ development. The director of the Post Office, Harry S. New, wanted the airmail carriers to expand their routes and to buy larger airplanes to carry passengers on their mail flights. However, partly due to the way the Post Office negotiated its contracts, there was not a real stimulus for companies to be more ambitious than necessary. Soon, air mail-contractors were focusing on the best-paid routes and picking the shortest distances with the highest earnings. There are even reports of airlines sending airmail to themselves: “They sometimes sent postcards to themselves using registered mail, which required a heavy, secure lock. The lock added weight and, therefore, the government had to pay more.” (Mola, 2003b). Notwithstanding these pitiable abuses of the Post Office’ subsidies, technological development and the stimulating policy eventually started to pay off. Aviation companies were making progress, flying longer routes, and starting with occasional combined passenger and mail flights. Passengers became an ever-increasing complementary source of revenue. In the decades that followed, many laws were passed and enquiries were held to try and prevent the abuse of government subsidies on airmail. At the same time a government-ran scheme, which stimulated

- 8 - development of private air enterprise was held intact, and aviation was not hindered in spreading its wings in any way.

2.3 International Aspirations Besides domestically, in America, where airlines developed from cautious airmail deliverers into scheduled passenger transporters, American entrepreneurs were also quite active abroad. The most famous of these entrepreneurs was Juan T. Trippe, director of the Pan American Airways Corporation (Pan American). As well as profiting from the lucrative post office contracts, which, with the revised Kelly Foreign Air Mail Act of 1928, also included foreign mail delivery, Trippe relied on his own “diplomatic corps” as well (Miller, 1979, pg. 12). From 1927 onward he arranged many exclusive contracts with Latin American governments allowing his company to develop an unparalleled empire:

Under the ideal conditions of the high subsidies and monopoly position, Pan American – strong, well-financed, and American – quickly fulfilled Government hopes. It spread around the Caribbean, through Central America, down both coasts of South America to Buenos Aires via Santiago in May 1929, via Rio de Janeiro in November 1930. A growth industry in the midst of Depression, Pan American in 1930 maintained 18,000 route miles, one third more than the 14,000 served by all European airlines in Latin America between 1921 and 1931. By December 1931 Pan American’s system covered 21,000 miles, while the American internal airlines flew 30,450; Pan American virtually controlled Latin skies. (Miller, 1979, pg. 13-14)

In the decade preceding the Second World War, Pan American tried, after its South American success, to expand across the Pacific and Atlantic oceans, and even into the European market. These undertakings met with a variable degree of success (Miller, 1979, pg. 17-45). However, having enjoyed too long from the patronage of the American Government, the entrepreneurial spirit waned and got replaced by a monopolistic standstill:

Costs and standards of service on Pan American’s Latin American division attracted a Civil Aeronautics investigation in 1939. Although hearings lasted until 1942, observers quickly realized that high postal subsidies and lack of competition had fostered inefficient and inconvenient operations with obsolescent equipment, high fares, and too many overnight stops. Pan American had used its expansion and its monopoly position, but not to modernize its Latin American services. (pg. 46)

In its early days, Pan American had achieved the Government’s goals: it had quickly established American aeronautical hegemony in Latin America. Now Pan American showed all the traits ascribed to monopolies: poor schedules, high prices, slow innovation, inefficiency, and the resultant high costs; self protective action in court, Congress, or negotiations to prevent American flag-competition; harmful effects on ancillary industries. The airline did not satisfy Administration goals, often putting its own interests before national ones. (pg. 49)

- 9 - So eventually, where at first the government ran scheme of supporting the aviation industry through airmail subsidies did its job well, after time passed, at the eve of the Second World War, it spawned a ‘Moloch’ that hindered progress of aviation. The American government was eager to give aviation a fresh start. The US policy on aviation was paradoxical. Where on the one hand the government very much acknowledged the value of a liberal market and a strong aviation community, on the other hand it went to great lengths to actively clear the way for this community to be. Subsidies, state planning and guided growth were expected to nurture a self-financing, self-developing and self- maintaining aviation industry. At the Chicago Civil Aviation Conference of 1944, the US position was one that stressed liberalism and equal opportunity. Having learnt through experience that their companies got selfish and lazy under the warm cloak of protective governmental policy, the Americans felt it was about time to bring a halt to their nursing activities. Also, having grown a capable national air industry that went through an enormous growth in the Second World War, the Americans could be confident that in a post-war, liberal international era, their companies would have a sweet deal in an opened up international market.

- 10 - 3. International Development Aviation, once it got well off the ground, was international by nature. Only in large states like the United States it was possible to set up an airline without having to deal immediately with national borders. In many other states it only made sense to embark upon an aircraft if one would travel beyond the national borders. Airlines were among the first modern international corporations, having to deal with issues typical in the international setting. Problems of multiple taxation, and for example fuel price differences, had all to be resolved in a relatively early stage. However, before the Second World War, international aviation was a relatively small and expensive business; only after the war, aviation became available for mass transportation.

3.1 The Interbellum Period Early attempts to come up with coherent international policy were made just after the ending of the First World War. General issues like the sovereignty of countries’ airspace were discussed and agreed upon6. The motive for these discussions was the urge to prevent another crisis in international relations, which demanded such a big toll in the First World War. However, in those days, taxation was not yet an issue in international negotiations. For example, the Paris Convention of Aerial Navigation of 1919 dealt with airworthiness, pilot licenses etc. (Hotchkiss, 1938). Also, in 1925, the League of Nations committee adressing double taxation issues (See Chapter 3.5) only dealt with taxation concerning shipping (Hund, 1982, pg. 111). ‘Advanced’ issues like international coordination of fair competition in the aviation-business – under which one would file taxation coordination – were only to be dealt with at a later stage. This changed in 1928, when at the Pan American Convention on Commercial Aviation in Havana it was “recognized that a system of uniform national law adopted internationally is a novel suggestion. The airplane, with its speed of operation, has created a situation that cannot be treated with existing ideas” (Hyzer, 1933, pg. 532). States throughout the Americas7 agreed at this convention, amongst other things, on the following:

Article 24. The aircraft of one contracting State engaged in international commerce with another contracting State shall not be compelled to pay other or higher charges in airports or airdromes open to the public than would be paid by national aircraft of the State visited, likewise engaged in international commerce. Article 25. So long as a contracting State shall not have established appropriate regulations, the commander of an aircraft shall have rights and duties analogous to those of the captain of a merchant steamer, according to the respective laws of each State. (Hotchkiss, 1938, pg. 136)

6 See for example Hotchkiss (1938) on the Paris convention. 7 Signatories were: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Ecuador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Salvador, The Dominican Republic, The United States, Uruguay and Venezuela (Hotchkiss, 1938). - 11 -

This last clause was relevant, considering that since 1928 the merchant marine already enjoyed widespread exemptions from direct taxes in foreign harbours (Hund, 1982, pg. 111). The first appearance of negotiations on international exemption of aviation from taxation was reported by Miller (1979, pg. 23-24) in 1936; he remarked that the US and the United Kingdom discussed “common rules on […] exemption from taxation”. Unfortunately, Miller did not elaborate on this fact, nor are we able to review his sources8. However, it is likely that the exemption issue was discussed, because three years later, in 1939, in London, the Convention concerning Exemption from Taxation for Liquid Fuels and Lubricants used in Air Traffic was convened. The forty-seven present states agreed there on a treaty text, although it would never be ratified, “[d]ue mainly to the outbreak of hostilities” of the Second World War (Gazdik, 1950, pg. 65).

3.2 The Chicago Civil Aviation Conference of 1944 The Chicago Convention is currently seen as the main reference document for the tax exemption for international aviation. Although this convention was just a step in the process, it was a landmark for aviation, also concerning taxation. When the end of the Second World War neared, governments started to consider what to do with aviation when the war would really be over. The government of the United States took the initiative and invited delegations from fifty-two nations to decide on the future course of international aviation. The Second World War brought major technological progress for aviation. There is a exhaustive list of facts in Miller (1979, Chapter 3: Wartime Expansion) of which we will name just a few: • [T]wo scheduled flights a week by any nation crossed the Atlantic in 1939, the ATC9 alone flew one hundred fifty four a week in 1944. (pg. 63) • [I]ncrease occurred in the British aircraft industry. Production jumped from 893 aircrafts in 1935 to 7,940 in 1939 […] and 26,461 in 1944. (pg. 75) • [T]he war educated people to the air age, making them more airminded. More people flew. Roosevelt flew to Casablanca and to Yalta; Churchill to Washington and Cairo. Internally or internationally, tens of thousand of people flew to speed the pace of work connected with the war effort. (pg. 76-77)

8 Minutes of “Meeting of the British, Irish, and Canadian Aviation Missions with the [Interdepartmental] Committee on Civil International Aviation for the purpose of discussing the possible establishment of trans-Atlantic airlines,” p.1, 5 December 1936, FO 371.20441, w 1303/186.27. (Miller, 1979, pg. 24) 9 Air Transport Command, an army division. - 12 - At the Chicago Convention there were two opposing views. The ‘British’ view encompassed the organisation of international aviation through a state controlled system, where designated national airlines (‘flag-carriers’) would be subject to government regulation and control. The ‘American’ view, represented below by Adolf Berle, the head of the American delegation, stressed the importance of fair competition and equal 10 opportunity: Preamble of the Chicago Convention Whereas the future development of international civil aviation can greatly help to create and Berle concluded the conference on preserve friendship and understanding among the 7 December 1944. He rightly compared nations and peoples of the world, yet its abuse can the British search of “order in the air” become a threat to the general security; and Whereas it is desirable to avoid friction and to with the American desire for “freedom in promote that cooperation between nations and the air.” peoples upon which the peace of the world (Miller, 1979, pg. 191) depends; Therefore, the undersigned governments having agreed on certain principles and arrangements in At the conclusion of the Chicago convention, a order that international civil aviation may be compromise was drawn up that tried to reconcile developed in a safe and orderly manner and that international air transport services may be the American and British views: it was agreed established on the basis of equality of opportunity and operated soundly and economically; that, to allow air traffic between any two states, Have accordingly concluded this Convention to that end. the states concerned had to sign a bilateral Air Service Agreement. In such an agreement, detailed arrangements on air traffic and routes were made. We will get more into these agreements in Chapter 3.4. It was also decided there should be established an International Air Transport Association (IATA, established one year later in Havana) which would set the rates for the air transport between contracting states. Besides these general arrangements, the Chicago Convention also decided on more precise regulation that would facilitate international aviation. Concerning taxation, Article 24 is especially interesting:

Article 24 - Customs duty (a) Aircraft on a flight to, from, or across the territory of another contracting State shall be admitted temporarily free of duty, subject to the customs regulations of the State. 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. (b) Spare parts and equipment imported into the territory of a contracting State for incorporation in or use on an aircraft of another contracting State engaged in international air navigation shall be admitted free of customs duty, subject to compliance

10 Online available at http://www.iasl.mcgill.ca/airlaw/public/chicago/chicago1944a.pdf - 13 - with the regulations of the State concerned, which may provide that the articles shall be kept under customs supervision and control.

As one reads this clause closely, it is clear that the fuel etc. already on board of airplanes is not to be taxed by third states. However, it does not mention anything on the taxing of fuel being taken onboard, or, for that matter, tickets being sold, etc.

3.3 The ICAO At the Chicago Convention the International Civil Aviation Organisation (ICAO) was established. The ICAO – which became a specialised UN body in 1947 (ICAO site) – is the international authority for civil aviation. It keeps file of the national and international air regulations, and convenes every three years its member states11 for the ICAO Assembly to discuss the state of affairs in international civil operation. ICAO’s main objective is the development of “safe, regular, efficient and economical air transport” (ICAO site). To accomplish its objective, the ICAO issues regulations, guidelines and recommendations to its member states. Because taxation clearly affects economical and efficient air transport, the coordination of tax policy is within ICAO’s competence. Consequently in 1950, the ICAO Council, the executive committee of the ICAO, made work of its competence, and issued regulation concerning taxation in Doc 7145. Although we are not able to review the final text of Doc 7145 – which contained three resolutions and one recommendation (ICAO, 2000, pg. iii) – we can look at a draft version of this resolution, which was “circularized to all contracting States to the Chicago Convention” (Gazdik, 1950):

WHEREAS the Convention concerning exemption from Taxation for Liquid Fuel and Lubricants used in Air Traffic, adopted by the International Conference held in London from 21 February to 1 March 1939, the Final Act of which Conference was signed by the representatives of 38 States, has not yet come into force, many of the signatories shortly thereafter having found themselves at war; WHEREAS, of the two operative clauses of that Convention, Article 2(1)(a) has been incorporated in substance into Article 24(a) of the Convention on International Civil Aviation, which provides that fuel and lubricating oils 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; WHEREAS it appears practicable and desirable to seek implementation of the principles agreed in article 2(1)(b), the second operative clause of the London Convention, particularly in view of long standing maritime practice with respect to analogous problems in the field of shipping; [WHEREAS Article 24(a) of the Convention applies also to spare parts, regular equipment and aircraft stores, and it appears practicable and desirable to extend the principles agreed in Article 2(1)(b) of the London Convention to other consumable technical supplies, such as

11 52 in 1944, 188 today. - 14 - de-icing fluid, hydraulic fluid, cooling fluid, which, like fuel and lubricants, are filled into receptacles forming part of the aircraft, which are essential for that purpose, so that all exemptions applicable to fuels and lubricants will apply also to such supplies]; THE COUNCIL RESOLVES THAT (1) When an aircraft registered in a particular State departs from a Customs airport of another State either for another Customs territory of that latter State or for the territory of any other State, the fuel, lubricants [and other consumable technical supplies] taken on board for consumption during the flight should be furnished exempt from all customs and other duties or, alternatively, any such duties levied should be refunded, provided that the aircraft has complied, before its departure from the customs territory concerned, with all customs and other clearance regulations in force in that territory. […] (Note: Bracketed portions of this resolution to be deleted if it is decided to limit the exemption to fuels and lubricants)12. (Gazdik, 1950, pg 65-66)

In this draft the following points are to be observed: In the opening paragraph the ICAO refers to the 1939 London Convention. Part of this convention (2.1.a) has already been included into the Chicago Convention as article 24(a), and deals with the exemption of fuels etc. remaining on board. But 2.1.b of the London Convention, which has not been included in the Chicago Convention, and which apparently referred to standing maritime practices, appears to have dealt with the exemption of fuel etc. taken on board of aeroplanes. According to Resolution 1, these resources should be exempted too. The ICAO adopted these resolutions “after a comprehensive study of the various existing and anticipated problems related to taxation in the field of international air transport” (ICAO, 2000, pg. iii). Afterwards, in 1966, the guidelines were published in Doc 8632 as ICAO’s policies on Taxation in the field of International Air Transport, which was again reviewed, and reissued in 1994 and 2000. In these three revisions the ICAO refined its policies, but the essence remained the unchanged (ICAO, 1994 & 2000). The ICAO policy dealt with the taxation of fuel etc. already on board upon arrival and retained on board upon leaving, of fuel etc. taken on board, of income of international air enterprises and taxation of sale and use of international air transport. Doc 8632 is in force today, and is one of the key factors that excludes international aviation from various kinds of taxation. However, in itself, it is not the cause that aviation has the tax exemptions, which it currently enjoys. Doc 8632 is not an international treaty to which signatory countries have to adhere13; it represents the consensus of the ICAO Council. It is up to individual states to decide if, and how their policies, and in particular their bilateral air service agreements, reflect the consensus as agreed upon in the ICAO Council. Individual states are not legally obliged to comply with this ICAO consensus. However, while at present 188 countries are party to the

12 […] is an omission by DM of non relevant parts. ‘Note…’ is in conformity with Gazdik. 13 Gazdik (1950, pg. 67) calls it “an attempt […] to create a ‘semi’ multilateral agreement” - 15 - Chicago Convention, and the main advocate for this taxation policy being the desire for “safe, regular, efficient and economical air transport”, there are no states which reject the ICAO policy. Although there are differences in the degree of national adherence, there is a tendency towards the harmonization of air and taxation policies, because of principles of reciprocity: if one state does not exempt its visiting airplanes from various kinds of taxation, chances are that other states do not feel themselves obliged to exempt the formers’ planes either.

3.4 Bilateral Air Service Agreements Under the general provisions of the Chicago Convention, it was decided that every state that wanted to engage into air transport with another state, would have to enter into either an International Air Services Transit Agreement or an Air Service Agreements (ASA) (Varley, 2000), before any such action could be undertaken. Air Service Agreements are sometimes also referred to as Air Transport Agreement, which is a more specific kind of ASA. In ASAs, provisions are generally made concerning routes, flag-carriers, tariffs and taxes. At present, around 3,000 ASAs are in force (1999, pg. 58).

3.4.1 The Bermuda Agreement A well-known ASA that was signed after the Chicago Convention regulated air transport between the United States and the United Kingdom. This agreement, signed on 11 February 1946 in Bermuda, became known as the Bermuda Agreement. In it, we find the following clause:

Article 3 (1) The charges which either of the Contracting Parties may impose, or permit to be imposed, on the designated air carrier or carriers of the other Contracting Party for the use of airports and other facilities shall not be higher than would be paid for the use of such airports and facilities by its national aircraft engaged in similar international air services. (2) Fuel, lubricating oils and spare parts introduced into, or taken on board aircraft in, the territory of one Contracting Party by, or on behalf of, a designated air carrier of the other Contracting Party and intended solely for use by the aircraft of such carrier shall be accorded, with respect to customs duties, inspection fees or other charges imposed by the former Contracting Party, treatment not less favourable than that granted to national air carriers engaged in international air services or such carriers of the most favoured nation. (3) Supplies of fuel, lubricating oils, spare parts, regular equipment and aircraft stores retained on board aircraft of a designated air carrier of one Contracting Party shall be exempt in the territory of the other Contracting Party from customs duties, inspection fees or similar duties or charges, even though such supplies be used by such aircraft on flights within that territory.14

14 Online available at http://www.aviation.go.th/airtrans/airlaw/us-uk.html and authenticity confirmed with Shawcross & Beaumont – Air Law (Butterworths) - 16 - When one reads these passages again closely, one finds that, in addition to Article 24 of the Chicago Convention, which deals with fuels etc. retained on board, now, in article 3.2, also fuels etc. introduced on board are mentioned. However, the UK and the US still only agreed to treat the visiting airline not less favourable as their respective national airlines. They do not speak of exemptions. But when considering the US policy – most states exempted national airlines from fuel taxation, and the US federal government levied only a small charge related to infrastructure – this was, from the side of the US, a de facto exemption of fuel tax for international aviation. The success of the Bermuda Agreement was spectacular due to “its conciliatory nature and somewhat vaguely worded rules” (Diederiks-Verschoor, 2001, pg. 53). It was no surprise that the clauses used in this treaty also appeared in others. As a result, the exemptions and refunds decided upon unilaterally by states were also available for international operators. Looking ahead to the upcoming ICAO Council resolution on taxation, J.G. Gazdik, the IATA legal representative, gave an overview of the existing unilateral exemptions:

• Austria imposes no duties or excise taxes. • Australia, Portugal, Turkey and Union of South Africa use an “in bond” procedure and grant 100 per cent exemption. • Belgium, Bolivia, Burma, Canada, Ceylon, Chile, China, Denmark, El Salvador, Finland, France, India, Ireland, Liberia, Luxembourg, Netherlands, New Zealand, Nicaragua, Norway, Pakistan, Paraguay, Siam, Spain, Sweden, Transjordan, and the United Kingdom refund 50 per cent of the duties and taxes levied on fuels. • Brazil, Czechoslovakia, Egypt, Greece and the United States refund 50 per cent of the duties, but only if a reciprocal air agreement has been negotiated and signed with the Government of the foreign airline concerned. • Dominican Republic and Haiti grant exemption from, or refund of the duties and taxes up to 50 per cent if the aircraft is registered in that State. • Venezuela refunds or exempts 50 per cent or more, subject to entering into an “operator contract”. • Cuba refunds or exempts 50 per cent or more, subject to entering into a contract to carry mail for that State. • Colombia, Italy, Iraq, the Philippines and Switzerland refund less than 50 percent of the imposts levied on fuels. • Argentina, Ethiopia, Guatemala, Iceland, Mexico and Peru grant no exemption or refund from fuel taxes levied. (Gazdik, 1950, pg. 65)

Under influence of international developments, such as the adopting of the taxation resolutions by the ICAO Council in 1950, the contents of ASAs evolved. In 1957, when the Netherlands signed an Air Transport Agreement with the United States, the taxation clause read as follows:

Article 7 In order to prevent discriminatory practises and to assure equality of treatment, both contracting parties agree that:

- 17 - (a) Each of the contracting parties may impose or permit to be imposed just and reasonable charges for the use of public airports and other facilities under its control. Each of the contracting parties agrees, however, that these charges shall not be higher than would be paid for the use of such airports and facilities by its national aircraft engaged in similar international activities. (b) Fuel, lubricating oils, other consumable technical supplies, spare parts, regular equipment, and stores introduced into the territory of one contracting party by or on behalf of the airline or airlines of the contracting party or its nationals and intended solely for use by aircraft of such contracting party in international services shall be exempt on a basis of reciprocity from customs duties, excise taxes, inspection fees and other similar duties, taxes or charges, even though such supplies be used or consumed by such aircraft on flights in that territory. Articles so introduced into the territory of a contracting party shall be kept under customs supervision until required for the use provided for in this paragraph or for re-exportation. (c) Fuel, lubricating oils, other consumable technical supplies, spare parts, regular equipment, and stores retained on board of aircraft of the airlines of one contracting party authorized to operate the routes and services provided for in this Agreement shall, upon arriving in or leaving the territory of the other contracting party, be exempt on a basis of reciprocity from customs duties or charges, even though such supplies be used or consumed by such aircraft on flights in international services in that territory. (d) Fuel, lubricating oils, other consumable technical supplies, spare parts, regular equipment, and stores taken on board aircraft of the aircraft of one contracting party in the territory of the other and used in international services shall be exempt on a basis of reciprocity from customs duties, taxes, inspection fees and other similar national duties, taxes or charges, even though such supplies be used or consumed by such aircraft on flights in that territory.

Clauses 7(a), (b) and (c) do not introduce any innovative elements – although it appears that besides fuel and lubricants, also other supplies are included in the agreement, which was not really clear from the 1950 draft ICAO-policy document. But in clause 7(d) it is interesting to see that the contracting states, probably under the influence of the ICAO policy, go beyond a “treatment not less favourable” of the 1946 Bermuda Agreement, to a full, reciprocal exemption.

3.4.2 The Open Skies treaty From 1992 onward the United States set out to finish their 1944 project of liberalizing civil air traffic, a project which before met with British reserve. In 1992 the US government set up a new model of bilateral Air Service Agreement, commonly referred to as the Open Skies treaty. The first Open Skies treaty was agreed upon in 1992 with the Netherlands, and today the US is partner in sixty-five15 Open Skies treaties:

[Open Skies treaties] sought to promote free determination of capacity without government interference, reduce route restrictions, establish multiple designation of airlines, remove the system of double governmental approval of tariffs, facilitate the operation of charter flights, and promote fair and competitive practices by airlines. (Varley, 2000)

15 See http://www.state.gov/e/eb/rls/othr/22281.htm - 18 -

This US-led innovation again filled a need in international aviation diplomacy; other countries were observed to rapidly incorporate similar Open Skies-like provisions into their own ASAs. In the field of taxation, the Open Skies model did not introduce significant innovations. The only novelty since the 1946 Bermuda agreement is the extending of exemptions to promotional and advertising materials taken on board of aircrafts16. Interestingly, after a long-standing conflict between the European Commission and European member states, in 2002 the European Court of Justice ruled that in the Open Skies treaty certain provisions were not in line with EU-law. Since 1995, the European Commission has been sole authority in Europe that is allowed to agree upon commerce treaties like Open Skies. Member states themselves are not allowed to sign these kinds of trade related treaties (review a detailed account on this case in, for instance, Middeldorp & Van Ooik (2003)). The result of the 2002 court ruling was that the European member states’ Open Skies treaties, which came to replace the traditional Bermuda-styled agreements, had to be renegotiated between the European Commission and the United States. Because inter- and intra-EU/US air traffic accounts for a significant share of global aviation, it is likely that the resulting community air service agreement will set a new standard for other bilateral air service agreements. Today the negotiations have not yet been concluded. We have reviewed a draft Memory of Understanding (MoU) that is currently being negotiated between a South American state and the European Union. Ir. J.W. Pulles, representative of the Dutch aviation authorities, informed us that this draft is common knowledge amongst European Aviation officials17. Therefore it is likely that a similar clause will return in the impending EU/US-ASA. The taxation clause in the MoU reads as follows:

Article 4 – Taxation of aviation fuel […] 2. Notwithstanding any other provision to the contrary, nothing in each of the agreements listed in Annex 2 (d) shall prevent Member States from imposing on a non- discriminatory basis taxes, levies, duties, fees or charges on fuel supplied in its territory for use in an aircraft of a designated air carrier of […] that operates between a point in the territory of that Member State or in the territory of another Member State. 3. Notwithstanding any other provision to the contrary, nothing in each of the agreements listed in Annex 2 (d) shall prevent […] from imposing on a non-discriminatory basis taxes, levies, duties, fees or charges on fuel supplied in its territory for use in an aircraft of a designated air carrier of a Member State that operates between a point in the territory of […] and another point in the territory of […] or in the territory of […].

Article 5 – Tariffs for carriage

16 See http://www.state.gov/e/eb/rls/othr/19514.htm 17 Personal communication on 16 September 2004. - 19 - […] 2. The tariffs to be charged by the air carrier(s) designated by […] under an agreement listed in Annex 1 containing a provision listed in Annex 2 (e) for carriage wholly within the European Community shall be subject to European Community law. European Community law is applied on a non-discriminatory basis. 3. The tariffs to be charged by the air carrier(s) designated by a Member State under an agreement listed in Annex 1 containing a provision listed in Annex 2 (e) for carriage between […] and […] shall be subject to […] law concerning price leadership and applied on a non-discriminatory basis.18

After more then sixty years of exemptions, this is a very different treaty. Notice that the word exemption does not appear in this draft, and that the contracting states even agree that nothing will prevent the possible imposition of taxes and levies on fuel. The European Commission has the freedom to negotiate such an agreement, because it is currently, as a supranational institution, not a signatory of, or adherent to, the Chicago Convention. Therefore it is also not bound by the ICAO Council’s policy. At the same time, the Commission is also not a part in the ICAO deliberations, and can only influence these through its member states19. This relative freedom allows the Commission to include above provisions, which anticipates on a future intra-European charge. The South American contracting partner only has this possibility for aviation within its own territories.

3.5 Double Taxation There are several ways in which aviation companies can be taxed. Amongst the options is the introduction of direct sales taxes on, for instance, fuel and tickets, or indirect taxes, such as the taxation of income. When taxation authorities deal with international operating companies like airlines, there is always the risk that a specific kind of tax is levied more than once, because of inharmonious taxation systems of different states. For example, if state A taxes income whenever it is earned within its territory, and state B taxes income when it is earned by an enterprise with its headquarters on its territory, the possibility exist that income already taxed in state A, is again being taxed in state B. Recalling Chicago Convention’s Article 24 it is clear that the international community already tackled the risk of charging double direct taxes such as fuel levies etc., because supplies on board of airlines upon arrival were not to be taxed again by subsequent host states. The Chicago Convention only allowed taxation of locally acquired supplies, and these would not again be taxed in other states adhering to the Convention.

18 on file with the author 19 See http://europa.eu.int/comm/transport/air/international/oaci_en.htm - 20 - For preventing the double taxation of income, international aviation met with a less special treatment; the topic of double taxation was already recognized by the League of Nations in 1921 (Hund, 1982, pg. 111), where, unlike international shipping, aviation was not yet mentioned. At present, following in the footsteps of the League of Nations, the Organisation for Economic Co- operation and Development (OECD) administers the international double taxation agreements. The OECD is to double taxation agreements comparable as what the ICAO is to air service agreements. Aviation is subject to both kinds of agreements. In the thirties in the United States, while dealing with interstate tax issues, courts were looking for a model that would prevent double taxation. In the interstate trade matter, as touched upon in Chapter 2.1, judges had to decide how they would consider airplanes. For this there were two available models. One: to consider airplanes as seagoing vessels, or two; to consider airplanes as railway carriages; in short, the Railway and Vessel models:

According to the first, the value of the physical assets of a corporation is allocated between the jurisdictions concerned on some such basis as track mileage or value of fixed assets. This seems to be justified in case of international railroads, since they have such assets as roadbeds, stations, etc., in several jurisdictions and their rolling stock is generally without a “home,” i.e. it is located somewhere along the route whether in movement or waiting. On the other side, in case of the vessel theory, the authority to impose taxes is left on a reciprocal basis to the State of registration (the home of the vessel). The basic theory behind this system is that ships, contrary to international railroads, usually have no terminal or docks abroad. Thus their assessment for tax purposes in the ports where they are embarking passengers or cargo would be an extremely complex and difficult problem. (Gazdik, 1950, pg. 67)

In the 1944 US Supreme Court case of Northwest Airlines vs. Minnesota, the court refused to choose unanimously between the two models (Gazdik, 1950, pg. 67). However, according to another quote of Gazdik, there appeared to be an emerging majority for the vessel model anyway:

The United Nations’ records show that the allocation (“railroads”) theory is supported by Australia, Belgium, China, Egypt, Greece, Iraq, the Philippines, and Siam, whereas the “vessel” theory of reciprocal exemption has at least 18 supporters including Canada, Denmark, Finland, France, New Zealand, Norway, Sweden, Switzerland, Union of South Africa, United Kingdom and United Sates. It must be mentioned, however, that these 18 countries generally retain tax jurisdiction over their own corporations and individuals on income derived from shipping and aviation in foreign countries, but exempt the income of foreign carriers derived within their countries on a reciprocal basis. (1950, pg. 68)

At a speech on Double Taxation Conventions at an IATA Seminar in Salzburg, Austria, 1982, Mr. D. Hund, Chief Inspector of Taxes of the Directorate for international fiscal affairs of the Dutch Ministry of Finance, explains the above majority noted by Gazdik as follows: “developing

- 21 - countries are naturally more inclined towards greater powers of taxation for source countries than are the developed countries” (Hund, 1982, pg. 112). In the taxation jargon, source countries are the countries where revenue is being generated. According to the Vessel model, source countries should not tax aviation revenue. In his conclusion, Hund elaborates on the reasons why, besides prevented from double taxation, there is the tendency to exempt aviation from taxation in source countries.

It may be seen that international air transport has occupied a special place in double taxation conventions from the very beginning. This in itself is a remarkable situation, for an airline is an enterprise and as such there is no reason to arrange the taxation of its profits in a way which departs from the internationally accepted practise for other enterprises, that is the taxation outside the country of residence being made dependent on the presence of a permanent establishment. As we have seen, however, airlines have been treated differently for over 50 years. There are two main reasons for this, one theoretical and one practical. The theoretical background for exemption in the source country is that the profits of an airline are not primarily obtained where passengers and freight are loaded. No, the activity that produces the profits in the first place is flying and that is done mainly in international air space. The practical argument against treating airlines according to the same rules as other enterprises is the fact that it is almost impossible to arrive at an acceptable method of dividing profits between the various permanent establishments and the headquarters. (Hund, 1982, pg. 113)

- 22 - 4. The Netherlands The Netherlands were, after a reluctant start at the 1919 Paris Convention (Dierikx, 1988, pg. 54), one of the states which, in close corporation with the US, pursued a liberal international aviation environment. According to the present State 20 Secretary of Transport, Public Works and Partner Subject Date Sweden Air Services 03/11/1945 Water Management, Drs. Schultz van Haegen AOA21 International Services 29/11/1945 Spain Air Services 03/02/1946 in a speech on 17 January 2003 “[t]he Portugal Air Transport 12/04/1946

Netherlands were one of the few countries that United Kingdom Air Services 13/08/1946 Uruguay Air Transport 12/05/1947 supported a completely liberal aviation policy Brazil Air Transport 06/11/1947 United States Double Taxation 29/04/1948 as early in the 1940s when the Treaty of Canada Air Services 02/06/1948 Argentina Air Transport 29/10/1948 Chicago was drafted. At a time when most Finland Air Transport 25/02/1949 other countries were not yet prepared to reject Switzerland Air Services 07/03/1949 Lebanon Air Transport 20/09/1949 22 the bilateral system, our country did.” . She Iran Air Services 31/10/1949 Egypt Air Services 08/12/1949 acknowledged KLM president Albert Syrian Arab Republic Air Services 13/02/1950

Plesman’s pioneering spirit for being an Italy Air Services 04/03/1950 Iceland Air Transport 22/03/1950 important stimulant behind this Dutch policy. Spain Air Transport 20/06/1950 Israel Air Transport 23/10/1950 Being one of the signatories of the Austria Air Transport 29/11/1950 * Thailand Air Services 22/02/1951 * 1944 Chicago Convention, and with KLM- India Air Services 24/05/1951 airline having a considerable interest in Greece Double Taxation 26/07/1951 Myanmar Air Transport 06/09/1951 international aviation, the Netherlands were Australia Air Services 25/09/1951 Paraguay Air Transport 05/03/1952 quick to endorse ASAs. In this context, it is a Philippines Air Services 15/03/1952 * bit awkward that the Netherlands signed its Pakistan Air Services 17/07/1952 Peru Air Transport 22/09/1952 ASA with the US in 195723. In particular Mexico Air Transport 13/10/1952 Japan Air Services 17/02/1953 because according to Bouwens & Dierikx United States Privileges and 19/06/1953 Immunities with respect (1996, pg. 115) on 21 May 1946 the KLM was to Air Carriers Sri Lanka Air Services 14/09/1953 the first European airline to open a route to Republic of Korea Air Transport 25/09/1953 * * New York. Libyan Air Transport 14/12/1953 South Africa Air Services 17/06/1954 However, in 1945, even before Venezuela Air Services 26/10/1954 Ecuador Air Transport 14/12/1954 Bermuda, an Exchange of Notes constituting Iraq Air Services 16/12/1954 United States Certificates of 19/09/1955 * an Authorization to Operate an Air Airworthiness

Transportation Service between New York, Sudan Air Services 12/02/1956 Germany Air Services 28/09/1956

20 Dutch bilateral aviation treaties, as registered by the ICAO until 1960. Source: ICAO's Database of Aeronautical Agreements and Arrangements. In case of registered treaty revisions only the first agreement is shown. 21 See text. * In case of multiple signing dates, only the first date is shown. 22 See http://www.minvenw.nl/cend/dco/nieuws/cgi-bin/vwn_p.pl?arch_srcID=1566 23 See table. The agreements of 1948, 1953 and 1955 are not ASAs. The Air Transport Agreement of 1957 is. - 23 - Amsterdam and beyond via intermediate Dutch bilaterals until 1960, continued * 24 Australia Double Taxation 29/11/1956 points . The American counterpart was not yet Yugoslavia Air Services 13/03/1957 the US government, but the American United States Air Transport 03/04/1957 Egypt Double Taxation 15/05/1957 Overseas Airlines (AOA). This ‘Exchange of Hungary Air Transport 28/05/1957 Romania Air Transport 27/08/1957 Notes’ provided the legal basis for the Ireland Air Transport 02/10/1957 * United Kingdom Certificates of Airworthiness 22/10/1957 Amsterdam-New York flights. Bulgaria Air Transport 07/02/1958

The Dutch agreement with the United USSR Air Services 17/06/1958 Afghanistan Air Services 16/10/1958 25 Kingdom on 13 August 1946 was almost an Liberia Air Services 28/11/1958 Tunisia Air Transport 19/03/1959 exact copy of the February 1946 Bermuda Morocco Air Transport 20/05/1959 Agreement; Of the twelve articles, the first nine, including the one concerning taxation, are identical. At the Double Taxation Convention between the United States and the Netherlands in Washington on 29 April 1948 only a tiny reference is made regarding aviation. It endorses the Vessel-model:

4. Art. VI 1. Inkomsten welke een onderneming van een der Verdragsluitende Staten verwerft met de exploitatie van schepen of luchtvaartuigen, welke in die Staat zijn ingeschreven, zijn slechts belastbaar in de Staat waar zodanige schepen of luchtvaartuigen zijn ingeschreven. [...]26

It states that income derived from ships or planes in either contracting state is only subject to taxation in the state where the ships or airplanes are registered. As seen in Chapter 3.4.1, the tax paragraph of the 1957 ASA with the United States was influenced by the 1950 ICAO policy on taxation. In 1982, the Netherlands were partner in approximately thirty-two double taxation conventions (Hund, 1982, pg. 113), and at present, in around 130 Air Service Agreements (Middeldorp & Van Ooik, 2003, pg. 2). In 1968, the Dutch government further incorporated the ICAO policy into its legislation by including the international aviation fuel tax exemption in its new Turnover Tax Law (Dutch: Wet op de omzetbelasting). When questioned in a Parliament committee on this topic27, the State Secretary of Finance, Mr. F. Grapperhaus, explained that, although the national stretch of an international journey is in principle subject to taxation, because of the negligibility of the national compared to the international stretch, and in order to prevent administrative complications, this exemption was incorporated into the law. Grapperhaus thus confirmed that the international stretch is exempt

24 See http://www.icao.int/applications/dagmar/agr_details.cfm?icaoregno=210.0 25 Retrieved from the Dutch law gazette Staatsblad 1947, H 77 26 Retrieved from the Dutch law gazette Staatsblad 1948, I 464 27 Retrieved from the Proceedings of the Dutch Lower House of the States-General, 1968, Supp. p. 21 - 24 - anyhow. He added that the tax exemption for international shipping and aviation is in fact a perpetuation of existing policy. Recent developments concerning Dutch aviation taxation policies deal with the Open Skies issue as described in Chapter 3.4.2. The Dutch government was in 1992 (again) the first government to agree on a novel international aviation agreement with the US. Because of the 2002 European Court of Justice-ruling, the Dutch will also replace their bilateral ASA with the US with the forthcoming Community ASA. To conclude this review of Dutch aviation taxation; there is also a taxation which is being paid by the aviation industry; the airport taxes. In 1961, every passenger paid a 5-guilder Passenger Service Charge and the airplane landing-fee was increased by “twenty-five percent” at the national airport Schiphol (Bouwens & Dierikx, 1996, pg. 215). Today this Passenger Service Charges amounts € 12.56 (http://www.schiphol.nl). Mrs. U. Huiskamp, Corporate Environmental Manager of the KLM28, informed us that at present, these fees annually add up to around 800 million euro. If one then considers that, when aviation fuel would be taxed equally to unleaded petrol, taxes would add up to € 2.7 billion, or, when it would be taxed like regular gasoline, to € 1.5 billion29, than it is apparent that there is still a significant disparity in tax burden compared to other transport modalities.

28 Personal communication through e-mail on 15 November 2004. 29 Calculation by B. Amelung on 28 October 2004, See Appendix. - 25 - 5. Discussion Since its early days aviation has met with a steady decline in tax burden. This declining tendency originated in the US, where the infant aviation industry was pampered by the government with tax benefits and beneficial contracts, and it spread throughout the world after the Second World War. The liberalisation of international aviation also had strong roots in the US; In 1944, the US initiated call for liberalisation of the air sector was still held back by the United Kingdom’s expectations of a more regulatory model, but gradually the American liberal position became commonplace. With the 1992-introduction of the Open Skies agreements, the liberalisation of the international aviation- sector was a matter of fact. Lately, in the aftermath of September 11th, the SARS-epidemic and the Iraq war, we have observed great turbulence at airlines. Aviation is a highly competitive industry, and a basic prerequisite for a company to stay aloft under pressure of external circumstances and fierce competition, is that it does not suffer from an unequal distribution of taxes. From the airlines’ perspective it was very sane to pursue zero tax rates, zero being the most equal rate of all. From the perspective of an outsider, however, it was not such an obvious pursuit. Airlines’ exempted position discords considering with other industries, some of them also highly international and competitive, but these are subject to all kinds of taxes. Ironically, the exemptions that were introduced to create a level playing field within the aviation sector now cause unfair competition between aviation and other sectors, such as railway companies. Also, the arguments that were used in favor of the exemption, earlier, have long surpassed their expiration date; aviation is a mature industry now; it has no need for supportive governmental policies to survive. And in return, it is safe to say that world peace does not rely on increasing aero-mobility. Besides that, we have a different conception of the purpose of fuel taxation. In the 1930s fuel tax was a means to finance roads. Today fuel tax is, more strictly, a taxation of fuel. It does not have a direct link with road construction anymore. If you use more, you should pay more. We appear to be trapped in a deadlock. Although the tax exemption for aviation seems outdated, aviation growth and its concurring increasing emissions are mocking other climate policies, and the number of pleas for change is steadily increasing, it seems impossible to escape from it. In 1997, the conference of the parties to the United Nations Framework Convention on Climate Change (COP) agreed to “pursue limitation or reduction of emissions of greenhouse gases […] working through the International Civil Aviation Organization and the International Maritime Organization, respectively.” (Kyoto Protocol, Article 2.2)30. This appears to have been a misjudgement. Working through the ICAO to limit or reduce aviation emission of greenhouse

30 See http://unfccc.int/resource/docs/convkp/kpeng.pdf - 26 - gasses, while the ICAO itself seeks a “safe, regular, efficient and economical air transport”, would be comparable with asking a butcher for a vegetarian recipe. Since 1997 the ICAO members have tried to combine Kyoto principles with their regular policies, and to no avail; at the latest ICAO triennial summit of October 2004, the convening states even agreed to prohibit any unilateral taxing policy until 2007 (The Financial Times, 12 October 2004). But now there appears a possible escape route out of this deadlock: The European Court of Justice ordered in November 2002 that the European Commission should replace the European-US ASAs with one Community ASA (Cases C-466/98 through C-476/98). With the European Commission’s apparent intention to exclude exemptions from new bilateral ASAs, it seems likely that the European Commission will also try to include similar provisions into the American- European ASA. Because the EU and US combined air fleets represent a considerable part of the worlds’ total aviation (Eastern Asia representing the last significant share) it is not unlikely that the EU-US bilateral will become the successor of the Open Skies standard. Its provisions will then also appear in many other air service agreements. If the tax exemptions were indeed to be excluded from this new Open Clear Skies treaty, a major legal obstacle for the introduction of taxes would be removed. (Heere, , 1976, , 1981, , 1985, , 1991)

- 27 - 6. Conclusion The tax exemptions for international aviation originate from the very beginning of aviation itself. At that time a beneficial policy was deemed necessary to support the start up of the sector. In the decades after the Second World War the exemptions consolidated into bilateral agreements. Logic of reciprocity made it undesirable for states to abolish the exemptions. Also, there was no thrive towards abolition, because the thought of levying national taxes on airlines, which operated an international taxation vacuum, did not occur. Since the mid-nineties this changed, and today there is an increasing call for the taxation of aviation. This call stems from concerns regarding the global emission of greenhouse gasses, in which airlines have a significant share, and because airline exemptions make it harder for transport companies which operate other modes of transport to compete with the advantaged sector. In spite all of this, as of today, airlines still enjoy widespread exemptions. Although the international community, inside COP and the ICAO has tried to entice the sector into policy that could curb emissions, no significant progress has been made so far. There appears to be a deadlock. However, since 2002, the European Commission has been renegotiating a specific kind of aviation treaty with the US. It appears that the EU is quite serious in its ambition to address aviation emissions, and therefore, there is a possibility that the prohibition of taxation, which now is hindering introduction of tax emissions, will be cancelled in the upcoming EU-US treaty. This EU- US lead innovation could have enough momentum to persuade other governments to cancel the prohibition, too. It is one thing to cancel the taxation prohibition; it is another thing to really start levying taxes. There is a strong international tendency towards harmonisation of aviation policy. After the cancellation of the tax-prohibition, it would be highly desirable if large aviation-entities, like the EU, the US, and Asian aviation giants, would take the lead and commence charging airlines uniformly. If this will not happen, it is not unimaginable that the international community will reside in maintaining the zero-tax rate, although they are not yet anymore legally obliged to do so, because no state is willing to take the first step. Aviation is a very dynamic sector, and it is always going through great turbulence, directly related to international turbulences. At first sight it seems not wise to start levying taxes on this sensible industry. But in spite of the last couple of crises, global aviation is continuing to increase. Therefore it is likely that when for example, an emissions charge is introduced, it will, at first gravely impact the industry. After the first turmoil, however, it is likely that the sector will find new balance, and continue to prosper as it does now, only competing more fair with her competitors and showing more responsibility towards global climate change.

- 28 - 7. References

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- 30 - Appendix: Tentative Calculation on Aviation Fuel Tax in The Netherlands By Bas Amelung, October 2004. Possible price changes due to changes in demand etc. are not taken into account.

Kerosenes and Jet Fuels - Inland Deliveries (x 1,000 tons) in 2002: • 3,372 (The Netherlands) • 44,808 (EU-15) (source http://epp.eurostat.cec.eu.int/cache/ITY_OFFPUB/KS-NQ-03-014/EN/KS-NQ-03-014-EN.PDF)

Conversion: tons to liters: • 1 ton kerosene = 1,258 liters kerosene (@ 20ºC) (source: http://www.dme.gov.za/publications/guidelines/annexure_A.htm)

Inland Deliveries of Jet Fuels and Kerosene • Netherlands: 3.37 million tons = 4.24 billion liters • EU-15: 44.8 million tons = 56.4 billion liters

Level of petrol and diesel taxation in 2002 (in Euros per 1,000 liters): The Netherlands: • € 627 (Unleaded Petrol) • € 345 (Diesel Fuel)

Average EU-15: • € 506 (Unleaded Petrol) • € 350 (Diesel Fuel) (source: http://www.euractiv.com/Article?tcmuri=tcm:29-117495-16&type=LinksDossier)

With this data one can arrive at a first-order estimate of the amount tax for aviation fuel which is not being levied:

The Netherlands: • € 2.66 billion when Jet Fuels and Kerosene would be taxed like Unleaded Petrol • € 1.46 billion when Jet Fuels and Kerosene would be taxed like Diesel Fuel

EU-15: • € 33,7 billion when Jet Fuels and Kerosene would be taxed like Unleaded Petrol • € 27,0 billion when Jet Fuels and Kerosene would be taxed like Diesel Fuel

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