• Navigating the headwinds

Navigating the headwinds

26 November 2018

Angela Fleming, Tax Director, and Carol Lynch, Customs and International Trade Services Partner, were recently interviewed by The Sunday Business Post. The article, written by Siobhán Maguire, focuses on current trends in the aircraft leasing industry, where it's heading and how Ireland is an attractive location for UK-based lessors looking to relocate post-Brexit.

Professional service firm BDO is on hand to help aviation industry clients navigate Brexit and the changing international tax landscape.

Ireland is considered by many to be the birthplace of the aviation finance industry, dating back to the foundation of Guinness Peat Aviation (GPA) in the 1970’s. Ireland is now firmly established as the leading global hub for the sector. Nine of the world’s Top 10 lessors are headquartered here and over 50 per cent of the world’s leased aircraft are owned and managed from Ireland.

Angela Fleming, BDO tax director, said the future of aircraft leasing continues to look positive as passenger numbers increase and further growth in the industry predicted.

“The future of aircraft leasing continues to look bright, despite some clouds gathering,” she said.  “For example, 2017 saw the fastest growth in passenger numbers since 2005, reporting a growth rate of 8.1 per cent. This passenger growth was supported by a broad-based improvement in global economic conditions, and, in particular, the growing middle class in Asia. This is significant for Ireland, as approximately 40 per cent of the world’s commercial aircraft are not owned outright by the airlines, but are leased, with this percentage expected to increase to 50 per cent by the end of the decade. Of these leased aircraft, over 50 per cent are owned and managed from Ireland. As a result, a growth in international traffic numbers presents a massive opportunity for Irish lessors and for the Irish economy in this high value industry.

“While there have been some signs of the growth rate moderating, the long term outlook is still positive. Boeing anticipate that the world fleet size will double over the next 20 years to over 40 thousand aircraft, resulting in a need for $4.8 trillion of new aircraft.

This view is also shared by the International Air Transport Association (IATA) who expect, even after recessions, to see a two-fold rise in air travel over the same period.”

Fleming said that while passenger growth rates are positive, there are a number of challenges putting pressure on airline profitability, not least of these is recent volatility in fuel prices. Oil and jet fuel reached four-year highs during October, but have fallen back sharply since. Additionally, lower fares have been a tailwind for passenger growth over the last number of years, meaning that passenger numbers do not necessarily equate to profitability.     

“Of course, projected growth in demand for aircraft may be impacted by geo-political factors such as a further pick-up in protectionism,” she said.

It is this current trend of “creeping protectionism” that is posing a challenge for airlines and aircraft leasing companies. Carol Lynch, partner in BDO Customs and International Trade Services, said Brexit and its uncertainty was a good example of this.

“The decision of our closest neighbour to leave to the EU has dominated discussions in boardrooms as companies grapple to come to terms with what Brexit may mean for their business,” she said.

“Once Brexit takes place and Britain is no longer a member of the European Union, all trade between Ireland and Britain must take place under the normal EU Trading rules which apply to all trade with non-EU countries. For aircraft leasing companies this will mean the introduction of customs documentation requirements for aircraft and parts moving into and out of the UK from other EU countries, including Ireland. This will cause significant problems in terms of the risk of delay and additional paperwork requirements.”  

Lynch said that many lessors are already seeing the impact of Brexit as it will be a condition of signing a contract with a UK lessee that the lessor is able to prove the EU customs status of the aircraft. For aircraft being delivered from the UK this now also means that they will be subject to customs requirements on import by the EU Airline to obtain EU status.

“It is clear that Brexit is a major concern for all lessors, airlines, manufacturers and Maintenance and Repair Operations (MROs),” said Lynch.

“Aircraft manufacturers and MROs purchasing parts from the UK will now need to lodge customs declarations. This will require the use of Customs Duty Suspension Procedures where parts are being imported from the UK for ultimate re-export out of the EU (either back to the UK or to another non-EU country). While there are reliefs available, claiming them will add an additional layer of bureaucracy as well as leaving the potential risk of duties if not imported correctly.

“Contingency planning for Brexit continues, and many parts manufacturers have received questionnaires from their customers requesting confirmation of their post-Brexit contingency plans to ensure security of supply. Similarly, the aircraft manufacturers have been contacting their suppliers regarding their contingency planning. This is a complex process and involves a supplier mapping their supply chain to check their UK purchases and their current delivery terms.

“Many high profile companies have warned about the risk to the supply chain and the ‘just in time’ model in place if there are delays at the borders. We are working with clients on a daily basis to address these potential delays and ensure the appropriate procedures are put in place and the risk of non-compliance is managed accordingly.    

“Threats can bring opportunities, however, and the impact of Brexit on the increase in financial services companies moving to Ireland is well documented. The same is true of many other industries, including aviation, and we are increasingly seeing an interest in Ireland from British-based aviation firms due to concerns about Brexit.”

BDO specialises in advising aircraft leasing companies on the global happenings affecting industry. Ireland, said Fleming, is a leader in this industry.

“Ireland is in an unrivalled position to capture this business due to its position as the global leader in the industry,” she said. “The availability of highly skilled talent in Ireland with relevant industry experience is the key differentiator over rival jurisdictions such as Hong Kong and Singapore. Coupled with other factors such as common law jurisdiction, English speaking workforce, no time difference, and a competitive corporate tax environment means that Ireland is the location of choice for Brexit-related entrants.  

“While we work with many of the largest lessors in the world, we also assist many smaller start-ups and new entrants to the market.  We provide a full-service approach including incorporating the Irish business, tax structuring, recruitment of specialist personnel, outsourced accounting functions, strategic advice and company liquidations when the aircraft are ultimately sold on. Our “one-firm” approach is vital in aiding new entrants navigate the Irish market.

“The changing international tax landscape means that new entrants need to be mindful of meeting the substance requirements in order to comply with recent changes introduced by the OECD’s BEPS (Base Erosion and Profit Shifting) project. Ireland is in the final stages of implementing the Multilateral Instrument, which seeks to amend over 1,000 double tax treaties. From 2020, accessing tax treaties, which is a key requirement for the aircraft leasing industry, will require lessors to have the proper substance in the country from which they are leasing aircraft.”

With its robust leasing regime, highly skilled and experienced workforce, Ireland is the perfect location for lessors to establish and develop their leasing platforms. And as a leading advisor to the aviation industry for over 30 years, BDO will be there to assist its clients in navigating the impact of Brexit and the changing international tax landscape.

Article adapated from The Sunday Business Post, available online.

To learn more about the services that BDO provides for companies in the aviation industry, click here.