aircraft leasing in the context of vat, customs and …...• airworthiness certificate must have...

Aircraft Leasing in the context of VAT, Customs and Brexit

Glenn Reynolds, Partner, KPMG Ireland —16 May 2018

Overview of VAT and Customs

3© 2017 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Ireland.

Introduction to VAT and customs1. VAT/GST• VAT/GST is a transaction tax, payable on supplies of goods (aircraft and aircraft parts) and services (repairs

and maintenance services) unless a specific exemption or relief is available.• Rate of VAT/GST varies across countries unless a specific exemption or relief is available• Certain countries (e.g. Ireland, UK) have established VAT regimes, with rules which facilitate transfer of aircraft

and aircraft parts. • VAT/GST incurred on acquisition of aircraft or aircraft parts typically recoverable (some notable exemptions)2. Customs duty• Customs duties are payable on the importation of goods (aircraft and aircraft parts) by the importer of record.• In EU rate of import duty of aircraft and aircraft part typically 0% or 2.7%.• Customs duties are not recoverable, and represent an absolute cost to aircraft owner/operator.• Customs relief and suspension regimes available.• Under WTO agreement (Agreement on Trade in Civil Aircraft) – often no customs duties on importation civil

aircraft and aircraft parts (engines etc. to be incorporated into civil aircraft).

1. Introduction to VAT and customs


• Many countries have established VAT/GST regimes, rules on transferring aircraft/parts are more commonly known:

EUCanadaAustralia

• Global trends around VATGST regimesChina (2012 - 2016)Malaysia (2015)Egypt (2016) India (2017)UAE (2018)

• Customs Unions/Trade Blocks EU Customs Union Gulf Cooperation Council Eurasian Customs Union WTO – Civil Aviation Agreement

2. VAT/GST & Customs


Sale of aircraft generally • VAT/GST generally chargeable on the sale of aircraft/aircraft parts.• Look to the location of aircraft/parts at time of delivery to determine which country has VAT/GST taxing

rights.• May give rise to local VAT/GST registration and VAT/GST charging obligations (should be managed).• Exemptions for aircraft in EU where conditions satisfied • Non EU countries – may have domestic VAT reliefs for aircraft sales.

3. VAT: sales and import of aircraft & parts


Import of aircraft• Customs duty and import VAT payable to tax authorities of country of importation unless specific reliefs

availableEnd use relief (customs) Inward Processing Relief (VAT and customs)Zero –rated import in EU (VAT)Temporary importationReturned goods relief

• Customs duties paid on importation not recoverable but VAT paid on importation (scope to recover)• Non-EU countries (particularly signatories of WTO agreements) have different customs reliefs.

3. VAT: sales and import of aircraft & parts


Common misconceptions – VAT and customs duties• No VAT payable on aircraft parts/importation of aircraft parts.• End use relief covers VAT. • No requirement to apply for customs relief in advance• Rules relating to sale of aircraft and aircraft parts standardised globally and within the EU.

4. Common misconceptions

General EU VAT & Customs


Aircraft and parts

Subject to VAT where aircraft located at time of supply. Reliefs from VAT-Aircraft a) 0%/ VAT exemption – direct sale to an international airline (“qualifying airline”). Definition of “qualifying

airline” varies across EU.b) Scope to apply 0% rate where aircraft moved to another Member State or exported post sale• Otherwise standard rate of VAT (between 17% and 25%)- Parts • Sale of parts: relief from VAT interpreted more strictly 0%/ VAT exemption – direct sale to an international airline; “Look through” more restrictive for parts (Ireland accepts look through); 0% rate where parts moved to another Member State or exported post saleOtherwise standard rate of VAT (between 17% and 25%)

1. EU - General VAT rules: sale of aircraft and aircraft parts


• Once in free circulation, parts can move across EU Member States without imposition of custom duties.• Movement of parts from one EU Member State to another may trigger local VAT :Local VAT registration obligations;VAT self-assessment obligations;Statistical reporting requirements (VIES and Instrastat returns);

• Any VAT incurred should be recoverable (but cashflow costs);

2. Moving parts around EU

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© 2018 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Ireland.

Where wasit made?

What isthe good?

SpecialProcedures

What isits value?

Classification Valuation

Origin

Tariff classification, preferential origin and customs value are the key elements necessary for establishing duty liability.

CLASSIFICATIONdetermines DUTY RATE

DUTY RATE may be reduced depending on COUNTRY OF ORIGIN

VALUE x DUTY RATE = CUSTOMS DUTY PAYABLE

The timing of payment of the CUSTOMS DUTY PAYABLE will depend on the SPECIALPROCEDURES used

3. Customs Duties – Key Elements


Duty rates on the import of aircraft:- 7.7% on aircraft of unladen weight less than 2,000kg - 2.7% on aircraft of unladen weight exceeding 2,000kg

Duty Rates on the import of aircraft parts is usually 2.7%

Import / export of an aircraft and aircraft parts:- Once aircraft crosses external border of EU- Customs declarations required on formal import and export

Reliefs from import duty and VAT are available – see following slides

4. Customs Rates (in the absence of reliefs)


5. Customs Reliefs• Airworthiness certificate must have been issued by a party authorised by aviation authorities within the Community or in a third country.

• Relief applies to parts, components and other goods to be incorporated in or used in the manufacture, repair, maintenance, rebuilding, modification or conversion of civil aircraft imported with an airworthiness certificate may be entered to this procedure.

EASA (EU)

FFA Airworthiness certificate (US)

• Can potentially remove the need to use either End Use relief or IPR.

• However, as not all goods are covered by this scheme, may not wish to use both this and End Use. It doesn’t cover semi-manufactured parts or un-serviceable parts which are imported for repair (would use full End Use authorisation or Inward Processing in this case).

• Doesn’t defer payment of import VAT.

• Allows a reduced or zero rate of customs duty on some goods (including aircraft and parts) when used for specific purposes and within a set time period and person availing of the relief must be EU established.

• Criteria

Importer holds EU authorisation

Goods are eligible for end-use: and goods to a prescribed use within a certain time (generally no more than 6 months).

• End use authorisations can be: for a specific EU Member State, more than one EU Member State or for one specific import.

• However, End Use relief may not be available where aircraft is destined for part out.

• More relevant to full aircraft than to aircraft parts.

Airworthiness Certificate (parts)

End Use Relief


5. Customs Reliefs• Allows goods to be imported into the EU for processing, repair, maintenance, painting and part out with suspension of import duties.

• The finished goods must then be released for free circulation in the EU or re-exported outside the EU.

• Can be sold under IPR without triggering Customs Duty.

• Typically no more than 6 months (but can be renewed).

• No obligation to own the goods but must be established in the EU.

• Commonly used by the part out industry and preferred by MROs on the continent.

• Customs warehousing allows non-community goods (aircraft and aircraft parts) to be stored in a designated location within the customs territory of the EU without being subject to import duties (or VAT).

• Duty becomes payable when the goods are released for free circulation.

• Typically no limit on length of time goods can be stored under Customs Warehousing.

• Modification/repair is not permissible (transfer into IPR for repair and work and subsequently transferred back to a Customs Warehouse – common in industry and notification to authorities required).

• Can represent an absolute saving on customs duty where a sale takes place in a Customs Warehouse.

• Provides an opportunity for ‘thinking time’.

• No customs duty if re-exported.

Inward Processing Relief (IPR)

Customs Warehouse

Transitioning aircraft/parts


VAT - Transitioning aircraft - sale/repair/import of aircraft/parts

Transitioning

• Aircraft coming off lease for part-out

• Place of supply where aircraft located

• VAT chargeable (unless direct sale to qualifying airline).

• Local reverse charge rules

• “Look through” relief will not be available

• VAT arises where the parts are located at the time of sale

• Many countries no exemptions for parts (“look through” may be available in certain EU Member States)

• VAT treatment dependent on whether parts are in a suspension regime (parts may be sold without VAT and import VAT a matter for purchaser).

• Non-EU countries exemptions not available

• Bringing aircraft free circulation – be mindful of country of importation.

end use relief not available e.g. in the UK or other countries.

imports aircraft parts to sell on to the domestic market without fitting them to an aircraft is not eligible for end-use relief, but airworthiness certificate may be available.

• Alternative reliefs:

Bring aircraft into a suspension regime (e.g. IPR, customs warehouse)

Suspends import VAT (import VAT pushed to third party)

• Moving parts around the EU for repair

Can create VAT registration requirements and statistical reporting requirements

Possible to move under suspension regime (IPR, ATA Carnet, customs warehouse)

What is the authorisation of the holder?

Sale of aircraft off lease Importing aircraft for part-out

Sale of parts Repair of parts


• Inconsistent application of customs rules creates confusion about what can and cannot be imported duty-free.

• MRO’s will be relied upon for certain customs authorisations • Are IPR authorisations in place?

• MRO’s to provide assistance in managing local rules • MRO’s to assist with managing aircraft/parts

• Documentation? • MRO’s knowledge of customs can create a competitive advantage

• Brexit challenges (see below)• Providing customs clearance solutions

MRO – Customs Challenges


Export of aircraft parts• To export (deregister) an aircraft, a request in writing from the registered owner(s) is required.• Must complete customs documentation – SAD Export SAD should be retained as evidence of export.

Export licences• Licence requirement depends on the nature of goods, the destination of delivery, end use etc. • E.g. licence required for goods that can be used for civil or military purposes - which meet certain

specified technical standards and some of their components • Variety of export licences: Open General Export Licences – for less restrictive destinations Open Individual Export Licences - cover long-term contracts, projects and repeat business, granted

to individual companies• Export control systems and procedures should be in place

Transitioning aircraft – export

19© 2018 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Customs – Transitioning AircraftConsider where is the Aircraft is coming from

(EU/Non-EU)

Going on Lease / Entering into Free Circulation:

• Lessee lined up – most straightforward scenario.

• No lessee lined up – VAT implications need to be considered (more so than customs).

• Consider availability of end use relief (Aircraft) or airworthiness certificate (parts) to achieve zero-rate of custom duty.

• No EU customs implications but non-EU customs must be carefully considered (not dealt with here).

• Should ensure customs documents are acquired from previous lessee to support customs status of Aircraft.

YES

NO

Storage / Repair / Part Out:

• Can import into IPR as no customs duty or import VAT due where repair works carried out under IPR.

• Consider customs warehousing which can be used to store Aircraft/parts with duty suspended (allows for ‘thinking time’).

• Aircraft destined for part out – seek customs advice.

• Seek customs advice when leaving IPR/customs warehouse.

YES

MRO Tips:• Understanding the

customs measures/reliefs• Competitor advantage

Brexit - Customs and VAT


• Currently, aircraft and parts can move from EU Member States to the UK without the imposition of customs duties or import VAT

• Brexit - import duties could arise on import of goods into the UK from the territory of other EU Member States.

• Unclear the form that the custom duty regime between the UK and the EU will take.

Brexit – customs implications


“Norwegian”, “Swiss” and “FTA” model “Turkish” model WTO Approach

No customs duty if origin rules are

met

No customs duty Customs duty

Implication

— Formal exportation from Ireland and formal importation in the UK

— Significant real time additional compliance obligations

— WTO Agreement on trade in civil aircraft eliminates import duty on civil aircraft and parts but not always.

— Import VAT due (recoverable)

Implication

• Formal exportation from Ireland and formal importation in the UK –Real time additional compliance obligations

• Potential need for ‘movement certificate’ (e.g. ATR.1 Certificate)

• Potential import VAT due (recoverable) – cash flow impact

• No intrastat or EC sales list obligation

Implication

• Formal exportation from Ireland and formal importation in the UK –Significant real time additional compliance obligations

• Determination and evidence of origin

• Potential need for ‘certificate of origin’

• Potential Import VAT due (recoverable) currently with cash flow impact

Post-Brexit – possible models


Customs and Brexit - Brexit planning

• Payable on the importation of aircraft and aircraft parts.

• Rate of duty for aircraft and aircraft parts typically 0% or 2.7%.

• Customs duty not recoverable.

• Can get end use relief for aircraft and parts (more difficult for parts)

• No duty where parts have certificate of airworthiness.

• Unserviceable parts can cause problems

• Aircraft and parts can move from EU Member States to the UK without customs duties or import VAT

• No customs formalities• Usually no VAT cash flow cost • Large “part out” industry in

UK.

• Worst case scenario.• Possible payment of custom

duty;• Question of VAT on import. • Formal import and export

requirements• Customs relief and

suspension regimes • More likely to cause issues for

off lease aircraft especially intended for part out.

• Brexit clause in leases/Planning.

Custom duty – general rules Pre-Brexit position Post-Brexit position

24© 2018 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Aviation and MRO industry Hard Brexit

• Should be better but not perfect• Customs declarations still required. • Customs Union versus FTA• Risk of Duty if no Customs Union• What about VAT• Use of customs reliefs and suspension regimes.• Most impact on part out/business jets• Most prepared will prosper best - e.g. MRO

authorisations AEO, • Brexit planning required• What about VAT

Soft Brexit (e.g. Customs Union/Partnership/FTA)

• More unknowns than knowns• Potential Customs Duty on import/to from UK.• Formal export and import declarations of goods

moving from UK to EU• Need to rely on reliefs • What will status of UK imported aircraft be?.• Use of customs reliefs and suspension regimes.• Most impact on part out/business jets• Most prepared will prosper best - e.g. MRO

authorisations • Brexit planning required• What about VAT

International VAT Update


International updates - focus areas

International update

• 1 January 2018 - VAT rate 5% on supplies of goods and services.

• Special rules for aircraft.

• Broad zero-rating sales of aircraft and parts.

• Lease of aircraft and parts also qualify for zero-rate.

• May be excepted from the requirement to register.

• VAT incurred not recoverable by non-established non-VAT registered traders.

• Expected that the supply of aircraft which are principally used for international transportation and designed to carry a minimum of 10 people or goods on a commercial basis will be zero-rated.

• Broadening in zero-rating for sales of parts

• 0% applies to supplies of parts not made directly to an qualifying airline if at the time of the supply the part is destined for use by a qualifying international airline.

• Broadening of the look through for sales and leasing.

• 1 January 2018 – 5%

• Zero-rating sales of aircraft and parts “predominantly” used in international transport

• Per guidance “Predominantly” means at least 75% of trips.

• Reverse charge mechanism for supplies by non-residents to Saudi residents

• Where all supplies are zero-rated, no requirement to VAT register.

UAE Germany

Bahrain Saudi Arabia

kpmg.ie

© 2017 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Ireland.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Thank youGlenn ReynoldsPartner, VATKPMG Ireland+353 1 410 [email protected]

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