The change to Article 8 of the Model Convention (see Annex A), would introduce a choice between residence-based and source-based taxation for international air transport operators. Residence-based taxation is the current global practice in air transport, and it is aligned with Article 8 of the OECD Model Tax Convention on Income and Capital, according to which airlines pay income tax in the country in which the head office is located (see Annex A). Further, this practice aligns with the primary principle of the International Civil Aviation Organization (ICAO) Policies on Taxation and Template Air Service Agreement, for which there should be reciprocal exemption for taxation on earnings of international air transport by States in respect to international airlines (see Annex B). Article 8 of the UN Model Convention has always foreseen the option of source-based taxation, however, thus far, it was only applied to shipping.
Introducing source-based taxation will allow any country where airlines generate income to impose income taxes. In other words, airlines could be taxed not just in the country where they are headquartered, but also in countries where they have sold tickets. Source-based taxation may lead to enhanced State revenue in developing nations, many of which support the change. However, it increases the risk of double taxation and adds significant administrative and fiscal complexity to the system, impacting both airlines and the States concerned. This may lead airlines to reconsider the States they fly to, increase the cost of travel and affect connectivity – indirectly impacting airports.
The UN Tax Committee, a group of 25 tax experts, is expected to formally propose the changes to Article 8 at its next session from 24 to 27 March 2025 in New York City. Following this meeting, on 28 March, the UN Economic and Social Council (ECOSOC) will be asked to approve the change. ECOSOC is comprised of State Representatives and delegates and has the power to issue policy recommendations to the UN system and to Member States. Unfortunately, it is uncommon for the Committee to reject changes that have been approved by the UN Tax Committee.
ACI’s position
The proliferation of various taxes and duties on airports, passengers and air transport, as well as disproportionate or unwarranted airport concession fees and rents to governments, represent an impediment to air transport. Only justifiable, equitable and non-discriminatory taxes on airports, passengers and air transport are acceptable, as they otherwise engender a negative economic impact hindering the sustainable development of airports and of air transport.
ACI opposes practices like double taxation, emphasizing their inefficiency as they raise travel costs, suppress connectivity, and diminish economic benefits.
Actions taken by other organizations
ICAO recently sent a State Letter to its Member States, highlighting the contradiction between these UN developments and ICAO’s own Policies on Taxation (see Annex B). The International Air Transport Association (IATA) has been at the forefront of these developments and has submitted several documents and positions.
Next steps
ACI World has prepared a letter to the 25 members of the UN Tax Committee and has met with ICAO, encouraging it to take a firm stance at the Economic and Social Council, the body through which it maintains a formal relationship with the United Nations. ACI is also coordinating a joint Working Paper with IATA to raise concerns about the increasing number of economic barriers to travel, for submission to the upcoming ICAO Airport Economics Panel.
Airports are encouraged to note the developments above and consider how they might impact connectivity and the development of air transport in their States.
ANNEX A
Article 8 – UN Model Convention
International Shipping and Air Transport
(Alternative A)
1. Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
2. Profits from the operation of boats engaged in inland waterways transport shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
3. If the place of effective management of a shipping enterprise or of an inland waterways transport enterprise is aboard a ship or a boat, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship or boat is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship or boat is a resident.
4. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.
(Alternative B)
1. Profits from the operation of aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
2. Profits from the operation of ships in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated unless the shipping activities arising from such operation in the other Contracting State are more than casual. If such activities are more than casual, such profits may be taxed in that other State. The profits to be taxed in that other State shall be determined on the basis of an appropriate allocation of the over-all net profits derived by the enterprise from its shipping operations. The tax computed in accordance with such allocation shall then be reduced by ___ per cent. (The percentage is to be established through bilateral negotiations).
3. Profits from the operation of boats engaged in inland waterways transport shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
4. If the place of effective management of a shipping enterprise or of an inland waterways transport enterprise is aboard a ship or boat, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship or boat is situated, or if there is no such home harbour, in the Contracting State of which the operator of the ship or boat is a resident.
5. The provisions of paragraphs 1 and 2 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.
Article 8 OECD Model Convention
International Shipping and Air Transport
1. Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State.
2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency
ANNEX B – ICAO POLICIES ON TAXATION
ICAO’S Policies on Taxation in the Field of International Air Transport (Doc. 8632) and related ICAO Council Resolution (pdf)
Available here.
2. With respect to the taxation of income of international air transport enterprises and taxation of aircraft and other moveable property:
a) each Contracting State shall, to the fullest possible extent grant reciprocally:
i) exemption from taxation on the income of air transport enterprises of other Contracting States derived in that Contracting State from the operation of aircraft in international air transport
3. With respect to taxes on the sale and use of international air transport: each Contracting State shall reduce to the fullest practicable extent and make plans to eliminate as soon as its economic conditions permit all forms of taxation on the sale or use of international transport by air, including taxes on gross receipts of operators and taxes levied directly on passengers;
ICAO – Template for Air Service Agreement
Article 14 – Taxation
Option 1
1. Profits from the operation of the aircraft of a designated airline in international traffic shall be taxable only in the territory of the Party in which the place of effective management of that airline is situated.
Option 2
1. Profits or income from the operation of aircraft in international traffic derived by an airline of one Party, including participation in inter-airline commercial agreements or joint business ventures, shall be exempt from any tax on profits or income imposed by the Government of the other Party.
ANNEX C – IATA DOCUMENTS SUBMITTED TO UN TAX COMMITTEE
- Position paper prepared by IATA (pdf) to explain the problems faced by international airlines in relation to taxation on income imposed by States in which they operate other than their own fiscal domicile.
- IATA’s public statement on the revision of Article 8 of the UN Model Convention (pdf) at the 28th Session of the Committee of Experts on International Cooperation in Tax Matters (“UN Tax Committee”), 19-22 March 2024.