IATA OPPOSES the Isakson Provision in the Chairman’s Modification to the Chairman’s Mark of the Tax

During the Senate Finance Committee markup of the Tax Cuts and Jobs Act, a provision was included by Senator Isakson in the Chairman's Modification to the Chairman's Mark that, if enacted, would upend long-established U.S. policy and decades of international precedent on the taxation of international aviation - to the detriment of U.S. airlines and their customers, and global aviation generally.

Isakson Provision

The Isakson provision seeks to tax any foreign air carrier whose home country: (1) does not have an income tax treaty with the United States and (2) has fewer than two arrivals and departures per week from major U.S. airlines.

Current Law & Agreements

Under 26 U.S.C. §883, the U.S. government exempts the gross income of foreign airlines operating in the U.S. from taxation if the home country of the airline grants an equivalent exemption to U.S. airlines. The U.S. has entered into a number of comprehensive income tax treaties (requiring Senate approval) and tax agreements (not requiring Senate approval, but considered treaties under international law) to provide for the same reciprocal exemption from taxation for income derived from the operation of aircraft.

Further, the International Civil Aviation Organization (ICAO), the UN body responsible for setting global standards for international aviation, has long had as a guiding principle that "each Contracting State shall, to the fullest extent, grant reciprocally…exemption from taxation on income of air transport enterprises of other states derived in that State from the operation of aircraft in international air transport…" The United States has formally represented to ICAO its agreement with and implementation of this principle, has vocally supported it, and has challenged countries who did not abide by it.

Implications

International commercial aviation today is a seamless experience. Passengers can travel between any two places on the globe with a single ticket, regardless of the number of airlines involved. This seamlessness is possible only because governments cooperate across borders on rules and regulations that govern the industry. Reciprocity between governments on taxation is a vitally important part of this cooperation.

If adopted, the Isakson provision would terminate the exemption from U.S. taxation currently granted reciprocally to airlines from multiple countries - in the Middle East and elsewhere around the globe (list attached). It would therefore require the U.S. to reverse its formal representation to ICAO that its practice is in keeping with established ICAO policy and would put the U.S. in breach of its obligations to many of its trading partners

Most importantly, this sudden change by the U.S., a leading champion of harmonized international aviation policy, would threaten to upend the reciprocity that has enabled the establishment of a seamless global aviation system for the benefit of peoples and economies everywhere. Foreign governments - even those not directly affected by the proposed language - may well feel empowered to follow the U.S. example, thereby terminating tax exemptions currently available to U.S. and other foreign airlines in the interest of near-term revenue enhancement. We should avoid taking so unfortunate a step backwards.