Article 8 of the United Nations Model Double Taxation Convention relates to the taxation of income from international shipping and air transport. It states that 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 is situated. The United Nations has a Tax Committee which has considered revisions to Article 8 to address concerns of developed and developing countries.
This amendment will have an effect on global aviation as well as aviation in Africa and aviation stakeholders in Africa need to collaborate in collectively making known their position on such a serious matter. One of the main arguments for a fundamental revision is that “very few ships and aircraft used in international traffic are operated by enterprises of developing countries.”
The United Nations model grants exclusive taxing rights to the country of residence of the airline. The United Nations Tax Committee has proposed revising article 8 to permit source based taxation of income from international air transport. However this proposal has been met with opposition.
This model provides two alternatives for treating income from shipping and air transport. Alternative A provides for exclusive residence-based taxation for income derived from ships and aircraft in international traffic which is similar to the OECD (the club of the world’s richest nations) Model. ‘Alternative B’ allows limited Source-State taxation for income from international shipping activities.
The proposal for a fundamental reconsideration of Article 8 aims to make ‘Alternative B’ more consistent with actual treaty practice. In this regard it considers whether to continue with exclusive residence-based taxation as in Alternative A, reverse the order of alternatives in Article 8, clarify whether Alternative B should cover both shipping and international air transport, look at ancillary income under Article 8, among others.
In October 2023, the UN Tax Committee released a document that puts out the possibility of fundamental revision, including deletion of Alternative A and a revised Alternative B which is aligned with other United Nations Model provisions. This proposal has the goal of striking a balance between residence-based and source-based taxation for shipping and air transport income.
The new Alternative B provides for limited taxing rights to the Source State. Source-State taxation is extended to include income from international air transport in addition to shipping. Paragraph 3 of this revised rule provides a comprehensive definition of the income covered by this article, while paragraph 4 puts in place a source rule. While paragraphs 1 and 2 provide for limited taxing rights to the Source States, paragraph 5 extends the application “to income from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships”.
Criticism of the proposed amendment is that it will lead to fragmented double or multiple taxation, it is not simple, it creates tax uncertainty, raises compliance costs as well as enforceability related issues. The International Air Transport Association (the international trade association for airlines) has opposed the proposal to change the taxation system for global airlines as it suggests taxing airlines where they generate revenue which could lead to increased complexity, costs, and potentially result in airlines scrapping routes.
While the discussion is ongoing there is need for a critical evaluation of all positions to ensure that Africa has her say.
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