Senate Tax Bill Targets Some Foreign Airlines-The Wall street Journal

Senate Tax Bill Targets Some Foreign Airlines- The Wall street Journal

Georgia Republican’s proposal would have big impact on three Persian Gulf airlines that have grown rapidly in U.S.

Qatar Airways is among foreign airlines that could be hit by a proposed change in U.S. corporate taxes. PHOTO: FREDERIC J. BROWN/AGENCE FRANCE-PRESSE/GETTY IMAGES

(wsj) —Some overseas airlines would be forced to pay U.S. corporate taxes on part of their profits under a proposal in the Senate tax-overhaul bill that would upset decades of protocols governing international aviation.

In general, airlines only have to pay taxes in their own countries, not on income generated abroad. The U.S. and other nations have negotiated a web of tax treaties and formally recognized agreements that enshrine this principle.

The tax bill is due to go before the U.S. Senate in the coming days.

An amendment from Sen. Johnny Isakson (R., Ga.) could affect three big Persian Gulf carriers that have expanded rapidly in the U.S. in recent years from their home bases in the United Arab Emirates and Qatar, according to people familiar with the provision. Those airlines—Emirates Airline, Etihad Airways and Qatar Airways—are already embroiled in a three-year old trade dispute with the three largest U.S. carriers, including Delta Air LinesInc. DAL +0.64%


A proposal in the Senate tax-overhaul bill would require airlines based in 14 nations or territories to pay U.S. corporate taxes on a portion of their profits:

  • British Virgin Islands
  • Cape Verde
  • Ethiopia
  • Fiji
  • French Polynesia
  • Jordan
  • Kuwait
  • Malaysia
  • Qatar
  • Samoa
  • Saudi Arabia
  • Serbia
  • Suriname
  • United Arab Emirates
Critics said, however, it would hurt a system that has allowed airlines to operate international flights without having to pay taxes in multiple jurisdictions. The International Air Transport Association, the global trade group, opposes the proposal, saying it “would upend decades of precedent—which the U.S. has long supported—on the taxation of international aviation.”

The trade group also said foreign governments—even those not directly affected by the proposed language—“would be tempted to follow the U.S. example and impose reciprocal taxes.”

The Arab Air Carriers Organization, a regional trade group, also raised alarms at its annual meeting last week.

United and Delta recently dropped their daily flights to Dubai, flights that didn’t attract many passengers and fared poorly against the big connecting hubs operated by their Persian Gulf carriers in their home markets.

The proposed measure would need to pass the full Senate, then survive a reconciliation process with a House bill that lacks such language.

Mr. Isakson, a longtime politician from Atlanta, home to Delta, said his proposal was intended to boost fairness and competition. “Foreign airlines should not receive preferential tax treatment if their countries choose not to open their markets to U.S. companies,” he said in a statement.

In addition to the three big Persian Gulf carriers, the proposed tax change would hit airlines in a dozen other nations including Saudi Arabia, Jordan, Kuwait, Fiji, Ethiopia and Malaysia, according to the people familiar with the proposed provision. That is because the language would apply to nations that don’t have full-fledged tax treaties with the U.S., and those that don’t attract at least two weekly round-trip flights by U.S. passenger airlines.

A spokeswoman for Mr. Isakson said the tax provision could raise $200 million in revenue from foreign airlines. The bipartisan Joint Committee on Taxation estimates the amendment would yield $100 million through 2022 and $200 million over a decade.

The trade spat with the three Persian Gulf carriers was started in 2015 by Delta, American Airlines Group Inc., and United Continental Holdings Inc. They have asked the U.S. government to amend its so-called open-skies air treaties with the U.A.E. and Qatar, alleging that the three carriers in those nations are backed by billions of dollars in state subsidies that allow them to expand without thought to earning a profit.

Such open-skies agreements have been negotiated by the U.S. and more than 120 other countries over the past 25 years. They give airlines on both sides unfettered access to the other’s countries and the ability to freely set prices and schedules.

The three Gulf carriers have denied they are subsidized and claim the U.S. airlines are being protectionist. Other U.S. passenger and cargo carriers have urged the U.S. government to stay out of the Gulf-airlines dispute and maintain its open skies strategy.

American, Delta and United declined to comment on the tax amendment, as did Emirates. Qatar Airways didn’t respond. Etihad, in a statement, called the amendment “inappropriate under U.S. law and contrary to several international agreements.”