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Tue, Jun 10, 2008

Proposed British Airline Tax Raises Ire Of US Embassy

New Plan Uses Environmental Impact As Basis Of Reasoning

A controversial new British plan to reduce environmental impact through the increase of airline taxes for transatlantic flights is receiving strong opposition by the United States, according to a letter leaked to the London Daily Telegraph.

The unusual attack -- especially ahead of a visit by President Bush to Britain next week -- is causing some concerns that Prime Minister Gordon Brown may need to address in the near term. The US Embassy’s "deep concerns with the proposal" threaten legal action against the British Treasury if the planned tax increase -- which could potentially increase taxes added to fares from £40 to about £100 ($79 to $200 US) per person -- went forward.

The sharp tax increase would net the British government an extra £520 million annually.

The plans, unveiled last year by Chancellor Alistair Darling, proposes to change the way flights are taxed by Fall 2009. Currently passengers pay a fixed tax per flight, but under the new plans, the Treasury will tax each aircraft instead and airlines will pass the tax to the customers aboard. The amount paid per aircraft will vary by distance travelled as aircraft fly into three distinct taxation zones. 

As a result, European flights would have less tax added than flights to America. Such a situation would give people flying long-haul a major incentive not to take direct flights but to change planes in Europe -- a significant disadvantage for British and American airlines that operate direct flights to the US and other destinations.

The new tax structure was said to be a measure to reduce environmental impact of airlines.

When the proposal was announced, Darling said it was to "encourage more efficient use of planes" so that aviation makes a "greater contribution in respect of its environmental impact.”

The letter from the American Embassy disagreed saying, "The Treasury's proposal, although cast as an environmental measure, appears in reality to constitute nothing more than a device for generating additional revenue from the airline community."

"There is no linkage between the funds collected from airlines and the mitigation of any environmental impact of airline emissions or any other environmental problem… Moreover, the Treasury's proposal does not demonstrate that the new duty would influence airlines to adjust their fleets or their booking practices to achieve higher load factors…Nor are any data provided to justify the levy based on an assessment of damage from aircraft emissions."

The embassy also warned the British Government that such a tax plan could significantly impact their competitiveness.

"The proposed duty, by raising the overall cost of flying aircraft to the United Kingdom relative to other destinations, is likely to diminish the number of flights operating to and from the United Kingdom," said the April 15 letter.

"This would seem an anomalous result, however, given the focus in the United Kingdom on, among other things, restoration of the competitiveness of Heathrow Airport with the opening of Terminal 5 and consideration of a third runway."

The Americans also warned the "proposed duty raises serious legal concerns."

The letter detailed a number of international treaties and agreements which the new tax would allegedly breach, raising the threat of international legal action. The embassy also sent the letter to other European governments.

The issue is made even more sensitive when recent increases in fuel prices, especially in America, threaten the financial stability of airlines and travelers bear higher fares for summer holiday travel.

A source close to the discussions said to the Telegraph, "The whole thing is a total nightmare. The Treasury have made a major mistake and not thought through the consequences. The Chancellor will have to sort this out or he will threaten the health of the airline industry in this country."

A spokesman for the Treasury insisted the proposed tax did indeed offer environmental benefits and was required to meet obligations in the global community.

"The per plane tax is intended to ensure the industry makes a greater contribution towards its environmental costs and to ensure that the aviation sector continues to contribute fairly and equitably towards the funding of public services," he said.

"The Government aims to have a fairer duty more in line with the environmental impacts of flights, including the distance travelled, and which takes account of any social or economic impacts including market distortions. We are committed to meeting our international obligations under the Chicago Convention and the EU-US Open Skies bilateral agreement and would not propose a measure that we considered illegal."

FMI: www.hm-treasury.gov.uk, www.usembassy.org.uk, www.number-10.gov.uk

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