Ryanair is paying no tax -- despite a record €3bn sales - Irish, Business - Independent.ie.
Not my work at all, but this is interesting:
Michael O'Leary's Ryanair effectively paid no corporate tax in its 2009 financial year, despite generating record sales of nearly €3bn.
The low-cost airline -- now Europe's biggest -- ended up with a €1.5m tax refund, more than cancelling out the modest €425,000 it owed in taxes at year end, according to expert analysis of its financial statements carried out for the Sunday Independent last week.
And this despite the fact that:
Last week, Michael O'Leary announced that the airline was to pay a special dividend of €500m to its shareholders, with another €500m possibly paid out before 2013.
The money is there all right, but:
A key part of the tax reduction strategy was to offset allowances generated during its vast €4bn airplane-buying spree against its earnings. Ryanair was also able to legally avoid paying tax as, despite its record revenues, the company took a €220m hit on the value of its stake in Aer Lingus and used up various other tax allowances, according to financial information in its annual report. Ryanair subsequently reported a pre-tax loss of €180m for the year ending March 2009.
By using various allowances and accountancy methods, Ryanair has been able to keep its average corporate tax rate at well below the current 12.5 per cent Irish tax rate.
While the year to March 2009 saw the airline pay no tax, other years were almost as low. Annual reports reveal it had an effective tax rate of just 3.4 per cent in 2007, with an effective tax rate of 9.4 per cent in 2006.
So, Ryanair is making money, making sales, expanding fast, paying dividends and not paying tax. That's the Clectic Tiger at play. And this is what the ConDems want for Northen Ireland even though:
Last week, [the Irish] Exchequer returns revealed the shocking state of government coffers. Corporation tax receipts have fallen off a cliff, with the latest projection suggesting that companies will pay 19 per cent less tax this year. Just €3.16bn is expected to be paid in corporation tax this year, down from €3.9bn last year.
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And why would you expect Ryanair to pay tax? Most airlines, particularly fast growing airlines, pay very little tax in the jurisdiction in which they own their aircraft because of accelerated capital allowances. In theory they might start paying tax when their business growth flattens out or when they stop acquiring aircraft so quickly but that might be many years from now.
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So this, according to your many definitions, must be tax compliance then?
@Peter
I made no suggestion of illegality
I was suggesting Ireland has a crass tax system we should not be copying
This has nothing to do with tax rates and everything to do with rates of capital allowances. The UK and Ireland have always had very similar approaches in this regard. BA and other UK airlines have always paid little tax, particularly at times when they renewed their fleets, whcih is why BA used to lease a significant number of aircraft under finance leases and they have equipment related deferred tax liabilities of over £1 billion.
“And why would you expect Ryanair to pay tax?” Why should they be able to get away with not paying tax? If they’re not other forms of transport are not able to compete on a level playing field. Maybe this explains why Ryanair has been so succesful. Based on what you’re saying here, such capital allowances would appear to be nothing much more than a tax avoidance device. No surprise that an arch Thatcherite like O’Leary uses them.
Actually most forms of transport business, particularly those that update their fleets regularly end up paying very little tax but end up with large deferred tax liabilities. It isn’t peculiar to Ryanair.
If it is any consolation, tax authorities do much better out of the sale of capital goods compared to other forms of business. WHen buying many services the service buyer gets to deduct the cost of buying the service, while the service provider brings the full amount of revenue fully into account, so the net taxable profit in the year is zero.
When aircraft manufacturer sells an aircraft (or any manufacturer salls any capital goods), the sales proceeds are brought into account as and when received, but the buyer only gets to deduct the cost over many years, effectively giving a timing advantage to the tax man.
@Alex
I wish you knew something about tax
Let’s be clear – a plane sells for say $100 million
Let’s say 5% – that $5 million is profit tax relievable
But $100 million is deductible for the airline
At 20% in the first year in the UK that’s $20 million
The relief is in one country, the tax in another
And the relief way exceeds the income
How does that balance exactly?
Where is the win for the tax man?
Of course there is a timing difference.
The guy who sold the aircraft brings $100m into the charge to tax immediately.
The purchaser (Ryanair, say), gets tax relief for it over 5, 10, 15 or however many years it is. Ryan cannot deduct the entire $100m immediately in arriving at its taxable profits. I think that is the point Alex is making.
@Peter
And you cannot, like Alex, seem to appreciate it is the profit not the sale value the seller brings into tax account but the sale value and not the profit that the buyer seeks relief on
Not the same thing at all
Can I ask what is wrong in giving an airline tax depreciation on the aircraft that it loans or in some cases finance leases? Are these not assets that are used in a trade? Even if the capital allowance is front loaded on a declining balance basis, the airline will over time end up with an allowance equal to the cost of the aircraft – in fact, the taxable profits of the airline will increase in later years as the capital allowances decreases and commercial depreciation kicks in.
Please do not try to argue that airlines (or similar asset heavy companies) defer their tax bills by investing in new aircraft every so often – this is what they are there to do. Buy new aircraft to serve their customers needs. The aircraft that are now on order by British airlines (787s, 737NGs, Embrarers and A380s) are very environmentally friendly and without capital allowances would not be ordered.
Sorry – opening sentence should read “Can I ask what is wrong in giving an airline tax depreciation on the aircraft that it OWNS or in some cases finance leases?: Oops
Well, Richard, you fail to appreciate that the government gets to tax the income of all those who produce the aircraft, including the salaries of the workers and all the spare parts suppliers, so let us assume that an aircraft is built from all its component parts in a year and sold for $100 million, then the government gets to tax the net profits of the selling company, its suppliers, their suppliers and all of their employees to the tune of an aggregate $100 million, but the ultimate purchaser who ultimately supplies the capital to pay for all of this cascading income by buying the plane only gets to deduct $20 million of the cost in the first year, $16 million in the second, $12.8 million in the third etc, so there is a massive benefit to the Treasury.
If you consider the more obvious case where company A manufactures sells high value capital goods (say, machine tools) to company B, while company B manufactures and sells the same value of capital goods to company A (perhaps trucks), both companies are taxed immediately on the value of their sales (less costs), but they only get to claim allowances on their purchases over many years – great advantage to the tax man.
On the other hand if my window washing company pays your lawn cutting company $10 to cut the lawn in front of my corporate offices and your lawn cutting company pays my window washing company $10 to wash the windows in your offices, we both recognise $10 or income and deduct $10 from our trading profits in the same year, so there is no net benefit to the exchequer.
And don’t bother to patronise me about capital allowances. I know the Capital Allowances Act inside out, as my clients will attest.
These arguments seem very logical. But the true tax arbitrage is if the maker of the airplane was in US, and transferred the plane to Irish subsidiary at low price and then Irish company made most of profit at a lower rate than if it stayed in US. Further more if a Bermudian company lent the money to the US company to build it and also lent money to Irish company to buy it. Voila! a nice triangular transaction that avoids tax in all directions. It would be even sweeter if RYanAir owned the Bermuda company!
@Alex
Since when did tax include a principle of reciprocity in relief?
If it did I’d get VAT relief on my personal spending
And tax relief for child care costs
Economic substance and social consideration is the basis for tax
Ryanair’s tax does not reflect economic substance in which case it is a subsidy
We cannot afford to give that subsidy
That is my point
@Michael Hardy
Indeed!
Well argued
@Richard
I have no problem with capital allowances
I do have problems with disguised subsides for so called entrepreneurs who use state capital to underpin their enterprises and then knock government
That’s what’s really happening here
I never said it idid. However our system currently favours service based activities (the cost of which is immediately deductible) over capital intensive industries (where capital expenditure is only relieved over many years).
One of the more foolish acts of the Labour government was to trumpet a reduction in the rate of corporation tax which was paid for by a reduction in the rarte of capirtal allowances – in practice keeping corporation tax receipts stable but favouring existing service companies at the expense of capital intensive and startup companies or inward investors. This was done at a time when capital investment in large fixed plant and machinery (which would have secured long term employment) had slowed to almost nothing.