Ryanair's tax case – a flight of fancy?

by Andrea Manzitti

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06 Nov 2012

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Grounded Ryanair airplane

LIKE ANY OTHER BUSINESS, airlines must find all ways to reduce their costs, including tax and social security on their work force. Pushing too hard on tax minimisation has its risks, though.

Ryanair is facing a €12m (£9.6m) tax bill in Italy on an alleged violation of Italian tax and social security contributions to its Italian employees.

Ryanair is an Irish-based company, flying all over Europe and elsewhere. It does not have a taxable presence in Italy. This is in line with generally accepted international tax rules, reproduced in the bilateral tax treaty between Ireland and Italy. Article 8 of the treaty 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 of the enterprise is situated".

Ryanair employs Italians to staff and operate the flights originating in – or landing in – Italian airports. Aircraft are deemed to be part of the territory of the state where the aircraft is registered. Ryanair operates aircraft registered in Ireland, considers its aircraft as Irish soil and deducts Irish taxes and social security on the wages to the Italian employees. This is what any Irish company would do when paying wages to non-Irish employees working continuously in Ireland.

The peculiarity of the situation of Ryanair is that its Italian employees live in Italy, "emigrate" daily to Ireland when they step on board the Ryanair aircraft and then "immigrate" back to Italy when they step out. They continue to be residents of Italy for Italian tax purposes and, like any other Italian resident individual, must pay tax in Italy also on their foreign-source income.

The tricky question here is whether or not Ryanair is withholding tax obligations in Italy, and at what rates. While the law is not crystal clear, the fact that Ryanair does not have a taxable presence in Italy does not automatically exclude it from withholding obligations.

Social mobility, tax-style
The situation for social security contributions is even trickier. As a general rule, these contributions are due in the country where the individual works, irrespective of the residence of the individual or of the employer. What if an activity is performed in more than one member state as is the case with pilots and cabin crew members? The general EU rule is that contributions are due in the member state of residence if employees pursue a "substantial part" of their activity in that member state. Otherwise, social security contributions are to be paid in the country where the employer has its registered office.

The recent European regulation 465/2012 introduced a special rule for pilots and cabin crew members. The regulation states that for social security purposes "an activity as a flight crew or cabin crew member performing air passenger or freight services is deemed to be carried out in the Member State of the home base". The "home base" is defined by Annex III to Council Regulation (EEC) No 3922/91 as "the location designated by the operator to the crew member from where the crew member normally starts and ends a duty period, or a series of duty periods, and where, under normal conditions, the operator is not responsible for the accommodation of the crew member concerned". In other words, social security contributions are due in the country where the individual usually starts and concludes the service.

Circular argument
A recent Italian circular for the airline sector issued by the Ministry of Labour simply summarises the new law.

Ryanair claims that the new rule applies only to newly hired Italian employees and not to those who are already employed because contracts entered into before the entry into force of the new European regulation (June 28, 2012) are subject to the old provision for a maximum of 10 years provided that "relevant situation remains unchanged" (a concept open to different interpretations).

It is difficult to decide who is right and who is wrong. Apart from any technical analysis, it would be interesting to see how other non-Italian airlines operating in Italy handle tax and social securities for their Italian resident employees. If they all do what Ryanair does, I don't see why Ryanair must be put on the hook. If, however, Ryanair stands alone in claiming that only its domestic tax and social security rules apply, then someone could be breaching the rules. They can't all be right.

This is one of the very many difficult issues that multinationals face daily. The increasing mobility of human and intangible capital makes compliance with the different tax rules of the various countries a task that is sometimes impossible to achieve. Even more so when, as in present times, national budgets are in desperate need of new resources. Grabbing them from foreigners has a negligible political cost.

Andrea Manzitti is a tax partner at Bonelli Erede Pappalardo

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