As industry puts pressure on, Russia lowers aircraft taxes

 - August 29, 2008, 10:45 AM

In some respects Russia’s development has followed a pattern familiar to Westerners, but that is not true for its business aviation industry. While Russian billionaires show off their huge yachts in the most expensive and trendy places in the world, buy A380s for personal use, haunt French ski resorts and buy islands off Dubai, some of the nation’s laws prevent wealthy individuals from reaping the benefits of business aircraft.

The current regulations are impeding the development of an industry that could benefit the 136,000 Russian millionaires still living at home and the nation as a whole, since liberalization of the rules could bring in a lot of money and create jobs. For now, most Russian-owned business jets are based outside the country because operators want to avoid the homeland’s extensive paperwork, limited slots, high parking prices, poorly trained employees and high taxes (20-percent import duties and 18-percent VAT). In addition, for many operators technical support is available only in nearby European countries.

However, things are starting to yield slowly under pressure from business aviation users. A year-and-a-half ago, a counselor to German Gref, former Minister of Economy and now general director of Russia’s biggest bank, initiated a campaign to reduce import duties from 20 percent to 10 percent. However, the initiative does not go far enough to be useful for most operators of business aircraft. The rule applies only to “flying objects weighing less than 20 tons and more than 15 (basic empty weight or dry weight) and passenger aircraft under 19 seats.”

For the purpose of this article, dry weight is defined as the weight of the aircraft without fuel, passengers or pilots but with other liquids such as oil.

More recently, at the April Aviaforum Conference 2008, deputy transportation minister Boris Korol and Rosaviatsia director Evgenii Bachurin emphasized the importance of lowering import duties and VAT on the import of foreign aircraft; Sergei Shishkarev, director of the Duma Transportation Committee, announced his intention to lobby for lower import duties for aircraft with fewer than 50 seats.

Shortly thereafter, the legislature received a recommendation from the Ministry of Economical Development to abolish all taxes on aircraft with fewer than 19 seats–in other words, business jets–thus creating a new category. The Minister, Elvira Nabiullina, later told the Russian media that the Ministry hopes to see business aviation flourish in Russia and that operators would start to register business jets in the nation.

On July 26 this year, Prime Minister Vladimir Putin signed a resolution eliminating import duties on aircraft with fewer than 19 seats. This resolution came into force retroactively on July 16, and (to conform with international agreements) the zero import tax would apply for nine months. These small steps show that the government understands where its interests lie and that it is taking action not to jeopardize such projects as the Sukhoi SuperJet 100 and, eventually, the MS-21. The foreign equivalents are still subject to VAT of more than 20 percent, which is why manufacturer OAK gave the airplane the green light. Indeed, there are no real business jet projects on the Russian agenda except for the modification of some existing jets such as the Antonov An-148, but even that is more a regional jet than a pure business jet.

It is not entirely clear why this tax relaxation applies to a limited segment of jets, or why it originated from the Ministry of Economical Development rather than Rosaviatsia, which was created to modernize and develop the Russian civil aeronautical system.

In any case, it is likely that in nine months another amendment will be written to introduce more changes for the aircraft industry. Once thing is certain: in an agreement with the World Trade Organization, Russia committed to reducing the tax on aircraft with fewer than 50 seats to 12.5 percent before 2015, and to cutting taxes on spare parts to 5 percent within three years.