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FIN 00284-18

Bud19#01 - S127B TCA 1997 - Taxation of International
Aircrew
REF#:
TO:
STATUS:

FIN 00284-18
Minister
Completed

Finance Bill
PURPOSE:
DIVISION/OFFICE: Banking Division

AUTHOR:
OWNER:
REVIEWERS:

Robert Barnes
Robert Barnes
Joe Cullen, Deirdre
Donaghy, John Hogan

DECISION BY:

Final comment
See copy of Minister's comments attached.

Action required
Decision as to whether to amend S127B of the Taxes Consolidation Act 1997 in Finance
Bill 2018 as regards the tax treatment of international aircrew.

Executive summary

• Section 127B was introduced in Finance (No. 1) Act 2011 as a measure to avoid
double non-taxation of aircrew working on international routes. It ensures that any
individual who is employed by an airline that is managed and controlled in the State
will be chargeable to Irish Income Tax.
• The matter was brought to your predecessor's attention by Ryanair who sought the
change at the time.
• Since 2011, there have been developments at international level including:
• In 2012, an EU Regulation was introduced to ensure that workers who
work in multiple jurisdictions such as aircrew pay social security in what is
considered to be their 'home base.'
• In 2017, the "OECD Model Tax Convention" was updated. The new model
proposes that the primary option for the taxation of international aircrew
should be that such personnel are. taxed only in the individual's country
of residence.
• The social security changes have given rise to a situation which a number of Irishbased airlines say is unsustainable commercially. Affected aircrew are paying
Income Tax/USC in Ireland but Social Insurance where they are resident, leading to
higher marginal tax rates for the staff and competitive pressures for the airlines.

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Urgent action to amend s127B is being sought particularly by Ryanair who have
made representations on several occasions in recent months.
• This paper presents options as to how best to respond but comes down in favour of
no change for the present due mainly to significant Budgetary implications.

Comments
Margaret Fitzgerald - 28/03/2018 18:40

Submitted to the Minister's office by Margaret Fitzgerald on behalf of the Secretary
General

Detailed information
Background of issue

1.

Section 1278 (s.1278) of the Taxes Consolidation Act provides that income arising to

any individual, whether resident in the State or not, from any employment exercised
aboard an aircraft that is operated in international traffic, shall be chargeable to tax in
Ireland where the aircraft is operated by an enterprise that has its place of effective
management in the State.

2.

The provision was introduced at Committee Stage of Finance (No.1) Act 2011 in order

to address concerns in relation to the double non-taxation of air crew working for Irish
carriers on international routes.

3.

A general rule of taxation is that income from Irish employment is taxable in Ireland.

Where an employee is tax resident in another country, that country may also claim taxing
rights on the income, and double tax agreements are used to allocate the sole or primary
taxing rights between the countries in such cases. Such cross-border issues are
particularly prevalent in transport industries, e.g. for employees working on board aircraft
flying on international routes.

4.

In 2010, Ryanair contacted the Department to express concerns in relation to the tax

treatment of Ryanair employees, not resident in the State. Ryanair had become aware
that certain employees resident outside the State had lodged claims for, and received,
repayment of PAYE income tax deductions from their salaries in respect of employment
duties exercised outside the State. This allowed for double non-taxation to take place

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where the employee was tax resident in a jurisdiction which did not apply tax on income
earned outside the state such as, for example, employment income earned on board
aircraft on routes in other jurisdictions.

5.

Ireland's Double Taxation Agreements (DTAs) in general follow the 'OECD Model Tax

Convention' which, prior to 2017, allocated primary taxing rights over income earned by
aircrew working on international routes to the country in which the airline was managed
and controlled.

6.

However, prior to the introduction of Section 127B, a provIsIon did not exist in

domestic legislation to exercise these taxation rights given by the treaty Article. Section 18
of the TCA 1997 allowed only for the taxation of income of an individual not resident in
the State if the trade, profession or employment is exercised in the State. Airline pilots
employed by an Irish based airline but based out of a foreign hub may not be resident in
the State and may never exercise their profession in the State and this lead to the
potential for reclaims of Irish tax withheld at source, as highlighted to the Department in
2010.

7.

At the time, Ryanair indicated that c.1,800 of its pilots were based on the Continent,

and that if all of the employees were to receive refunds, the costs to the Irish State could
run into the tens of millions.

8.

A decision was therefore made by your predecessor to introduce the provision now

contained in Section 127B which allows a domestic tax charge to be applied to
international aircrew who are residents of another State but are employed by an airline
headquartered in the Irish State where the relevant DTA specifically allows for this charge.
Where the country of residence also seeks to tax the income, the DTA provides tax relief
for the tax paid in Ireland when calculating any foreign tax due on the same income.

Developments since the introduction of Section 127B
9.

A number of developments have occurred since the introduction of s.127B which are

now giving rise to urgent concerns to affected airlines from the perspective of commercial
viability.

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a)

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In 2012, EU Regulation (No.465/2012) was introduced to ensure that

workers who work in multiple jurisdictions such as aircrew pay social
security in what is considered to be their 'home base.' Which is defined as;

The concept of "home base" for flight crew and cabin crew members is defined
as the location nominated 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.[11
b)

Also in 2017 the OECD updated the 'OECD Model Tax Convention', the

template from which Ireland begins negotiations to agree tax treaties with
new treaty partner countries. As noted above the previous model treaty
allocated primary taxing rights on the income of international aircrew to the
country in which the airline was managed and controlled.
c)

In 2017, the European Court of Justice upheld a decision from the cour

du travail de Mons (Higher Labour Court, Mons, Belgium) that ruled that
aircrew must have a contract of employment in the country where they are
based or are ordinarily resident. While this has no direct impact on tax
treatment of aircrew, it represents an emerging possibility that such
personnel could be subject to regulation where they are resident or have
their 'home base.'
10.

In relation to {b) above, the new OECD model treaty proposes as the primary

option for the taxation of international aircrew that such employment income should be
taxable only in the individual's country of residence.
11.

This change in the OECD Model moves away from associating taxation rights with

the "place of effective management of the enterprise is situated," and moves toward
recommending that the first taxing right should go to the State where the employee is
"resident."
12.

This amendment does not impact our existing DTAs as it is a change to the

template used to begin negotiations for new DTAs in the first instance, but it is indicative
of a broader shift in perspective on the appropriate place of taxation for international
aircrew.

Current Issues for Irish Based Airlines

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13.

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After the EU Regulation amendment in 2012, which resulted in individuals being

subject to social security in the country where their "home base" is situated, Irish Airlines'
aircrew operating in international traffic were made subject to Income Tax and USC in
Ireland combined with social security charges that apply in their "home base" country. In
many of these countries, social security rates are comparatively higher than our PRSI
rates of 4% (employee) and 10.85% (employer), while their income tax contributions may
be lower. As a result, many of these employees are paying both the higher (local) social
security rate and the higher (Irish) income tax rate, resulting in relatively high marginal
rates of tax as compared to aircrew employed by local operators in the countries
concerned.

14.

Furthermore, while the country of residence is obliged to grant double tax relief

for the Irish tax deducted, difficulties can arise in relation to the timing and
administration of the relief. Where the country of residence requires local tax to be
collected via a PAYE-type system, this can result in the employee having to pay both Irish
and local tax up front and then claim double tax relief after the year-end. This can cause a
very significant financial burden to the affected employees.

15.

Due to the business model of some low-cost airlines, whereby they do not have

one central hub where the majority of their staff are based, this split between income tax
and social security obligations is causing particular problems. Three companies have
expressed their concern directly with Department regarding s.127B over the last two to
three years: Cityjet, Norwegian Air and Ryanair. Of these, Ryanair is the most significantly
impacted because of its size. In recent months, the company has been particularly active
in raising its concerns both directly to you and to the Department at official level. It has
written to us several times on the matter and we also met with the company
representatives at official level earlier this month. It is seeking urgent action to address
what it sees as a huge competitive/commercial issue for it, particularly in relation to the
recruitment and retention of pilots.

16.

The Department also believes that a fourth Irish-based company, ASL Aviation

Holdings, may be impacted by this issue, although on a smaller scale. Aer Lingus are not
thought to be heavily impacted by this provision as it is understood that the majority of
their aircrews are based and resident in Ireland.

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17.

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All three airlines who have raised the issue have stated that s.127B places Irish

Airlines at a significant commercial disadvantage to European competitors who have an
effective place of management outside of Ireland.

18.

In attempting to challenge s.127B, Cityjet and Norwegian Air have raised a

concern that the provision may be contrary to the Freedom of Establishment, however
advice from the Attorney General suggests that this may not be a persuasive legal
argument.

19.

At the end of 2017, Ryanair recognised unions as representatives of their aircrew

for the first time in the company's history. The airline has advised that, since this decision,
and following the conclusion of the 'Mons' case referred to at paragraph 9 (b) above,
there has been increased pressure on the airline from union representatives to provide
aircrews with local contracts, and take home pay comparable with competitors. The
company is currently in negotiations with local unions in Italy where the matter has
particularly come to the fore. The company is urgently seeking a solution that would be
viable from its perspective.

20.

The international shortage of qualified pilots is also driving cost pressures for

airlines. Due to the effects of s.127B, to provide net salaries comparable with locally taxed
competitors throughout Europe, Ryanair says it is required to materially increase gross
pay levels of its employees.

21.

Ryanair have also stated that recent developments in the Italian airline market

will further impact on their position in that country. Qatar Airlines have announced a plan
to rebrand Meridiana as Air Italy and Ryanair expect that Air Italy will focus on recruiting
Ryanair's Italian based pilots by offering them significantly larger net pay packages
through favourable local tax structures. In information provided to the Department,
Ryanair indicate that it currently has 958 Italian based aircrew who could be impacted by
this, accounting for 25% of its total non-Irish based crew. It is currently negotiating with
the unions there and cites this a reason behind the need for an urgent decision.

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FIN 00284-18

22.

Ryanair has provided the Department with data (Attachment II) to illustrate how

the implications of s.127B combined with changed EU social insurance regulations are
giving

rise

to

high

marginal

rates

of

taxation

at

65%

or

above

in

five locations outside Ireland (Hungary, Italy, Poland, Lithuania and Romania). In the case
of Romania, the marginal rate of tax is 83%.

Possible developments if s.127B remains unchanged
23.

Ryanair has stated that in the absence of a viable solution - ideally the

amendment of s.1278 so that it aligns with the OECD model treaty and no longer applies
to non-Irish resident aircrew that are subject to income tax in their country of residence it will be forced to consider alternative operating structures in order to sustain existing
operations and the employment of non-Irish resident aircrew. This would include the
migration of Ryanair's operations from Ireland. The correspondence from the company
indicates that it may well seek to obtain an Air Operators Certificate (AOC) in Italy, and
move the management and control of relevant sections of Ryanair's business from the
Irish AOC to the Italian AOC. This would remove its employees from the scope of s.1278
and from Irish income tax/USC. It is likely that it would also result in the profits of that
section of the business becoming subject to Italian Corporation tax rather than Irish
Corporation Tax.

24.

Cityjet have indicated that they may need to consider a similar relocation of

their business to Scandinavia in order to remain viable in the competitive international
market.

Brief summary of options examined
a) DTA Amendment; In order to address its current negotiating challenges in Italy,
Ryanair has proposed an amendment or protocol to the DTA between Ireland and Italy.
However, this would not be feasible in a short time frame, and furthermore would
address only one local instance of an issue affecting the wider industry. Essentially, this is
not a viable option.
b) Amend s.127B; Amend the provision to align it with the principles expressed in the
new OECD model tax treaty, such that primary taxing rights should be allowed to the
country of residence of the aircrew employee. This line of response will involve a
significant cost to the Exchequer - see below.

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c) Take no action and make no amendment to legislation for now; S.127B would

remain as it stands. This would leave each enterprise to consider its own business model
and to develop its own solution, such as the solution identified by Ryanair to relocate
management and control functions to Italy. There is a possibility that this could result in
migration of some or all of the affected airlines' management and control out of Ireland
with a consequent potential cost in terms of lost income tax/USC and corporation tax.
However, decisions on location can involve a variety of factors besides staffing costs and
also take time to implement.

Options (b) and (c) - Potential Exchequer and Budgetary Implications

25.

Ryanair has stated that it remits well over €200m in taxes to the Irish Exchequer

each year and has provided detailed data in support. For the year 2017, this includes
€55m in payroll taxes (excl PRSI) for its entire operations and €144m in corporation tax.
The company states that of the €55m in payroll taxes, the amount arising from the impact
of s.127 B is of the order of €35m.
26.

Although we do not have similar estimates for other airlines, the quantum of

income tax/USC related to s.1278 from all affected carriers could be of the order of €40m
plus per year. A change in s.1278 along the lines sought would mean that such tax would
no longer accrue to the Irish Exchequer.
27.

At the same time, however, in the absence of a change to s.127B, it cannot be

assumed that such tax would continue to accrue as Ryanair, and the other airlines, may
migrate parts of their management and operation activities to locations outside Ireland as
indicated above. For a variety of reasons, it is difficult to estimate the sums involved as
other factors besides costs, e.g regulatory environment, contractual issues and other
practicalities are likely to be involved in the carriers' decisions as to the extent of
operations that might transfer out of Ireland and the timing of such moves. We know
from the data supplied by Ryanair for 2017 that the estimated value of payroll taxes likely
to accrue to Ireland from Italian aircrew is almost €7.Sm. In terms of the cost implications
for the Irish Exchequer of a decision not to amend s.127B, this would mean that,
theoretically, the full €40m mentioned in paragraph 26 above could be at risk. In practice,
however, a decison now to relocate management and control functions abroad will take
time to implement so that the short-term impact on the Exchequer is likely to be at the
lower end of the scale. For example, if Ryanair secured an AOC for Italy the cost in
income tax/USC foregone could be in the region of the €7.Sm already mentioned. As
corporation tax is based on profits earned, it is not possible to provide an estimate of any
reliability for costs arising on that front.

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FIN 00284-18

27.

From a budgetary perspective, if a decision was made to amend s.127B on foot

of the

carriers'

concerns,

the

move

would

represent

a policy

change

with

immediate implications for fiscal space available for other tax measures in Budget 2019
and subsequent years. It is not possible to avoid such an impact. It is estimated therefore
that Option (b) above could reduce the fiscal space available for other 2019 Budget
measures by an amount in the region of €40 million. There would be no cost impact on
the corporation tax side.
28.

Having regard to all factors, it is recommended that you give consideration

to Option (c) above, do nothing for the present as reassess matters in the course of 2019.
The alternative to this is that you decide now to set aside a figure of c.€40m to address a
sectoral issue at the expense of the generality of income taxpayers and of retaining full
flexibility on budgetary decisions until much closer to the Budget. As indicated above, it is
not clear what the airlines will do in practice in response to a decision to leave s.127B
unchanged for now but there are good reasons why the airlines may be slow to move
large elements of management and operation outside of Ireland. These include higher
rates of corporation tax in other countries, the regulatory environment and other factors
as mentioned above. In the case of Ryanair, those countries with the largest number of
aircrew have corporation tax rates at generally double the Irish or more.
29.

In the event that you decide to leave s.127B unaltered for the present, further

sustained representations from Ryanair in particular or other measures from the
company in support of its case may be expected.

ill https://publications.europa .eu/en/publication-detail/-/publication/a8a3c4f2-c66f-11 e1 b84a-01 aa75ed71 a1 /language-en

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INVOLVED: Robert Barnes

READ RECEIPT: BTSSP-SC

Deirdre Donaghy

Robert Barnes

Joe Cullen
Marie O'Leary
Deirdre Galvin

Marie O'Leary

Heather Cuddy
Mairead Ross
John Hogan
Sub_FIN Sec Gens Office
Sub_FIN Ministers Office
Niamh Callaghan (PER)

Deirdre Galvin
Joe Cullen
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John Hogan
Margaret Fitzgerald
Ed Brophy
Helena Quane
Rosemary Kearney
Mary Young
Niamh Callaghan (PER)
Mairead Ross

Action log
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USER

DATE

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Robert Barnes granted access to Deirdre

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Barnes

26/03/2018
14:44

Donaghy, Joe Cullen
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Mairead Ross

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26/03/2018
15:47

Sent For Review

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review by Robert Barnes

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Attachment I - The Mons Case.docx

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FIN 00284-18

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by Margaret Fitzgerald on behalf of the
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 t'nnt :Subm1ss1on

00284-18: Budl9#01 - S127B TCA 1997

#

Taxation of International Aircrew

00284-18: Budl9#01 - S1278 TCA 1997

Taxation of International Aircrew

To: Minister

Author: Robert Barnes

Status: For Review by Minister

Owner: Sub_FIN Ministers Office

Purpose: Finance Bill

Pagel of 10

Reviewers:, Joe Cullen, Deirdre Donaghy, John
Hogan

Division/Office: Tax Division
Decision By:

To: Minister
Status: For Review by Minister
Purpose: Finance Bill
Division/Office: Banking Division
Decision By:

Author: Robert Barnes
Owner: Sub FIN Ministers Office
Reviewers: Joe Cullen,Deirdre Donaghy,John Hogan

Action Required

Minister's Comments:

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Decision as to whether to amend S 127B of the Taxes Consolidation Act 1997 in Finance Bill
20 I 8 as regards the tax treatment of international aircrew.

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• Section 127B was introduced in Finance (No. 1) Act 2011 as a measure to avoid double
non-taxation of aircrew working on international routes. It ensures that any individual
who is employed by an airline that is managed and controlled in the State will be
chargeable to Irish Income Tax.
The matter was brought to your predecessor's attention by Ryanair who sought the change
at the time.
Since 20 l l , there have been developments at international level including:
• In 2012, an EU Regulation was introduced to ensure that workers who work
in multiple jurisdictions such as aircrew pay social security in what is
considered to be their 'home base.'
• In 2017, the "OECD Model Tax Convention" was updated. The new model
proposes that the primary option for the taxation of international aircrew
should be that such personnel are taxed only in the individual's country of
residence .

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• The social security changes have given rise to a situation which a number of Irish-based
airlines say is unsustainable commercially. Affected aircrew are pay ing Income Tax/USC
in Ireland but Social Insurance where they are resident, leading to higher marginal
tax rates for the staff and competitive pressures for the airlines. Urgent action to amend
s l 27B is being sought particularly by Ryanair who have made representations on several
occasions in recent months.
This paper presents options as to how best to respond but comes down in favour o f no
change for the present due mainly to significant Budgetary implications.

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Page 2 of JO

Comments
• (28/03/2018 18:40:45) Margaret Fitzgerald: Submitted to the Minister's office by
Margaret Fitzgerald on behalf of the Secretary General

Prmt ~ubm1ss10n

5.

Page 3 of 10

Ireland's Double Taxation Agreements (DTAs) in general follow the 'OECD Model Tax

Convention' which, prior to 2017, allocated primary taxing rights over income earned by
aircrew working on international routes to the country in which the airline was managed and
controlled.

6.

However, prior to the introduction of Section I 27B, a provision did not exist in domestic

Detailed Information

legislation to exercise these taxation rights given by the treaty Article. Section I 8 of the TCA

Background of issue

trade, profession or employment is exercised in the State. Airline pilots employed by an Irish

1997 allowed only for the taxation of income of an individual not resident in the State if the

I.

Section 127B (s.127B) of the Taxes Consolidation Act provides that income arising to any

individual, whether resident in the State or not, from any employment exercised aboard an
aircraft that is operated in international traffic, shall be chargeable to tax in Ireland where the

based airline but based out of a foreign hub may not be resident in the State and may never
exercise their profession in the State and this lead to the potential for reclaims of Irish tax
withheld al source, as highlighted to the Department in 20 I 0.

aircraft is operated by an enterprise that has its place of effective management in the State.
7.
2.

The provision was introduced at Committee Stage of Finance (No.I) Act 2011 in order to

address concerns in relation to the double non-taxation of air crew working for Irish carriers on

At the time, Ryanair indicated that c.1,800 of its pilots were based on the Continent, and

that if all of the employees were to receive refunds, the costs to the Irish State could run into the
tens of millions.

international routes.
8.
3.

A general rule of taxation is that income from lrish employment is taxable in Ireland.

Where an employee is tax resident in another country, that country may also claim taxing rights
on the income, and double tax agreements are used to allocate the sole or primary taxing rights
between the countries in such cases. Such cross-border issues are particularly prevalent in
transport industries, e.g. for employees working on board aircraft flying on international routes.

4.

In 2010, Ryanair contacted the Department to express concerns in relation to the tax

A decision was therefore made by your predecessor to introduce the provis10n now

contained in Section 127B which allows a domestic tax charge to be applied to international
aircrew who are residents of another State but are employed by an airline headquartered in the
Irish State where the relevant DTA specifically allows for this charge. Where the country of
residence also seeks to tax the income, the DTA provides tax relief for the tax paid in Ireland
when calculating any foreign tax due on the same income.

Developments since the introduction of Section 127B

treatment of Ryanair employees, not resident in the State. Ryanair had become aware that

9.

certain employees resident outside the State had lodged claims for, and received, repayment of

giving rise to urgent concerns to affected airlines from the perspective of commercial viability.

A number of developments have occurred since the introduction of s.127B which are now

PA YE income tax deductions from their salaries in respect of employment duties exercised
outside the State. This allowed for double non-taxation to take place where the employee was

a)

tax resident in a jurisdiction which did not apply tax on income earned outside the state such as,

work in multiple jurisdictions such as aircrew pay social security in what is considered to
be their 'home base.' Which is defined as;

for example, employment income earned on board aircraft on routes in other jurisdictions.

In 20 I 2, EU Regulation (No.465/20 I 2) was introduced to ensure that workers who

The concept of "home base" for flight crew and cabin crew members is defined as the
location nominated by the operator lo the crew member from where the crew member
normally starts and ends a duty period, or a series of duty periods, and where, under

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normal conditions, the operator is not responsible for the accommodation of the crew
member concerned.ill

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I 4.

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Furthermore, while the country of residence is obliged to grant double tax relief for

the Irish tax deducted, difficulties can arise in relation to the timing and administration of the
relief. Where the country of residence requires local tax to be collected via a PA YE-type

Also in 2017 the OECD updated the 'DECD Model Tax Convention', the template

system, this can result in the employee having to pay both Irish and local tax up front and then

from which Ireland begins negotiations to agree tax treaties with new treaty partner

claim double tax relief after the year-end. This can cause a very significant financial burden to

countries. As noted above the previous model treaty allocated primary taxing rights on

the affected employees.

b)

the income of international aircrew to the country in which the airline was managed and
controlled.
c)

In 2017, the European Court of Justice upheld a decision from the cour du travail de

Mons (Higher Labour Court, Mons, Belgium) that ruled that aircrew must have a contract
of employment in the country where they are based or are ordinarily resident. While this
has no direct impact on tax treatment of aircrew, it represents an emerging possibility that
such personnel could be subject to regulation where they are resident or have their 'home
base.'

15.

Due to the business model of some low-cost airlines, whereby they do not have one

central hub where the majority of their staff are based, this split between income tax and social
security obligations is causing particular problems. Three companies have expressed their
concern directly with Department regarding s.1278 over the last two to three years: Cityjet,
Norwegian Air and Ryanair. Of these, Ryanair is the most significantly impacted because of its
size. In recent months, the company has been particularly active in raising its concerns both
directly to you and to the Department at official level. It has written to us several times on the

In relation to (b) above, the new OECD model treaty proposes as the primary option

matter and we also met with the company representatives at official level earlier this month. It is

for the taxation of international aircrew that such employment income should be taxable only in

seeking urgent action to address what it sees as a huge competitive/commercial issue for it,

the individual's country of residence.

particularly in relation to the recruitment and retention of pilots.

10.

11.

This change in the OECD Model moves away from associating taxation rights with the

"place of effective management of the enterprise is situated," and moves toward recommending
that the first taxing right should go to the State where the employee is "resident."
12.

This amendment does not impact our existing DTAs as it is a change to the template

used to begin negotiations for new DTAs in the first instance, but it is indicative of a broader

16.

The Department also believes that a fourth Irish-based company, ASL Aviation

Holdings, may be impacted by this issue, although on a smaller scale. Aer Lingus are not
thought to be heavily impacted by th.is provision as it is understood that the majority of their
aircrews are based and resident in Ireland.

shift in perspective on the appropriate place of taxation for international aircrew.
17.
Current Issues for Irish Based Airlines

All three airlines who have raised the issue have stated that s.127B places Irish

Airlines at a significant commercial disadvantage to European competitors who have an
effective place of management outside of Ireland.

13.

After the EU Regulation amendment in 2012, which resulted in individuals being

subject to social security in the country where their "home base" is situated, Irish Airlines'
aircrew operating in international traffic were made subject to Income Tax and USC in
Ireland combined with social security charges that apply in their "home base" country. In many
of these countries, social security rates are comparatively higher than our PRSl rates of 4%

18.

In attempting to challenge s.127B, Cityjet and Norwegian Air have raised a concern

that the provision may be contrary to the Freedom of Establishment, however advice from the
Attorney General suggests that this may not be a persuasive legal argument.

(employee) and 10.85% (employer), while their income tax contributions may be lower. As a
result, many of these employees are paying both the higher (local) social security rate and the
higher (Irish) income tax rate, resulting in relatively high marginal rates of tax as compared to
aircrew employed by local operators in the countries concerned.

At the end of 2017, Ryanair recognised unions as representatives of their aircrew for
19.
the first time in the company's history. The airline has advised that, since this decision, and
following the conclusion of the 'Mons' case referred to at paragraph 9 (b) above, there has been

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also result in the profits of that section of the business becoming subject to ltalian Corporation
increased pressure on the airline from umon representatives to provide aircrews with local

tax rather than Irish Corporation Tax.

contracts, and take home pay comparable with competitors. The company is currently in
negotiations with local unions in Italy where the matter has particularly come to the fore. The
company is urgently seeking a solution that would be viable from its perspective.
24.

Cityjet have indicated that they may need to consider a similar relocation of their

business to Scandinavia in order to remain viable in the competitive international market.
20.

The international shortage of qualified pilots is also driving cost pressures for

airlines. Due to the effects of s.127B, to provide net salaries comparable with locally taxed
competitors throughout Europe, Ryanair says it is required to materially increase gross pay
levels of its employees.

Brief summary of options examined
a) DTA Amendment; ln order to address its current negotiating challenges in ltaly, Ryanair
has proposed an amendment or protocol to the DTA between lreland and ltaly. However, this
would not be feasible in a short time frame, and furthermore would address only one local

21.

Ryanair have also stated that recent developments in the Italian airline market will

instance of an issue affecting the wider industry. Essentially, this is not a viable option.

further impact on their position in that country. Qatar Airlines have announced a plan to rebrand
Meridiana as Air Italy and Ryanair expect that Air Italy will focus on recruiting Ryanair's

b) Amend s.127B; Amend the provision to align it with the principles expressed in lhe new

Italian based pilots by offering them significantly larger net pay packages through favourable

OECD model tax treaty, such that primary taxing rights should be allowed to the country of

local tax structures. ln information provided to the Department, Ryanair indicate that it

residence of the aircrew employee. This line of response will involve a significant cost to the

currently has 958 ltalian based aircrew who could be impacted by this, accounting for 25% of

Exchequer - see below.

its total non-Irish based crew. It is currently negotiating with the unions there and cites this a

c) Take no action and make no amendment to legislation for now; S.127B would remain as

reason behind the need for an urgent decision.

it stands. This would leave each enterprise to consider its own business model and to develop its
own solution, such as the solution identified by Ryanair to relocate management and control
functions to Italy. There is a possibility that this could result in migration of some or all of the

22.

Ryanair has provided the Department with data (Attachment II) to illustrate how the

affected airlines' management and control out oflreland with a consequent potential cost in

implications of s. l 27B combined with changed EU social insurance regulations are giving rise

terms of lost income tax/USC and corporation tax. However, decisions on location can involve

to high marginal rates of taxation at 65% or above in five locations outside Ireland (Hungary,

a variety of factors besides staffing costs and also take time to implement.

Italy, Poland, Lithuania and Romania). In the case of Romania, the marginal rate of tax is 83%.

Options (b) and (c) - Potential Exchequer and Budgetary Implications
Possible developments ifs.127B remains unchanged
25.
23.

Ryanair has stated that in the absence of a viable solution - ideally the amendment of

Ryanair has stated that it remits well over €200m in taxes to the lrish Exchequer each

year and has provided detailed data in support. For the year 2017, this includes €55m in payroll

s.127B so that it aligns with the OECD model treaty and no longer applies to non-lrish resident

taxes (excl PRSl) for its entire operations and €144m in corporation tax. The company states

aircrew that are subject to income tax in their country of residence - ii will be forced to consider

that ofthe €55m in payroll taxes, the amount arising from the impact ofs.127B is of the order

alternative operating structures in order to sustain existing operations and the employment of

of€35m.

non-Irish resident aircrew. This would include the migration of Ryanair's operations from
Ireland. The correspondence from the company indicates that it may well seek to obtain an Air
Operators Certificate (AOC) in Italy, and move the management and control of relevant
sections of Ryanair's business from the Irish AOC to the Italian AOC. This would remove its
employees from the scope of s.127B and from Irish income tax/USC. It is likely that it would

26.

Although we do not have similar estimates for other airlines, the quantum of income

tax/USC related to s.127B from all affected carriers could be of the order of €40m plus per year.
A change in s.127B along the lines sought would mean that such tax would no longer accrue to
the Irish Exchequer.

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27.

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At the same time, however, in the absence of a change to s. l27B, it cannot be

assumed that such tax would continue to accrue as Ryanair, and the other airlines, may migrate

ill https://publications.europa.eu/en/publication-detail/-/publication/a8a3c4f2-c66f- l le l-b84a-

parts of their management and operation activities to locations outside Ireland as indicated

Ol aa75ed 7 la! /language-en

above. For a variety of reasons, it is difficult to estimate the sums involved as other factors
besides cosl~, e.g regulatory environment, contractual issues and other practicalities are likely to
be involved in the carriers' decisions as to the extent of operations that might transfer out of
Ireland and the timing of such moves. We know from the data supplied by Ryanair for 2017
that the estimated value of payroll taxes likely to accrue to Ireland from Italian aircrew is almost
€7.5m. In terms of the cost implications for the Irish Exchequer of a decision not to amend

Action Logs

s. !27B, this would mean that, theoretically, the full €40m mentioned in paragraph 26 above
Created: 26/03/20 I 8 14:3 7:03: Submission created by Robert Barnes

could be at risk. In practice, however, a decison now to relocate management and control

Grant Access: 26/03/2018 14:44:38: Robert Barnes granted access to Deirdre Donaghy, Joe
Cullen
Reason: Updated

functions abroad will take time to implement so that the short-term impact on the Exchequer is
likely to be at the lower end of the scale. For example, if Ryanair secured an AOC for Italy the
cost in income tax/USC foregone could be in the region of the €7 .5m already mentioned. As

Grant Access: 26/03/2018 15:47:28: Robert Barnes granted access to Marie O'Leary, Deirdre
Galvin, Heather Cuddy, Mairead Ross
Reason: xx

corporation tax is based on profits earned, it is not possible to provide an estimate of any
reliability for costs arising on that front.
27.

Sent For Review: 26/03/20 ! 8 16:41 :36: Submission sent to Joe Cullen Cullen for review by
Robert Barnes

From a budgetary perspective, if a decision was made to amend s. l27B on foot of the

carriers' concerns, the move would represent a policy change with immediate implications for

Reverted to the Author: 28/03/20 l 8 01 :44:48: Submission reverted to Robert Barnes by Joe
Cullen Cullen
Reason: Deirdre, Rob, Have a careful read of the attached to catch any factual inaccuracies. If
you are happy, I propose that we submit it up the line before 10.30 in the morning. Joe

fiscal space available for other tax measures in Budget 20 l 9 and subsequent years. It is not
possible to avoid such an impact. It is estimated therefore that Option (b) above could reduce
the fiscal space available for other 20 l 9 Budget measures by an amount in the region of €40

Sent For Review: 28/03/2018 09: I 0:25 : Submission sent to Deirdre Donaghy for review by
Robert Barnes

million. There would be no cost impact on the corporation tax side.
28.

Having regard to all factors , it is recommended that you give consideration to Option

Ownership Taken: 28/03/2018 10:20:08: Ownership of submission taken by Robert Barnes
Reason: xx

(c) above, do nothing for the present as reassess matters in the course of 2019. The alternative
to this is that you decide now to set aside a figure of c.€40m to address a sectoral issue at the

Attachment removed: 28/03/2018 I 0:31 :02: Robert Barnes removed attachment Attachment I The Mons Case.docx

expense of th.e generality of income taxpayers and of retaining full flexibility on budgetary
decisions until much closer to the Budget. As indicated above, it is not clear what the airlines

Attachment removed: 28/03/2018 10:31:34: Robert Barnes removed attachment Attachment II
- Ryanair Inforrnation.docx

will do in practice in response to a decision to leave s.127B unchanged for now but there are
good reasons why the airlines may be slow to move large elements of management and

Sent For Review: 28/03/2018 10:34: 10: Submission sent to Deirdre Donaghy for review by
Robert Barnes

operation outside of Ireland. These include higher rates of corporation tax in other countries, the

Sent For Review: 28/03/2018 1 l :02:54: Submission sent to Joe Cullen Cullen for review by
Deirdre Donaghy

regulatory environment and other factors as mentioned above. In the case of Ryanair, those
countries with the largest number of aircrew have corporation tax rates at generally double the

Sent For Review: 28/03/2018 15:05:56: Submission sent to John Hogan for review by Joe
Cullen Cullen

Irish or more.
29.

In the event that you decide to leave s. l 27B unaltered for the present, further sustained

Sent to the Secretary General: 28/03/2018 18:04:35: Submission sent to Secretary General for
review by John Hogan

representations from Ryanair in particular or other measures from the company in support of its
case may be expected.

Sent to the Minister: 28/03/2018 18:40:46: Submission sent to Minister for review by Margaret
Fitzgerald on behalf of the Secretary General

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Reason: Submitted to the Minister's office by Margaret Fitzgerald on behalf of the Secretary

General

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 Attachment I - The 'Mons' Case

The European Court of Justice upheld a decision from the cour du travail de Mons
(Higher Labour Court, Mons, Belgium) that ruled that aircrew must have a contract of
employment in the country where they are based or are ordinarily resident.ill
In this case, Ryanair and Crewlink, an agency who specialise in the recruitment and
training of cabin crew for airlines, between 2009 and 2011 hired employees from
Portugal, Spain and Belgium and set their 'home base' as Charleroi airport in Belgium .
All employment contracts for these employees were drafted in English, subject to Irish
law and included a jurisdiction clause providing that the Irish courts had jurisdiction.
Six employees brought proceedings before Belgian Courts in 2011 taking the view that
Ryanair and Crewlink had to comply with the provisions of Belgian employment law .
The Higher Labour Court, Mons, Belgium asked the ECJ to interpret if it had jurisdiction
over these employees under EU Regulation. The ECJ ruled in favour of the employees
and determined that cabin crews can derive their rights and applicable law from their
home base.

ill https ://curia .europa .eu/icms/upload/docs/applicati: on/pdf/201709/cpl 70097en .pdf

 Private and Confidential: Appendix l - Illustrative Tax and Social Insurance Calculations

Exam le of Net P

~

·..c
+,.I

·..c

Earned b PIiots Eamln 050k Under E>tlstin Section 1278

Ireland

Hunga

Ital

Poland

Uthuanl.- Romania

€'000
150

€'000

(59)

(51J)

{59)

21

(14

53)

(79)

(72)

( 111)

€'000

€'000

150

ISO

€'000
150

E'OOO

Gross Salary
Irish Tax {PAYE & USC)

(59)

(59)

(59)

local Country Emplovee Social Insurance
Total Irish TaJC and Local Social Insurance

(6)

(28)

(65)

(87)

{ II)
(70)

150

150

)(

LU
*Note· In the Instance of Romania, high soda! loc.il lnsur.ince (35%) coupled with the marginal lf!come ta_x rate In lrelill'ld {48%), results In Romanian resident pilots suffering an effect!~ margln.-1
rate of Income tax and social insurance of 83%. This leads to a reduction In net pay of C: 54% when compared to their lrlsh resident counterparts. Based on the five non-Irish jurisdictions above, on
average. plloU suffer a marginal rate of Income tax/social Insurance of over65%, and-In eKtreme drcurmtances such as Romania 83%.

Example.of Net P.>Y famed by PIiots Eamln asok Under Local T.-uc Rules

N

....,

··..c:

.0

X

Ireland

Hungary

Italy

Poland

€'000

€'000

f'OOO
150

f'OOO

€'000

£'000

150

150

150

(24)
( 11)

(JI)

(23)

{ I 5)

28

(21)

(14)

(SJ)

(SO)

(J5)

(52)

(36)

(68)

100

115

98

I I~

83

Gron Salary

ISO

Loe.11 Income TaK
Local Country Employee Social Insurance
Total local Income Tax & Social Insurance

(2J)

Net P_
;ay- Under LDcal Taxation i,e. without operation

of Section 127B

Lithuania Romania

w

As demonstrated above, non~lrish tax resi_dent pllots grossing (150k earn signlflcantly reduced net pays when taxed under Section 1278 in comparison to the net pay which would be earned if tal(ed
In accordance with their local tall rules. Over the five Jurisdictions presented, on averar:e, pilots see a reduction in their net pay of c. 06k per annum under Section U7B. This provides a significant

recruitment/commercial advantage to non-Irish alrllnes who operate without the implications of Section 1Z71l.

 ,,..,.nc1

Ital

Poland

{ '000

f.'000

{'000

£'000

l'000

259

262

2(12

234

411

local lnccme Ta•

t 111)

ti IJ)

(77)

\99)

t 184)

local Ccunlry Employee Sotiill lnsur;ance
To~ Loe.iii Income l;i,1 & Socl.11 lns1JriJnce

148)
1159)

135
(Ml)

127
(104)

(21

[144)

(120)

(32M)

100
2.19

115

?I
202

114

26:/.

83
41 I

51

76

Example ol Cost to lriihAlrUnes to OcliYl!r S;ime Net Pit to PIiots Com ;ired to Non -Irish AlrtlnH

€'000
Grou Salary

rr,

:t:
.c
.c

Net Pa • UnderS.tllon 1278
Gro" S.la,y · Under S.rllon 1278

X

Hun:,

Lithuania Romania

234
77

9

w

As d~mon1tr,1ted ~ave, Irish ;ilrHnes a~ .ll.tn e11tn:me commrrdal dlpdv•ntaa• to thtlr non-1,W, COun*9,pUU-whe re reuuiting ;and ramuneratlng pUotl.. Due to ttte appUcaUon of Section 12781
combined with hJah emplaver soda.I imu~nc.e r.11tes.. the 1rot!i salilry nqulred lo provide .n equ1I net pili'f Offered by non-Irish 1irUnes ruulu In an ln~ased mnas hi1h H 174" of th;itlncurred by
a non-Irish Airline . On aw~ e. over the five )urisdictlons rcn:nted, Irish ahilnet are required \l)pay an ~dltJonal <lA6k per llot per artnum.