Jim Armitage: Airlines, their owners and corporate tax
The next plane you catch will probably be owned by a vast company that flies well clear of paying meaningful corporate tax
Jim Armitage is the City editor of The Independent and London Evening Standard group of newspapers. He has been a reporter and editor for more than 20 years and was recently shortlisted for the Press Gazette financial journalist of the year and The Society of Editors financial journalist of the year awards. He contributes news, investigative reports and comment to the Independent titles plus a daily column in the Evening Standard.
Saturday 11 January 2014
Next time you jump on an aeroplane, it may say British Airways, easyJet or Virgin on the side, but the chances are it will be owned by a company you’ve never heard of. That company is a specialist arm of the giant General Electric conglomerate called Gecas, or to give its full name, GE Capital Aviation Services.
With a fleet of 1,700 planes, it leases Boeings, Airbuses and other popular aircraft to pretty much every major airline around the world, and most of the smaller ones too. No fewer than 230 airlines use its services.
Gecas doesn’t stop there, though. It also lends money to companies wanting to buy aircraft, effectively acting a lot like a bank.
Its hugely powerful position in the aviation industry has created a vast, profit-making machine, raking in $1.3bn (£790m) of pure profit last year, according to its website.
Why should we care?
Because on the vast majority of that profit, ultimately made from our plane tickets, Gecas apparently pays barely any meaningful corporate tax at all.
Gecas’s boss Norm Liu may operate out of headquarters in Stamford, Connecticut, but the company is registered in the super low-tax region of Shannon, Ireland. This is a legacy of its heritage as Tony Ryan’s Guinness Peat Aviation group.
Recognise that aviation name, “Ryan”? Yup. Same guy.
Before creating the behemoth we know today as Ryanair, Mr Ryan pretty much created an industry – global aviation leasing – from scratch in the 1970s.
He figured out his formula while at Aer Lingus, where he was part of the team trying to make money out of the un-needed aircraft it had lying around after the Opec oil crisis. They realised they could make good money putting them to work for other airlines.
GPA expanded massively in the 1980s and the Irish government feted him as a hero, offering the aircraft-leasing industry extraordinary tax breaks that exist to this day.
A failed stock-market flotation in the 1990s and overbearing debts eventually saw the business start to unravel and General Electric snapped up the bulk of it, creating the current-day Gecas.
While its headquarters are stated on its website to be in Shannon and Connecticut, a Gecas senior manager agreed in a recent court case brought against Gecas by Alexander Lebedev, financial backer of The Independent, that the company was “very sensitive about the notion that its US management might be giving instructions to people working outside the US”. Accountants said this was likely to be, entirely legally, for tax reasons.
The Gecas holding company in Shannon, GE Capital Aviation Funding, made nearly $1bn of profit in 2012 but paid only $105,000 tax, a rate of just 0.01 per cent, according to its most recent set of accounts filed at the Irish version of Companies House.
Despite its pre-tax profit of $902.1m, the business employs no staff, using those of its subsidiaries instead. It makes its money by earning interest on loans to other parts of the GE aircraft-leasing empire.
Beneath it is a sea of companies across Europe and in offshore locations, paying it large dividends from their hugely profitable activities in return for its finance. Accountants said dividends generally accrue very little tax.
Among the money pouring in was a $100m dividend from a subsidiary called GE Capital Aviation Services Ltd. This appears to be the second link in the long GE chain. It made a profit of $124.2m in 2012 but, far from paying tax, actually got a $466,000 tax credit.
Gecas Ltd also earned huge sums from dividends from other associated GE plane leasing businesses, with $122.5m coming in from two associated companies.
Its 232 staff are highly paid: from the janitor to the manager, they earned an average salary higher than at many City and Wall Street banks – $210,000.
Gecas stresses that it pays all its tax dues in full around the world, but declined to comment on the specifics, or state where those taxes were paid.
Accountants say aircraft leasing is one of the most aggressively tax-efficient industries in the world, and an extremely specialist area. One said: “Much of the planning revolves around exploiting cross-border rules to get ‘double’ or ‘triple dip’ [tax breaks] on expenditure such as capital allowances and financing costs. For example, you might get a tax deduction for an interest payment in one country but no tax charge on the receipt.”
It is not clear if this is how Gecas operates, and there is no suggestion of illegality.
The accountant added: “Tax is only payable on profits, so the skill is to get the profits to arise in jurisdictions where tax is low or nil.”
You certainly have to drill a long way into Gecas’s accounts to find any meaningful tax rate. We eventually found one another link down the chain at a company called Gecas Services Ltd, which mustered up a 2.5 per cent corporate tax rate. But it is a tiny operation compared with the top companies. The tax take was $302,000 on its $12m pre-tax profit.
Gecas Services’ 22 employees are at the top of the tree financially, being paid an average $560,000 each.
A General Electric spokesman said: “Our Gecas business was formed from the Guinness Peat Aviation acquisition 20 years ago and it remains the core of our non-US operations. GE carries on significant and substantive business activity in Ireland and fully complies with all tax laws and regulations in all jurisdictions in which it does business.”
The Gecas companies are welcomed by the Irish government. In fact, Ireland has whole websites dedicated to the joys of its low-tax aircraft-leasing hub. Local newspapers rejoiced at a recent takeover by another Shannon-based giant, AerCap, of the financial conglomerate AIG’s vast plane-leasing business.
But in the US, where corporate tax rates are far higher, these structures are less popular. General Electric has been the target of repeated criticism in the US over its tax arrangements.
Bob McIntyre of the group Citizens for Tax Justice, said: “GE is a notorious tax avoider. Its leasing businesses are one of its biggest tax shelters.”
He added: “GE takes advantage of a loophole in US tax law so that it pays no US income tax on its “active financing” income abroad. It then shifts its foreign profits into tax havens to avoid paying tax to foreign governments – ridiculously easy to do in Europe and elsewhere.”
But what does Ireland get out of this practically untaxed industry?
Cormac Marum, tax specialist at Harwood Hutton, says there are benefits: “By attracting such companies to Ireland, the Irish government enables financial services to be provided which Ireland will tax. Even taking a little tax is a little tax that otherwise would never be seen in Ireland.”
We asked the same question of Citizens for Tax Justice’s Mr McIntyre, who gave a more simple answer: “What does Ireland get? Not much.”
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