Having considered some pitfalls that buyers and sellers of business aircraft face in the purchase or sale of an aircraft globally, Jet Tolbert highlights a related topic deserving particular attention: Import and export regulations pertaining to local taxes and VAT…
Local customs and tax procedures often cause aircraft transactions to die prematurely, and unnecessarily, choked in a haze of confusion. I’ve seen the scenario unfold several times in which an ill-informed buyer and/or seller becomes paralyzed by the fear of a seemingly unavoidable tax burden.
In some of those cases, the transaction was resuscitated by bringing in expert partners to provide assurances of proper regulatory procedure and accepted tax mitigation strategies to limit exposure for the buyer/seller. On those occasions we were able to successfully present a structure easily understood and implemented, with the deal eventually closing to everyone’s benefit.
In other instances the potential buyer refused to heed the advice of a well-qualified adviser with predictable results.
The irony is that such buyers or sellers could inadvertently create a self-imposed penalty by unnecessarily delaying the aircraft acquisition, and be left to deal with the fallout from a poor acquisition process for years after the event, or miss out on a great opportunity.
While there are many different pitfalls that could prevent a transaction from moving beyond the discussion phase to serious negotiation, construction of a deal with regards to tax exposure (specifically import or export) is one area that should be considered early, with due diligence and foresight.
Although tax exposure can be limited successfully if certain conditions are met, the potential liability can potentially be onerous with countries such as Brazil imposing a 10% federal tax in addition to as much as 18% local tax. In fact, Brazil has a history of confiscating aircraft (sometimes for years) when its regulators are unhappy with an owner’s structure.
With such dire consequences, it is easy to see why this topic should be treated with serious respect.
VAT & Market Value Considerations
Given that many countries impose VAT on the import of aircraft, acquisition price and the total transaction cost becomes a huge consideration. Since the same is not always true of aircraft already imported into the region, a potential buyer could rightly or wrongly (dependent on circumstances) value aircraft differently, based on whether the import tax has been paid.
I’ve seen buyers mistakenly believe that paying full VAT is an unavoidable cost leading the would-be buyer to only focus on aircraft with VAT paid, and mistakenly placing a higher value of them than on other aircraft on the market.
Sometimes we were able – with the help of a local tax adviser in our network - to show the buyer that there were in fact several aircraft that could be imported into their region, and meet the buyer's specific needs, and that the VAT exposure was less than 1%.
The use of tax shelters can be appropriate for many situations, and often includes registering an aircraft offshore; acquiring the aircraft through use of an approved domestic bank; using a domestic AOC to prove commercial application of the aircraft; and importing to the tax region through a tax free zone.
A broker with a long history of transactions across borders and with a deep pool of industry connections within the international aviation community will be able to provide insight on specific deal construction, based on experience.
Additionally, they may also provide a key referral to a specialist who will navigate the treacherous waters so that the buyer experiences only smooth seas.
When conducting complex and costly international aircraft transactions, the peace of mind that knowing you and your business are acquiring an aircraft with the regulatory procedures handled promptly and accurately may be the best value of all!
Read more from Jet Tolbert at AvBuyer.
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