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. Last Updated: 07/27/2016

Foreign Airlines Fly Into Tax Feud

A bureaucratic snafu has foreign airlines feeling extorted and airport officials scratching their heads.

Based on an interpretation of a vaguely worded passage in the new Tax Code that nearly everyone involved considers bizarre, the Tax Ministry has taken the unprecedented step of ordering all airports to charge foreign airlines a 20 percent value-added tax on ground handling services -- a violation of international agreements Russia is party to.

The only airport to take the bait thus far, however, is St. Petersburg's Pulkovo, which has sent letters to all the foreign airlines it services -- including British Airways, SAS, KLM, Lufthansa and Air France -- demanding up to an extra $180,000 a year from each.

"We suggest this amount be transferred immediately, and in the future the invoices for provided services must be paid strictly in accordance with the sum mentioned in the invoice," Pulkovo said in a letter sent to one of the airlines in September, a copy of which was obtained by The Moscow Times.

The airlines, however, are refusing to pay, saying the tax violates international aviation agreements.

Rightfully so, says the Justice Ministry, which calls the tax illegitimate.

Nonetheless, Pulkovo says that whatever the Tax Ministry says goes.

"In case of non- or partial payment Pulkovo will be obliged to readdress to your company those charges which may be presented to ... Pulkovo by currency control authorities," the airport said in the letter.

"It is a very awkward situation; they are demanding quite a big amount of money, which we are very reluctant to pay because we do not believe this is in conformity with the rules," said Marek Pedersen, Swedish airline SAS's manager for Russia and the CIS, adding that the company is consulting with lawyers over what steps to take.

Daniel Burkard, British Airways' commercial manger for Eastern Europe, said the airline is preparing, together with the European Business Club, to lodge a complaint with airport and tax authorities, as well as St. Petersburg City Hall.

"We are not aware of any country in which airports would charge taxes on any services to Aeroflot, Transaero or Pulkovo airlines," he said.

Pulkovo -- which handled 2.8 million passengers last year, 22 percent of whom flew on foreign carriers -- adhered to international practices on ground handling before and after the new Tax Code came into effect in January 2001.

But the Tax Ministry later decided to slap VAT on airport ground-handling services following its own interpretation of the code.

Clauses 148 and 149 of the code state that no VAT is to be imposed on "services rendered directly in Russian airports" and in the country's air space involving the servicing of aircraft, including air navigation services, but a list of such services is not provided.

The Tax Ministry, in order to find out what was meant by "services rendered in Russian airports," consulted a two-year-old Transport Ministry order, said an official at the St. Petersburg branch of the Tax Ministry.

The Tax Ministry then decided that the tax break only covers air navigation services and duties for landing and takeoff, overtime aircraft parking, use of airport terminals and meteorological services.

But the letter omits ground handling activities such as servicing passengers and crew members, handling cargo and delivering food and fuel, which makes them automatically taxable, the ministry concluded.

Vladimir Goryachev, the chief economist for the State Civil Aviation Service, which is under the Transport Ministry, said tax officials based their decision on a single Transportation Ministry document without consulting a single person in the ministry, despite the Tax Ministry's claim that its ruling had ben coordinated with the Transportation Ministry.

"This is our internal terminology," Goryachev said. "Just one phrase gave the Tax Ministry the ability to interpret which are airport duties and which are not."

Despite repeated requests, the Tax Ministry would only say that it would take some time to formulate a comment.

Goryachev said that all ground handling is carried out at airports and should be included in "services rendered in Russian airports."

Pulkovo questioned the Tax Ministry at first and sent an inquiry to the local tax directorate, later receiving confirmation that the ground services were to be taxed, said Irina Grigoryeva, Pulkovo's chief economist.

The airport has no choice but to comply with the local directorate, even though Pulkovo management believes the demands in the letter are wrong, she said.

"The situation has become somewhat twisted, and our sympathy is with the foreign airlines, but if we don't comply, we will be fined," Grigoryeva said. "We don't wish to step into the conflict with tax authorities. This is a very expensive undertaking and is useless.

"We cannot afford to pay the 20 percent ourselves all the time, which we now do on behalf of the foreign airlines," she said.

Moscow's Sheremetyevo Airport, which also received the letter from the Tax Ministry, has not charged VAT on ground handling.

"Our colleagues from Pulkovo asked us whether we would charge VAT, but we said that it was not the best idea," said Alexei Kudryavtsev, Sheremetyevo's deputy director for economics.

"It's a matter of interpretation of the Tax Code, which does not spell out exactly which services to tax and which not to," he said.

Sheremetyevo Airport consulted the Justice Ministry, which said it has not registered the Tax Ministry's letter so it is not legally binding, Kudryavtsev said.

"The Tax Ministry tried to interpret the Tax Code, but the Justice Ministry put them in order and said they were wrong," he said.

St. Petersburg's tax directorate also disagrees with charging VAT on ground handling, said an official at the directorate who confirmed that the letter had not been registered with the Justice Ministry.

The directorate must follow the orders in the letter and has not received documents stating that the directorate must do otherwise, said the official, who declined to be identified.

"The fact that the Tax Ministry violates the rules on registration is well over the top, but when they come here, they demand that we fulfill everything," the official said.

She added that her office has asked for guidance on the issue from Tax Ministry headquarters in Moscow but the request has been ignored.

"If Pulkovo goes to arbitration court with us over the issue, we will lose and the whole issue will be resolved," she said.

A tax adviser for a law firm that works with airlines said that the Tax Ministry letter is not binding and "frankly taken out of context."

Pulkovo is "panicking because of an internal state tax service letter," said the adviser, who asked not to be identified.

"Rather than stand up to the tax service, they are trying to pass the risk on to the airlines -- the airlines are saying 'no' and rightfully so."

International air transport activity is exempt from taxation in other countries, the adviser said. If an air transport service is taxed, it makes it more expensive for airlines to operate, and in the end the costs are passed on to passengers.