By John Helmer, Moscow
Going or coming, Russian users of private jet aircraft think they are screwed.
If they fly on foreign-made planes which are registered in Russia, they are obliged under the current tax regulations to pay 18% value-added tax (VAT) on the customs-declared value of the aircraft, plus 2.2% annual property tax. If they try to avoid the VAT, and fly foreign-owned, foreign-registered aircraft, and if they are individuals, then their right to fly in style is subject to special permits issued by Rosaviatsia, the Russian aviation authority. Its rules require that the use of the aircraft is private, not commercial, and this is defined in government decrees as meaning that the flier isn’t aiming to derive income from his use of the aircraft. In addition, Russian Customs, which must issue permits for these aircraft to fly into Russian airports and pick up or drop passengers, requires that individual aircraft don’t operate inside Russia for more than 30 consecutive days; don’t accumulate more than 180 days of operation in a calendar year; and don’t carry more than 19 passengers at a time.
So what’s a Russian oligarch, or individual wealthy enough to prefer private jetting to regularly scheduled commercial airlines, to do?
One option, reported by Severstal, the steel and mining group owned by Alexei Mordashov, is to import the aircraft, and pay the VAT up front. This charge can then be offset in the company’s accounts by VAT owed the government on other transactions. According to disclosures by Severstal, two Challenger-604 planes, manufactured by Bombardier of Canada, were imported, and the VAT bill then offset in as little as five months.
The much larger 20% import duty which was payable on such imports a year ago has now been abolished. That tax break for private aircraft imports comes with the condition that the number of seats on board is less than 50. Lobbying by the foreign aircraft manufacturers and by Russian users is under way right now to get the 18% VAT charge eliminated as well.
Derek Bloom, a Moscow-based lawyer with Capital Legal Services, specializes in aviation law and advises Russians using private and business aircraft. In a presentation to the International Aviation Transactions Conference in Geneva last May, Bloom argued that “the import VAT tax rate of 18% is the single largest reason that Russian owned business jets are not commonly registered in Russia.” If the tax were reduced to zero, he said, this would stimulate investment in business aviation facilities at airports around Russia; increase employment for Russian pilots and mechanics; and create “a level playing field between Russian and European [private and business jet] operators”.
Bloom adds that elimination of VAT is favoured by the federal Ministry of Transportation, but it has not been approved by the government. At the State Duma sources say there is no sign yet of a vote coming on this proposal.
Another oligarch option is to avoid importing aircraft and registering them in Russia, saving the VAT. But this also means sticking to the current clock, calendar and permit rules, making sure that aircraft stay out of the country for 180 days each year. This may be Oleg Deripaska’s preference. Plane-spotters who monitor the movement of his Boeing business jet report this schedule of airport takeoffs and landings over the past two months.
| November | ||
| 2012-11-16 | Bologna – Lokovica | |
| 2012-11-16 | Bologna | |
| 2012-11-15 | Biaroza – Bologna | |
| 2012-11-15 | Moscow – Yukhnov | |
| 2012-11-13 | Dubai – IRI | |
| 2012-11-13 | Dubai | |
| 2012-11-12 | Abu Dhabi | |
| 2012-11-12 | Taldom – Moscow – Michurinsk | |
| 2012-11-12 | Moscow | |
| 2012-11-11 | Tokyo – Siberia | |
| 2012-11-11 | Tokyo | |
| 2012-11-08 | Moscow – Novosibirsk | |
| 2012-11-07 | Moscow – Novosibirsk | |
| 2012-11-04 | Niigata – Komsomolsk on Amur | |
| 2012-11-04 | Tokyo – Niigata | |
| 2012-11-01 | Taipei – Tokyo | |
| 2012-11-01 | Taipei – Tokyo | |
| October | ||
| 2012-10-31 | Tokyo – Kagoshima – Taipei | |
| 2012-10-29 | Athens – Komsomolsk on Amur | |
| 2012-10-27 | Moscow – Athens | |
| 2012-10-14 | Athens – Bulgaria | |
| 2012-10-11 | Moscow – Baden Baden | |
| 2012-10-11 | Moscow – Poland | |
| 2012-10-07 | Dubrovnik – Moscow | |
| 2012-10-05 | Moscow – Krasnodar | |
| 2012-10-02 | NY – New Brunswick – Moscow |
The hitch with this option is that Deripaska is flying so often; into Moscow so little; and to destinations at which there is no known asset belonging to the company he is paid to run, United Company Rusal. So the company auditors and shareholders are bound to ask what Rusal, or an associated company, may be paying for the aircraft, if anything; and what Rusal business Deripaska is performing while on board.
In the US, Rusal’s competitor Alcoa is obligated to divulge such information when its executives fly on company-owned aircraft for company business. If they fly for private purposes, they are obligated to repay the company at the going rate. But in Russia, the rules are twisted in a different direction. According to the Russian Customs rules, an aircraft owned by an offshore subsidiary or associate of the Russian corporation will not be cleared for passengers to board and fly if the purpose of the flight is earning income and doing business. The potential contradiction between what a company like Rusal may be paying for, and what the private flight rules require, is obvious.
As reported [1] last month, Deripaska is trying to sell his Boeing 337. A source close to the transaction claims the aircraft is being sold in Deripaska’s name, not in Rusal’s. The advertising broker refuses to provide more details. If the aircraft is registered to an offshore company under Deripaska’s personal control, not Rusal’s, then the plane spotters must start verifying his whereabouts before it’s possible to say how the chief executive is earning his Rusal salary by flying so much of his working time according to the daily log.
When the airforces of Russia’s best-known businessmen was reported in 2010, it wasn’t possible to distinguish between company-owned and individually-owned aircraft. Nor was it possible to get inside the airframes to count the seats; or to check the Russian Customs permits to see if their flight operations meet the calendar rules [2]. But now that the government in Moscow is debating whether to relieve corporate and private jet fliers of their VAT payments, disclosure of who would benefit from the tax relief, and by how much, ought to follow, if not at the Finance Ministry, or at the weekly session of the government chaired by the prime minister, then in the Duma reading debates.
As of November 1, according to government data compiled by Bloom, there are a total of 671 foreign manufactured aircraft on the Russian state registry for civil aircraft. Of these, 245 are fixed-wing; and 426 helicopters. The fixed-wing number includes just 63 jets, and 182 propeller models. The number of private jets actually controlled and flown by Russians in and out of the homeland is at least double the registry figure; Bloom estimates this number at about 150. Most commercial jets operated in Russia, according to Bloom, are not in the registry; they are often registered in Bermuda and operated on special leasing terms known in the aviation industry as Article 83bis agreements. These cover flight, equipment and pilot regulations. Whether the VAT should be charged on the value of the lease or the value of the aircraft is unsettled policy.
“There is a lot of skating close to the edge of illegality in the operation of foreign-registered aircraft in Russia on flights that are declared to be private,” Bloom acknowledges.
A third option for the Russian jetset is to buy into time-share aircraft operated by international companies like NetJets. This is a private company, owned since 1998 by Warren Buffett and based in Columbus, Ohio. It was one of the first business and private charter jet operators, and also the first to introduce fractional ownership. It refuses to register any of its aircraft in Russia. NetsJets isn’t the most expensive operator on the private jet market, and data on Russian market share and revenues are closely held. One trade source claims the most expensive operator in Russia is the British company AirPartner, which exploits its royal warrant – it is the official carrier of the Queen.
Sergei Morozov, president of the Business Aviation Club in Moscow, says NetJets is “probably the largest operator in the world. They work fine in Europe, because they have a large fleet of aircraft. In Moscow, where 99% of Russia’s business aviation is concentrated, they don’t have so many planes. They have very expensive prices and everyone knows it. When the cost of the plane is two times more expensive than in the market, no one likes it.”
NetJets has more explicit Russian detractors. According to one, who is speaking from experience of flying on NetJets aircraft on long-term contracts, the contracts themselves can be misleading, and the company less than fully compliant. “A timeshare owner,” says this source, “is tied up to his aircraft by the arms and legs, because he’s obliged to fly a certain contract number of hours from a minimum of 50 every year in accordance with his 6.25% share in the plane for the five years of the contract. Usually one aircraft is sold to between eight and sixteen owners. “The problem at the outset, he says, is that for the same aircraft, Americans pay significantly less than Russians. “NetJets sent one American contract to our friend’s address by mistake for exactly the same plane and the number of flight hours, but there [in the US] the price was almost two times lower.”
He suspects there may be similar discrimination in pricing between Russians and West Europeans. “The European branch of NetJets, which sells you a plane, is sitting in tax-exempt Switzerland enjoying one of the lowest VAT rates in Europe, and the air-fleet operating office is in least expensive Portugal. An excellent choice to save the maximum on costs, but NetJets is not going share these savings with [Russian clients].”
Another complaint from Russian users of NetJets is that it advertises amortization rates and buy-back deals which it fails to honour in its contracts. On five recent deals, a Moscow lawyer claims, “our clients’ sad experience shows that you will get back a maximum of 40% of the price you paid for the jet, if you are lucky. Also for ‘awarding’ a fair price NetJets charges its customers 7% commission on the buy-back of the aircraft, so a customer actually gets back 33% of the aircraft value after five years instead of the promised 75%.”
Other sources, including trade industry analysts, claim that NetJets may downgrade the class of aircraft provided to its timeshare owners without justification. “I would not say there is fraud. This company has long been on the market. I do not think that if it was so bad, the customers would continue as they do. But in my subjective opinion, there is a rather complicated contract — we have talked with many lawyers about this. I think that [NetJets] still have to operate within the contract, and customers, if they act without a lawyer, do not always pay attention to the nuances. Those who are flying, are wealthy people and can afford a lawyer.”
NetJets Europe was asked to respond to the criticisms. It responded that it does not issue business data, client numbers, or annual revenues. Nor does it divulge what it believes to be its market share in Russia, compared to its competitors. On the amortization and buy-back issue, the company said: “NetJets Europe guarantees buy-back at fair market value of a customer’s share in an aircraft once their contract has come to an end.”
Is there price discrimination for Russians, compared to Americans? “Flying privately in general in Europe costs more than flying in the US due to the operating costs in the market.”
An industry analyst who requested anonymity and spoke off the record, explained that the cost of fuel is a major source of the difference. In addition, the Vnukovo airport in Moscow is notorious for charging for private jet services several times more than other airports in Europe. The source believes that NetJets may have lost some of its Russian clientele to competitors. “Nevertheless, there are customers who only fly with them and are very happy. I do not think there are a lot of them, but they are in Russia, this is absolutely true.”
An aviation industry survey of charter company flight price quotes in Moscow has reported finding that prices were “more or less of comparable value”.
Another source, who works for a rival operator in the Russian market, says the aircraft downgrade problem is a real one, and is acknowledged in the market. NetJets may start with a contract for a particular type or class of aircraft, the source claims, but at the time lack the aircraft promised to and expected by the client. Offer pricing for flying hours is often dry, not wet, as the industry terms the difference between airframe operation and the additional costs of takeoff and landing, food, fuel and airport charges. “Or else,” the source adds, “they quote wet hours, but mislead on the aircraft class and type. Because of this [NetJets] have problems with customers.”
Some Russian prefer NetJets, said another industry veteran, “because they provide one-way tickets.”