State aid and tax avoidance – the case of Lufthansa

This is a guest blog by Steffen Redeke and Christoph Trautvetter (Netzwerk Steuergerechtigkeit, Germany) First, here’s a useful European Airline bailout tracker (which reflects the most up to date public information available at the time it was published on May 8, 2020). Thanks to the Global Anti-Aerotropolis Movement for highlighting it to us.

As pointed out here by Transport and Environment:

the sector depends heavily on public support — from tax exemptions from VAT and kerosene tax, to state aid for airports, low-cost airlines and infrastructure linking airports with nearby cities. Airlines also get 85% of their allocated pollution permits for free under the EU’s carbon market. The kerosene tax exemption in Europe alone is valued at €27 billion a year. Other more sustainable transportation methods — such as rail — have not benefited from such generous tax treatment.”

It remains to be seen however what meaningful green conditions could be imposed on airlines, one of the fastest-growing contributors to climate change over the last two decades.

Now, to our guest blog:

The idea of “no state aid to tax havens” has received public support around the world and some parliaments – eg Denmark, Austria and Scotland – have excluded companies based in tax havens from receiving Covid-19 state aid. The German finance minister Olaf Scholz seems to take a similar view:

anyone (…) who has placed his company headquarters in a tax haven cannot expect that this is now the right corporate structure to be able to claim state and taxpayer money in a crisis. We are quite clear on that.”

The idea also received support from more than 280,000 Germans, who signed a corresponding call for action by the NGOs Finanzwende and Campact.

Because Covid-19 has brought air traffic to a worldwide standstill, the German airline Lufthansa is one of the first companies to need massive state aid or else it faces insolvency. In response to German press raising issues with Lufthansa’s subsidiaries in the Cayman Islands and Panama – two countries from the EU’s tax haven list – Lufthansa voluntarily published selected information on its six subsidiaries in those countries, but that failed to create real transparency because important information (turnover, profits, taxes) and activities in other tax havens (Ireland, Malta, Switzerland, etc.) was missing from the disclosure.

The German government has now approved €9 billion worth of state aid with few conditions regarding tax transparency, mainly requiring Lufthansa to provide its country by country reporting to the fund administering the state aid (Lufthansa still seems reluctant to accept). Meanwhile, an analysis of Lufthansa’s financial reporting reveals big risks for state aid ending up in tax havens:

• In total, the airline has 92 subsidiaries in corporate tax havens (using the Tax Justice Network’s Corporate Tax Haven Index as benchmark). In Malta, a subsidiary with only two employees made a profit of almost €200 million. Nine other Maltese companies are run by six employees and manage assets worth more than €8 billion.
• In the last ten years, the airline paid only €3 billion in taxes on a profit of €15.6 billion. This corresponds to a rate of only 19.4 per cent compared to 32.45 per cent due at the company’s headquarters. Lufthansa’s tax practices have repeatedly led to high back payments and legal disputes in the past.
• The individual ownership structure suggests that they too are moving their profits to tax havens. German billionaire Heinz Hermann Thiele, who bought 10 per cent of shares in March 2020, is particularly noteworthy. He has, on several occasions spoken out against state influence and is himself engaged in aggressive tax “optimisation” using a family holding in an inner-German tax haven. In addition, many of the institutional investors are structured via the Cayman Islands or Delaware.

In order for the public to be assured that state aid does not end up in tax havens, Netzwerk Steuergerechtigkeit recently called on the German government to finally abandon its years of resistance to public country by country reporting in the EU. Tax Watch (UK) makes further good suggestions on how the idea can become more than symbolic politics – besides a repayment obligation if tax authorities find tax avoidance in the future, they demand more capacity for tax authorities, a black list to exclude tax avoiders from state contracts, as well as detailed public data on state aid.