Passing on a discriminatory tax – the Court’s judgments in the Aer Lingus and Ryanair cases

Last week this UKSALA blogger was the happy beneficiary of a perfectly-timed bit of serendipity. Having missed the last flight from Luxembourg to London on Wednesday evening, due to a late-running hearing in the General Court, I was able to return to the same courtroom on Thursday morning to collect judgment in this pair of cases concerning the vexed question of the Irish air travel tax: Aer Lingus judgmentRyanair judgment. And very interesting reading they make too.

Both cases concerned the imposition of the Irish air travel tax (ATT) between 2009 and 2011. The ATT was (and is) an excise duty that is collected from airlines but is intended to be passed on to passengers via the flight ticket price. When originally introduced, the tax was set at two different tax rates: €2 for destinations located within 300 km of Dublin airport and €10 for all other destinations. All domestic flights fell within the lower rate, whereas almost all international flights were subject to the higher rate.

Ryanair, who operated flights falling into both categories, complained to the Commission that the tax was both an infringement of Regulation 1008/2008 and an unlawful State aid to other airlines. The Commission took action on both fronts. In relation to Regulation 1008/2008, the Commission issued a letter of formal notice to the Irish authorities, in consequence of which the differential tax rates were replaced, from March 2011, with a single €3 rate.

So far so good. But on the State aid front, the result was not exactly as Ryanair had expected. While the Commission did conclude that the ATT gave rise to State aid, it decided that Ryanair itself was one of the beneficiaries thereof, along with Aer Lingus and Aer Arann. According to the Commission’s decision, the aid amounted to €8 per passenger on the lower-taxed routes – i.e. the difference between the lower and the higher rates during the period in question. The Commission proceeded to order that the aid should be recovered from the various beneficiary airlines.

Both Aer Lingus and Ryanair appealed the Commission decision to the General Court, disputing both the finding of an “advantage”, within the meaning of Article 107(1) TFEU, and the quantification of the aid in the amount of €8 per passenger.

As regards the existence of an advantage, the arguments in both appeals, while not put in identical terms, turned essentially on the juxtaposition of the alleged Regulation 1008/2008 infringement with the State aid investigation. If the higher €10 rate was unlawful under Regulation 1008/2008 and Article 56 TFEU and thus liable to be reimbursed, so it was argued, how could that unlawful rate be taken to be the normal “reference” rate for the purposes of determining whether the lower €2 rate amounted to an “advantage”?

The Court rejected that argument, finding that the question of whether there is an advantage has to be examined in the light of the competitive effects of the aid measure, and not in the light of the unlawfulness of the measure. Moreover, in the Court’s view, the alleged unlawfulness of the tax (pursuant to Regulation 1008/2008 and Article 56) lay in the existence of differential rates, rather than the fact of imposition of a €10 rate as such. The Court also considered that any right of reimbursement arising from the differential tax rates would depend on various factors including the absence of unjust enrichment. For all of those reasons, the Court took the view that the Commission had not erred in characterising the higher €10 rate as the reference rate for the purpose of establishing the advantage obtained by the operators whose flights were subject to the lower €2 rate.

However the Court agreed with Aer Lingus and Ryanair that, in the circumstances of this case, the Commission was not entitled to assume that the advantage actually obtained and retained by the airlines amounted in all cases to €8 per passenger. It was common ground that the ATT was an excise duty that was required to be indicated separately in the price of each ticket sold to the airlines’ passengers. The ATT was thus formally intended to be passed on through the ticket price. Even if there had been some consequential benefit to airlines in respect of the flights taxed at the lower rate, the Commission could not assume that that benefit was in the amount of €8 per passenger; rather, the precise amount of the advantage depended on various factors including the extent to which the economic burden of the ticket prices was passed on to passengers rather than being borne by the airlines, and the extent to which the airlines subject to the lower tax were able to offer more attractive prices to their customers.

The Court also pointed out that the airlines could not retrospectively charge their passengers the higher rate of tax. In those circumstances, a recovery order in the amount of €8 per passenger would not restore the status quo ante; on the contrary,  it would be liable to create additional distortions of competition, since it could lead to the recovery from the airlines of a greater advantage than they actually enjoyed.

This is an important judgment. It is the first time that the Court has found that the quantification of an aid arising from a differential tax rate should take account of the extent to which the tax in question was borne (indeed was intended to be borne) by consumers. As a matter of principle, however, that should not be a surprising result. As the Court pointed out, if the Commission does decide, in its decision, to quantify the aid to be recovered, it must assess that amount as accurately as possible, and must limit the amount to the advantage actually obtained by the supposed beneficiary. The Commission should not be able to side-step a proper assessment of that advantage, in a case like this, by a simplistic assumption that the advantage corresponds to the amount of the tax differential.

Having said that, this sort of case is likely to be rare, and the Court was at pains to emphasise the specific facts that gave rise to the aid here. The aid in this case was not like a straight grant, which the airlines (even endowed with the omniscience that the jurisprudence supposes) could have declined, or returned following the Commission’s negative decision. Nor did the aid take the form of a differential rate of a direct tax imposed on the airlines themselves. Rather, the aid took the form of a charge to be collected by the airlines from their passengers, such that the airlines could not in law do anything other than collect the specified charges from those passengers – no more and no less; and once those amounts had been collected via the ticket prices, the airlines could not retrospectively charge any more. Few State aid cases exhibit those characteristics.

The floodgates, therefore, probably remain shut. But this particular aid investigation will have to stay on the runway for a bit longer.

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