Ireland is a global aviation finance powerhouse thanks to our favourable tax regime and an unsurpassed talent pool.
Talent, tax and track record are three of the key ingredients in the recipe which has turned Ireland into a global aviation finance powerhouse. The statistics speak for themselves in this respect. It is estimated that Ireland commands a 60 per cent share of the global leasing market, with more than 50 aircraft leasing companies, including 14 of the world’s top 15 lessors based here. That dominant share translates into an Irish leased aircraft taking off every two seconds somewhere in the world.
“The business here goes back to the 1970s,” says KPMG Head of Aviation Finance Joe O’Mara. “A lot of talent and experience has grown up here over that time. It comes down to the tax and business environments. The tax regime is very attractive for aviation leasing. It is straightforward and transparent with a 12.5 per cent corporation tax rate on profits and an eight-year capital write-off for aircraft assets. Most important is the international tax treaty network. Ireland has a best-in-class tax treaty system. It’s not the number but the quality that counts. The amount of cross-border transactions involved in aviation leasing makes this a strategic advantage for Ireland.”
The talent piece is hugely important. “It is very hard to build that expertise from scratch,” O’Mara points out. “Other things like the professional services network and the supply infrastructure that supports the industry are important as well. They are the foundations of Ireland’s success and they are still there.” That talent pool is by no means restricted to the specialist finance and legal roles required by the aviation leasing firms. The industry is supported by a broad ecosystem of aircraft maintenance and other specialist firms required to keep the planes in the air and to get them to customers around the world. That brings with it a requirement for highly qualified engineers, technicians and pilots.
Hong Kong and Singapore are attempting to carve out a niche in the global aircraft leasing market, but do they represent a threat to Ireland’s pre-eminent position?
With the International Air Transport Association predicting China will overtake the US as the world’s largest aviation market within the next five years, it is quite natural for Asian jurisdictions to see themselves as potential competitors to Ireland when it comes to aircraft finance.
KPMG Head of Aviation Joe O’Mara believes Ireland is well-placed to retain its leading position but says the threat must still be acknowledged. “It is always the case with an industry with mobile assets that you can move them where you wish,” he says. “An aviation lessor can move its fleet to Hong Kong or choose to own the next aircraft in Singapore.”
Singapore has long cast a covetous eye in Ireland’s direction. “It’s been there for a long time,” says O’Mara. “On the face of it, Singapore has similar tax arrangements to Ireland. The challenge that it faces is that Ireland’s system is straightforward while theirs is concessionary. Singapore’s Aviation Leasing Scheme (ALS) regime is discretionary. A company typically gets a concession for five to 10 years and has to renew it after that. That leads to uncertainty.”
Hong Kong is a more recent entrant to the market. “The government there has always been interested,” O’Mara point out. “Tax was the issue until quite recently. They didn’t allow a tax write-off for the asset and that made it wholly uneconomic. They introduced a new regime two years ago with a lot of fanfare. You can get to a single digit effective rate of corporation tax. What holds it back is its tax treaty network.”
Another issue has been the political situation in the jurisdiction, says O’Mara. “There was a possibility that Hong Kong could have become an Asian hub for aviation leasing with a complementary offering to Ireland’s but that was before the political unrest of 2019. That sort of thing makes people nervous.”
As O’Mara points out, Ireland cannot remain complacent. “At a local level, we have to consider what we can do from a personal tax perspective. Many other jurisdictions offer personal tax rates in the mid-teens and we have to compete with that when attracting senior people. We also need to continue to expand the tax treaty network and focus on building the talent pool that’s already here in aviation finance.”
Digitilisation is set to transform the cumbersome and time-consuming process of aircraft trading and leasing. Trading in the aviation sector is about to experience some turbulence. The impact of technology will be keenly felt as the sector begins to modernise, with blockchain and digitalisation of leases hopefully leading to further efficiencies and cost savingsalleviating the heavy burden of what is still a largely paper-based system.
Kieran O’Brien of KPMG aviation finance agrees that aviation trading is still “a fairly manual concept”. “If company A wants to sell an aircraft to company B, there is a huge amount of work in terms of the aircraft’s records. There have been some advances in terms of document management systems, but they are just document repositories, the documents are still PDFs,” he explains. “You are talking about wading through pages and pages of data – it’s time-consuming and labour-intensive. There is no question that GATS will be helpful.”
O’Brien notes that Irish finance company Fexco won a fiercely competitive global tender process to develop the platform upon which GATS will operate. “This is really positive for Ireland as an aviation hub,” he notes.
Blockchain is also set to become an integral tool in the aviation trading sphere. Blockchain facilitates the integrity of transactions and will eventually be utilised across all aspects of aviation trading, believes O’Brien.
“The letters of credit process [which guarantees payment] is a manual process and very time-consuming, so there will be a number of people putting letters of credit into blockchain,” he says, adding that putting technical records into blockchain would also be a significant move. “An awful lot of the value of an aircraft is in that paper, the technical records. So if you can give them that level of integrity and security with blockchain where you are utterly certain that every transaction is accurate and recorded and every maintenance is accurate and recorded and you can trace back the signature or the stamp of the engineer that did it, there is clear value in that.
“Smart contracts are also connected to Blockchain, but companies are also looking towards machine learning and robotics, in order to take away that manual routine,” explains O’Brien. “This will help in not only getting the deal done, but in dealing with the aftermath of a transaction. It’s about the reality of having a dataset that is searchable and can be interrogated and accessed in an easier fashion, that will be really powerful.”
This article first appeared in The Irish Times, and is reproduced here with their kind permission.