DESIGNING AVIATION TAXES WITHIN THE EU - CHARTERING ONGOING CHALLENGES AND PROPOSING FUTURE SOLUTIONS.

• Author: Lind, Yvette

1. INTRODUCTION TO THE PROSPECT OF TAXING THE 786 AVIATION SECTOR II. SCOPE AND RESEARCH APPROACH 789 A. Aim and Areas of Law Included in the Study 789 B. Fundamentals of Environmental Tax Theory 790 C. Design of the Study 795 D. Methodology for Calculating C[O.sub.2] Pricing 796 E. Structure of the Article 798 III. SOME FUNDAMENTALS CONCERNING THE DESIGN OF 799 (AVIATION) TAXES IV. A SHORT INTRODUCTION TO THE SEMI-FUNCTIONING 800 MARRIAGE BETWEEN DOMESTIC TAXES AND EU LAW v. AN INTRODUCTION TO FISCAL STATE AID AND THE 801 RATHER UNSUCCESSFUL MARRIAGE BETWEEN TAXES AND EU STATE AID LAW A. Introduction to the EU Internal Market and the 801 Function of State Aid Rules B. Article 107 TFEU 803 C. Application of a Selectivity Test When Determining (Selective) Aid 804 D. Article 108 TFEU 808 VI. AVIATION TAXES IN RELATION TO STATE AID RULES 809 VII. THE EXAMPLE OF THE FORMER IRISH AVIATION TAX 811 A. Background and Design of the Irish Aviation Tax 811 B. Initial State Aid Investigation 813 C. Appealed Decision 815 D. Initial Analysis 817 VIII. THE EXAMPLE OF THE SWEDISH AVIATION TAX 818 A. Background and Design of the Swedish Aviation Tax 818 B. Initial Analysis 822 IX. DESIGNING AVIATION TAXES IN PRACTISE--WHAT TO 825 DO AND WHAT NOT TO DO I. INTRODUCTION TO THE PROSPECT OF TAXING THE AVIATION SECTOR

   The aviation sector is presently a fast-growing emitter of carbon dioxide (C[O.sub.2]), (1) which incites frequent criticism for its detrimental impact on the environment. The sector is often portrayed as a major contributor to our ongoing climate crisis. Environmental taxes, in this case, aviation taxes, (2) are generally considered as efficient policy tools when aiming to reduce CO2 levels and attempting to impact environmentally harmful behaviour at (primarily) the consumer level. Aviation taxes are becoming increasingly popular, and it can be seen globally that they have been implemented in a variety of designs and in many countries (3) over the last five to ten years.

   This is not surprising as aviation taxes not only provide states with a market-based instrument that is capable of adjusting prices in a manner that will influence a more environmentally friendly behaviour at both company and consumer levels. (4) They are also a tool devoted to generating important fiscal revenues from a business sector otherwise difficult to tax due to the existence of international agreements such as the Chicago Convention. (5)

   The taxation of aviation fuel has been restricted since the introduction of the Chicago Convention in 1944. (6) Other international agreements such as the International Civil Aviation Organization's (ICAO) resolution on the taxation of aviation fuel later fortified this prohibition. (7) As a result, the EU institutions (specifically the EU Commission) gave up their ambition to integrate the aviation sector into the energy tax scheme and, instead, integrated it into the EU Emissions Trading Scheme (EU ETS). Therefore, it is enforced through EU law, and the Energy Taxation Directive (EU ETD) prohibits the taxation of aviation fuel for commercial flights. (8) A prohibition against the taxation of this use of fuel is in accordance with stated international conventions, yet it is not in harmony with more general environmental goals at both EU and international levels, e.g., the UN's sustainable development goals (9) and the recently introduced European Green Deal. (10)

   Considering this background, this would be why some EU Member States have decided to utilize alternative tax bases other than fuel to circumvent the prohibitions imposed by both the Chicago Convention and the EU ETD to fulfil these general environmental goals. However, these taxes could feasibly disrupt international trade as they may result in potential trade barriers and provide certain industries or enterprises preferential tax treatment, e.g., in those cases when these tax schemes contain tax subsidies to certain consumer groups or certain regions. Several Member States have attempted, and failed, to either introduce and/or maintain domestic aviation taxes due, in part, to the difficulty of designing these taxes to be compatible with EU state aid law. Denmark, Norway, (11) Malta, and the Netherlands have all faced legal and/or political difficulties with their aviation taxes and, therefore, have abolished them.

   EU law, specifically free movement provisions, generally applies directly to national legislation to assure that potential barriers to the free movement in the internal market are removed through mainly the far-reaching prohibition on non-discrimination and removal of restriction clauses. Despite EU Member States having retained their tax sovereignty, they are still mandated to abide by EU law and uphold the internal market, which is clearly illustrated by the negative harmonisation of taxes provided through the extensive, and occasionally contradictory, case law of the European Union Court of Justice (ECJ). (12) Otherwise stated, Member States are allowed to implement taxes at the national level at their own discretion as long as they do not impose barriers to the free movement of persons, capital, and goods through, for instance, discrimination of non-nationals. (13) Additionally, preferential tax treatment is covered by EU competition law, specifically by the EU state aid rules, as advantageous taxes could possibly distort competition neutrality and promote (harmful) tax competition between Member States.

2. SCOPE AND RESEARCH APPROACH

   1. Aim and Areas of Law Included in the Study

      An aviation tax does not necessarily need to be discussed in an environmental context; it could as easily be placed in another context such as that of excise taxes or as a tax aimed at funding specific public services (e.g., airports, communication, etc.). Furthermore, it has been discussed as a common EU tax in order to raise revenues at the EU level rather than relying solely on membership fees provided by individual EU Member States. Yet, in this Article it is linked to an environmental context due to ongoing discussions at both the national and international level.

      The existence of parallel and different legal systems within the EU, therefore, is the focus of this Article and will be illustrated and discussed through some comparative examples gathered from Sweden and Ireland. The focus will be on the obstacles to national legal procedures, explicitly those imposed by EU state aid rules, when designing aviation taxes. The aim is not to provide an exhaustive tax technical study but rather to contribute with a conceptual framework of how EU Member States may design aviation taxes in order for these taxes to comply with the current EU law framework while at the same time fulfilling the Member States' environmental goals. This implies an additional discussion of the weaknesses with the present legal situation in which some de lege ferenda suggestions will follow.

      EU free movement law and environmental law are closely linked to EU state aid law and, therefore, also to the design of aviation taxes. Consequently, it is not possible to completely delimit these two legal areas despite them not being the focus of the study. Hence the need for a holistic approach. Aviation taxes are highly complex as they are subject to rules and principles from differing areas of law (tax law, free movement law, environmental law, state aid law) in addition to legal pluralism as these particular taxes are subject to a variety of policy regimes at national, EU, and international levels. Technically, they fall under the umbrella of tax law and all the legal requirements attached to the enactment of taxes, yet they are also considered environmental-regulatory instruments and are, as a result, also subject to specific requirements and guiding principles governing environmental law, such as the Polluter-Pays Principle. This complexity not only encourages, but indeed requires, the application of a holistic approach in which all three legal areas (at all policy levels) are included in order to provide a more coherent and transparent discussion and analysis. (14)

   2. Fundamentals of Environmental Tax Theory

      Further, despite this being a conceptual piece, a more technical methodology is applied to some parts of the study, resulting in an exclusion of more subjective environmental law aspects and instead focusing on tax technicalities and state aid law provisions. Including environmental law to a greater extent would surely not only result in interesting findings but also useful ones. However, such a research approach would result in a different paper and has already, successfully so, been done by other scholars such as Alice Pirlot and Marta Villar Ezcurra. (15) Nevertheless, some environmental theory must be introduced in order for the reader to obtain a more holistic understanding of the nature of environmental taxes and how these fundamentals impact the relationship between these particular taxes and applicable EU law provisions.

      To define the matter being studied is an additionally complex matter when considering environmental taxes, as there are a variety of labels, functions, definitions, and categorisations of environmental taxes due to the influence of national preferences and political discourses. Therefore, discussing and analysing environmental taxes from a legal angle may be both complex and comprehensive as the purpose of such a tax varies depending on the intent or effect when pursuing an environmental goal, e.g., a tax can act as a behavioural incentive or as a tax with the aim of financing a common good pollution abatement. Another problem would be the association between the tax and environmental policy objectives. Some scholars have contended that there must be a tangible link, i.e., the objective of the tax must have an intentional environmental purpose. (16)

      Others have argued that it is almost impossible to identify such a link as, in practise, many states...