13 May, 2014

The UK APD reform “victory”: The Real Story

Imtiaz Muqbil

When the Pacific Asia Travel Association holds its various board and annual general meetings in Xuhai this week, one of the key issues will be an extension of the three-year contract for PATA CEO Mr. Martin Craigs. In the last few weeks, a slew of announcements has emerged from PATA to indicate that the association is now on a roll, and that Mr. Craigs, having fulfilled his mandate, deserves such an extension. At the peak of these rah-rah announcements is the decision by the UK government to reform the Air Passenger Duty (APD), which has been portrayed as a grand victory. An announcement by PATA in March said, “The role of PATA along with GTAC and other organizations has proved how aligned advocacy can play a vital role in fighting against impediments to the travel and tourism industry.”

A closer look at what really happened will show an entirely different story. Aside from being half-baked and semi-cosmetic, the so-called “reform” may adversely affect PATA destinations. It may have saved UK travellers some money but the real savings have been accrued by the British tax bureaucrats who have been freed up to channel their energies elsewhere. In the same “reform” announcement, the UK government also jacked up the tax by six times on users of private jets. Hence, the bottom-line tax-revenue stream to the UK remains more or less intact. No tax-collector ever gives anyone a break without finding creative ways of recouping the loss via other means.

To better understand the illusory nature of the “reform”, take a closer look at the original lengthy regulation that endeavoured to help APD payers understand how it works. It showed that APD was calculated based on the distance flown from London. It was divided into four “bands”. Band A covers flights of less than 2,000 miles, B covers those between 2,001 and 4,000 miles, C applies to those between 4,001 and 6,000, and D to those farther than 6,000 miles. It was originally based on the (false) premise that the longer distance travelled, the more expensive the ticket probably would be and the more a traveller could afford to pay a higher bracket.

Calling this “crazy and unjust,” the UK Chancellor of the Exchequer Mr. George Osborne eliminated Bands C and D, effective April 2015. That leaves the tax very much in place but now divides it on the basis of distances of less than 4,000 miles or more than 4,000 miles.

Going unmentioned in the simplistic media reports was that the tax was also calculated on a number of other factors, such as class of travel. The fine print also sought to explain how the tax is levied on complex itineraries – for example, if a traveller is going to Sydney via Frankfurt, is the tax paid on the London-Frankfurt sector or the London-Sydney sector?

The original APD was a masterpiece of confusion. The administrative paperwork and enforcement must have been a nightmare, and a waste of many hours of productivity. Moreover, this editor could not find any detailed info to show how much revenue the APD actually generated annually, nor a comparative analysis of how it impacted on specific destinations.

Governments do not change tax structures lightly. The overall objective of the UK budget is to create fairness and help improve the lot of the so-called hard-working man. Hence the tax system is designed to help lower income people while taxing the rich. This has to be done within the broader context of global economic conditions and the desire to retain the UK competitive advantage for business and investment. Other key drivers of the UK budget include controlling immigration, promoting health and education and infrastructure development.

Like anywhere else, UK tax bureaucrats have to expend their energies in a time- and cost- effective way so that they collect maximum amount of tax in the least possible time. They also have to balance this against external tax-cut pressures from politicians, businesses and industry groups. A “reform” of the APD now makes this possible. By simply reducing its administrative complexity, the bureaucrats have freed up some time, the politicians look like they’ve done the industry a big favour, PATA and the other travel industry groups calling for the tax cuts can claim victory.

But the tax remains in place.

While actual results will not be known until after the reform takes effect, it will give short haul destinations a huge competitive advantage. Travel agents will recommend their clients to North Africa, Greece and Spain because it is much cheaper. These destinations will also step up their marketing campaigns. That may not be very good for the Asia Pacific. Although long haul destinations beyond 4,000 miles will have a more level playing field, in the final analysis, the final choice of destinations is based on other factors such as the word-of-mouth recommendations, strength of marketing campaigns, aviation access, value for money, safety & security issues, etc.

Thailand is a clear example – the APD had no impact on UK visitors. In fact, over the last five years, the UK overtook Germany as the top source-market from Europe and has only just been overtaken in turn by much more voluminous flows generating from Russia.

A real victory would have been elimination of the APD entirely. However, as PATA, along with IATA, UNWTO and other members of the Global Travel Association Coalition, are claiming victory anyway, here are some key issues they may choose to address next:

Selective advocacy syndrome: Why was such a big deal made about the APD and not the many other taxes, charges and price-hikes slowly creeping into the industry? Dubai has just imposed one on hotel guests to pay for its marketing campaigns, and nobody said anything. When fuel surcharges are imposed, very few airlines face any transparency pressure, even though surcharges have a much more significant dampening effect on global travel. Many airports are jacking-up charges to pay for enhanced services for passengers and airlines. And what about wholesale tax evasion by the rich and tax avoidance by multinational companies, many of whom are members of PATA and WTTC?

Security charges: The U.S. budget for 2015 is set to impose huge new charges to pay for enhanced security. Soon, they will rise worldwide, generating windfall profits for companies providing biometrics, RFID and baggage-scanning equipment. There is no light at the end of this tunnel. How much is it going to cost, and who will pay?

Visa charges: The UK, the US, all Schengen countries as well as Australia levy horrendous visa charges of US$100 and above per person. Citizens of developing countries are worst affected, because most need visas to these countries. To add insult to injury, visa fees are not refunded if the application is denied. By contrast, citizens of the US, UK, etc, can walk into most developing countries visa-free, including their paedophiles, Ku Klux Klansmen, football hooligans, mafia gangsters, etc. Not too many complaints about these double-standards, either.

Racial profiling: At many border checkpoints in the US, UK, Australia and Europe, if your name happens to be Muhammad or Khalid or Fatema, be prepared for trouble. Blatant discrimination against Muslims has become commonplace, a gross violation of human rights made worse by the complete absence of protests by GTAC members. This editor raised it in a recent conversation with Mr. Craigs, pointing out that the PATA region is home to the largest population of Muslim travellers in the world. He had a number of reasons ready why he didn’t want to pursue it.

Compared to the APD, how high do these issues deserve to be ranked on the global travel & tourism industry advocacy agenda? A lot of hoop-la was made about the APD because it was politically “safe”, relatively non-controversial and could make industry leaders “look good”. These “quick-win” agendas need to be scrutinised more thoroughly. A more important agenda would be to demand accountability about where all the tax-money generated by travel & tourism eventually lands up. It will not take much to see that the defence, military and aerospace sector is a big winner. If governments instead spent more time building bridges of peace, travel & tourism tax-payers would be much more ready to pay for them, and the GTAC members, like the UK tax-collectors, would be freed up to channel their energies elsewhere.