Gulf carriers may be in crosshairs under foreign airline US tax exemption cut

Qatar Airways, Emirates and Etihad Airways have for years been accused by US competitors of being illegally subsidized by their governments. (Reuters)
Updated 17 November 2017
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Gulf carriers may be in crosshairs under foreign airline US tax exemption cut

CHICAGO: A US congressional proposal that would eliminate income tax exemptions for certain airlines could affect major Gulf carriers, potentially worsening an international spat between US airlines and their Middle East rivals.
US airlines have been petitioning the federal government for years to intervene in what they see as unfair competition by the three major Gulf carriers.
The proposal, tucked deep in the Senate tax-cut plan, calls for airlines headquartered in foreign countries to pay the US incorporate tax rate if: 1) the carrier’s home country does not have an income tax treaty with the United States and 2) the carrier’s country of origin has fewer than two arrivals and departures, per week, operated by major US airlines.
Qatar Airways, Emirates and Etihad Airways have for years been accused by US competitors of being illegally subsidized by their governments. The Gulf carriers deny the accusation.
They could not immediately be reached for comment on Thursday.
If the proposal passes, it could leave the Gulf carriers more vulnerable because their home countries – the UAE and Qatar – do not have income tax treaties with the US, according to the Internal Revenue Service website.
A number of nations could possibly also be affected at a time when perceived discrepancies in US trade agreements are facing a critical eye from US corporations and the federal government.
The language in the Senate proposal sets the stage for a crackdown in tax leniency for these and other airlines. This would likely be well-received by American carriers, which have for years petitioned the US government to intervene in the dispute.
Under US tax treaties, entities of foreign countries are either exempt or pay a reduced rate on their income, and vice versa for US entities abroad. Reciprocity agreements, however, are less formal deals that fall short of an official accord, according to tax attorney Sam Brotman of Brotman Law.
“Reciprocity agreements are usually with countries that are not necessarily 100 percent friendly with the US” Brotman said on Thursday. “We’ll call it a handshake deal.”
The bill’s wording stands to ramp up an already tense battle between US airlines and Gulf carriers.
The addition was introduced by US Senator Johnny Isakson of Georgia. Delta Air Lines, one of the most vocal critics of Gulf carrier practices, is headquartered in Atlanta.
A spokeswoman for Isakson did not mention the Gulf airlines. “This provision supports American jobs by providing a level playing field and mutual fairness in international passenger aviation,” Isakson spokeswoman Marie Gordon said in an email on Thursday.
“Foreign airlines should not receive preferential tax treatment if their countries choose not to open their markets to US companies.”
Delta declined to comment.


Gulf exporters to reap oil dividend as battle for Asia market share heats up

Updated 35 min 19 sec ago
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Gulf exporters to reap oil dividend as battle for Asia market share heats up

  • Chinese exports to US fall
  • IEA ups demand forecast

LONDON: China is expected to buy more oil from Saudi Arabia and other Gulf producers as it seeks to replace US supply amid a worsening trade war with Washington.
Although China last week omitted US crude from a list of a retaliatory tariffs, analysts told Arab News that the Chinese were cutting forward orders for US oil in case the trade war escalates.
Richard Mallinson, co-founder of London consultancy Energy Aspects, said: “Chinese buyers, anticipating that crude and LNG could go on the list if tensions escalate further, are looking to alternative sources.”
Mallinson said that Chinese buyers wanted to avoid having significant amounts of US oil sitting on tankers in the middle of the ocean, which would be hit with tariffs when unloaded at Chinese ports.
“There is definitely an opportunity for Middle East producers here, and particularly the biggest, Saudi Arabia,” he said.
Andrew Critchlow, head of energy news (EMEA) at S&P Global Platts, told Arab News that there was every likelihood of more demand from China for non-US oil and “Saudi Arabia and other Gulf Cooperation Council countries were the place to get it.”
OPEC already provides 56 percent of China’s oil imports, according to the International Energy Agency (IEA). The US has also been exporting increasing levels to the Asia powerhouse.
A report by the Houston Chronicle on Aug. 13, said that US crude exports to China surged from about 22,000 barrels per day (bpd) in 2016 to almost 400,000 bpd last year and early in 2018, accounting for about 20 percent of all US crude shipments.
This summer, those volumes fell below 200,000 barrels daily, said the report.
Critchlow said that the Kingdom was currently producing about
10.5 million bpd with spare capacity of around 2 million bpd, although the closer you get to that number, the more difficult it was to extract and process, he said.
Russia could also ramp up production, but not as much as KSA, said Critchlow.
“We now have the IEA upping its demand forecast for 2019. They have increased their OPEC barrels estimate by a few hundred thousand barrels a day and by half a million a day by 2019 (for the OPEC 15),”
he said.
But the scope for increased global export potential from the Gulf was also being driven by anticipated tighter supply after the reimposition of US sanctions against Iran later this year.
Still, there was a danger of demand erosion the longer the trade wars continued, and especially if there was further escalation.
Shakil Begg, head of Thomson Reuters oil research in London, warned that by the second half of 2019, global GDP could be cut if world trade levels contracted.
That would lead to a sharp fall in the price of crude, and even herald a US recession that could spill into Europe, he told Arab News.
But Critchlow made the crucial point that the big competition in the oil market today “is to win a bigger share of the Chinese and Asian market, including India.”
He said: “That’s where the battle for market share will take place over the next decade. Also, as Iranian barrels are lost, customers in nations such as China, South Korea, India and Japan will look to the GCC and others to step in.”
US exporters will still be a big force to be reckoned with, he said. The IEA has predicted that the US will overtake KSA and Russia as the largest producer by as early as 2019.
Mallinson said: “At the end of this year and the beginning of next, the market is going to get extremely tight. And the Saudis will have to pump at much higher levels.
“When you’ve got buyers restricted from where they go, it does create alternatives to move upwards,” said Mallinson.
But he warned that if the trade war worsens, it could hobble economic growth.
“These are the two largest economies in the world and it is not good news for them getting into a conflict like this.
“But even with a severe economic slowdown, we still see a tight oil market next year. Iran and sanctions are the biggest driver.”
Mallinson said that there were two other constraints: Underinvestment in capital projects outside the US, and infrastructure bottlenecks
in America.
“Those factors are big enough on the supply side to outweigh the possibility of a sharp slowdown of growth on the demand side,” he said.