Is the departure tax illegal?

Last week I outlined some of the complaints I received on the budget announcement that the passenger departure tax will go up from Lm10 to Lm20 from next August. The question is whether this tax or its increase are in line with EU law.

According to the budget estimates, this year alone the government expects to raise Lm1.8 million in revenue from this tax. Next year it estimates a revenue of Lm3.8 million.

The airport tax is imposed in several other countries, including EU countries. Yet, the Maltese version of this tax has some characteristics that are worth highlighting.

For instance, in Malta, the airport tax is imposed on flights starting from Malta. It does not apply to flights departing from Malta but which would have started abroad. In other words, it does not apply to tourists or other travellers visiting Malta for a while. So there is a clear difference in treatment between persons starting their trip from here (mostly Maltese) and persons who do not.

As a starting point it must be said that national governments have the right to impose taxes. EU membership does not take away this right. Moreover, EU law does not prevent member states from treating non-nationals more favourably than their own nationals. This is known as "reverse discrimination".

However, EU law does put on national governments the obligation to ensure that tax measures do not infringe EU law. In particular, through tax measures, national governments cannot restrict the freedom of movement of persons, services, capital or goods.

So the answer to the question should be that the airport departure tax does not infringe EU law. It is a tax measure and the government has the right to impose taxes. And it does not discriminate between Maltese and non-Maltese because a non-Maltese person who starts a trip from Malta will also have to pay this tax.

Yet, having looked more closely into the issue, particularly in the light of the recent budget announcement, I feel there is a case to be made against the way this tax is imposed.

Firstly, it transpires that the airport tax only applies to international flights. It does not apply to flights between Malta and Gozo. The legal notice which introduced this tax defines the passenger who is liable to pay this tax as a person who is flying "outside Malta". It therefore does not apply to domestic flights between Malta and Gozo (which are temporarily suspended).

I have come across at least two judgments of the European Court of Justice which clearly state that it is illegal under EU law to impose higher airport taxes on international (including EU) flights than on domestic flights. The court held that EU law "precludes the application of any national legislation which has the effect of making the provision of services between member states more difficult than the provision of services purely within one member state..." This is clear enough. But the court went further and added that this applied "irrespective of whether there is discrimination on the grounds of nationality or residence".

The Advocate General who issued an opinion on this case was more explicit. He said that "what matters is not whether the measure constitutes discrimination on grounds of nationality. It is sufficient that the cross-border intra-Community service is made more expensive than the comparable purely domestic service". EU law, he said, "lays down a prohibition on restriction and not purely a prohibition on discrimination".

So the fact that our airport tax applies equally to Maltese nationals and non-Maltese nationals (as long as they start their trip from Malta) is of no material consequence to the conclusion that this difference between domestic and international travel is untenable under EU law.

Secondly, the tax raises questions on the freedom to provide services. For instance, does the tax make it less attractive for foreign airlines to operate from Malta? Does this tax discriminate between tourism services offered in Malta and tourism services offered abroad at the expense of the recipient of the service? And, more importantly, does the tax make it more difficult for Maltese citizens - as recipient of services - to receive services, whether a wider choice of air transport services or merely a greater possibility to use tourism services abroad?

I would say yes on all counts.

As the European Court stated, "the freedom to provide services confers rights on both providers of services and recipients and any restriction of that freedom may thus undermine the rights of a recipient of services".

In another case, the court held that "the freedom to provide services includes the freedom, for the recipient of services, to go to another member state in order to receive a service there, without being obstructed by restrictions, even in relation to payments. Tourists, persons receiving medical treatment and persons travelling for the purposes of education or business are to be regarded as recipient of services".

The court could have hardly been more clear.

Thirdly, the fact that the tax does not apply to flights that commence abroad also raises some questions because this means that this tax is not imposed on tourists visiting Malta. Although one appreciates that this exemption is important to avoid burdening the price of our tourist package, this difference in treatment does raise the question whether this exemption constitutes a form of state aid or even a form of protection for our tourism sector. If this is so, then EU law on state aids comes into play and one has to justify this differentiation.

This point would not apply if, for instance, the airport tax applied to all flights leaving Malta, that is, a departure tax across the board. But ours is not a departure tax across the board. It is a tax that applies only for flights originating in Malta. So the issue of state aid must be raised.

Fourthly, according to the budget speech, the increase in the departure tax does not apply to departures using maritime services. In other words, after August, the departure tax payable if we leave Malta on a cruise ship would still be Lm10 against the Lm20 if we leave on board an aircraft. By making such a distinction the government appears to be favouring the cruise liner industry when compared to air transport. This raises questions on unfair competition and also on state aid as explained above.

Fifthly, and most importantly, there is the obvious consideration of the right of Maltese citizens to travel freely. One of the main pillars of EU law is the "free movement of persons" and the treaty speaks about EU citizenship and the right of EU citizens to free movement.

Now it is evident that the airport tax, whether at Lm10 or Lm20, does not, as such, restrict this right. It does not stop you from travelling. It merely makes travelling more expensive. On this score, there is no clear-cut reply under EU law and the point still remains in a grey area.

In one case involving Greece, the Advocate General did say that the doubling of a departure tax from €10 to €20 seemed negligible when compared to the price of the ticket. He said that "it does not make the exercise of the right under (EU law) so difficult that there would seem to be justification for considering that the right to freedom of movement within the Union is impaired". But this implies that the European court may be willing to look into the matter if it feels that the tax is so high it actually discourages persons from exercising their right to travel freely within the EU.

So the question we should ask is whether our airport tax, particularly at the increased rate, makes it prohibitively expensive for Maltese citizens to exercise their right of free movement. For instance, does the revised tax at Lm20 make it too expensive for a family of four or five to travel? Or does the fact that some flights, advertised at Lm17, are actually cheaper than the departure tax make any material difference? Or does the fact that there are also additional charges, such as the passenger service charge payable to the MIA, compound the situation?

Again I would say yes on all counts.

And the conclusion should reasonably be that, in its current form, the tax may breach our right to free movement under EU law. More so in view of the fact that Malta is an island and consequently we are restricted in our choice of transport means. We cannot drive out of the country or catch a train. We are constrained to use the plane, which is already the most expensive means of travelling.

So there are some interesting legal arguments that can be used to challenge the revised airport tax. And any one of the above would be enough. But, of course, the final say rests with the courts of law.

And, of course, it is not the tax as such that may need to be removed altogether (although this is an option). It is the way that it is imposed. So my contribution does not mean that we shall no longer be taxed when we buy a flight ticket.

But it may mean that the way this tax is imposed may have to be revised.

Readers who would like to raise issues or ask a question to Dr Busuttil are invited to send an e-mail, making reference to this column, to contact@simonbusuttil.com.