Cross Border Transport Taxation in Nepal

Taxation of Cross Border Foreign Transport of Foreign Airlines Companies

Provision relating to taxation of Airline's Income

Surely, an Airlines company based in Nepal will be taxed on its Global Income as per the rules and regulation framed under Income Tax Act 2058. But regarding taxation of the income generated by an airlines industry through its general sales agent based in Nepal, the incomes derived from ground handling activities and such, it will be dependent on the specific provisions of the Income Tax Act 2058. Relevant Laws are listed for easy reference:

दफा ६७. नेपालमा श्रोत रहेको मानिने

देहायका भुक्तानीहरुको स्रोत नेपालमा रहेको मानिनेछ:–
दफा ६७(६)(छ): कुनै व्यक्तिले अन्तर चलान (ट्रान्ससिपमेन्ट) गरेको परिमाणस्वरुप बाहेक नेपालमा स्थल, सामुन्द्रिक वा हवाई यातायात वा चार्टर सेवा व्यवसाय सञ्चालन गरी देहाय बमोजिम प्राप्त गरेको भुक्तानी:–
(१) प्रस्थान गर्ने यात्रुहरुको ओसार पसार गर्ने, वा
(२) डांक, पशुपंक्षी वा अन्य प्रत्यक्ष चल सम्पत्ति चलान गर्ने ।
दफा ६७(६)(ज): तार, रेडियो, अप्टिकल फाईबर वा भू–उपग्रह जस्ता सञ्चारको माध्यमबाट खबर वा सूचना सम्प्रेषण गर्ने व्यवसाय सञ्चालन गर्ने व्यक्तिले त्यस्ता खबर वा सूचना नेपालमा उत्पत्ति भएको वा नभएको जे भएपनि नेपालमा स्थापित संयन्त्रहरुबाट खबर वा सूचनाको सम्प्रेषणका सम्बन्धमा सो व्यक्तिले प्राप्त गरेको भुक्तानी,

English Translation:
The following payments shall be treated as having a source in Nepal:
Section 67(6)(g): Payments received in Nepal, other than as a result of transshipment by a person, who conducts a business of land, sea, or air transport operator or charterer from:
a. The carriage of passengers who embark; or
b. Mail, livestock, or other moveable tangible assets that are embarked.
Section 67(6)(h): Payments received by a person who conducts a business of transmitting messages by cable, radio, optical fiber, or satellite communication in respect of the transmission of messages by apparatus established in Nepal, whether or not such messages originate in Nepal;

दफा ७०. नेपालमा जल यात्रा, हवाई यातायात वा दूर सञ्चार सेवा उपलब्ध गराउने गैरबासिन्दालाई लाग्ने कर

दफा ७०(१): जल यात्रा सञ्चालन, चार्टर सेवा सञ्चालन वा हवाई यातायात सञ्चालन गर्ने गैरबासिन्दा व्यक्तिको कुनै आय वर्षको करयोग्य आयमा सो वर्षमा अन्तर चलान (ट्रान्ससिपमेन्ट) बाट प्राप्त रकम बाहेक देहायका कार्यहरुबाट प्राप्त रकमहरु समावेश गर्नु पर्नेछ :–
(क) नेपालबाट प्रस्थान हुने यात्रुहरुको ओसार पसार, वा
(ख) नेपालबाट चलान गरिएको डांक, पशुपंक्षी वा मालसामानको ओसार पसार ।
दफा ७०(२): तार, रेडियो, अप्टिकल फाइबर वा भू–उपग्रह सञ्चारको व्यवसाय सञ्चालन गर्ने गैरबासिन्दा व्यक्तिको कुनै आय वर्षको करयोग्य आयमा नेपालमा स्थापित संयन्त्रबाट गरिएको नेपालमा उत्पत्ति भएको वा नभएको खबर वा सूचनाको सम्प्रेषणबाट प्राप्त रकमहरु समावेश गर्नु पर्नेछ ।
दफा ७०(३): उपदफा (१) वा (२) बमोजिम कुनै गैरबासिन्दा व्यक्तिको करयोग्य आयमा समावेश गरिने रकमहरुमा अनुसूची–१ को दफा २ को उपदफा (७) मा तोकिएको दरले कर लाग्नेछ ।
तर,
(क) सो व्यक्तिको कुनै बाँकी करयोग्य आयका सम्बन्धमा दाखिला गर्नुपर्ने कर गणना गर्दा ती रकमहरुलाई गणना गर्नुपर्ने छैन,
(ख) ती रकमहरुको गणनासंग सम्बन्धित खर्चहरु सो बाँकी कर योग्य आय गणना गर्दा कट्टी गर्न पाइने छैन, र
(ग) ती रकमहरुका सम्बन्धमा यस दफा बमोजिम सो व्यक्तिबाट दाखिला गर्नुपर्ने कर रकमबाट सो व्यक्तिले कुनै पनि कर मिलान गर्ने सुविधा पाउने छैन ।
स्पष्टीकरणः यस दफाको प्रयोजनको लागि “गैरबासिन्दा व्यक्ति” भन्नाले नेपाल बाहिर मुख्य कार्यालय रहेको सम्बद्ध निकायहरुको समूहभित्र रहेको बासिन्दा निकाय सम्झनु पर्छ ।
निर्देशिकामा: यस सन्दर्भमा जलयात्रा, चार्टर सेवा तथा हवाई सेवा सञ्चालन गर्न नेपालमा कार्यालय स्थापना वा अधिकार प्राप्त सेल्स एजेन्ट नियुक्त गरेको छ भने पनि यस दफाको प्रयोजनको लागि नेपालमा स्थित स्थायी संस्थापन नमानी गैर बासिन्दा व्यक्ति नै मानिने व्यवस्था गरेको छ ।

English Translation:
Section 70(1): The taxable income for an income-year of a non-resident person who carries on a business of ship operator, charterer, or air transport operator shall include the following amounts derived during other than as a result of transshipment during the year:
a. The carriage of passengers who embark from Nepal; or
b. Transportation of mail, livestock or goods that embark from Nepal.
Section 70(2): The taxable income for an income-year of a non-resident person who carries on a business of transmitting messages by cable, radio, optical fiber, or satellite communication shall include amounts derived during the year from the transmission of messages by apparatus established in Nepal, whether or not such messages originate in Nepal.
Section 70(3): The amounts included in a non-resident person’s taxable income under Section 70(1) or Section 70(2) shall be taxed at the rate prescribed in paragraph 2(7) of Schedule-1 and Income of Shipping, Air Transport Services outside Nepal shall be taxed at the rate prescribed in proviso of paragraph 2(7) of Sechedule-1. Provided that,
a. The amounts shall not require to be included in calculating tax payable with respect to any remaining taxable income of the person;
b. No deduction shall be allowed with respect to calculating that remaining taxable income to the extent to which the deduction relates to the calculation of the amounts; and
c. No tax credits shall be allowed to the person to reduce the tax payable by the person under this section with respect to the amounts.
Non-Resident Person: Clarification: For the purpose of this section, non-resident person includes a resident entity that is part of a group of associated entities the main headquarters of which is situated outside Nepal.
Directive: In this regard, for the purpose of this Section, even if the office has been established in Nepal or authorized sales agent has been appointed for the operation of business of ship operator, charterer or air transport operator, they shall be considered to be non-resident person rather than an establishment situated in Nepal.

अनुसूची २ दफा २. निकायको सम्बन्धमा लाग्ने कर

अनुसूची २ दफा २(१): यस दफाको उपदफा (२), (३), (५) र (७) को अधीनमा रही कुनै आय वर्षमा कुनै निकायको करयोग्य आयमा पच्चीस प्रतिशतका दरले कर लाग्नेछ ।
अनुसूची २ दफा २(७): कुनै आय वर्षमा ऐनको दफा ७० मा उल्लिखित आयको सम्बन्धमा कुनै गैर बासिन्दा व्यक्तिको करयोग्य आयमा पाँच प्रतिशतका दरले कर लाग्नेछ । तर नेपालबाट अर्को विदेशी मुलुकमा पुग्ने गरी प्रस्थान नहुने जल यातायात, हवाई यातायात वा दूरसञ्चार सेवा उपलब्ध गराउने गैर बासिन्दा व्यक्तिको हकमा दुई प्रतिशतका दरले कर लाग्नेछ ।

English Translation:
Schedule 1(2)(1): Taxable Income of any entity, subject to subsection (2), (3), (5) and (7) shall be taxed at the rate of 25%.
Schedule 1(2)(7): The taxable income of a non-resident person with respect to income referred to in section 70 for an income-year, shall be taxed at the rate of 5%. However, non-resident person making service available in water transport, air transport, or telecommunication service which have no destination to another foreign country from Nepal, shall be taxed at the rate of 5%.

How does revenue generation of airline industry work?

Airlines generate income through ticket sales. These ticket sales may be direct ticket sales by the airlines or it may be made through the general sales agents. Airlines have international operations but it is not feasible to establish ticketing / revenue collection units across the globe. A general sales agent’s role comes into the play. A General Sales Agent (GSA) is a sales representative for an airline in a specific country or region. Typically, the GSA is responsible for selling cargo and passenger space. A GSA will typically sell products from multiple airlines. Airlines normally use a GSA in areas that it does not operate to or from, allowing them to have a sales presence in a country at lower cost than opening their own offices in short term. It may also use their services because the GSA has historical ties with travel and cargo agents which will be too time-consuming for the airline to build itself. The GSA agreement is entered into by the local sales agents with the airlines based on a bid/auction held between the potential GSAs. GSAs receives a commission of on all revenue tickets and unit of cargo space sold in the region that it represents.

An unique perspective on tax relating to taxation of International Airlines in Nepal is that, GSAs although registered and operating in Nepal are assumed to be non-resident for the purpose of collection of taxes, under Section 70 of the Act.

What is ICAO?

The International Civil Aviation Organization (ICAO) is a specialized agency of the United Nations. It underlines and changes the principles and techniques of international air navigation and fosters the planning and development of international air transport to ensure safe and orderly growth. Its headquarters is located in the Quartier International of Montreal, Quebec, Canada. The ICAO Council adopts standards and recommended practices concerning air navigation, its infrastructure, flight inspection, prevention of unlawful interference, and facilitation of border-crossing procedures for international civil aviation. ICAO is distinct from other international air transport organizations, particularly because it alone is vested with international authority (among signatory states): other organizations include the International Air Transport Association (IATA), a trade association representing airlines; the Civil Air Navigation Services Organization (CANSO), an organization for Air navigation service providers (ANSPs); and the Airports Council International, a trade association of airport authorities. Nepal is also a member of ICAO.

How is Airlines industry different from other industry in financial reporting and tax perspective?

There are some significant difference between the derivation of revenue by other companies and airlines due to

Existence of IATA Tickets: Interline traffic agreements between airlines provide one airline with the facility to issue its own tickets for travel on another of any number of IATA airlines. For this reason a standard format of flight coupon is used by all IATA airlines including electronic tickets. Additionally, IATA tickets are freely interchangeable unless the class of travel paid for happens to be one restricted to the issuing airline only, e.g. some charter or inclusive tour fares.
IATA Ticket Commission: Normally, the carrying airline has a legal right to the revenue applicable to its carriage less a standard rate of commission. In this event, the selling airline only retains so much of the total sale value of the original transaction as it actually carries, plus the commission received on the balance.
Agents/GSAs Commission: Where the ticket is sold by a travel agent, the selling airline only retains the portion of the total sale actually carried less the agent’s commission on that portion.
Unfeasible to establish revenue and business units globally: Airlines operate globally or even their domestic haul may be huge. It is not feasible to establish revenue and business units globally for this.

All this necessarily imposes on each airline a high degree of standardization of accounting processes, enabling the pro-ration of the total fare paid by passengers among participating airlines. This can only be accomplished at a central accounting office, requiring highly sophisticated data processing capabilities. Much the same considerations might apply to other companies but airlines usually has high stake in this cost. As such, revenue sourced to a State should include only revenue accruing to the operating airline, excluding revenue claimed and remitted to other airlines. Airlines are able to produce this information on a consistent and accurate basis although not all use precisely the same accounting methods.

Because of the foregoing, it is clear that the financial reporting and taxation perspective of the Airlines industry require intervention by International Organization like ICAO.

How does Nepal tax the airline industry? vis-à-vis Nepal Tax Laws

It might be logical to divide the forms of airlines travel relating to country A into three broad categories as per the table below and discuss the red flags:

Tax on Income of Non-Resident under Section 70 in Country-A

SN	Form of Travel	Ticketing is done	Ticket Income is	Collected from ()
1	Passenger embarks from Country-A to Country-B (with/without layover at any other Country)	Not in Country-A	Taxed @ 5% (1)	Airlines
1		In Country-A	Taxed @ 5% (2)	GSAs
2	Passenger embarks from Country-A to Country-B (only by the reason layover/transit)	Anywhere	Not Taxed in Country A (3)	n/a
3	Passenger embarks from Country-B to any Country (with/without layover at any country)	Not in Country-A	Not Taxed in Country A (4)	n/a
3		In Country-A	Taxed @ 2% (5)	GSAs

Lets discuss all the flags:
(): In cases where there are no GSAs of the foreign Airlines but only branch office of the airlines , then the taxes would be applicable to Nepal establishment of the Airlines.
1. (1): In this case, the ticketing is not done in country A but the country A still retains the taxing rights as per the Section 70(1) and the tax rate has been specified in Schedule 1(2)(7). Since, the ticketing income is not recovered in Nepal, question arises how is this tax recovered? This is recovered from the Airlines. Most airlines do establish their Branch Offices in Nepal for aircraft ground handling, cabins service, catering, ramp service, passenger service and field operation service. Hence, drawing a tax assessment order on these Branch offices for collection of taxes isn’t a big issue.
Example: A two way ticket is booked by a person DEL-KTM-DEL from India. The income of the ticket DEL-KTM is not taxable in Nepal. (Refer 3) However, the income of ticket KTM-DEL is taxable at the rate of 5%. This tax is recovered by drawing assessment on the branch of Airlines registered in Nepal, who is non-resident person for the purpose of Section 70.
2. (2): In this case, the ticketing is done in country A and country A retains the taxing rights as per the Section 70(1) and tax rate has been specified in Schedule 1(2)(7). The tax is recovered from GSAs of the Foreign Airlines in Nepal. In cases where there are no GSAs of the foreign Airlines but only branch office of the airlines, then the taxes would be applicable to Nepal establishment of the Airlines.
Example: A two way ticket is booked by a person KTM-DEL-KTM from Nepal. The income of the ticket KTM-DEL is taxable in Nepal at the rate of 5%. However, income of ticket DEL-KTM is taxable at the rate of 2%. (Refer 5)
3. (3): In this case, irrespective of where the ticketing is done Nepal doesn’t retain any taxing rights. Firstly, this is not income sourced in Nepal as per Section 67 for the purpose of taxation. Secondly, Nepal being a member of ICAO adheres to the principle of Article 15 of Chicago Convention on International Civil Aviation reads “No fees, dues or other charges shall be imposed by any contracting State in respect solely of the right of transit over or entry into or exit from its territory of any aircraft of a contracting State or persons or property thereon”.
Example: A two way ticket is booked by a person from PEK-DEL-PEK from China. During the travel PEK-DEL there is a layover in KTM. Nepal doesn’t have taxing in case passenger embarks from Nepal simply by the reason of layover/transit.
4. (4): In this case, ticketing is not done in country A and Country A doesn’t retain any taxing rights. This not income sourced in Nepal as per Section 67 for the purpose of taxation.
Example: Refer Example 1
5. (5): In this case, ticketing is done in country A and Country A retains the taxing right as per Proviso to Schedule 1(2)(7). The applicable tax rate is 2%. However, this is a unique case. In this case although the income is not sourced in Country A as per Section 67, Country A retains the taxing right. The tax is recovered from GSAs of Foreign Airlines in Nepal. In cases where there are no GSAs of foreign Airlines but only branch office of the Airlines, then the taxes would be applicable to Nepal establishment of the Airlines.
Example: Refer Example 2

Pictorial Summary

Amir Ihsan says:

June 29, 2022 at 3:43 pm

Is the taxable amount is based on the full amount collected on the ticket or just the prorated value of sector flown to Nepal/KTM?
The sample given was DEL/KTM/DEL under Flag 1 with payable tax for coupon value of sector DEL/KTM or KTM/DEL.
If the journey started in LON with full itinerary as LON/DEL/KTM/DEL/LON, how does the tax is calculated and is it based on LON/DEL/KTM and KTM/DEL/LON return journey fare or just the prorated value of sector DEL/KTM and KTM/DEL?

- Sushil Parajuli says:
  
  September 11, 2022 at 9:10 pm
  
  Hello I think this might help. This is the view of Office of Auditor General of Nepal.
  https://sushilparajuli.com/wp-content/uploads/2022/09/layoverOAG.png
  
Sushila Shrestha says:

November 17, 2022 at 7:04 am

shall we deduct tds on payment for flight ticket in nepal?

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