ICAO has taken the extraordinary step of writing to their Contracting States to remind them of the longstanding and effective agreement among States for residence-based airline taxation.
The ICAO letter came following a proposed revision to Article 8 of the UN Model Convention, which would carry considerable consequences for airlines, including a significant additional administrative burden.
Signed by Juan Carlos Salazar, ICAO’s Secretary General, the letter notes that “ICAO’s Policies on Taxation in the Field of International Air Transport (Doc 8632 ) recommend exclusive residence State taxation (where an airline profit is taxed only in the State of effective management of the airline). The approach in ICAO’s policies aims to avoid multiple taxation on the income of air transport enterprises, based upon the principle of reciprocity.”
If officially adopted in March 2025, the Article 8 revision allows contracting States to choose either a residence or source-state taxation approach to international aviation. Put another way, airlines could be taxed in the country where they are domiciled and by one or more countries in which they earn revenue, with no effective mechanism to eliminate any double or multiple taxation.
Such an outcome would upend 95 years of a residence-based approach that has served the world well, allowing airlines to grow connectivity and thereby boost socio-economic progress. Moreover, the move is totally inconsistent with the Organisation for Economic Co-operation and Development's (OECD) Model Convention, which also supports a residence-based system for airlines.
Every ICAO State has already agreed that governments “to the fullest possible extent, grant reciprocally exemption from taxation on the income of air transport enterprises of other contracting states derived in that contracting state from the operation of aircraft in international air transport (Doc 8632 ).”
ICAO also called on Member States to “coordinate with relevant taxation or finance authorities” of each State regarding compliance with Doc 8632.
“The ICAO state letter is a very welcome reminder of the potentially severe consequences of shifting to source-based taxation for aviation,” says Willie Walsh, IATA’s Director General. “The current residence-based system is efficient for airlines and States with little or no leakage. Source-based taxation would create costs and add complexity. There is no upside for anybody, except the army of accountants it will take for airlines to manage their obligation and for countries to collect the revenues.”
Why is a source-State approach wrong?
Ignoring the fact that the Article 8 amendment was agreed by 25 non-aviation tax professionals acting in a personal capacity, the logic of the change is wrong.
Besides the critical and objective flaws of the revision from the technical perspective, one of the main economic arguments has been that Least Developed Countries (LDCs) will gain taxing rights over foreign carriers and so increase their fiscal revenue and overall prosperity. But this is not what will happen.
In reality, LDC businesses, investment, and growth opportunities—especially in tourism—have a lot to potentially lose. Most LDCs have their own airlines, whose tax obligations would be distributed over their networks. And if double taxation or additional administration adds to airline costs, this will be reflected in ticket prices that could dampen demand. Meanwhile, the countries themselves would have their own administrative burden to deal with—converting long-standing air service agreements to reflect the change and then managing a far more complex system.
According to figures from the Air Transport Action Group (ATAG), aviation supports some 56 million jobs and $760 billion in GDP in LDCs worldwide. A change to Article 8 puts that at risk. LDCs stand to lose far more than they would gain.
The concerns for airlines are very real. The most obvious one is double and multiple taxation, which the proposal remains unable to address. If airlines must shift their view on tax liabilities from looking at their entire network to route-by-route, some marginal routes could easily become uneconomical and lead to trimming. And on top of that would be the heavy cost of the accounting and filing in many jurisdictions instead of one.
Advocacy efforts to return Article 8 to a residence-based approach only will continue. IATA is joining ICAO in calling for States to raise their concerns to the UN Economic and Social Council (ECOSOC), within which the UN Tax Committee operates.
It is vital that the economic and social benefits of aviation are preserved, including the facilitation of foreign investment, trade, jobs, and economic growth. LDCs need those benefits most of all and the UN Tax Committee and the ECOSOC should not lose sight of that.
