It’s awards season and we’re shortlisted

Our recent microsite for Baker McKenzie, Ghosts in the Machine: Revisited has been shortlisted for Best Use of Interactivity in the annual Shorthand awards. We’re chuffed!

Ghosts2-Social Share

Revisited is the follow-up to the original Ghosts in the Machine report from 2016, and looks at the use of artificial intelligence in the financial services industry.

We’re proud to be shortlisted alongside other great players in the storytelling field like the Thomson Reuters Foundation and the BBC.

And while the Shorthand Awards jury members put their heads together to decide on a winner, we will wait patiently. In the meantime we recommend to take a look at Ghosts Revisited — happy scrolling.

To check out the competition, head over to Shorthand’s The Craft for the complete shortlist.

How a San Francisco-based hedge fund uses the blockchain

Banks were among the first to recognise the need to embrace digital currencies and distributed ledger technology, but they are not the only ones.

Within the financial services industry credit card companies or insurers come to mind.

But one particularly intriguing example comes from Numerai.  In a bid to develop artificial intelligence, the San Francisco-based hedge fund developed its own cryptographic token, called Numeraire. The idea is that data scientists developing AI models stake Numeraire in an auction to quantify their confidence in the models. Those that prove their predictive prowess earn Numeraire, while those that don’t see their digital stakes destroyed.

Geoffrey Bradway Numerai

Geoffrey Bradway, VP of engineering at Numerai, expects “more and more novel coin applications in the finance realm”.

In part nine of our digital currencies series we’re going beyond banking, looking at other areas where the financial services industry considers – or already uses – distributed ledger technology.

To read the article, which we have produced in collaboration with law firm Baker McKenzie, please follow this link.

Earlier in the series, in May 2017, we looked at the potential of digital currencies and distributed ledger technology for central banks. And in June, we discussed what’s in it for banks.


Animation: how the blockchain could fix payments systems

Today’s payments platforms are creaking. The next-generation will use digital currencies and distributed ledger technology to make them faster, cheaper and more convenient.

But there are barriers.

For our digital currencies project in collaboration with law firm Baker McKenzie, we have produced a new animation that explains how the blockchain could improve today’s payments systems, and what the hurdles are central banks need to clear first.

The two-minute animation can be accessed by following this link.



Aviation Finance and the Cost of International Tax Reform

Tony Ryan, the Irish businessman, is best remembered as the co-founder of the low cost airline that carries his name. Ryanair launched in 1985 with a single 15-seat turboprop connecting Waterford with London Gatwick. Today, it is Europe’s largest airline. More than 106 million customers boarded Ryanair planes last year.
But before popularising no-frills flying in Europe, Ryan had already revolutionised the aviation industry in a different area: In 1975, as the founder and CEO of Guinness Peat Aviation (GPA), he invented aircraft leasing as it exists today.

Patrick Blaney, who succeeded Ryan in the CEO post, described in an interview with the Irish Independent in 2016 how the GPA founder created the new industry almost single-handedly. It began when Aer Lingus, his employer at the time, tasked Ryan to solve an overcapacity problem by ridding the company of two unneeded planes.

“Tony Ryan was dispatched by [Aer Lingus] to find a home for these two planes and he found an airline in Thailand called Air Siam, which needed not just the planes but a flight crew and cabin staff,” Blaney said.

“So he very neatly organised for two aeroplanes that Aer Lingus had bought but didn’t need, they had trained crews and all the rest to fly, and he shipped the whole lot out to Thailand.”

With the creation of GPA soon after sealing the Air Siam deal, Ryan filled a niche in the market: leasing allowed airlines to quickly increase capacity in growth times, or scale back when demand dropped. In addition, there are certain advantages to airlines in the way leased planes are accounted for on the balance sheet.

Aircraft leasing and financing became big business. Today, 40–50% of all commercial planes are leased. While Ireland still dominates the industry, other jurisdictions including Singapore, Hong Kong, Cyprus and Malta have also sought to attract the sector.

New Challenges

But the business model is facing new challenges created by changes to the international tax environment. Supranational organisations have agreed measures to curb tax avoidance and the question arises whether this will have a detrimental impact on aviation finance.

In a global survey of more than 400 industry experts, conducted by Euromoney Institutional Investor Thought Leadership in conjunction with Deloitte, 78% of aviation experts working for airlines, and 87% of those working for lessors agreed that the industry will feel the impact of anti-tax avoidance measures.

General impact chart 1One of the main drivers for changes to international taxation is the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. This project aims at closing gaps in international tax rules that allow multinationals to minimise their tax bills by playing the tax regimes of different jurisdictions against each other.

Haroun Asghar, Head of Tax at Etihad Airways, thinks that “the political support underpinning [the] BEPS [Project] can’t be under-estimated”. He adds that “the speed and scope of these changes has been impressive. It is the most significant development to international tax architecture for over half a century.”

The anti-tax avoidance directive (ATAD) is the EU’s implementation of the BEPS Action Plan. Agreed last year, the ATAD will come into effect from January 2019 and apply to all EU members, including Ireland, the global centre of aviation finance.

What financial impact will the new measures have? While the survey results display considerable uncertainty — 30% of respondents didn’t take a view — a narrow majority of the survey panel, 53%, expects the cost for leasing aircraft to increase. Only a 13% minority does not think so.

Double tax treaty changes

More recently in focus of the BEPS Project have been double tax treaties. An OECD signing ceremony scheduled to take place in June in Paris will set in motion changes to more than 2,000 tax treaties– about two-thirds of the worldwide total. First treaty amendments could come into effect from January 2018.

In addition to the other measures, the prospect of changing double tax treaties will draw increased attention to tax gross-up clauses.

Included in most standard aircraft lease agreements — but rarely triggered — gross-up clauses could almost be considered a mere formality: added to every contract, but never expected to become relevant. Now that tax bills are set to increase, they will be subject to closer scrutiny.

Half of respondents to the survey agree that “proposed double tax treaty changes will have an impact on the negotiation of aircraft lease agreements, in particular the provisions of tax gross-up clauses”.

Gross up clauses Q18Again, a considerable number of respondents refrained from taking a view, underlining the lack of clarity around the impact of international tax reform.

If — as the survey indicates — aircraft leasing costs are set to go up, who will pay for it?

Lessors’ largest customers might have sufficient buying power to force lessors to absorb rising costs themselves. It’s an indicator for market expectations that 41% of experts believe (vs 25% who disagree) that the implementation of the BEPS Action Plan via the ATAD will result in a drop of lessor profits.

Lessor profits decline Q11

But that does not mean that the aircraft leasing business invented by Tony Ryan in the 1970s has seen its best days. Leasing aircraft offers more than just tax-related advantages, and therefore it is unlikely that its popularity with airlines will change significantly. “Ultimately, the amount of leasing will depend on wider market and business factors,” comments Etihad Airways’ Haroun Asghar.

And Markus Ohlert, Head of Leasing at Lufthansa, adds that this might be particularly true for companies that don’t have strong balance sheets. For them, “leasing may be the only way to get access to aircraft,” he says.

The survey and report “Game Changer not Game Over: Aviation Finance and International Tax Reform” has been prepared by Euromoney Institutional Investor Thought Leadership in conjunction with Deloitte. The complete research is available for free download here.

Aviation Finance in the Hot Seat

Aviation finance is not an industry on everyone’s radar even though it’s huge. The term refers to the business of aircraft leasing: up to 50% of planes globally are no longer owned by airlines directly. Instead, those planes are on lease from specialist companies.
International tax reform might change the way competition among global aviation finance centres from Ireland to Singapore plays out in the future.

Leasing is an attractive way for airlines to manage their aircraft fleets. Compared to owning planes leasing increases flexibility and does not require airlines to take on huge amounts of debt.

The top 50 aircraft lessors have planes worth $260 billion under management, according to Airfinance Journal, which gives an idea about the size of this growing industry.

Aircraft leasing is concentrated in a few jurisdictions globally, and about half of that business is conducted from Ireland. It’s so important to the Irish economy that The Economist recently described aircraft finance as “perhaps the city’s [Dublin’s] most successful industry”.

This makes the country, with its population of just 4.6 million, the biggest player by far in aviation finance, competing with a handful of other territories around the world including Singapore, Hong Kong and Chinese free trade zones.

But with international tax reform on the horizon there are concerns that Ireland’s leading position will come under increased pressure from other jurisdictions.

The EU Anti-Tax Avoidance Directive

Being a member of the European Union, it is the EU’s anti-tax avoidance directive (ATAD) that poses the biggest threat to Ireland as a destination for aircraft leasing. The ATAD, which comes – with a few exemptions – into effect in January 2019 introduces a variety of measures designed to make it harder for corporations to play the tax laws in different countries in and outside the EU against each other.

When Euromoney Thought Leadership and Deloitte teamed up recently to survey the aviation finance community, it turned out that the experts are worried about the impact the ATAD may have on their business.

53% of 400 experts surveyed told us that they expect airline’s aircraft leasing costs to increase in the wake of the directive coming into effect. Only 13% disagreed.

And 40% also believe that the ATAD will result in fewer planes being leased.

ATAD statements Q11


That sounds like bad news for Ireland, the leading aviation finance jurisdiction not only in Europe, but globally. It appears to make intuitive sense: if the ATAD puts pressure on lessors and lessees based in the EU, they’ll move elsewhere.

And indeed, our survey reveals that the industry is prepared to take action if deemed necessary. Aircraft lessors expect to relocate 28% of their business on average in the wake of anti-tax avoidance initiatives.

In addition, when asked which aviation finance location will see the fastest growth in the next five years, Chinese free trade zones and Singapore came first and second, with Ireland in third place. The data appears to confirm expectations that the ATAD might have a direct impact on Ireland as a centre for aviation finance.

Map growth expectations

But it’s not that simple. While aircraft leasing is concentrated in jurisdictions with favourable tax regimes, there are  reasons other than low taxation that make those locations attractive.

It’s not about taxation only

“Ireland’s competitive strength is its double tax treaty network, which is hard to duplicate in a hurry,” Edward Hansom, Chief Investment Officer at Seraph Aviation Management, says. Focusing on the low tax rate in Ireland would be “a bit of a red herring in the context of aircraft leasing because companies anywhere tend to have enough legitimate capital allowances to defer tax liability”.

Our survey data concurs.

reasons for picking a location (chart 2)

Yes, the effective corporate income tax rate matters (38% of all respondents say it is very important), but double tax treaty networks get an even higher score (42% of all respondents, and 54% for lessors only).

While on the one hand other factors in addition to the tax environment are at least as important to the aviation finance community, it is on the other hand also necessary to look beyond the ATAD when it comes to taxation.

EU member states set their own respective corporate tax rates, and Ireland’s 12.5% rate is the lowest within the Union. This won’t change in light of the anti-tax avoidance directive coming into effect. “The low corporate tax rate is not going to go anywhere soon regardless of what the European Commission wants to do,” Eamonn Brennan, CEO of the Irish Aviation Authority, notes.

Other aspects include the strong and supportive regulatory environment in Ireland, an effective legal system, and a strong skill set that comes from over four decades of experience in aircraft leasing in the country.

In the end, the situation might be less bleak for Ireland than the numbers suggest, when taking into account all the factors that matter. Tax is an important ingredient, but not the only one. In the words of Markus Ohlert, Head of Leasing at Deutsche Lufthansa: “In many countries purely tax driven aircraft investments are not attractive any more. You must have a real business case behind it.”

The survey and report “Game Changer not Game Over: Aviation Finance and International Tax Reform” has been prepared by Euromoney Institutional Investor Thought Leadership in conjunction with Deloitte. The complete research is available for free download here.


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