US cross-border tax leases involving foreign sales corporations (FSCs) appear to have been dealt a fatal blow by a recent US Internal Revenue Service ruling that eliminates accelerated depreciation mechanisms.
But sources indicate US lessors are still looking at ways around the ruling, despite some estimates of a 500 basis-point increase in a FSC structure as a result.
Commission FSCs and Pickle-Dole leases, both involving accelerated depreciation schedules and the use of replacement leases, have provided significant net present value benefits over other structures. And it was exactly the advantageous depreciation schedule the IRS negated. By taking away a US lessor's tax benefits, a non-US lessee's NPVs could be cut by as much as half, making what has become a financing tool of choice for such stalwart credits as KLM, Singapore Airlines and Asiana simply another expensive option among many.
Last year, ownership FSCs went by the wayside as a result of a similar IRS investigation. Now, financiers fear, the loss of accelerated depreciation schedules - as well as accelerated leases which were often halved to 12 years - means fewer deals and higher costs for airlines. 'If you have to do a 24-year deal and use the depreciation [stretched out to 30 years], you are just not going to use the structure,' says Babcock & Brown managing director Bruce Carussi. 'It is going to make it more expensive for airlines to operate airplanes.'
Despite attempts to circumvent the IRS rules, there are concerns the FSC structure has had its day.
Source: Airline Business
