# EUR-Lex - 52014PC0171 - EN

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# 52014PC0171

**Proposal for a COUNCIL DECISION on the AIEM tax applicable in the Canary Islands /* COM/2014/0171 final - 2014/0093 (CNS) */**

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EXPLANATORY MEMORANDUM

1.           CONTEXT OF THE PROPOSAL

The Treaty on
the Functioning of the European Union (TFEU), which applies to the outermost
regions of the EU, which include the Canary Islands, does not in principle
allow any difference between the taxation of local products and the taxation of
products from Spain or other Member States. Article 349 of the TFEU provides,
however, for the possibility of introducing specific measures for those regions
because of the permanent handicaps which affect the economic and social
conditions of the outermost regions.

Council
Decision 2002/546/EC of 20 June 2002[1],
adopted on the basis of Article 299(2) of the EC Treaty, authorised Spain, up
to 30 June 2014, to apply exemptions from or reductions in the ‘Arbitrio sobre
Importaciones y Entregas de Mercancías en las Islas Canarias’ (hereinafter ‘AIEM’)
to certain products produced locally in the Canary Islands. The Annex to that
Decision contains a list of products to which tax exemptions and reductions may
be applied. The difference between the taxation of locally manufactured
products and the taxation of other products may not exceed 5, 15 or 25
percentage points, depending on the product.

Decision
2002/546/EC sets out the reasons for adopting specific measures, which include
isolation, raw material and energy dependence, the obligation to build up
stocks, the small size of the local market and the low level of export
activity. The combination of these handicaps means that production costs, and
therefore the cost price of goods produced locally, are increased, so that
without specific measures they would be less competitive than goods produced
elsewhere, even taking into account the cost of transporting the latter to the
Canary Islands. This would make it harder to maintain local production. The
specific measures covered by Decision 2002/546/EC were thus designed to
strengthen local industry by making it more competitive.

The AIEM is an indirect State tax levied in a
single stage on the supplies of goods in the Canary Islands. The taxable base
for the imported goods is based on the customs value, and that of the supplies
of goods by producers in the Canary Islands is based on the total amount of the
consideration. The specific measures covered by Decision 2002/546/EC establish a form of differentiated taxation, benefiting the local production of
some products. This tax benefit constitutes state aid that requires the
approval of the Commission, which was granted by
Decision on State Aid NN 22/2008.

On 16 November
2010, Spain submitted a request to the Commission to extend the period of
application of Decision 2002/546/EC for two years, so that its expiry date
coincided with the one of the Guidelines on national regional aid for 2007-2013[2].

In addition, Spain also introduced a request for the extension for two years of the period of
application of Decision on State Aid NN 22/2008, according to which the aid
given by the Spanish authorities, in respect of the AIEM, was compatible with
the common market. The Commission authorized this extension for two years by
means of its Decision on State Aid SA.31950 (N 544/2010)[3], which extended the
period of Decision on State Aid NN 22/2008 up to 31 December 2013.

As regard the
request for the extension of the period of application of Decision 2002/546/EC,
the Commission assessed it in light of the scale of the handicaps affecting the
 Canary Islands and came to the conclusion that it was justified to grant the
requested extension.

In fact, the
report from the Commission to the Council on the application of the special
arrangements concerning the AIEM tax applicable in the Canary Islands, adopted
on 28 August 2008, confirmed that the AIEM was functioning in a satisfactory
manner and without the need to any amendments to the provisions of Decision
2002/546/EC.

Therefore,
Council Decision 895/2011/EU of 19 December 2011[4]
amended Decision 2002/546/EC, extending its period of application up to 31
December 2013.

On 04 March
2013, the Spanish authorities requested the Commission to prepare a Council
Decision authorising Spain to apply exemptions from or reductions in the AIEM
to certain products produced locally in the Canary Islands for the period
2014-2020, modifying the list of products and the maximum rates applicable to
some of them.

On 28 June 2013
the Commission has adopted new regional aid guidelines for the period 2014-2020[5]. These Guidelines are
part of a broader strategy to modernise state aid control, aiming at fostering
growth in the Single Market by encouraging more effective aid measures and
focusing the Commission’s enforcement on cases with the biggest impact on
competition.

Considering
that these Guidelines will enter into force on 1 July 2014, it seemed justified
to extend the period of application of Decision 2002/546/EC, as amended by
Decision 895/2011/EU, for six months, so that its expiry date coincides with
the expiry date of the current Guidelines. Decision 2002/546/EC has been
amended accordingly by Decision 1413/2013/EU[6]
that extended its application until 30 June 2014.

The Commission
has analysed the request received from the Spanish authorities, as well as the
information provided by many different stakeholders that have taken the
initiative to contact the Commission. This analysis confirms that the special
characteristics of the Canary Islands restrain their development and are
responsible for additional costs for the operators situated there. It is
therefore justified to maintain the exemption of the AIEM to a list of locally
produced industrial products. This measure is necessary and proportionate and
does not undermine the integrity and the coherence of the Union legal order.

2.           ANALYSIS OF THE SPANISH
REQUEST AND PROPORTIONALITY OF THE DEROGATION DECISION

According to Article 110 TFEU no Member State shall impose, directly or indirectly, on the products of other Member States
any internal taxation of any kind in excess of that imposed directly or
indirectly on similar domestic products. Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a
nature as to afford indirect protection to other products.

However, on the basis of Article 349 TFEU
the Council may authorise Member States with outermost regions to derogate from
the provisions of Article 110 TFEU so as to take account of the structural
social and economic situation of these regions and which is compounded by other
factors that severely restrain their development. Such derogation may not
undermine the integrity and the coherence of the Union legal order, including
the internal market and common policies, such as common taxation policies based
on Article 113 TFEU. Thus, such derogations must remain proportionate, i.e.
they must not go further than necessary to address the adverse framework
conditions hampering the economic development of these regions and it must not
excessively distort competition in the single market. In consequence, any
derogation from Article 110 TFEU should remain limited to fully or partially
compensating the cost disadvantage from which producers in these regions
suffer.

The Canary Islands economy is highly
dependent on tourism. This dependency is a serious threat to the development of
the Canary Islands because change of taste, natural disasters or economic
recessions can have a huge impact in the economic and social situation of the
archipelago. This was precisely what occurred during the global financial
crisis of 2008 and 2009 that had a strong impact in the number of tourists
visiting the Islands and, consequently, in its economy. The decrease in
tourists led to a huge increase in the levels of unemployment, with the rate of
unemployment becoming higher than in mainland Spain, which is, together with Greece, one of the two Member States with the highest unemployment rate in the European Union.
The growth was even more visible in the rate of youth unemployment, which can
be explained by the large number of young people depending on the seasonal jobs
created by tourism.

The Canary Islands market is also characterised
by its reduced dimension that prevents industries from reaching the optimal
point of production. Most industrial machines are designed to produce at large
scale, in order to increase productivity and profitability. These machines are
not designed for a smaller market, generating unused productive capacity, which
means that industries are forced to operate at a production level lower than the
necessary to minimise production costs, restricting opportunities for economies
of scale.

The countries and territories in the
proximity of the Canary Islands (Morocco, Western Sahara and Mauritania) have reduced acquisitive capacity, and the considerable development gap limits the
possibilities for Canary Islands exports.

Another characteristic of the Canary Islands with an important effect in the additional costs incurred by operators
established there is the territorial fragmentation and distance to the sources
of most raw materials, which generates higher transport costs. The problem has
been aggravated by the rise of oil prices that has had an important impact in
the increase of transportation costs.

Water is a scarce resource in Canary Islands. The insufficiency of water has an obvious impact in its cost, creating a
competitive disadvantage towards industries located in other parts of Spain or the European Union. This is particularly important for the industries that use
water as an important raw material (e.g. food, chemistry, paper) but also the
ones that require high levels of refrigeration.

There are projects for the introduction of
natural gas in the two major islands of Canary Islands, but it is not clear
when this fuel can be used in an effective way. The absence of natural gas generates
an important element of loss of competitiveness, as the cost of generating heat
and energy using other sources is considerably more expensive.

As there are no recycling plants and waste
has to be transported to the mainland and toxic waste has to be treated outside
the Canary Islands, the disposal of industrial waste and treatment of toxic
waste leads to higher environmental costs.

The characteristics of the Canary Islands previously described affect to a certain extent all domestic production. It
is therefore appropriate to verify what has been the effect of the existing differentiated
taxation in the market share of local production and adjust this differentiated
taxation to ensure that there is no excessive distortion of competition.

The analysis made to conclude on the
differentiated rates accepted took into account not only the average market share
of local production in the period 2008-2011 but also its evolution and other
information provided by stakeholders that contacted the Commission to provide
relevant information. For industries producing products with different common
customs tariffs it was analysed the evolution of the combined market share for
all products and not only the individual market shares.  These reasons explain
why products with similar average market shares of local production have a
different maximum rate of differentiated taxation.

In the case of tobacco, it is suggested to
keep the differentiated rate in 25% and update the minimum for 1000 cigarettes
from EUR 6 to EUR 18 as requested by the Spanish authorities.

The Spanish authorities have included in
the list of products to be subject to differentiated taxation some products
with an extremely low market share of local production. The justification presented
by the Spanish authorities is that there are plans to increase local production
of these products, an increase that will not be possible without the
differentiated taxation.

In total, of the 139 products mentioned in
the request received from the Spanish authorities, the Commission accepts the
rate as requested for 119 of these, while for the remaining 20 the Commission considers
that the differentiated rate should be lower, to prevent possible cases of
distortion of competition.

From the detailed analysis made by the
Commission, it is possible to establish the different lists of products
according to the rates of tax differentiation, sector and the Common Customs
Tariff:

5%

Agricultural
and fishery products:

0207 11/0207
13

Minerals:

2516 90
00 00/6801/6802

Building
materials:

3816/3824
40 00 00/3824 50/3824 90 45 00/3824 90 70 00/ 3824 90 97 99/ 6809

Chemicals:

2804 30 00
00/2804 40 00 00/3105 20 90 00/3208/3209/3210/3212 90 00 00/3213/3214/3304 99
00 00/3925 90 80 00/ 3401/3402/3406/3814 00 90/3923 90 00 00/4012 11 00/4012 12
00/4012 13/4012 19

Metal-working industries:

7604/7608

Food industry:

0210 12 11 00/0210 12 19 00/0210 19 40 00/0210 19 81/0305 41 00/0305
43 00 90/

0901
22 00 00/1101/1102/1601/1602/1704 90 30 00/1704 90 51 00/1704 90 55 00/

1704
90 75 00/1704 90 71 00/1806/1901 20 00 00/1901 90 91 00/1901 90 99/

1904
10 10/1905/2005 20 20/2006 00 31 00/2008 11 96 00/2008 11 98 00/2008 19 92/

2008
19 93/2008 19 95/2008 19 99/2309

Beverages:

2009 11/2009 12 00/2009 19/2009 41/2009
49/2009 50/2009 61/2009 71/2009 79/2009 89/ 2009 90/2201/2202/2204

Textiles and leather:

6112 31/6112 41

Paper:

4818 90 90 00/4823 90 85 90

Graphic arts and publishing:

4910

10%

Agricultural and fishery products:

0203 11/0203 12/0203 19/0701 90/0703

Building materials:

2523 29 00 00/

Food industry:

0210 11 11 00/0210 11 31 00/1905/2105

Paper:

4808/4819/4823 90 40 00/

15%

Agricultural and fishery products:

0407 21 00 00/0407 29 10 00/0407 90 10 00

Building materials:

2523 90/7010

Chemicals:

3809 91 00/3917 21/3917 23/3917 32 00/ 3917
33 00/3917 39 00/3917 40 00/3923 10 00/39 23 21 00/3923 30 10/3924 10 00

Metal-working industries:

7309 00/7610 10 00 00/9403 20 80 90

Food industry:

0403/0901 21/1902/2103 20 00 00/2103
30/2103 90 90/2106 90 98/

Beverages:

2203/2208 40

Textiles and leather:

6302

Paper:

4818 10/4818 20/4818 30/4821

Graphic arts and publishing:

4909/4911

25%

Tobacco:

2402

These lists of products address the
objective of Article 349 of adopting specific measures to take into account the
special characteristics of the Canary Islands as outermost regions, while at
the same time, not distorting competition in a way that could undermine the
internal market.

When the Spanish authorities submit the
report foreseen in Article 2 of this Council Decision it would be advisable for
the Commission to evaluate the effects of the differentiated rates and assess
the need for changes. It would also be important at that time to check whether
there has been an increase in local production of those products for which a
differentiated taxation is requested but which do not have significant local
production at the moment.

3.           LEGAL ELEMENTS OF THE
PROPOSAL

Summary of
the proposed measures

To authorise Spain to apply exemptions from or reductions in the tax known as AIEM for certain products produced
locally in the Canary Islands.

Legal basis

Article 349
TFEU.

Subsidiarity
principle

Only the
Council is authorised, on the basis of Article 349 TFEU, to adopt specific
measures in favour of the outermost regions to adjust the application of the
Treaties to those regions, including the common policies, because of the
permanent handicaps which affect the economic and social conditions of the
outermost regions.

The proposal
therefore complies with the subsidiarity principle.

Proportionality
principle

The proposal
complies with the proportionality principle for the following reasons:

Choice of
instrument

Proposed
instrument: Council Decision.

Other
instruments would not have been appropriate for the following reason:

Derogations granted under Article 349 TFEU
are contained in Council Decisions.

4.           BUDGETARY IMPLICATION

The proposal
has no impact on the budget of the European Union.

2014/0093 (CNS)

Proposal for a

COUNCIL DECISION

on the AIEM tax applicable in the Canary Islands

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 349 thereof,

Having regard to the proposal from the
European Commission,

Having regard to the opinion of the
European Parliament[7],

Acting in accordance with a special
legislative procedure,

Whereas:

(1)       Pursuant to Article 349 of
the TFEU, the Council, taking into account the structural social and economic
situation of the outermost regions, which is compounded by their remoteness,
insularity, small size, difficult topography and climate and economic
dependence on a few products, shall adopt specific measures aimed, in
particular, at laying down the condition of application of the Treaties to
those regions, including common policies.

(2)       Specific measures should
therefore be adopted in order to establish the conditions for applying the
Treaty to those regions. They must take account of the special characteristics
and constraints of these regions, but without undermining the integrity and
coherence of the Community legal order, including the internal market and
common policies.

(3)       At the top of the list of
handicaps identified in the Canary Islands is the predominance of the services
sector and in particular tourism in the regional product and also the
dependence of the Canary Islands’ economy on this sector and the small share of
industry in the Canary Islands’ GDP.

(4)       In second place is the
isolation inherent in an archipelago which hinders the free movement of
persons, goods and services. Dependence on certain modes of transport, air
transport and maritime transport is increased since these are modes of transport
which have not yet been fully liberalised. Production costs are greater because
these modes of transport are less efficient and more expensive than road or
rail.

(5)       As a further consequence
of this isolation, higher production costs result from dependence in terms of
raw materials and energy, the obligation to build up stocks and difficulties
affecting the supply of production equipment.

(6)       The small size of the
market and the low level of export activity, the geographical fragmentation of
the archipelago, and the obligation to maintain diversified but only small
production lines in order to meet the requirements of a small market, restrict
the opportunities for economies of scale.

(7)       It is in many cases more
difficult or more expensive to obtain specialised and maintenance services, and
training for managers and technicians, or to subcontract or promote business
expansion beyond the Canary Islands’ market. The narrow range of distribution
methods also results in overstocking.

(8)       As regards the environment,
the disposal of industrial waste and the treatment of toxic waste give rise to
higher environmental costs. These costs are higher because there are no
recycling plants, other than for certain products, and waste has to be
transported to the mainland and toxic waste has to be treated outside the Canary Islands.

(9)       On the basis of all this
information and the notification from the Spanish authorities, it is advisable
to renew the authorisation to the application of a tax to a list of products
for which exemptions for local products may be allowed.

(10)     Council Decision
2002/546/EC of 20 June 2002[8],
adopted on the basis of Article 299 of the EC Treaty, initially authorised
Spain, up to 31 December 2011, to apply exemptions from or reductions in the
tax known as ‘Arbitrio sobre Importaciones y Entregas de Mercancías en las Islas
Canarias’ (hereinafter ‘AIEM’) to certain products produced locally in the
Canary Islands. The Annex to that Decision contains a list of products to which
tax exemptions and reductions may be applied. The difference between the
taxation of locally manufactured products and the taxation of other products
may not exceed 5, 15 or 25 percentage points, depending on the product.

(11)     Council Decision 895/2011/EU
of 19 December 2011[9]
amended Council Decision 2002/546/EC, extending its period of application up to
31 December 2013.

(12)     Council Decision 1413/2013/EU
of 17 December 2013[10]
amended Council Decision 2002/546/EC, extending its period of application up to
30 June 2014.

(13)     The AIEM tax is serving the
objective of autonomous development of the Canary Islands’ industrial
production sectors and of diversifying the Islands’ economy.

(14)     The maximum exemptions
which may be applied to the industrial products in question vary depending on
sector and product, from 5 % to 15 %.

(15)     The maximum exemption
applicable to finished tobacco products is nevertheless higher, because the
tobacco sector is an exceptional case. The tobacco industry, which had greatly
expanded in the Canary Islands, has been declining very markedly for a number
of years. The traditional handicaps of insularity described above are of course
at the root of the decline in local tobacco production in the Canary Islands.
There are grounds for keeping a substantial exemption for tobacco. Exemption
from taxation is in direct relation with the objective of maintaining
production in the Canary Islands.

(16)     The objectives of promoting
the socio-economic development of the Canary Islands are reflected at national
level in the purpose of the tax and the allocation of the revenue it generates.
The incorporation of the revenue from this tax in the resources of the Canary Islands
‘economic and tax system and its use for an economic and social development
strategy involving the promotion of local activities is a legal obligation.

(17)     The arrangements are to
apply for 6.5 years. It will nevertheless be necessary to evaluate its results.
The Spanish authorities must therefore present to the Commission by 30
September 2017 at the latest a report on the application of the arrangements
referred to in Article 1, in order to check the impact of the measures taken
and their contribution to promoting or maintaining local economic activities,
account being taken of the handicaps affecting the outermost regions. On this
basis, the scope and the exemptions authorised under Community rules will be
revised if necessary.

(18)     The fiscal advantage
covering the AIEM needs to remain proportionate so as not to undermine the
integrity and the coherence of the Union legal order, including safeguarding
undistorted competition in the internal market and state aid policies.

(19)     This Decision is without
prejudice to the possible application of Articles 107 and 108 of the TFEU,

HAS ADOPTED THIS DECISION:

Article 1

1.         By way of derogation from
Articles 28, 30 and 110 of the Treaty on the Functioning of the European Union,
the Spanish authorities shall be authorised until 31 December 2020 to lay down,
in respect of products listed in the Annex that are produced locally in the
Canary Islands, total exemptions from or partial reductions of the tax known as
‘Arbitrio sobre las Importaciones y Entregas de Mercancias en las islas
Canarias (AIEM)’. These exemptions must form part of the strategy for economic
and social development of the Canary Islands and contribute to the promotion of
local activities.

2.         Application of the total
exemptions or reductions referred to in paragraph 1 may not lead to differences
in excess of:

(a) 5 % for the products listed in the
Annex, Section A;

(b) 10 % for the products listed in the
Annex, Section B;

(c) 15% for the products listed in the
Annex, section C

(d) 25 % for the products listed in the
Annex, section D. Nevertheless, the Spanish authorities may establish a minimum
tax on cigarettes of not more than EUR 18 per 1 000 cigarettes, applicable only
if the AIEM tax resulting from the application of general types of taxation is
below this figure.

Article 2

The Spanish authorities shall present to
the Commission at the latest by 30 September 2017 a report on the application
of the arrangements referred to in Article 1, in order to check the impact of
the measures taken and their contribution to the promotion or maintenance of
local economic activities, account being taken of handicaps affecting the
outermost regions.

On this basis, the Commission shall present
a report to the Council comprising a full analysis of the economic and social aspects
and where appropriate a proposal for adapting the provisions of this Decision.

Article 3

This Decision shall be applicable from 1
July 2014.

Article 4

This Decision is addressed to the Kingdom of Spain.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 179, 9.7.2002, p. 22-27

[2]               OJ C 54, 4.3.2006, p. 13

[3]               OJ C 237, 13.8.2011, p. 1

[4]               OJ L 345, 29.12.2011, p. 17

[5]               OJ C 209, 23.7.2013, p. 1.

[6]               OJ L 353, 28.12.2013, p.13,14

[7]               OJ C [...].

[8]               OJ L 179,9.7.2001, p. 22.

[9]               OJ L 345, 29.12.2011, p. 17

[10]             OJ L 353, 28.12.2013, p.13,14