EUROPEAN COMMISSION Brussels, 28.2.2019 COM(2019) 116 final REPORT FROM THE COMMISSION TO THE COUNCIL on the application of the special arrangements concerning the AIEM tax applicable in the Canary Islands

(submitted by the Commission in accordance with Article 2 of the Council Decision 377/2014/EU of 12 June 2014)







TABLE OF CONTENTS A. Background 2 B. Summary 3 C. Analysis 3 1. Economic growth – activity and employment variables …3 2. Proposal of technical adjustments 5 3. Remaining handicaps justifying the continued application of the special arrangements concerning AIEM 5 D. Conclusions ……………………………………………………………………………………………………………………………………6

A.Background The AIEM (‘Arbitrio sobre las Importaciones y Entregas de Mercancías en las islas Canarias’) is a tax imposed on products imported into or obtained in the Canary Islands. Given the numerous obstacles that the Canary Islands face, Council Decision 377/2014/EU of 12 June 2014 on the AIEM tax applicable in the Canary Islands provides for special tax arrangements. In particular, it authorises the Kingdom of Spain to exempt or reduce partially from the AIEM tax certain products produced in the Canary Islands that are listed in the annex to the Decision. This authorisation applies from 1 July 2014 to 31 December 2020. The difference in taxation between products taxed on a regular basis and those to which an exemption or partial reduction is applied cannot be higher than 5%, 10%, 15% or 25% depending on the product. That Decision replaced Council Decision 2002/546/EC of 20 June 2002, which is based on Article 349 of the Treaty on the Functioning of the European Union, which confers the status of EU outermost region to the Canary Islands. This article recognises the permanent constraints faced by the outermost regions - remoteness, insularity, small size, difficult topography and climate, and economic dependence on a few products – and enables the adoption of specific measures tailor-made to these regions. The reasons underlying the adoption of the special arrangements are the problems faced by the Canary Islands by their isolation and the fragmentation of the local market. This causes various difficulties mainly connected with higher production costs (transport, energy, supplies of raw materials, treatment of waste, etc.) and the low diversification of the economy, which is weaker and more susceptible to negative changes than European and global markets. In other words, the special measures were introduced to counter the handicaps faced by the Canary Islands and thereby allowing the economy of the Islands to develop. The measures are especially targeted at strengthening domestic industry by increasing its competitive position, which is disadvantaged because of the location, structure and size of the market. Article 2 of Council Decision 377/2014/EU, requires the Spanish authorities to present to the Commission by 30 September 2017 a report on the application of the arrangements concerning the AIEM tax. The purpose of the report is to assess the impact of the measures taken and their contribution to the promotion or maintenance of local economic activities, taking into account the disadvantages affecting the Canary Islands. Spain has submitted the interim report to the Commission in October 2017 (Annex 1). A translation of the Report, in English, is also annexed (Annex 2). The Commission was conducting additional analysis and had to conduct additional exchanges with Spanish authorities during the year of 2018 in order to finalise the assessment. In addition, Article 2 of the Council Decision 377/2014/EU requires the Commission to present a report to the Council comprising an analysis of the economic and social aspects of the application of those special arrangements concerning the AIEM tax and where appropriate, a proposal for adapting the provisions of this Decision. B.Summary The purpose of this report is to examine the impact of the measures taken under the Decision, for the period from 1 July 2014 to the end of 2016, and to assess their contribution to the promotion or maintenance of local economic activities. Duly account is taken of the obstacles faced by the Canary Islands. In general, it would appear that between 2014 and 2016 the measures in place have contributed to the economic recovery of the outermost region concerned. There are visible positive trends generated by the exemptions from AIEM, such as the Gross Domestic Product (GDP) growth and the positive increase in the number of companies and jobs created. In the same period, income from AIEM tax rose. The imports of products subject to the AIEM also rose between 2014 and 2016. The comparison of local products, who have benefitted and continue to benefit from the special measures in question with comparable imported products subject to AIEM have not revealed measurable negative effects for imported products in the categories of goods concerned.

C.Analysis This analysis is based on the data provided by the Spanish authorities in their interim report for the period from 1 July 2014 to the end of 2016 submitted to the Commission in accordance with Article 2 of the Decision. The report describes various factors, including changes that took place after the entry into force of the Decision in 2014. 1.Economic growth – activity and employment variables During the period analysed, when special arrangements for the AIEM tax were applicable, many positive tendencies have been observed. A number of examples are provided to evidence the impact of the AIEM-related measures and their contribution to the maintenance or development of domestic economic activities. It is made clear, though, that industrial activity is influenced by a multitude of factors such as the economic context, the framework of other taxes and costs that affect operations, as well as the changing conditions in the market and distribution systems. Hence, isolating the direct impacts of the AIEM on industrial activity in the Canary Islands is a complex exercise. In general terms, the economic environment since 2014 has experienced a period of stable global growth worldwide and economic recovery at both national and European level. From 2014 onwards, the Canary Islands’ economy has started to recover and has continued to expand up to the present date, with real GDP growth accelerated to reach 3.5 % in 2016. This rate exceeds that of Spain, the EU-28 and the world average for the same year. Moreover, the number of enterprises in the manufacturing, mining and quarrying sectors which benefit from the AIEM (‘AIEM industry’ which represent 67.3% of the total amount of enterprises) increased between 2014 and 2016, whereas the enterprises not benefiting from the AIEM (‘non-AIEM industry’) decreased between 2014 and 2016. In quantitative terms, there were 14 more enterprises in AIEM industry in 2015 than the previous year, and in 2016 there were further 41 new enterprises. As regards employment in the AIEM industry, the data provided in the Report demonstrate a successive annual growth of registered employees over the period 2014-2016. In quantitative terms, the number of employments in the AIEM industry had increased from 20,050 registered in 2013 to 21,541 in 2016. The only sectors that suffered a decrease were the following: Other mining and quarrying, Manufacture of beverages, Manufacture of tobacco products, Manufacture of pulp, paper and paper products, and lastly Manufacture of rubber and plastic products. Intra-sectoral analysis reveals the significant relative weight of employment of the Manufacture of food products within the overall AIEM industry. It is followed by the Manufacture of metal products, except machinery and equipment, and the Manufacture of beverages. Analysing different sectors, the Spanish data shows that the services sector, which accounts for the greatest share of the Canary Islands’ economy, has performed favourably from 2014 onwards. Tourism, which contributes nearly 32% of regional GDP, has recovered strongly in recent years and, following a small decline in 2015, even achieved record figures in 2016, assisted by a context of political uncertainty in several North African and Middle Eastern Mediterranean countries. The dynamism of the tourist sector continues to date; it has resulted in an increase of its share in terms of contribution to Gross Value Added and employment in the Canary Islands’ overall economy. We can assume that the AIEM measures for promotion of local activities have had a positive effect in the sense that local enterprises are prepared to offer better quality service, which guarantee a sustained growth of the tourism in this region. The Report demonstrates that local enterprises have been consolidating deployment of quality management systems to ensure that the products and services they offer meet standards that instil confidence in consumers. This reflects the commitment of domestic enterprises to production efficiency and competitiveness. The trend is especially true as regards enterprises operating in the food and packaging sectors, of which more than 41.9 % hold external food safety certification and a further 9.3 % were in the process of obtaining it in 2017. The average rates applied to imports of products subject to the AIEM, with the exception of tobacco products, are approximately 7 % (7.1 % in 2016). This indicates that the average rates in the new period during which the AIEM is in force are, in general, similar to the average rates of the previous period (7.2%), and therefore there is no change in the burden imposed by this charge. Further analysis by sectors and imports of products subject to the AIEM reveals that the majority of industries saw increases in imports after 2014, with the exception of three sectors. The imports of Chemical products decreased steadily between 2014 and 2016; Building materials decreased significantly in 2015 to increase again in 2016, albeit remaining to lower levels than in 2014; and Manufacture of food products fluctuated downwards in 2015 before increasing in 2016. In general, the imports of products subject to the AIEM rose between 2014 and 2016, despite a slowdown in 2015. The evidence presented thus indicates that the Council Decision of 12 June 2014 fulfils its purpose. However, the situation for businesses operating on the local market remains at a disadvantage and there is still a need for this specific and targeted measure. This aspect will be analysed in the subsection 3. 2.Proposal of technical adjustments The Spanish authorities mentioned in the mid-term report a limited number of modifications to tax rates and tariff codes with regard to the AIEM products specified in the Annex. To be able to resolve problems that arise from modifications in the tariff classification of products, Spain requests the establishment of an agile mechanism that allows for relatively easy updating of the list of products for which a tax differential is permitted. The necessary amendments to the lists of tax rates and tariff codes as well an agile mechanism to amend them, could be considered at a later stage during the renewal of the Decision.