Proposal for a COUNCIL DECISION on the arrangements concerning the AIEM tax applicable in the Canary Islands

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Article 299(2) of the EC Treaty recognises the specific nature of the outermost regions, which include the Canary Islands. These provisions lay down the framework for the rules applicable to these regions. Although the provisions of the EC Treaty apply to these regions, [1] account should be taken of their structural economic and social situation. The aggravating factors identified by the Treaty are their remoteness, insularity, small size, difficult topography and climate, economic dependence on a few products, the permanence and combination of which severely restrain their development. On this basis, the Council is requested to adopt specific measures in order to establish the conditions for applying the EC Treaty to these regions. Specific measures can be adopted in the area of tax policy and must take into account the special characteristics and constraints of these regions, without undermining the integrity and coherence of the Community legal order, including the internal market and common policies. This is the context in which the new tax measures applicable to the Canary Islands should be set.

[1] In the case of taxation, the Act of Accession of Spain excluded the application of a number of provisions forming part of the secondary legislation under the EC Treaty to certain territories, among them the Canary Islands. This applies to the common system of value added tax established under the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover and Council Directive 72/464/EEC of 19 December 1972 on taxes other than turnover taxes which affect the consumption of manufactured tobacco (OJ L 302, 15.11.1985, p.1067).

2. A number of positions adopted by successive European Councils, [2] Parliament, [3] the Committee of the Regions, [4] and the Economic and Social Committee [5] highlight the characteristics of these regions; they stress their handicaps and the need to adopt the specific measures provided for in Article 299(2) of the EC Treaty in order to offset them and call on the Commission to propose these measures as soon as possible.

[2] Paragraph 38 of the conclusions of the Cologne European Council of 4 June 1999, paragraph 59 of the conclusions of the Lisbon European Council of 24 March 2000, paragraph 53 of the conclusions of the Feira European Council of 20 June 2000, conclusions of the European Council held in Nice on 7, 8, and 9 December 2000, conclusions of the Göteborg European Council of 15 and 16 June 2001.

[3] European Parliament resolution of 24 April 1997 on development problems in the outermost regions of the European Union (OJ C150, 19.5.1997, p.62).

[4] Opinion of the Committee of the Regions of 13 December 2000 on the problems of the outermost regions in connection with the report on the implementation of Article 299(2) (OJ C 144, 16.5.2001, p.11).

[5] Opinion of the Economic and Social Committee of 1 March 2001 on the proposal for a Council Regulation amending Regulation (EEC) No 1911/91 on the application of the provisions of Community law to the Canary Islands (OJ C139, 11.05.2001, p.93).

3. In a report which it adopted on 13 March 2000, [6] the Commission identified a number of specific measures. With regard to the tax component, the report indicates that Article 299(2) authorises special measures for the outermost regions which must be considered in response to the requests made by the Member States concerned. The Commission's report also indicates that in each case the instruments most appropriate to the regional development and support of these regions should be sought, including tax derogations, which could apply on a long-term basis.

[6] Commission Report of 13 March 2000 on the implementation of Article 299(2) to the outermost regions (COM (2000) 147 final).

4. The memorandum which the Spanish authorities sent the Commission on 23 November 1999 spoke of implementing a tax described as neutral which would take account of the need to bring the production of goods in the Canary Islands up to a certain level.

5. In its letter of 25 July 2000, the Spanish Government sent the Commission details concerning socio-economic data relating to the situation in the Canary Islands and the content of a new tax called "Arbitrio sobre las Importaciones y Entregas de Mercancías en las islas Canarias (AIEM)". This tax was to implement Article 299(2) of the EC Treaty in tax matters and would follow the tax on production and imports (APIM), due to expire on 31 December 2000. After that date, the Spanish Government sent further information to the Commission, indicating in particular the rates planned for the future tax, and providing data on the specific features of the Canary Islands. On this basis, the Commission evaluated the proposed tax.

6. Since, however, it was not possible to complete the examination before the APIM tax expired, the Spanish authorities requested an extension of the transitional period laid down in Article 5 of Council Regulation (EEC) No 1911/91 of 26 June 1991 on the application of Community law to the Canary Islands. [7] The Council then adopted Council Regulation (EC) No 1105/2001 of 30 May 2001 amending Regulation (EEC) No 1911/91, extending until 31 December 2001 Article 5 of Regulation (EEC) No 1911/91. [8]

[7] OJ L 171, 29.6.1991, p. 1.

[8] OJ L 151, 7.6.2001, p. 1.

7. Since the Canary Islands were excluded from the scope of the common system of value added tax, the indirect taxes applicable in this region are the Impuesto General Indirecto Canario (IGIC), and the tax on production and imports (APIM). The APIM authorised by Article 5 of Regulation (EEC) No 1911/91 is a degressive indirect tax which applies to products imported into and obtained in the Canary Islands and from which locally produced products can be exempted. Authorisation for such exemption was considered essential for supporting local production and thereby the socio-economic development of the region. A tax known as the "arbitrio insular - tarifa especial" was authorised until 31 December 2000 by Article 6(4) of the above-mentioned Regulation (EEC) No 1911/91; it was a tax applied to products supplied from other parts of the Community.

The proposed AIEM tax is levied on supplies of goods produced in the Canary Islands effected by the producers of these goods and on imports of comparable or similar goods of the same type defined by reference to the Common Customs Tariff Nomenclature. The taxable base for imported goods will be based on the customs value and that of supplies of goods effected by producers in the Canary Islands will be based on the total amount of the consideration. Like the APIM, the AIEM may be exempted on locally produced goods.

8. Council Regulation (EC) No 2674/1999 of 13 December 1999, amending Regulation (EEC) No 1911/91, [9] suspended the degressive nature of the APIM for certain sectors which were regarded as sensitive and which it was thought would virtually disappear if the tax were abolished. They are the following: food, tobacco, chemicals, paper, textiles, the metalworking industries and other manufactures. When this Regulation was adopted, the Council asked the Commission to examine with the Spanish authorities the impact of the suspension of the dismantling of the APIM tax on the economic sectors concerned and in particular on the products targeted by the suspension measure. It also asked the Commission to present to it, where appropriate in the light of the results of this examination, a proposal concerning the measures to be taken on the basis of the Treaty, in order to avoid jeopardising certain particularly vulnerable local production activities, while ultimately abolishing the tax. This objective of ultimate abolition of the tax must now be included in the measures adopted on the basis of Article 299(2) of the Treaty, which authorises specific long-term measures to take account of the handicaps listed.

[9] OJ L 326, 18.12.1999, p.3.

9. In order to evaluate the need for tax measures in order to contribute to the socio-economic development of the Canary Islands, it was necessary to look at these sectors. It was also necessary to identify the handicaps suffered by the Canary Islands' economy in order to evaluate the measures suggested by the Spanish Government.

10. One of the main handicaps which affect the Canary Islands' economy and which the proposed AIEM tax is intended to address is of a general and structural nature. It is the predominance of tourism in regional production and the degree to which the Canary Islands' economy depends on it. The services sector, the main share of which is accounted for by tourism, represents 75.57% of GDP. Industry plays a very small part in the Canary Islands' GDP at only 7.85%, and 5% if the energy and water treatment sectors are excluded. The Spanish authorities are therefore pursuing the objective of diversifying production and more especially developing industrial production in the Canary Islands. The AIEM tax is a useful tool for furthering autonomous development of the region and promoting its industry. The IGIC is applied indiscriminately to all products placed on the Canary Islands' market, but the AIEM allows the tax to be adjusted to favour local production, this being a measure of support for this production which can offset the specific handicaps identified below.

11. The study published by the European Parliament on the costs of insularity includes a general description of the handicaps involved in isolation. [10] Contrary to the objectives of the internal market, the isolation inherent in an island prevents the free movement of persons, goods and services. There is greater dependence on certain modes of transport, air transport and maritime transport, since these are modes of transport which are not yet fully liberalised and they are less efficient and more expensive than road, rail or the trans-European networks. This general handicap is reflected in a number of individual handicaps affecting production.

[10] European Parliament, REGI 111 EN, 2001

12. The small size of the region and hence of the market because of its isolation is also an unfavourable factor. Despite the demand generated by the tourist industry, producers in the Canary Islands have a territory of only 1 600 000 inhabitants. These drawbacks are exacerbated by the fact that, other than in the case of the tobacco industry, the amount exported is very small, and even non-existent for most of the industries. The obstacles in the way of export are described by business as being the transport constraints in terms of availability and cost, isolation and the longer or less reliable delivery periods which result. Exports are essential for achieving economies of scale in any productive activity.

13. The isolation and small size of the region, aggravated by its fragmentation into an archipelago, generate higher production costs which make it difficult to compete with imported products.

14. The high level of production costs is due largely to the raw materials and energy component. The Canary Islands depend on international reference prices for obtaining raw materials and transporting them makes them even more expensive. Distance means stocks of raw materials have to be built up, and this is a financial burden.

15. Production equipment is also less easy to acquire and maintain, so that capital investment is higher.

16. Production costs are also pushed up because isolation makes specialised services more expensive, since they have to be obtained from the mainland; they include repairs, spare parts and specialised training for staff, managers and technicians.

17. Account should also be taken of environmental costs, which may be higher. The cost of disposing of industrial waste is higher, owing to the lack of recycling plants other than for certain products such as glass. The cost of disposing of waste on the mainland is an additional cost for businesses, as is the disposal of toxic waste, which is treated outside the Canary Islands.

18. Distance also makes it difficult to attend trade fairs and congresses in order to promote business.

19. The lack of a large distribution network forces businesses to build stocks, which are also a source of additional costs.

20. The small size of the Canary Islands' market, its isolation and dependence on external resources also force businesses to maintain large production capacities to cope with demand but these are sometimes greater than demand from the Canary Islands' market. This obligation on firms to provide diversified production ranges and hence to maintain short production runs prevents optimum economies of scale and forces firms to maintain overcapacity which brings extra costs. A similar difficulty arises from the fact that there is little or no scope for subcontracting on the Canary Islands' market. This means that manufacturing firms are obliged to overstock.

21. It can therefore be concluded that geographical remoteness and fragmentation and the fact of having a small area and population generate handicaps which cannot be remedied even by modern communications technology, i.e. lack or scarcity of resources and energy, the remoteness of raw materials and sales markets other than the domestic market.

22. Generally speaking, it has also been found that firms in the Canary Islands are unable to benefit from the present trend towards globalisation of markets. Since the features of globalisation are the concentration of production and hence specialisation of production sectors, local production in the Canary Islands is being replaced by imports, to varying degrees depending on the sector and the product. The Canary Islands' market is attracting some major foreign producers who are exporting increasing quantities there. This situation is particularly striking in the tobacco sector, where local production has recently slumped. In addition, a common feature of local production is the interdependence of local firms, in a form which resembles vertical integration, so that when activities are relocated in one sector this triggers the loss of activities in other related sectors.

23. The Spanish authorities refer to a number of studies in support of the conclusion that the costs caused by remote location amount to 8.3% for large firms and 9.89% for small and medium-sized firms. For tobacco the Spanish authorities put the costs of remoteness at 29.47%.

24. On the basis of all these data, the notification of 12 June 2001 gives a list of industrial products, with rates of 5% or 15% according to product, with exemptions for local production and a list of industrial products for which no rate is specified but for which local production would qualify for a reduction of 15% of the taxable base.

25. Industrial products for which there is exemption fall into the following categories: agricultural and fisheries products, building materials, chemicals, products of the metalworking industries, foodstuffs and beverages, tobacco products, textiles and leather, paper, graphic arts and publishing.

These sectors correspond to the sensitive sectors identified by Regulation (EC) No 2674/1999 and the products involved correspond largely to those identified as sensitive by the same Regulation.

As regards the rates applicable to these various products, the Spanish authorities have taken as a basis the level of the APIM tax as it resulted in 1996 from the application of Regulation (EEC) No 1911/91 and the acts adopted pursuant to the Regulation and the Regulation on the "tarifa especial" tax.

26. There is one very special case, namely tobacco products, which 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 involved in insularity are of course at the root of the decline in local tobacco production in the Canary Islands. The phenomenon of numerous relocations of firms established in the Canary Islands is also the result of the globalisation of the economy and concentration of production, and the emergence and development of new markets outside Europe.

The decline in local production led to 67% job losses between 1985 and 2000. The series of relocations and closures has involved the production plants of multinationals which are among the world's leading manufacturers. [11] This phenomenon of declining local production is in contrast, furthermore, with a local market on which sales rose steadily over the same period. The increased sales of tobacco are attributed by producers partly to the buoyant market created by tourists. The retail price of tobacco products in the Canary Islands is still very attractive. A comparison shows price differences of about half compared with the selling prices for tobacco in the rest of Spain. Increased taxes on tobacco since 1995, in particular the IGIC, have not slowed down sales of tobacco products, which rose steadily over the corresponding period.

[11] Philip Morris, British American Tobacco and Japan Tobacco International

It has proved possible to maintain a large volume of supply on this growing market despite the drop in local production as a result of the increase in imports from 5% to 32% between 1992 and 2000.

27. Account being taken of all these factors, there are grounds for a substantial increase in the rate of the AIEM in relation to the APIM tax for tobacco. Increased taxation is in direct relation with the objective of maintaining production in the Canary Islands.

28. It is nevertheless necessary to bear in mind the coherence of the internal market, as the criteria set out in Article 299(2) of the EC Treaty remind legislators. Trade is important in this sector. Imports of tobacco products into the Canary Islands have increased in recent years but the proportion of tobacco exports from the Canary Islands is also large. At present some 76% of the Canary Islands' cigarette production is exported and only 24% goes to the Canary Islands' market. Comparison of the figures reveals that the volume of exports from the Canary Islands has been increasing since 1995, but the volume of imports has increased even more. This means that, in a growing market, local production does not cover all requirements. These findings underpin the argument that an AIEM is needed as a sufficient incentive to maintain or restore local production given the importance of trade in this sector.

29. Consequently, the initial proposal by the Canary Islands authorities, suggesting a rate of 45%, seems excessive, since the tax may be accompanied by total exemption for local production and local producers have an advantage over other producers, namely the possibility of importing up to 20 000 tonnes a year of raw and semi-manufactured tobacco. [12] For that reason a rate much higher than for all other products but not exceeding 25% is proposed.

[12] Commission Regulation (EC) No 1528/2001 of 26 July 2001 amending Regulation (EEC) No 2179/92 laying down detailed rules for the application of the specific import measures for the Canary Islands as regards tobacco (OJ L 202, 27.7.2001, p. 9-10).

30. As for how to deal with the other products, it is necessary to meet a combination of the requirements of Articles 299(2) and 90 of the EC Treaty and the need to ensure the coherence of the internal market. This means, therefore, that only the measures which are necessary and proportionate to the objectives pursued should be taken, in the light of the Islands' handicap of remote location. The proposed Community framework therefore comprises a list of sensitive products for which the Canary Islands authorities are authorised to introduce a tax, the maximum rates being determined by this decision, and to apply total or partial exemptions where the products are produced locally. It goes without saying, however, that the responsibility for implementing these measures lies with the regional and national authorities. Consequently, the rates set in the Community framework are maximum rates for the products concerned. The same applies to the exemptions authorised. These may be total, but the Spanish authorities may decide that for certain products partial exemptions would be more appropriate. The rates and exemptions contained in the Community framework must be seen as options subject to ceilings which the national and regional authorities may use in combination with the support needed for local production. Furthermore, the applicability of Article 87 and 88 of the Treaty on State aids to such exemptions cannot be ruled out.

31. Likewise for all the products not included in the scope of this Decision, in particular products automatically considered as non-sensitive, the national and regional authorities may apply the tax they consider appropriate, without however being able to grant any benefit for local production. The Commission takes the view that Article 299(2) does not allow a general reduction of 15% of the taxable base for all products other than those which may be subject to total or partial exemption, as proposed by the Spanish authorities.

32. The list of sensitive products included in the scope of this Decision may be adapted in line with changing requirements. If necessary the Spanish authorities will notify the Commission, which if necessary will propose to the Council that the scope of the Decision be amended.

33. The aim being to support the socio-economic development of the Canary Islands, the purpose of the tax and the allocation of the revenue will be legally enshrined as a principle by the national authorities when the measures are implemented. The national authorities have provided details concerning the use of the revenue from the AIEM and the IGIC by the regional authorities. A specific provision is to be included in the draft legislation concerning the AIEM. This provision will define the purpose of the tax, stating that the revenue is to be combined with that under the Canary Islands' economic and tax system and establishing the legal obligation to allocate them to an economic and social development strategy for the Islands to help promote local activities.

34. According to the information supplied earlier by the Commission the arrangements laid down for this Decision are to apply for a long period, set at ten years. It will nevertheless be necessary to evaluate the proposed system after five years. An evaluation is therefore to be made of the arrangements and if necessary the Decision can be adapted on the basis of the evaluation.

Comments on the Articles

Article 1

This provision authorises the Spanish authorities to apply until 31 December 2011 a tax applicable to products imported into and obtained in the Canary Islands (AIEM), the rates of which are determined by Article 2, and to apply, on the basis of Article 3, total or partial exemptions for those products where they are produced locally.

Article 2

This provision sets the maximum rates which the Spanish authorities are authorised to lay down for products listed in Annex I. The Spanish authorities may adjust these rates as required, up to the maximum rates laid down. For products not listed in Annex I, the Spanish authorities are not bound to observe these maximum rates determined under this provision.

Article 3

This provision authorises the Spanish authorities to grant total or partial exemption from the AIEM tax in respect of the products listed exhaustively in Annex I. Total exemptions are authorised but, as for the rates referred to in Article 2, the option is subject to a ceiling. The Spanish authorities may consider that for certain products partial exemptions would be more appropriate. For products not listed in Annex I the Spanish authorities may apply the tax which they consider appropriate, without however being authorised to grant any benefit for local production.

Article 4

This allows for adapting the Community framework at the end of five years by means of a proposal from the Commission to the Council, on the basis of an evaluation report which the Spanish authorities are obliged to transmit to the Commission, to check the impact of the measures and their contribution to promoting or maintaining local economic activities.

Article 5

This Article provides for entry into force and application. In order to ensure continuity, the date from which the Decision becomes applicable is set at 1 January 2002.

2001/0284 (CNS)

Proposal for a COUNCIL DECISION on the arrangements concerning the AIEM tax applicable in the Canary Islands

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 299(2),

Having regard to the proposal from the Commission, [13]

[13] OJ C , , p. .

Having regard to the opinion of the European Parliament, [14]

[14] OJ C , , p. .

Having regard to the opinion of the Economic and Social Committee, [15]

[15] OJ C , , p. .

Having regard to the opinion of the Committee of the Regions, [16]

[16] OJ C , , p. .

Whereas:

(1) Article 299(2) of the EC Treaty states that the provisions of the Treaty apply to the outermost regions and hence the Canary Islands, account being taken of their structural economic and social situation, which is exacerbated by their remoteness, insularity, small size, difficult topography and climate, economic dependence on a few products, the permanence and combination of which severely restrain their development.

(2) Specific measures must therefore be adopted in order to establish the conditions for applying the EC Treaty to those regions. Specific tax policy measures may be adopted. 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. The European Council, [17] Parliament, [18] the Committee of the Regions [19] and the Economic and Social Committee [20] have on several occasions stressed the need to adopt these specific measures.

[17] Paragraph 38 of the conclusions of the Cologne European Council of 4 June 1999, paragraph 59 of the conclusions of the Lisbon European Council of 24 March 2000, paragraph 53 of the conclusions of the Feira European Council of 20 June 2000, conclusions of the European Council held in Nice on 7, 8, and 9 December 2000, conclusions of the Gotheborg European Council of 15 and 16 June 2001.

[18] European Parliament resolution of 24 April 1997 on development problems in the outermost regions of the European Union (OJ C150, 19.5.1997, p.62).

[19] Opinion of the Committee of the Regions of 13 December 2000 on the problems of the outermost regions in connection with the report on the implementation of Article 299(2) (OJ C 144, 16.5.2001, p.11).

[20] Opinion of the Economic and Social Committee of 1 March 2001 on the proposal for a Council Regulation amending Regulation (EEC) No 1911/91 on the application of the provisions of Community law to the Canary Islands (OJ C139, 11.5.2001, p.93).

(3) On the question of taxation, specific measures to be implemented must be based on the instruments most appropriate to regional development and support of these regions. They may include long-term tax derogations, in accordance with the criteria of coherence of Community law and the internal market and provided that these measures are necessary and proportionate to the objectives pursued.

(4) The indirect taxation arrangements applicable to the Canary Islands comprise a number of taxes including the Impuesto General Indirecto Canario (IGIC) and the « Arbitrio sobre la Producción y sobre las Importaciónes » (APIM) (tax on production and imports) authorised until 31 December 2001 by Article 5 of Council Regulation (EEC) No 1911/91 of 26 June 1991 on the application of the provisions of Community law to the Canary Islands, [21] as amended by Regulation (EC) No 2674/1999 of 13 December 1999, [22] suspending the degressive nature of the APIM tax for certain sectors regarded as sensitive, and extended by Regulation (EC) No 1105/2001 of 30 May 2001 amending Regulation (EEC) No 1911/91. [23]

[21] OJ L 171, 29.6.1991, p. 1.

[22] OJ L 326, 18.12.1999, p.3.

[23] OJ L 151, 7.6.2001, p. 1.

(5) When Regulation (EC) No 2674/1999 was adopted, the Council requested the Commission to examine with the Spanish authorities the impact of suspending the dismantling of the APIM tax on the economic sectors concerned and more especially the products forming the subject of the suspension measure. It also asked the Commission to present to it, where appropriate in the light of the results of this examination, a proposal concerning the measures to be taken on the basis of the Treaty, in order to avoid jeopardising certain particularly vulnerable local production activities, while ultimately abolishing the tax. This objective of ultimate abolition of the tax must now be included in the framework of measures adopted on the basis of Article 299(2) of the Treaty, which authorises specific long-term measures to take account of the handicaps listed.

(6) In their letters of 25 July 2000 and 12 June 2001, the Spanish authorities sent the Commission on the basis of Article 299(2) of the EC Treaty details concerning a new tax known as "Arbitrio sobre las Importaciones y Entregas de Mercancías en las islas Canarias (AIEM)". This is a tax on supplies of goods in the Canary Islands effected by the producers of these goods and on imports of comparable or similar goods of the same type defined by reference to the Common Customs Tariff Nomenclature. The taxable base for imported goods shall be based on the customs value and that of supplies of goods effected by producers in the Canary Islands shall be based on the total amount of the consideration. Like the APIM, the AIEM may be exempted on locally produced goods. The Commission evaluated this proposed tax in the light of the undertakings it gave the Council when Regulation (EC) No 2674/1999 was adopted and in the light of the handicaps affecting industrial production in the Canary Islands.

(7) At the top of the list of handicaps identified 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. The AIEM tax should serve the objective of the autonomous development of the Canary Islands' industrial production sectors and of diversifying the Islands' economy.

(8) In second place is the isolation inherent in an island 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 they are less efficient and more expensive than road, rail or the trans-European networks.

(9) 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.

(10) 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.

(11) 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.

(12) 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.

(13) Generally speaking, the present trend towards the globalisation of markets, which is characterised by the concentration of production, and consequently specialisation of production sectors, does not enable business in the Canary Islands to derive benefits comparable with business situated in less isolated, larger markets. As a result, to varying degrees depending on the sector and product, local production in the Canary Islands is gradually being replaced by imports. On top of this, a common feature of local production is interdependence of local firms, in a form which resembles vertical integration, so that when activities are relocated in one sector this triggers the loss of activities in other related sectors.

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

(15) It is nevertheless advisable to combine the requirements of Articles 299(2) and 90 of the EC Treaty and observance of the need for coherence of Community law and the internal market. This means applying only the measures strictly necessary and proportionate to the objectives set, account being taken of the handicaps of a remote location. The proposed Community framework therefore comprises a list of sensitive products for which the Canary Islands authorities are authorised to introduce a tax, the maximum rates being determined by Council decision, and to apply total or partial exemptions where these products are produced locally.

(16) Industrial products for which there is exemption fall into the following categories: agricultural and fisheries products, building materials, chemicals, products of the metalworking industries, foodstuffs and beverages, tobacco products, textiles and leather, paper, graphic arts and publishing. These sectors and products largely correspond to the sensitive sectors identified by Regulation (EC) No 2674/1999. The provisions of this Decision shall apply to the implementation of these exemptions without prejudice to the possible application of Articles 87 and 88 of the EC Treaty.

(17) The maximum rates which may be applied to the industrial products in question vary depending on sector and product by 5% to 15%. The rates applicable to these products correspond, according to the Spanish authorities, to the level of the APIM tax as it resulted in 1996 from the application of Regulation (EEC) No 1911/91 and the acts adopted pursuant to the Regulation and the Regulation on the "tarifa especial" tax.

(18) The rate 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. The phenomenon of numerous relocations of firms established in the Canary Islands is also the result of the globalisation of the economy and concentration of production and the emergence and development of new markets outside Europe. The decline in local production led to 67% job losses between 1985 and 2000. The series of relocations and closures has involved the production plants of multinationals which are among the world's leading manufacturers.

(19) This phenomenon of declining local production is in contrast, furthermore, with a local market on which sales increased steadily over the same period. The increased sales of tobacco are attributed by producers partly to the buoyant market created by tourists. The retail price of tobacco products in the Canary Islands is still very attractive. A comparison shows price differences of about half compared with the selling prices of tobacco in the rest of Spain. Increased taxes on tobacco since 1995, in particular the IGIC, have not slowed down sales of tobacco products, which rose steadily over the corresponding period. It has proved possible to maintain a large volume of supply on this growing market despite the drop in local production as a result of the increase in imports from 5% to 32% between 1992 and 2000.

(20) Account being taken of all these factors, there are grounds for a substantial increase in the rate of the AIEM for tobacco. Increased taxation is in direct relation with the objective of maintaining production in the Canary Islands.

(21) It is nevertheless necessary to bear in mind the coherence of the internal market, as required by Article 299(2) of the EC Treaty. Trade is important in this sector. Imports of tobacco products into the Canary Islands have increased in recent years but the proportion of exports of tobacco from the Canary Islands is also large. At present some 76% of the Canary Islands' cigarette production is exported and only 24% goes to the Canary Islands' market. Comparison of the figures reveals that the volume of exports from Canary Islands has been increasing since 1995, but the volume of imports has increased even more. This means that, in a growing market, local production does not cover all requirements. These findings underpin the argument that an AIEM is needed as a sufficient incentive to maintain or restore local production given the importance of trade in this sector.

(22) Account being taken of these factors, the fact that the tax may be accompanied by a total exemption for local production and the fact that local producers enjoy a benefit in relation to other producers, comprising the opportunity to import up to 20 000 tonnes a year of raw and semi-manufactured tobacco, [24] the initial proposal drawn up by the Spanish authorities, who suggested a rate of 45%, seems excessive. For that reason a much higher rate than for all the other products but not exceeding 25% is proposed.

[24] Commission Regulation (EC) No 1528/2001 of 26 July 2001 amending Regulation (EEC) No 2179/92 laying down detailed rules for the application of the specific import measures for the Canary Islands as regards tobacco (OJ L 202, 27.7.2001, p. 9-10).

(23) 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 will be a legal obligation.

(24) The arrangements are to apply for ten years. It will nevertheless be necessary to evaluate the proposed system after five years. The Spanish authorities must therefore present to the Commission by 31 December 2005 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, rates and exemptions authorised under Community rules will be revised if necessary,

HAS ADOPTED THIS DECISION:

Article 1

Until 31 December 2011, the Spanish authorities shall be authorised to apply a tax known as "Arbitrio sobre las Importaciones y Entregas de Mercancías en las islas Canarias (AIEM)", the rates and exemptions for which are set in accordance with Articles 2 and 3, to products imported into and obtained in the Canary Islands, as listed in Annex 1.

Article 2

1. For the products listed in Annex I.A, the rates of the AIEM tax may not exceed 5%.

2. For the products listed in Annex I.B, the rates of the AIEM tax may not exceed 15%.

3. For the products listed in Annex I.C, the rates of the AIEM tax may not exceed 25%.

Article 3

By way of derogation from Articles 23, 25 and 90 of the Treaty, the Spanish authorities shall be authorised to lay down, in respect of the products listed in Annex I that are produced locally in the Canary Islands, total or partial reductions of the tax referred to in Article 1.

These exemptions must form part of the strategy for the economic and social development of the Canary Islands and contribute to the promotion of local activities.

Article 4

The Spanish authorities shall present to the Commission at the latest by 31 December 2005 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, and where appropriate a proposal for adapting the provisions of this Decision.

Article 5

This Decision shall be applicable from 1 January 2002.

This Decision shall be addressed to the Kingdom of Spain.

Done at Brussels,

For the Council

The President

ANNEX I

A. List of products referred to in Article 2(1) according to the classification of the Common Customs Tariff nomenclature:

Agriculture and fishery products:

020311 / 020312 / 020319 / 020711 / 0207 13 / 0302 69 6100 / 0302 69 9400 / 0701 90 / 0702 0703 / 0803

Building materials:

3816 / 3824 400000 / 3824 90 4500 / 3824 90 7000 / 6809

Chemicals:

2804 3000 / 2804 4000 / 2851 00 30 / 3208 / 3209 / 3210 / 3212 90 9000 / 3213 / 3214 / 3401 / 3402 / 3406 / 3814 00 90 90 / 3920 30 00 90 / 3921 90 60 / 3923 90 90 / 4012 10

Metal-working industries:

7604 / 7608 / 8428 39 98 00 / 8479 500000

Food industry:

0210 11 1100 / 0210 11 3100 / 0210 12 1900 / 0210 19 4000 / 0210 19 8100 / 0305 4100 / 0901220000 / 1101 / 1901200090 / 1901909196 / 2006003100 / 1601 / 1602 / 1704 90 30 00 / 1704 90 51 90 / 1704 90 5500 / 1704 90 71 / 1704907500 / 1806 / 1901 90 99 / 1904 10 10 / 1905 / 2007 91 10 / 2008 99 61 / 2008 99 68 / 2009 11 / 2009 19 / 2009 40 / 2009 50 / 2009 70 / 2009 80 / 2009 90 / 2105/ 2309

Beverages:

2201/ 2202

Textiles and leather:

6112 31 / 611241

Paper:

482290 / 4823 90 90 90

Graphic arts and publishing:

4910

B. List of products referred to in Article 2(2) according to the classification of the Common Customs Tariff nomenclature:

Agriculture and fishery products:

0407 00 30

Building materials:

2523 290000 / 2523 90 / 7010

Chemicals:

38099100 / 3917 / 3923 1000 / 3923 2100 / 3923 30 10 / 3924 10 10

Metal-working industries:

730900 / 7325 / 7610 / 9403209900 / 9404

Food industry:

0403 / 0901 21 / 1902 / 2103 / 210690 98

Beverages:

2203 / 2208 40

Textiles and leather:

6302

Paper:

4808 / 4818 10 / 4818 20 / 4818 30 / 4818 90 90 10 / 4819 / 4821 / 4823 59 10 / 4823 59 90

Graphic arts and publishing:

4909 / 4911

C. List of products listed in Article 2(3) according to the classification of the Common Customs Tariff nomenclature:

Tobacco:

2402

FINANCIAL STATEMENT //

// DATE: 9.2001

1. // TITLE OF MEASURE:

Council Decision on the arrangements concerning the AIEM tax applicable in the Canary Islands

2. // LEGAL BASIS:

Article 299(2) of the EC Treaty

3. // FINANCIAL IMPACT:

No financial impact