EXPLANATORY MEMORANDUM

Traditional rum from France’s outermost regions has been subject to special excise duty arrangements on the French mainland market since 1923. This reflects a long-term fiscal State aid strategy based on the observation that, occasional years of particularly strong growth notwithstanding, the global rum market is expanding steadily (by around 3.2 %), and on aligning the eligible quantities with this growth rate to ensure the long-term competitiveness of the cane-sugar-rum sector in France’s outermost regions. Since the creation of the internal market and the harmonisation of excise duty in Europe, these special excise duty arrangements have been extended with EU approval. The current system permitting this extension was introduced by Council Decision No 2002/166/EC of 18 February 2002 authorising France to extend the application of a reduced rate of excise duty on ‘traditional’ rum produced in its overseas departments to take into account the sugar common market organisation review in 2001 and the dismantling in 2003 of the customs protection for spirits. Decision No 2002/166/EC also noted that the Community and national measures taken to improve the competitiveness of the cane-sugar-rum sector in the overseas departments still did not in themselves make it possible to reach the level of competitiveness which would enable France to adapt the taxation of traditional rum produced in its overseas departments.

Decision No 2002/166/EC limited the reduced rate of excise duty to an annual quota of 90 000 hl of pure alcohol, corresponding to traditional trade flows recorded in the last few years before the Decision was adopted, without taking a growth rate into account. The authors of Decision No 2002/166/EC felt that, in order to create a climate of legal certainty for traders in the cane-sugar-rum sector and given the time it takes to amortise equipment and buildings, an annual fixed quota of 90 000 hl applicable for seven years, from 1 January 2003 until 31 December 2009, would suffice.

In fact, the Council has already amended Decision No 2002/166/EC, by Decision No 2007/659/EC of 9 October 2007; this Decision retroactively introduced an annual quota of 108 000 hl of pure alcohol, applicable from 1 January 2007 until 31 December 2012. Decision No 2007/659/EC also noted (in recital 9) that only the market in mainland France, where rum from the overseas departments qualifies for special tax arrangements that partially compensate its high cost price, has enabled the overseas departments’ rum industry to survive.

Council Decision No 896/2011/EU of 19 December 2011 amended Decision No 2007/659/EC by shortening the period of application of the annual quota of 108 000 hl by two years, until 31 December 2010, and introducing an annual quota of 120 000 hl of pure alcohol for the period from 1 January 2011 until 31 December 2013.

In Council Decision No 896/2011/EU of 19 December 2011 (recital 5), the Council considered that the quota eligible for a rate of excise duty lower than the full rate should allow an annual growth rate of 3.2 % and 4.3 % for years of strong growth. It goes without saying that this Decision did not imply any future legal obligation on the part of the Council and the Commission. However, it is very clear that these growth rates have, for more than 25 years, been the most stable economic factors and those closest to the economic reality:

‘...since the competitiveness of traditional rum from the overseas departments needs to be supported on the market in mainland France in order to safeguard the activity of their sugarcane-rum sector, the quantities of traditional rum originating in the overseas departments eligible for a reduced rate of excise duty when released for consumption on that market should be reviewed. The 108 000 hectolitre annual quota established by Decision No 2007/659/EC should be, therefore, increased to 120 000 hectolitres, including the quota for 2011 in order to ensure continuity, taking into account the increase forecasted for that year. This increase would cover annual growth of 4.3 %, i.e. a little more than the 3.2 % increase witnessed in 2007-10’.

Council Decision No 189/2014/EU repeals and replaces Decision No 896/2011/EU, capping the annual quota at 120 000 hectolitres of pure alcohol (hap) for the period from 1 January 2010 until 31 December 2020. The quota set by Decision No 189/2014/EU does not fully reflect the growth rates referred to in Decision No 896/2011/EU. Moreover, setting the quota at an annual level of 120 000 hap for a lengthy period of ten years increased the discrepancy between the growth rates projected by the Council in 2011 and the quotas available.

Year Projected growth rate End of year requirement according to the projected rate (hap) Available quota (hap) EC/EU Decision 2002 0 % 90 000 2002/166 2003 3.2 % 92 880 90 000 2002/166 2004 3.2 % 95 852 90 000 2002/166 2005 3.2 % 98 919 90 000 2002/166 2006 3.2 % 102 084 90 000 2002/166 2007 3.2 % 105 351 90 000 108 000 108 000 2002/166 2007/659 2011/896 2008 3.2 % 108 722 90 000 108 000 108 000 2002/166 2007/659 2011/896 2009 3.2 % 112 201 90 000 108 000 108 000 2002/166 2007/659 2011/896 2010 3.2 % 117 025 108 000 108 000 2007/659 2011/896 2011 4.3 % 122 057 108 000 120 000 2007/659 2011/896 2012 4.3 % 127 306 108 000 120 000 120 000 2007/659 2011/896 189/2014 2013 4.3 % 131 379 120 000 120 000 2011/896 189/2014 2014 3.2 % 135 583 120 000 189/2014 2015 3.2 % 139 922 120 000 189/2014 2016 3.2 % 144 400 120 000 189/2014 2017 3.2 % 149 020 120 000 189/2014 2018 3.2 % 153 789 120 000 189/2014 2019 3.2 % 158 710 120 000 189/2014 2020 3.2 % 163 789 120 000 189/2014

As a result, producers of traditional rum have been unable to benefit from sufficient access to the French mainland market. The projected growth rates permitted a quota of 144 400 hap at the end of 2016, yet the quota was limited to 120 000 hap. For this reason, the retroactive increase of the quota for 2016 to 144 400 hap is an adjustment measure aimed at aligning the quota with growth rates already projected by the Council.

The urgency of the increase is clear: the quota of 120 000 hap for 2016 was used before the end of 2016 and, without a retroactive increase with effect from 1 January 2016, producers will suffer significant - and likely irreparable - harm. Relations between traditional rum producers and retailers in France are governed by annual contracts that include commitments on volumes delivered, purchase prices, and discounts and promotions. The expiry of the quota brings about a subsequent increase in taxation for quantities that exceed it, yet at the start of the year when the contracts are signed, producers cannot foresee either the likelihood that the quota will be exceeded or to what extent. Given that the purchase price is set at the start of the year on the basis of a lower rate of taxation, the tax increase created by the quota being exceeded before the end of the year is a risk that rum producers have to face. This risk became a reality in 2016. Without a retroactive increase in the quota, rum producers will suffer substantial losses for the quantities exceeding it.

Furthermore, not increasing the quota would weaken rum producers in France’s outermost regions in terms of their commercial strategies for 2017: with a lack of visibility concerning the expiry date of the quota for 2017, they would have to abandon the idea of offering their rum during the promotional season at the end of the year.

The urgency of the increase is accentuated by the economic climate, in which exports of traditional rum to the EU from Guadeloupe, French Guiana, Martinique and Réunion have fallen. Between 2005 and 2011, exports of traditional rum to the EU from these regions increased from 155 559 to 205 482 hap. Since 2012, they have fallen dramatically: after dropping to 189 928 hap that year, they rose slightly in 2013 (190 382 hap), before falling in 2014 (179 755 hap) and increasing slightly again in 2015 (180 482 hap).

This substantial decrease was mainly caused by the fall in exports of traditional rum to the EU from Réunion, which is the largest producer of traditional rum among these outermost regions. Between 2005 and 2011, exports of traditional rum from Réunion increased from 60 092 hap to 87 314 hap. They began to fall sharply in 2012, dropping to 69 491 that year before rising slightly in 2013 (74 702 hap), only to then fall to 63 240 hap in 2014 and 58 890 hap in 2015.

The drop in shipments of traditional rum from these outermost regions to mainland Europe was mainly due to the fact that they had lost market share for light rum in Germany to producers from third countries. In 2008, sales of light rum from these outermost regions reached 46 065 hap. In 2014 and 2015, they came to just 22 885 and 17 091 hap respectively.