Proposal for a Council Decision authorising France to apply a reduced rate of excise duty on "traditional" rum produced in its overseas departments and repealing Council Decision 2002/166/EC of 18 February 2002
Date: 2007-06-27
Institutions: European Commission
Subjects: EU aid, France, French overseas department and region, derogation from EU law, excise duty, originating product, spirits, tariff reduction

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 27.6.2007 
COM(2007) 318 final 

2007/0131 (CNS) 

Proposal for a 

COUNCIL DECISION 

authorising France to apply a reduced rate of excise duty on "traditional" rum 
produced in its overseas departments and repealing Council Decision 2002/166/EC of 
18 February 2002 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1) 

CONTEXT OF THE PROPOSAL 

•  Grounds for and objectives of the proposal 

Maintaining  the  cane-sugar-rum  sector  in  the  overseas  departments  is  crucial  to  their 
economic  and  social  balance.  In  the  three  departments  most  affected,  i.e.  Réunion, 
Guadeloupe  and  Martinique,  the  sector  produces  an  annual  turnover  of  about  € 250 million 
and provides some 40 000 jobs, 22 000 of them directly. The cultivation of sugar cane is by 
far  the  most  significant  example  of  activity  performed  in  the  French  overseas  departments 
which provides not only a direct benefit development in terms of the production of rum and 
sugar but also provides additional benefits through the by-products, such as the molasses or 
the  straw,  which  can  be  used  as  a  source  of  energy,  animal  feed  or  natural  fertilizers. 
Moreover,  it  is  worth  underlining  the  positive  impact  which  the  cultivation  of  cane  has  in 
terms  of  protecting  the  environment  in  the  overseas  departments,  namely  its  qualities  in 
protecting against soil erosion which can be caused by the slopes and strong rains which are 
prevalent in the overseas departments. In addition, the root system of cane, associated with its 
relatively  low  need  for  fertilizers,  ensures  that  a  good  level  of  water  quality  is  maintained. 
Moreover the use of pesticides for cane cultivation culture is limited. Finally, according to the 
French authorities, bagasse, resulting from the industrial process, contributes to a significant 
degree to the production of electricity, thus avoiding the use of fossil fuels and the resultant 
CO2 emissions, which is consistent with the international commitments entered into under the 
Kyoto protocol. Together with the banana sector, the cane sector is the only significant 
exporting  activity  in  the  regions  whose  exports  represent  not  more  than  7%  of  the 
imports. 

The  proposed  decision  authorises  France  to  apply  a  reduced  rate  of  excise  duty  on 
"traditional" rum produced in its overseas departments in respect of a quota of 108 000 HPA 
(hectolitres  of  pure  alcohol)  from  1 January 2007  to  31 December 2012.  It  increases  the 
volume  and  duration  of  the  tax  arrangements  currently  applied  to  traditional  rum 
because the situation has worsened since 2001. 

Given the small scale of the local market, the overseas departments’ distilleries can continue 
their activities only if they have sufficient access to the market in mainland France, which is 
the main outlet for their rum production (over 50% of the total). 

The  inability  of  traditional  rum  to  compete  on  the  Community  market,  which  is  mainly  the 
result of increased market prices, is attributable to the high cost price of rums produced in the 
overseas departments.  

In particular, trends in wage costs since 2001 have placed the overseas departments at a 
disadvantage, since the minimum hourly wage increased by 24% in the period 2001-2006.  

In addition, the overseas departments have invested heavily since 2001, laying out more than 
€ 45.5 million.  These  departments  are  subject,  inter  alia,  to  Community  emissions  and 

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safety  standards,  which  entail  a  considerable  non-productive  investment1.  While  total 
investment increased 2.6 times in the period 2001-2004, the percentage of the total accounted 
for by investment necessary to conserve the environment represents € 21.3 million, that is to 
say  47%  of  the  total.  This  investment  has  admittedly  been  partly  covered  by  the  structural 
funds2, which contribute to the initial investment by distilleries. This aid does not, however, 
offset  the  whole  of  the  investment  required  nor,  moreover,  does  it  cover  the  increase  in 
operating  costs  imposed  by  compliance  with  standards. It  should  be  borne  in  mind  that  this 
increase in costs in no way increases productivity but does increase the unit cost of every litre 
of  rum  produced:  depending  on  the  distillery,  the  costs  of  maintaining  and  operating  this 
equipment add 10 to 15% to the cost price of rum. Financial support is therefore required each 
distilling year. 

All these costs place overseas departments businesses in often awkward financial situations, 
with  a  regulatory  environment  that  is  growing  ever  stricter.  The  only  solution  for  the 
distilleries is to offset these costs against higher output by allowing them sufficient access to 
the mainland market, as the total volume shipped to the Community market fell 12% between 
2002 (176 791 HPA) and 2005 (155 559 HPA). 

The  overseas  departments  should  therefore  be  helped  to  maintain  their  position  on  the 
mainland  French  market  by  being  granted  an  extension  of  the  current  quota.  While  the 
consumption  of  rum  in  France  increased  by  20%  in  the  period  2000-2005,  rum  from  the 
overseas departments increased its market share by only 16%, constituting a relative fall in the 
market, whereas in the same period production costs increased. Since 2005 the total quota has 
been used. However, the reduced rate makes it possible to partly offset the high cost price and 
relatively  strong  degree  of  alcohol  of  rum  produced  in  the  overseas  departments  thus 
maintaining the distribution network and marketing positions.  

It  is  therefore  proposed  that  the  present  quota  be  raised  by  18 000 HPA  to  a  total  of 
108 000 HPA, which corresponds to the extrapolation over a six-year period of consumption 
trends recorded in mainland France in recent years. 

Given  the  need  to  create  a  climate  of  legal  certainty  for  operators  in  the  cane-sugar-rum 
sector,  in  view  of  the  depreciation  periods  for  plant  and  buildings,  and  in  the  interests  of 
consistency with other Community rules, the derogation should be granted to the end of 2012. 

•  General context 

By a Council Decision of 30 October 1995, France was authorised to apply to traditional rum 
produced in the overseas departments a rate of excise duty lower than the full rate applicable 
to  ethyl  alcohol.  This  measure  was  to  expire  on  31 December 2002.  It  was  extended  by  the 
Council  Decision  of  18 February 2002  in  respect  of  a  quota  of  90 000 HPA.  That  Decision 
stipulated  that  France  was  to  send  the  Commission  by  30  June  2006  at  the  latest  a  report 
enabling it to assess whether the reasons which justified the granting of the reduced rate still 
exist. France submitted a mid-term report on 27 December 2005 and requested a further quota 
for  traditional  rum.  The  French  government’s  request  was  examined  in  the  light  of 
Article 299(2) of the EC Treaty. 

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2 

By  way  of  example,  the  production  costs  of  cachaça  are  equivalent  to  the  cost  to  the  overseas 
departments of meeting environmental standards alone. 
Note that measures to increase capacity are not eligible for cofinanced modernisation aid. 

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•  Existing provisions in the area of the proposal 

Pursuant  to  Article 299(2)  of  the  EC  Treaty,  the  Treaty  applies  to  the  French  overseas 
departments,  the  Azores,  Madeira  and  the  Canary  Islands.  However,  taking  account  of  the 
structural  social  and  economic  situation  of  the  French  overseas  departments,  the  Azores, 
Madeira and the Canary Islands, which is compounded by their remoteness, insularity, small 
size,  difficult  topography  and  climate,  economic  dependence  on  a  few  products,  the 
permanence  and  combination  of  which  restrain  their  development,  the  Council,  acting  by  a 
qualified  majority  on  a  proposal  from  the  Commission  and  after  consulting  the  European 
Parliament, shall adopt specific measures aimed, in particular, at laying down the conditions 
of application of the EC Treaty to those regions, including common policies.  

Council Decision 2002/166/EC of 18 February 2002, taken on the basis of Article 299(2) of 
the EC Treaty, authorises France to apply a reduced rate of excise duty on "traditional" rum 
produced  in  its  overseas  departments.  The  reduced  rate  is  confined  to  an  annual  quota  of 
90 000 HPA. Compared with the rates of taxation applied to similar products not originating 
in the French overseas departments, the reduced rate may be lower than the minimum rate of 
excise duty on alcohol set by Directive 92/84/EEC, but may not be more than 50% lower than 
the  standard  national  excise  duty  on  alcohol.  The  Council  Decision  is  to  apply  until 
31 December 2009,  with  a  mid-term  report  to  be  drawn  up  by  June 2006  at  the  latest.  The 
proposed decision is aimed at replacing that Decision. 

•  Consistency with the other policies and objectives of the Union 

The specific measures provided for in Article 299(2) of the EC Treaty must take account of 
the  special  characteristics  and  constraints  of  the  outermost  regions  without  undermining  the 
integrity and the coherence of the Community legal order, including the internal market and 
common policies. This requirement has been met by a particularly thorough examination of 
the  French  government’s  request.  Accordingly,  whereas  the  French  government  initially 
asked  for  the  quota  to  be  increased  by  30 000 HPA,  the  Commission  believes  that  only 
18 000 HPA  are  warranted  under  Article 299(2)  of  the  EC  Treaty,  since that  corresponds  to 
the  extrapolation  over  a  six-year  period  of  the  consumption  trends  recorded  in  mainland 
France in recent years.  

When  examining  the  proposal,  the  Commission  also  assessed  the  impact  of  other  measures 
taken in favour of the cane-sugar-rum sector (the overhaul, in February 2006, of the common 
organisation  of  the  markets  in  the  sugar  sector  goes  some  way  towards  safeguarding  the 
industry’s  future),  and  in  particular  the  aid  measures  laid  down  in  Council  Regulation  (EC) 
No  247/2006  of  30 January 2006  laying  down  specific  measures  for  agriculture  in  the 
outermost regions of the Union, and their consistency with this proposal. 

For makers of rum from sugar production and rum from molasses, the aid provided under the 
sugar CMO serves to maintain the purchase price of the raw material in spite of falling sugar 
prices, but it does not reduce their production costs.  

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2) 

CONSULTATION  OF 
ASSESSMENT 

•  Consultation of interested parties 

INTERESTED 

PARTIES  AND 

IMPACT 

The  French  government’s  request  was  a  response  to  requests  from  the  economic  sectors 
concerned.  

•  Collection and use of expertise 

No recourse to external expertise has been necessary. 

•  Impact assessment 

Rums from the overseas departments currently account for about 20% of the total Community 
market.  

The  current  quota  represents  less  than  8.68%  of  the  Community  market,  and  the  proposed 
increase in the quota concerns no more than about 1.5% of that market for a six-year period. 
The increase amounts to 18 000 HPA, which corresponds to the extrapolation for a six-year 
period  of  trends  in  traditional  trade  flows  recorded  in  mainland  France  between  1999  and 
2005. 

Trends in release for consumption 

Release for consumption 

at the reduced rate of excise 
duty 

Non-quota 

Third 
countries 

Total 

2005 

2004 

2003 

2002 

2001 

2000 

90 000 

87 900 

86 400 

86 900 

86 200 

78 300 

Variation 2000/2005: 20 %  

Projection 

18 000 HAP 

35 500 

5 500 

131 000 

30 800 

26 200 

37 000 

26 500 

30 000 

1 000 

109 300 

The measure contributes to regional development. The reduced rate benefits the various actors 
in the cane-sugar-rum sectors as follows:  

–  on release to the market, it makes it possible for the mainland consumer to have access to 

the traditional rum of the overseas departments at an acceptable price;  

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–  it makes it possible to ensure an outlet for the production of the distilleries and at a better 

value;  

–  consequently,  it  ensures  the  maintenance  of  the  sugar  cane  industry,  continued 

employment, and contributes to the regional planning of the overseas regions.  

The French authorities estimate that the removal of the reduced rate would result in a loss of 
50%  to  the  trade  outlets  (mainly  in  mainland  France)  and  thus  the  closure  of  75%  of  the 
distilleries. Other effects would be felt on the profitability of the whole sector, growers and 
sugar refineries. In addition to the maintenance of approximately 22 000 direct employed in 
connection  with  the  production  of  rum,  it  contributes  indirectly  to  the  development  of  the 
production of products such as molasses or straw obtained from the cane and used as a source 
of  energy,  animal  feed  or  natural  fertilizers.  On  the  contrary,  the  tax  system  allows  for  the 
maintenance  of  11  distilleries  in  Guadeloupe,  9  in  Martinique,  3  in  Réunion  and  one  in 
Guyana. Only one distillery ceased operating during the period 2002-2005. 

Note that imports into mainland France of rums of other origins increased by over 500% over 
the period 2000-2005. The existence of special tax arrangements is not, therefore, preventing 
competing  rums  from  increasing  their  penetration  of  the  French  market.  In  addition,  the 
integrity  of  the  internal  market  is  respected:  the  special  tax  arrangements  granted  to  the 
overseas  departments  since  1995  have  not  affected  the  growth  in  market  share  of  rums  of 
other  origins  both  on  the  internal  market  (compared  with  1995,  the  overseas  departments’ 
share of the EU internal market (excluding France) has fallen by more than 50%, whereas the 
market share of ACP and third-country imports has risen by over 20%, accounting for about 
80% of the volume marketed in 2005) and the French market.  

The  proposed  increase  in  the  quota  eligible  for  a  reduced  rate  of  excise  duty  in  mainland 
France is not therefore likely to disturb the internal market or the common fiscal policy.  

3) 

LEGAL ELEMENTS OF THE PROPOSAL 

•  Summary of the proposed action 

The proposed decision authorises France to apply from 1 January 2007 to 31 December 2012 
a  reduced  rate  of  excise  duty  on  "traditional"  rum  produced  in  its  overseas  departments  in 
respect of a quota of 108 000 HPA. 

•  Legal basis 

Article 299(2) of the Treaty. 

•  Subsidiarity principle 

The  proposal  concerns  an  area  that  falls  under  exclusive  Community  competence.  The 
subsidiarity principle does not therefore apply. 

•  Proportionality principle 

The  proposal  complies  with  the  proportionality.  It  does  not  go  beyond  what  is  necessary  to 
offset the high costs associated with the production of traditional rum. 

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The French authorities also note that the reduced rate of excise duty on traditional rum of the 
overseas  departments,  has  not  encouraged  the  large  international  producers  setting  up  their 
own  production  in  the  overseas  departments  thus  seeking  to  profit  from  the  tax  advantage 
granted  to  the  sector.  In  addition,  the  last  international  company  stopped  operating  in 
Martinique in 2004; the others operate only in the ACP countries. 

All  this  evidence  demonstrates  the  proportionality  of  the  aid  arrangements  to  the  objective 
pursued, namely improving the competitiveness of the cane-sugar-rum sector, and shows that 
the  arrangements  have  not  affected  the  development  of  the  market  share  of  rums  of  other 
origins on the internal market. 

•  Choice of instruments 

Article 299(2)  of  the  Treaty  provides  for  specific  measures  for  the  outermost  regions  to  be 
adopted by decision of the Council. 

4) 

BUDGETARY IMPLICATION 

The proposal has no implication for the Community budget. 

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2007/0131 (CNS) 

Proposal for a 

COUNCIL DECISION 

authorising France to apply a reduced rate of excise duty on "traditional" rum 
produced in its overseas departments and repealing Council Decision 2002/166/EC of 
18 February 2002 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to the proposal from the Commission3, 

Having regard to the opinion of the European Parliament4, 

Whereas: 

(1) 

Pursuant to Article 299(2) of the EC Treaty, the Treaty applies to the French overseas 
departments, the Azores, Madeira and the Canary Islands. However, taking account of 
the  structural  social  and  economic  situation  of  the  French  overseas  departments,  the 
Azores,  Madeira  and  the  Canary  Islands,  which  is  compounded  by  their  remoteness, 
insularity, small size, difficult topography and climate, economic dependence on a few 
products,  the  permanence  and  combination  of  which  restrain  their  development,  the 
Council, acting by a qualified majority on a proposal from the Commission and after 
consulting the European Parliament, shall adopt specific measures aimed, in particular, 
at  laying  down  the  conditions  of  application  of  the  EC  Treaty  to  those  regions, 
including common policies. The Council is required, when adopting such measures, to 
take into account areas such as fiscal policy. When adopting these measures, it has to 
take  into  account  the  special  characteristics  and  constraints  of  the  outermost  regions 
without  undermining  the  integrity  and  the  coherence  of  the  Community  legal  order, 
including the internal market and common policies. 

(2) 

On the basis of these provisions of the EC Treaty, the Council adopted on 18 February 
2002,  in  respect  of  the  French  overseas  departments,  Decision  2002/166/EC 
authorising  France  to  apply  a  reduced  rate  of  excise  duty  on  "traditional"  rum 
produced in its overseas departments. Compared with the rates of taxation applied to 
similar products not originating in the French overseas departments, the reduced rate 
may  be  lower  than  the  minimum  rate  of  excise  duty  on  alcohol  set  by  Directive 
92/84/EEC,  but  may  not  be  more  than  50%  lower  than  the  standard  national  excise 

3 
4 

OJ C […], […], p. […]. 
OJ C […], […], p. […]. 

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duty on alcohol. The Council Decision was to apply until 31 December 2009, with a 
mid-term report to be drawn up by June 2006 at the latest. 

(3) 

On 27 December 2005 the French government presented a mid-term report indicating 
that  it  was  vital  that  the  tax  arrangements  for  traditional  rum  marketed  in  mainland 
France  be  maintained.  Furthermore,  in  view  of  developments  on  the  Community 
market  for  rum,  which  are  mainly  benefiting  products  originating  in  third  countries, 
and given the economic and social importance of the sector and the structural nature of 
the  production  conditions  that  diminish  the  sector’s  productivity  in  the  overseas 
departments  and  make  it  difficult  to  maintain  its  production  on  the  Community 
market,  France  has  asked  that  the  volume  and  duration  of  the  tax  arrangements  for 
traditional rum on the mainland market be extended.  

(4)  Maintaining  the  cane-sugar-rum  sector  in  the  overseas  departments  is  vital  to  their 
economic  and  social  balance.  In  the  three  departments  most  affected,  i.e.  Réunion, 
Guadeloupe  and  Martinique,  the  sector  produces  an  annual  turnover  of  over 
€ 250 million and provides some 40 000 jobs, including 22 000 direct jobs. It is also 
advisable  to  note  the  positive  impact  which  the  cultivation  of  cane  has  for  the 
safeguarding  of  the  environment  in  the  overseas  departments.  Together  with  the 
banana  sector,  this  sector  is  the  only  significant  exporting  activity  in  areas  whose 
exports  represent  not  more  then  7%  of  the  imports.  It  is  therefore  necessary  and 
justified for France to maintain, by way of derogation from Article 90 of the Treaty, a 
reduced rate of excise duty on "traditional" rum produced in its overseas departments 
in order to avoid endangering their development.  

(5) 

(6) 

(7) 

The  overhaul  of  the  common  organisation  of  the  markets  in  the  sugar  sector  in 
February 2006  goes  some  way  towards  securing  the  sector’s  future.  Thus,  there  are 
plans to introduce support measures under the Posei systems (Council Regulation (EC) 
No 247/2006 of 30 January 2006 laying down specific measures for agriculture in the 
outermost regions of the Union), in the form of both Community and national aid, in 
order  to  improve  the  competitiveness  of  the  overseas  departments’  cane-sugar-rum 
sector. However, these measures still do not offset the gradual dismantling of customs 
protection and maintain the overseas departments’ share of the rum market. 

Given  the  small  scale  of  the  local  market,  the  overseas  departments’  distilleries  can 
continue their activities only if they have sufficient access to the market in mainland 
France, which is the main outlet for their rum production (over 50% of the total).  

The  inability  to  compete  on  the  Community  market,  which  is  mainly  the  result  of 
increased market prices, originates from cost prices which have increased since 2001. 
Since  that  date  both  production  and  labour  costs  have  grown  a  lot  in  the  overseas 
departments. Moreover, overseas departments’ rums have to comply with Community 
regulatory standards, which calls for important non-productive investment. Since 2001 
investment in the overseas departments has exceeded € 45.5 million, over half of it to 
conserve the environment, representing 47% of the total. However, though part of this 
investment has been covered by structural funds,  this  is not  the case  of  the resulting 
operating  costs,  which,  depending  on  the  distillery,  can  add  about  10  to  15%  to  the 
cost price of rum.  

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(8) 

(9) 

All  these  costs,  which  have  increased  significantly  since  2001,  place  overseas 
departments’ businesses  in financial  difficulties. The only  way to  ensure the sector’s 
long-term survival is to offset these costs against greater output.  

Since  2002  the  total  volume  shipped  to  the  Community  market  has  fallen  by  12%, 
from 176 791 HPA to 155 559 HPA. 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.  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 sugar-cane-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. 

(10)  The  tax  advantage  authorised  by  the  present  decision  does  not  go  beyond  what  is 

necessary to address the high cost of production faced by traditional rum producers. 

(11) 

In order to ensure that the present decision does not undermine the single market, the 
quantities  of  rums  originating  in  the  overseas  departments  eligible  for  this  measure 
may  not,  as  before,  exceed  the  trade  flows  recorded  in  recent  years  for  the  different 
sources of supply. 

(12)  Given  the  need  to  create  a  climate  of  legal  certainty  for  operators  in  the 
cane-sugar-rum sector and in view of the depreciation periods for plant and buildings, 
and  in  the  interests  of  consistency  with  other  Community  rules  for  the  sector,  the 
derogation should be granted to the end of 2012. 

(13)  The  granting  of  such  a  duration  must,  however,  be  subject  to  the  condition  that  a 
mid-term report be produced so that the Commission can assess whether the reasons 
which  justify  the  granting  of  the  tax  derogation  still  apply  and,  if  need  be,  consider 
whether  the  duration  or  quantities  concerned  should  be  revised  in  the  light  of 
developments on the Community rum market. 

(14)  Council Decision 2002/166/EC should be replaced. 

(15)  This Decision is without prejudice to the possible application of Articles 87 and 88 of 

the Treaty, 

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Article 90  of  the  Treaty,  France  is  authorised  to  extend  the 
application on the French mainland, to “traditional" rum produced in its overseas territories, 
of  a  rate  of  excise  duty  lower  than  the  full  rate  for  alcohol  set  by  Article  3  of  Council 
Directive 92/84/EEC of 19 October 1992 on the approximation of the rates of excise duty on 
alcohol and alcoholic beverages. 

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Article 2 

The derogation referred to in Article 1 shall be confined to rum as defined in Article 1(4)(a) of 
Council  Regulation  (EEC)  No  1576/89  of  29  May  1989  laying  down  general  rules  on  the 
definition, description and presentation of spirit drinks, produced in the overseas departments 
from sugar cane harvested in the place of manufacture, having a content of volatile substances 
other  than  ethyl  and  methyl  alcohol  equal  to  or  exceeding  225  grams  per  hectolitre  of  pure 
alcohol and an alcoholic strength by volume of 40% vol. or more. 

Article 3 

1. 

2. 

The reduced rate of excise duty applicable to the product referred to in Article 2 shall 
be confined to an annual quota of 108 000 hectolitres of pure alcohol. 

The reduced rate may be lower than the minimum rate of excise duty on alcohol set 
by  Directive  92/84/EEC,  but  may  not  be  more  than  50%  lower  than  the  standard 
national excise duty on alcohol. 

Article 4 

By 30 June 2010 at the latest, France shall send the Commission a report to enable it to assess 
whether the reasons which justified the granting of the reduced rate still exist and, if need be, 
whether the quota needs to be adjusted in the light of developments on the market. 

This Decision shall apply from 1 January 2007 until 31 December 2012. 

Article 5 

Article 6 

1. 

2. 

Council Decision 2002/166/EC of 18 February 2002 is hereby repealed. 

References to the repealed Decision shall be construed as references to this Decision. 

Article 7 

This Decision is addressed to the French Republic. 

Done at Brussels,  

For the Council 
The President 

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