Report from the Commission to the Council on the application of the special arrangements concerning the AIEM tax applicable in the Canary Islands
Date: 2008-08-28
Institutions: European Commission
Subjects: CCT duties, Canary Islands, customs territory (EU), derogation from EU law, indirect tax, production, tariff nomenclature, tax exemption

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 28.8.2008 
COM(2008) 528 final 

REPORT FROM THE COMMISSION TO THE COUNCIL 

on the application of the special arrangements concerning the AIEM tax applicable in 
the Canary Islands 

(presented by the Commission) 

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REPORT FROM THE COMMISSION TO THE COUNCIL 

on the application of the special arrangements concerning the AIEM tax applicable in 
the Canary Islands 

TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

Background .................................................................................................................. 3 

Summary ...................................................................................................................... 3 

Analysis........................................................................................................................ 4 

Economic growth - activity and employment variables............................................... 4 

Remaining handicaps justifying the continued need for the special arrangements 
concerning AIEM......................................................................................................... 5 

3.3. 

Integrity and coherence of the Community legal order ............................................... 6 

4. 

General conclusion....................................................................................................... 7 

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1. 

BACKGROUND 

The provisions of the EC Treaty, which apply to outermost regions of the Community, such as 
the Canary Islands, in principle do not permit differences in taxation between local products 
and  products  sold  from  one  Member  State  to  another.  Article  299  (2)  of  the  EC  Treaty 
however envisages the possibility of introducing special measures to those regions because of 
the  existence  of  permanent  handicaps  affecting  the  social  and  economic  situation  of  those 
regions.  

In the Council Decision of 20 June 2002 (2002/546/EC), taken on the basis of Article 299(2) 
of  the  EC  Treaty,  the  Kingdom  of  Spain  was  authorised  from  1  January  2002  until  31 
December  2011  to  exempt  or  reduce  partially  from  the  AIEM  tax  ("Arbitrio  sobre  las 
Importaciones  y  Entregas  de  Mercancias  en  las  islas  Canarias")  some  products  produced 
locally in the Canary Islands. The AIEM tax is generally imposed on products imported into 
or obtained in the Canary Islands. In the annex to the Council Decision is the list of products 
to  which  the  above  mentioned  special  measure  applies.  The  difference  in  taxation  between 
goods taxed on a regular basis and those to which is applied an exemption or partial reduction 
cannot be higher then 5%, 15% or 25% depending on the product. 

In the Council Decision of 20  June  2002  the  reasons  underlying the adoption of the special 
arrangements were presented. The main sources of the problems faced by the Canary Islands 
are  isolation  and  fragmentation  of  the  market.  This  causes  various  difficulties  mainly 
connected  with  higher  production  costs  (transport,  energy,  supplies  of  raw  materials, 
treatment of waste, etc). It also contributes to 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  disadvantages  faced  by  the 
Canary  Islands  and  thereby  allowing  the  economy  of  the  Islands  to  develop.  They  were 
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  the  Council  Decision  of  20  June  2002  mentioned  above,  obliges  the  Spanish 
authorities  to  present  to  the  Commission  at  the  latest  by  31  December  2005  a  report  on  the 
application of the arrangements concerning the AIEM tax. This is necessary in order to assess 
the impact of the measures taken and their contribution to the  promotion  or maintenance of 
local  economic  activities  with  account  being  taken  of  the  handicaps  affecting  the  outermost 
regions.  This  report,  submitted  to  the  Commission  in  the  first  days  of  January  2006,  is 
annexed to the present report (Annex 1). A summary of this report, in English, is annexed as 
well (Annex 2). 

In addition, Article 2 of the mentioned Council Decision requires the Commission to present a 
report to 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.  

2. 

SUMMARY 

The  purpose  of  this  report  is  to  check  the  impact  of  the  measures  taken  under  the  Council 
Decision of 20 June 2002 (2002/546/EC) and to assess their contribution to the promotion or 
maintenance of local economic activities with account being taken of the handicaps faced by 
the Region. 

The greatest handicaps faced by the Region are connected with isolation, the small size of the 
market and its fragmentation. The Islands, because of those limitations, have a higher cost of 

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production  and  transport,  and  higher  environmental  costs.  Also,  they  are  unable  to  benefit 
from  globalisation.  The  AIEM  aims  at  reducing  those  disadvantages  of  the  market  of  the 
Canary Islands.  Data provided by  the Spanish Government shows  that  positive  effects were 
observed  after  the  special  measures  were  introduced,  however  the  problems  underlying  the 
special tax scheme continue to exist. Therefore continuation of special measures is justified.  

The analysis in the report takes into account the special characteristics and constraints of the 
region and the objective not to undermine the integrity and coherence of the community legal 
order, including the internal market and common policies. 

The Commission concludes that, given the data provided by the Spanish authorities and the 
absence  of  any  significant  complaints  from  the  stakeholders,  the  AIEM  is  functioning  in  a 
satisfactory manner. Therefore, the current rules can remain in force, without any necessity to 
amend the provisions of this Decision. 

3. 

ANALYSIS  

This analysis is based on the data provided by the Spanish Authority in its report presented in 
accordance  with  Article  2.  The  report  describes  variable  factors,  and  among  them  indicates 
changes that took place after the introduction of special measures for the AIEM tax. 

3.1. 

Economic growth - activity and employment variables 

During the analysed period, when special arrangements for the AIEM tax were in force, many 
positive tendencies were observed. 

Firstly,  the  growth  in  the  Canaries'  economy  has  been  noted.  The  industrial  sector  in  the 
Canaries has grown faster (especially in the construction sector) than in the rest of Spain and 
this  has  produced  an  increase  in  the  importance  of  the  Canaries'  industry  in  the  Spanish 
industrial sector. Examination of business activity shows that the number of AIEM businesses 
(covered  by  special  measures  introduced  under  the  Council  Decision  of  20  June  2002) 
gradually  increased  in  the  period  2001-03  to  involving  nearly  60%  of  all  manufacturers.  It 
should  be  underlined  that  the  increase  in  number  of  these  AIEM  businesses  was  more 
important than that of other manufacturing firms in the Canaries. In years 2001 to 2003 the 
number  of  enterprises  manufacturing  products  taxed  only  on  imports  increased  by  12,5  %. 
This  increase  was  larger  than  that  of  the  manufacturing  industry,  that  in  the  same  period 
increased only by 2,6 %. 

With regard to turnover, the net amount for AIEM businesses showed a tendency to increase 
more, especially in the year 2004, than in other manufacturing activities. 

Certain  diversification  of  industry  in  the  manufacturing  sector  was  observed  after  the 
introduction of the AIEM. Several new production lines were installed in production sites in 
the  Canary  Islands.  Also  some  new  products  and  brands  were  introduced  such  as  new 
bevrages and tobacco brands, bottled water and packaging materials. 

As for the investment rate, for the AIEM companies it increased 13,7% during the years 2001 
to  2003  (Net  investment  of  AIEM  businesses  in  million  euro:  in  2001  –  114,44;  in  2002  – 
125,28; in 2003 – 130,14). Net investment in all manufacturing industries increased greatly in 
2002 but fell in 2003 (Net investment of all manufacturing businesses in million euro: in 2001 
– 209,58; in 2002 – 260,29; in 2003 – 238,86).  

AIEM  had  also  an  impact  on  employment.  In  the  years  2002  and  2003,  the  number  of  jobs 
created  in  AIEM  activities  increased  at  a  higher  rate  than  in  the  rest  of  the  manufacturing 
industry. The AIEM employment constituted almost 63% of total manufacturing employment 
(Number of AIEM jobs: in 2001 – 22 618; in 2002 – 23 721; in 2003 – 24 561 / Number of all 

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manufacturing  jobs:  in  2001  –  37  112;  in  2002  –  38  571;  in  2003  –  39  107).  During  those 
years the ratio of AIEM turnover to all manufacturing industry turnover stayed at similar level 
of around 51,5 % (in 2001 – 51,8 %, in 2002 – 51,5%, in 2003 – 51,3 %). The preliminary 
results for the year 2004 suggested a fall in employment in AIEM activities, but this fall was 
less marked than the decrease generally observed in the Canary Islands. 

In  general  terms,  the  evolution  of  the  consumption  price  index  (CPI)  has  been  more 
favourable  in  the  Canary  Islands  than  in  the  rest  of  the  Spain.  The  inflation  differential  in 
2004 was of 0.7%. Regarding the evolution of the CPI in the Canary Islands in comparison to 
the CPI of the AIEM product basket, the AIEM items showed a better evolution. While the 
CPI  increased  by  2.5%  in  the  period  2001-2004,  it  increased  only  by  1.8%  for  AIEM 
products.  Within  AIEM  products,  Food  and  beverages  and  tobacco  experienced  particularly 
low inflation rates 

The AIEM tax revenue is to be incorporated into the Canary Islands' economy and used for an 
economic and social development strategy involving the promotion of local activities (recital 
No 23 of the Council Decision 2002/546/EC). The Spanish report demonstrates that the actual 
expenditures  of  the  Canaries'  public  bodies  for  the  promotion  of  local  activities  exceed  the 
revenues generated by the AIEM.  

The  above  described  trends  indicate  that  there  have  been  positive  changes  in  the  Canaries' 
economy, after introducing special measures for the AIEM tax under the Council Decision of 
20  June  2002.  In  many  respects  (overall  growth,  turnover,  diversification,  investments, 
employment)  the  situation  of  businesses  to  which  exemption  or  partial  reduction  from  the 
AIEM tax for goods produced locally is applied, has improved. This is especially true when 
compared with businesses not affected by the application of special measures for the AIEM 
tax. 

The  evidence  presented  thus  indicates  that  the  Council  Decision  of  20  June  2002  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 immediately below. 

3.2. 

Remaining  handicaps  justifying  the  continued  application  of  the  special 
arrangements concerning AIEM 

The local industry remains in a disadvantaged position. 

There are certain permanent handicaps of the Region which hinder the economic development 
of the Canary Islands: geographic isolation, fragmentation and the small  size of the market. 
Those  circumstances  affect  many 
the  economic 
development of the area. 

important  aspects  connected  with 

One  of  the  main  handicaps  is  the  limitation  of  the  means  of  transport  (only  by  air  or  sea). 
Consequently  the  cost  of  transport  is  much  higher  than  the  average  cost  in  Spain.  This  is 
especially  true  in  relation  to  transport  of  freight  and  to  a  lesser  extent  when  it  concerns 
passenger transport. The transport of goods has in practice many restrictions connected with 
weak price competition and delays in deliveries. Therefore additional costs for the Canaries' 
business connected with transport can be expressed both in money and time. Such a restriction 
leads to a lower efficiency and higher costs of production in the Canaries.  

Other  aspects  connected  with  the  production  process  also  lead  to  higher  costs.  Companies 
depend mostly on imported raw materials and energy (more then 70 % of their inputs are from 
outside the Islands, whereas in the rest of Spain such imports do not exceed 40 %). In practice 

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they must build up additional stocks and quite often are faced with overstocking. As a result 
some raw materials have higher costs. For example, for water the total average cost per cubic 
meter is 1,68 Euro. This price is the most expensive in Spain where the average cost for the 
whole country is 0,86 Euro. 

Extra  costs  for  companies  are  also  connected  with  such  factors  as  specialised  maintenance 
services, training for managers and technicians, or promotion of the business. As the market is 
small, specialists must be brought from further distances. The same applies when staff need to 
attend training, attend a business fair or conference, or undertake a business trip in order to 
promote goods or sign a new contract.  

Furthermore, costs connected with the disposal of industrial waste are also high. Many kinds 
of waste (including toxic waste) cannot be treated in the Canary Islands because there are a 
limited  number  of  specialised  recycling  plants.  Therefore  very  often  waste  has  to  be 
transported outside of the Islands. 

The analysis of price levels shows that for certain groups of AIEM products (food, medicines 
and perfume) price levels are generally higher in the Canaries than in the rest of Spain. The 
higher prices reflect the additional burden on industrial activity in the Canaries. This means 
that  the  reduction  or  elimination  of  this  protection  would  reduce  the  competitiveness  of 
Canaries'  industrial  production  vis-à-vis  imported  products  even  further,  and  thus  the 
profitability of this production, and the continued existence of at least some of the activities 
concerned may directly be put at risk.  

Given  the  geographical  constraints,  the  market  of  the  Canaries  remains  very  limited  in  its 
nature.  The  contribution  of  exports  to  total  GDP  is  the  lowest  of  all  the  Autonomous 
Communities  of  Spain.  The  Canaries,  in  comparison  to  the  rest  of  Spain,  have  the  smallest 
number  of  firms  involved  in  the  export  activity.  Additionally  local  firms  are  very 
interdependent:  closing  one  firm  has  a  negative  effect  on  others  businesses.  Moreover,  the 
average  size  of  the  Canaries'  industrial  businesses  in  terms  of  employees  tends  to  be  lower 
then for the whole country. 

Constraints  experienced  by  the  Canarias  market  cause  low  diversification  of  the  whole 
economy.  This  means  that  for  the  market  there  is  no  balance  between  different  sectors  of 
industry.  The  predominance  of  the  service  sector  (especially  tourism)  remains  at  a  similar 
level  and  has  almost  not  changed  over  the  last  few  years.  In  2001  the  contributions  of  the 
service sector to the total Gross Value Added was 79% and in 2004 it was 78%. In Spain, for 
both periods, it remained at 66%.  

Such a bias puts the market in a weaker position. 

3.3. 

Integrity and coherence of the Community legal order 

Data presented in the analysis of the report shows that the scheme in question also fulfils the 
requirement  whereby  Council  measures  under  Article  299(2)  of  the  Treaty  shall  not 
undermine the integrity and coherence of the Community legal order. 

Measures  applied  in  accordance  with  the  Council  Decision  of  20  June  2002  (2002/546/EC) 
are necessary and proportionate to the objectives set by this decision. 

From  the  start  measures  adopted  in  the  framework  the  Council  Decision  were  targeted  and 
aimed  at  the  most  vulnerable  industrial  products  only.  Figures  presented  by  the  Spanish 
government  show 
this  outermost  region  are  not 
overcompensated by the application of allowed exemptions to specified AIEM products. The 

that  additional  costs  faced  by 

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measures in place are thus proportionate to the objectives set. Details have been set out in the 
Commission decision of 16 April 2008 relating to the State aid aspect of this file1. 

Moreover,  it  results  from  the  additional  study  presented  by  the  Spanish  government 
(IMPACTO  DE  LOS  APE  EN  CANARIAS  of  26  September  2006)  that  trade  relations 
between the Canary Islands and ACP countries are of a negligible nature and therefore special 
arrangements for the AIEM tax cannot be seen as an obstacle in the context of the European 
Partnership  Agreement  under  negotiation  between  the  EU  and  West  Africa  and  intended  to 
increase trade and investment between them. 

In addition, the Commission did not receive any significant complaints on a possible negative 
impact of the AIEM on the functioning of the internal market. In particular, the Commission 
did not receive any information indicating that the application of the AIEM overcompensate 
costs connected with the permanent handicaps affecting the Canary Islands. 

In conclusion to the above findings it appears that the current arrangements work properly and 
should  be  kept  in  force  in  order  to  compensate  appropriately  the  difficult  position  of  the 
Canary Islands. 

4. 

GENERAL CONCLUSION 

The  special  measures  introduced  by  the  Council  Decision  of  20  June  2002  (2002/546/EC) 
have had positive effects on the economic and social environment of the Islands. The analysis 
of trends of the given indicators shows that the objective of promotion or maintenance of local 
economic activities has been fulfilled. 

Given  the  handicaps  connected  with  the  specific  situation  of  the  Canary  Islands,  the 
continuation of these measures is still justified. In particular, it appears that their situation is 
still disadvantaged in many ways, despite positive tendencies. 

The information available confirms that the integrity and coherence of the  community  legal 
system  is  not  undermined  by  the  special  arrangements  for  the  AIEM  tax.  The  measures  are 
well targeted (only at the most sensitive products) and limited to what is necessary to achieve 
the  objectives  set  (compensation  for  the  handicaps  of  the  region  such  as  remoteness,  small 
size  and  fragmentation  of  the  market).  All  the  stakeholders  are  satisfied  by  the  current 
arrangements,  which  do  not  disturb  the  proper  functioning  of  the  Internal  Market.  On  the 
other  hand,  the  reduction  or  elimination  of  this  protection  would  reduce  dramatically  the 
profitability  of  manufacturing  in  the  Canaries  in  industrial  products.  In  some  cases  it  might 
even provoke the cessation of some domestic production. 

The Commission concludes that the AIEM tax, as introduced under the Council Decision of 
20  June  2002,  is  still  justified  in  its  present  form.  Therefore,  no  proposal  from  the 
Commission for adapting the existing provisions of this Council Decision is required. 

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Case NN 22/2008 

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