Proposal for a Council Decision authorising Portugal to apply reduced rates of excise duty in the autonomous region of Madeira on locally produced and consumed rum and liqueurs and in the autonomous region of the Azores on locally produced and consumed liqueurs and eaux-de-vie
Date: 2009-06-09
Institutions: European Commission
Subjects: Azores, Madeira, Portugal, alcoholic beverage, excise duty, spirits

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 9.6.2009 
COM(2009) 259 final 

2009/0075 (CNS) 

Proposal for a  

COUNCIL DECISION 

authorising Portugal to apply reduced rates of excise duty in the autonomous region of 
Madeira on locally produced and consumed rum and liqueurs and in the autonomous 
region of the Azores on locally produced and consumed liqueurs and eaux-de-vie 

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EXPLANATORY MEMORANDUM 

1) 

CONTEXT OF THE PROPOSAL 

•  Grounds for and objectives of the proposal 

Council Decision 2002/167/EC of 18 February 20021 authorised Portugal to apply a reduced 
rate of excise duty in the autonomous region of Madeira on locally produced and consumed 
rum  and  liqueurs  and  in  the  autonomous  region  of  the  Azores  on  locally  produced  and 
consumed liqueurs and eaux de vie. According to this decision, Portugal could apply to these 
products  a  rate  of  excise  duty  lower  than  the  full  rate  on  alcohol  laid  down  in  Article  3  of 
Directive 92/84/EEC2, and lower than the minimum rate of excise duty on alcohol set by this 
Directive  but  not  more  than  75  %  lower  than  the  standard  national  excise  duty  on  alcohol. 
This  measure  was  applicable  from  1  January  2002  until  31  December  2008.  By  its  requests 
dated 16 June 2008 and 20 June 2008, Portugal has sought an extension of this authorisation 
until 31 December 2013 

On  5  November  2008  and  25  February  2009,  following  requests  from  the  Commission's 
services,  the  Portuguese  authorities  have  provided  additional  information  aiming  to 
demonstrate that it is necessary to extend the reduced rate of excise duty beyond the end of 
2008 in order to maintain the production of rum, liqueurs and/or eaux-de-vie and associated 
agricultural activities. 

At  present,  eight  companies  are  registered  to  produce  rum  and/or  liqueurs  in  Madeira;  nine 
companies  produce  liqueurs  and  thirty-eight  companies  produce  eaux-de-vie  in  the  Azores. 
The largest of all producers, a producer of rum and liqueurs in Madeira, is foreseen to produce 
a total of 558.02 hectolitres of pure alcohol on average per annum in the period 2009-2013. In 
2007,  the  economic  operators  in  the  autonomous  region  of  Madeira  produced  a  total  of 
1304.99 hl of rum and 419.95 hl of liqueurs (alcoholic strength 100 %). In the same year, the 
operators  in  the  autonomous  region  of  Azores  produced  1680 hl  of  liqueurs  (alcoholic 
strength  20 %)  and  994  hl  of  eaux-de-vie  (alcoholic  strength  between  37.5%  and  42 %). 
Practically all production is sold on the regional markets, with only a small proportion being 
exported (for Azorean liqueurs: ±10 % of output is exported mainly to North America). 

The  local  industry  employs  around  130  workers  in  Madeira  and  around  90  workers  in  the 
Azores. In Madeira, the cultivation and processing of sugar cane and fruits provides work for 
around 1 000 family-owned agricultural holdings.  

In 2007 the market share of the products benefitting from a reduced rate of excise duty was 
lower than that of similar products imported or supplied from other parts of the Community 
(20.3 %  in  Madeira;  38.9 %  in  the  Azores)  from  which  these  products  therefore  face  strong 
competition.  Furthermore,  notwithstanding  the  application  of  a  reduced  rate  of  excise  duty, 
the  average  retail  selling  price  (including  tax)  in  Madeira  and  in  the  Azores  of  locally 
produced  rum,  liqueurs  or  eaux-de-vie  is  higher  than  that  of  similar  products  from  outside 
these regions.  

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OJ L 055, 26.2.2002, p. 0036 - 0037. 
Council Directive 92/84/EEC of 19 October 1992 on the approximation of the rates of excise duty on 
alcohol and alcoholic beverages, OJ L 316, 31.10.1992, p. 29 

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The  main  handicaps  faced  by  the  producers  of  rum,  liqueurs  and/or  eaux-de-vie  arise  from 
additional costs linked to the factors identified in Article 299(2) of the Treaty (i.e. remoteness, 
insularity, small size, difficult topography, and climate). 

Raw  materials  of  agricultural  origin  (according  to  the  case,  sugar  cane,  fruit,  plants,  honey, 
cream, milk and wine) are more expensive than under normal conditions of production. This 
is due to the small size and fragmented nature of the agricultural holdings and the ensuing low 
degree  of  mechanisation.  In  the  case  of  Madeira,  in  addition,  output  from  the  processing  of 
sugar  cane  is  lower  than  in  other  outermost regions,  owing  to  topography,  climate,  soil  and 
artisanal production. 

The transport to the islands of certain raw and packaging materials not produced locally leads 
to additional cost, as compared to the transport merely of the finished product. In the case of 
the Azores, the insularity is twofold, since the islands are spread over a distance of 600 km, 
causing further additional cost for inter-island transports. Finally, the transport and installation 
of processing, production and packaging equipment is more costly in the territories concerned 
than on the mainland, due to their remoteness and insularity. 

Additional costs for the storage of finished products arise because local consumption does not 
absorb output as it materialises, but stretches throughout the year. 

Travel  costs  for  visiting  suppliers  and  customers  on  the  mainland  have  to  be  taken  into 
account, as well as the extra costs for the shipment of samples for the purposes of laboratory 
analysis (in the case of the Azores). 

Per  unit  costs  are  increased  through  other  factors  linked  to  the  small  size  of  the  regional 
market,  such  as  the  need  to  maintain  large  stocks  of  raw  materials  and,  importantly,  the 
unfavourable  relationship  between  fixed  costs  and  output.  This  unfavourable  relationship 
concerns  the  over-sizing  of  equipment  but  also,  to  some  extent,  costs  necessary  to  meet 
environmental  norms.  In  this  regard,  rum  producers  in  Madeira  bear  an  additional 
disadvantage since they are obliged to assume the cost of treating waste from the processing 
of sugar cane whereas producers in other regions can recycle these by-products. 

Other additional costs applicable to all enterprises located in the islands, as compared to those 
located on the mainland, have equally to be borne by the producers concerned. This covers in 
particular  labour  costs  (the  minimum  wage  is  5%  higher  in  the  two  regions  concerned)  and 
energy costs, but also (in the case of Madeira) construction costs and the cost of land. 

To  demonstrate  that  the  rate  of  the  reduction  of  excise  duty  does  not  go  beyond  what  is 
necessary to offset the additional costs caused by the factors identified in Article 299(2) of the 
Treaty  (i.e.  remoteness,  insularity,  small  size,  difficult  topography,  climate,  economic 
dependence on a few products), the Portuguese authorities have provided a quantification of 
the additional costs linked to these handicaps which indicates that the additional costs per unit 
of product exceed the value of the corresponding reduction of excise duty by approximately 
between 7 % to 19 %.  

The application of a reduced rate of excise duty can be therefore considered as necessary for 
producers in this sector to be able to maintain their competitive position in relation to similar 
products from other parts of the Community.  

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Having  considered  both  the  legal  certainty  which  is  required  for  local  producers  to  develop 
their  commercial  activities  and  the  need  to  set  a  time  limit  on  tax  derogations,  the 
Commission proposes to authorise an extension of the derogation for a period of five years. It 
is proposed, though, to require Portugal to submit a mid-term report by 31 December 2011 to 
enable the Commission to assess whether the reasons that justified the granting of the reduced 
rate still exist. 

•  General context 

The Community framework concerning excise duty on alcohol and alcoholic beverages is laid 
down  in  two  Directives.  Council  Directive  92/83/EEC  of  19  October  1992  on  the 
harmonization  of  the  structures  of  excise  duties  on  alcohol  and  alcoholic  beverages3  lays 
down  common  definitions  of  the  products  subject  to  the  duty,  specifies  the  method  of 
calculating the duty and the criteria under which certain products may qualify for exemptions 
or reduced rates. Council Directive 92/84/EEC, referred to above, lays down minimum rates 
of duty for each product category.  

Decision 2002/167/EC authorised Portugal to apply a reduction in the rate of excise duty on 
rum and liqueurs locally produced and consumed in the autonomous region of Madeira and on 
liqueurs  and  eaux-de-vie  locally  produced  and  consumed  in  the  autonomous  region  of  the 
Azores. The reduced rate applied must not be more than 75 per cent lower than the standard 
national excise duty on alcohol. This decision ceased to have effect on 31 December 2008. 

•  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 (the outermost regions). However, 
taking account of the structural social and economic situation of the outermost regions, 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. 

•  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.  As  mentioned  above,  the  tax  reduction  is  limited  to  what  is  necessary  to 
offset  the  handicaps  borne  by  the  locally  produced  and  consumed  products  concerned. 
Bearing this in mind, as well as the fact that the volumes at stake remain modest and that the 
tax  advantage  remains  limited  to  consumption  in  the  regions  concerned,  the  effects  on  the 
internal market are very limited, so that the above requirement of Article 299(2) is fulfilled. 

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OJ L 316, 31.10.1992, p. 21 

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2) 

CONSULTATION  OF 
ASSESSMENT 

INTERESTED 

PARTIES  AND 

IMPACT 

•  Consultation of interested parties  

The  Portuguese  government’s  request  was  a  response  to  demands  from  the  economic 
operators concerned.  

•  Collection and use of expertise 

No recourse to external expertise has been necessary. 

•  Impact assessment 

The economic  impact of the proposal concerns in essence producers of rum and liqueurs in 
Madeira  and  producers  liqueurs  and  eaux-de-vie  in  the  Azores  and  can,  therefore,  be 
considered as minimal. 

If  such  producers  were  to  lose  the  benefit  of  the  reduced  rate  of  excise  duty,  the  resulting 
increase  in  retail  selling  price  would  risk  jeopardising  the  subsistence  and  survival  of  these 
economic sectors, as well as employment directly and indirectly connected thereto.  

3) 

LEGAL ELEMENTS OF THE PROPOSAL 

•  Summary of the proposed action 

It  is  proposed  to  authorise  Portugal  to  apply,  from  1  January  2009  to  31 December 2013,  a 
reduced rate of excise duty applicable to locally produced and consumed rum and liqueurs in 
the autonomous region of Madeira and to locally produced and consumed liqueurs and eaux-
de-vie  in  the  autonomous  region  of  the  Azores.  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 75 per cent lower than the standard national excise duty on alcohol. This corresponds to 
the  authorisation  granted  from  1  January  2002  until  31  December  2008  by  Decision 
2002/167/EC. 

•  Legal basis 

Article 299 (2) of the Treaty. 

•  Subsidiarity principle 

Derogations  from  rules  of  the  Treaty  in  accordance  with  Article  299(2)  thereof  fall  under 
exclusive Community competence. The subsidiarity principle does not therefore apply. 

•  Proportionality principle 

The  proposal  complies  with  the  proportionality  principle.  It  does  not  go  beyond  what  is 
necessary  to  offset  the  high  costs  associated  with  production  of  rum  and  liqueurs  in  the 
autonomous region of Madeira and production of liqueurs and eaux-de-vie in the autonomous 
region of Azores (cf. above). 

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•  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 IMPLICATIONS 

The proposal has no implication for the Community budget. 

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2009/0075 (CNS) 

Proposal for a  

COUNCIL DECISION 

authorising Portugal to apply reduced rates of excise duty in the autonomous region of 
Madeira on locally produced and consumed rum and liqueurs and in the autonomous 
region of the Azores on locally produced and consumed liqueurs and eaux-de-vie 

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 Commission4, 

Having regard to the opinion of the European Parliament5, 

Whereas: 

(1) 

Through  Council  Decision  2002/167/EC  of  18  February  20026  Portugal  has  been 
authorised to apply a reduced rate of excise duty in the autonomous region of Madeira 
on locally produced and consumed rum and liqueurs and in the autonomous region of 
Azores on locally produced and consumed liqueurs and eaux-de-vie. The application 
of  a  reduced  rate  of  excise  duty  on  these  products  was  considered  necessary  for  the 
survival of the local industry producing and marketing these products. In view of the 
high  cost  of  those  activities  arising  mainly  from factors inherent to their situation as 
outermost regions (remoteness, insularity, small size, topography and climate) it was 
considered that only a reduction of the rate of excise duty on the locally produced and 
consumed products concerned could enable them to continue to compete on an equal 
footing with similar products imported or supplied from other parts of the Community 
and thus ensure the survival of the industries. According to the same Decision, thus, 
Portugal could apply to these products a rate of excise duty lower than the full rate on 
alcohol laid down in Article 3 of Directive 92/84/EEC7, and lower than the minimum 
rate of excise duty on alcohol set by this Directive but not more than 75 % lower than 
the  standard  national  excise  duty  on  alcohol.  This  measure  was  applicable  from  1 
January 2002 until 31 December 2008.  

(2) 

By  requests  dated  16  June  2008  and  20  June  2008,  Portugal  has  sought  an 
authorisation subject to the same terms, for the time period from 1 January 2009 until 
31 December 2013. 

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OJ C , , p. . 
OJ C , , p. . 
OJ L 55, 26.2.2002, p. 36. 
Council Directive 92/84/EEC of 19 October 1992 on the approximation of the rates of excise duty on 
alcohol and alcoholic beverages, OJ L 316, 31.10.1992, p. 29 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

The granting of the new authorisation sought is justified in order to avoid endangering 
the  development  of  these  outermost  regions.  The  local  industry  employs  around  130 
workers in Madeira and around 90 workers in the Azores. In Madeira, the cultivation 
and processing of sugar cane and fruits provides work for around 1 000 family-owned 
agricultural holdings. Faced with difficulties to export outside the regions, the regional 
markets are the only possible outlets to sell these products. 

A  reduction  of  the  rate  of  excise  duty  should  continue  to  be  authorised  at  the  level 
requested  to  help  offset  the  competitive  disadvantage  which  distilled  alcoholic 
beverages produced in Madeira and in the Azores face as a result of higher production 
and marketing costs.  

Indeed,  raw  materials  of  agricultural  origin  are  more  expensive  than  under  normal 
conditions  of  production,  due  to  the  small  size,  fragmented  nature  and  low 
mechanisation  of  agricultural  holdings.  In  the  case  of  Madeira,  in  addition,  output 
from the processing of sugar cane is lower than in other outermost regions, owing to 
topography,  climate,  soil  and  artisanal  production.  The  transport  to  the  islands  of 
certain raw and packaging materials not produced locally leads to additional cost, as 
compared to the transport merely of the finished product. In the case of the Azores, the 
insularity is twofold, since the islands are widely spread. Transport and installation of 
equipment  in  these  remote  and  insular  regions  further  increase  the  additional  costs. 
The  same  applies  to  certain  necessary  travels  and  shipments  to  the  mainland. 
Additional  costs  are  also  required  for  the  storage  of  finished  products  as  local 
consumption  does  not  absorb  output  as  it  materialises,  but  stretches  throughout  the 
year.  The  small  size  of  the  regional  market  increases  per  unit  costs  in  various  ways, 
notably through the unfavourable relationship between fixed costs and output, both as 
regards equipment and costs necessary to meet environmental norms. Moreover, Rum 
producers in Madeira have to treat waste from the processing of sugar cane, whereas 
producers in other regions can recycle these products. Finally, the producers concerned 
also  bear  extra  costs  generally  supported  by  the  local  economies,  in  particular 
increased labour and energy costs. 

The 75 % reduction does not go beyond what is necessary to counterbalance the levels 
of  additional  costs  that  are  incurred  by  operators  as  a  result  of  the  said  particular 
characteristics of Madeira and of the Azores as outermost regions. 

A  careful  examination  of  the  situation  shows  thus  that  it  is  necessary  to  grant 
Portugal's request, if the alcohol industry is to be maintained in the outermost regions 
concerned.  

Since the tax advantage is limited to what is necessary to offset additional costs and 
since  the  volumes  at  stake  remain  modest  and  the  tax  advantage  limited  to 
consumption in the regions concerned, the measure does not  undermine the integrity 
and coherence of the Community legal order. 

(9)  Weighing  the  need  to  set  a  time  limit  on  tax  derogations  against  the  need  for  local 
economic  operators  to  obtain  the  requisite  security  to  develop  their  commercial 
activities, it is appropriate to grant the authorisation for a period of five years.  

(10) 

It  should  be  ensured  that  Portugal  can  apply  the  reductions  in  question  as  from  the 
expiry  of  the  analogous  authorisation  granted  through  Decision  2002/167/EC  for  the 

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previous  period.  The  new  authorisation  requested  should  therefore  be  granted  with 
effect from 1 January 2009. 

(11)  The submission of a mid-term report should be required, so that the Commission can 
assess whether the conditions justifying the granting of such derogation continue to be 
fulfilled. 

(12)  This Decision shall not prejudice 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, Portugal is hereby authorised to apply a 
rate  of  excise  duty  lower  than  the  full  rate  on  alcohol  laid  down  in  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  in  the  autonomous  region  of  Madeira,  to  locally  produced 
and  consumed  rum  and  liqueurs,  and  in  the  autonomous  region  of  the  Azores,  to  locally 
produced and consumed liqueurs and eaux-de-vie. 

Article 2 

The derogation referred in Article 1 shall be confined: 

(1) 

in Madeira 

(a) 

to rum as defined in category 1 of Annex II of Regulation (EC) No 110/2008 of 
the  European  Parliament  and  of  the  Council  of  15  January  2008  on  the 
the  protection  of 
definition,  description,  presentation, 
geographical  indications  of  spirit  drinks  and  repealing  Council  Regulation 
(EEC)  No  1576/898,  having  the  geographical  indication  "Rum  da  Madeira" 
referred to in category 1 of Annex III of that Regulation,  

labelling  and 

(b) 

to  liqueurs  and  'crème  de'  as  defined  in  categories  32  and  33  of  Annex  II  of 
Regulation (EC) No 110/2008 produced from regional fruit or plants;  

(2) 

in the Azores 

(a) 

(b) 

to  liqueurs  and  'crème  de'  as  defined  in  categories  32  and  33  of  Annex  II  of 
Regulation (EC) No 110/2008 produced from regional fruit or raw materials,  

to  eau-de-vie  made  from  wine  or  grape  marc  having  the  characteristics  and 
qualities  defined  in  categories  4  and  6  of  Annex  II  of  Regulation  (EC)  No 
110/2008. 

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OJ L L 39, 13.2.2008, p. 16 

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Article 3 

The  reduced  rate  of  excise  duty  applicable  to  the  products  referred  to  in  Article  1  may  be 
lower than the minimum rate of excise duty on alcohol set by Directive 92/84/EEC, but may 
not be more than 75 % lower than the standard national excise duty on alcohol. 

By 31 December 2011 at the latest, Portugal shall send the Commission a report to enable it to 
assess whether the reasons which justified the granting of the reduced rate still exist. 

Article 4 

This Decision shall apply from 1 January 2009 until 31 December 2013. 

Article 5 

This Decision is addressed to the Portuguese Republic. 

Article 6 

Done at Brussels, 

For the Council 
The President 

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