REPORT FROM THE COMMISSION TO THE COUNCIL on the application of the special arrangements concerning the AIEM tax applicable in the Canary Islands (submitted by the Commission in accordance with Article 2 of the Council Decision 377/2014/EU of 12 June 2014)
Date: 2019-02-28
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Canary Islands, Spain, derogation from EU law, economic growth, import, indirect tax, peripheral region, production, tax exemption, tax relief

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 28.2.2019  COM(2019) 116 final  REPORT FROM THE COMMISSION TO THE COUNCIL on the application of the special arrangements concerning the AIEM tax applicable in the Canary Islands (submitted by the Commission in accordance with Article 2 of the Council Decision 377/2014/EU of 12 June 2014)     
 
 
TABLE OF CONTENTS 

A.  Background ...................................................................................................................................... 2 

B. 

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

C.  Analysis ............................................................................................................................................ 3 

1. 

Economic growth – activity and employment variables ........................................................... …3 

2.  Proposal of technical adjustments .............................................................................................. 5          

3.  Remaining handicaps justifying the continued application of the special arrangements 
concerning AIEM ................................................................................................................................. 5 

D. Conclusions ……………………………………………………………………………………………………………………………………6 

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A. Background 

The AIEM (‘Arbitrio sobre las Importaciones y Entregas de Mercancías en las islas Canarias’) 
is  a  tax  imposed  on  products  imported  into  or  obtained  in  the  Canary  Islands.  Given  the 
numerous obstacles that the Canary Islands face, Council Decision 377/2014/EU1 of 12 June 
2014 on the AIEM tax applicable in the Canary Islands provides for special tax arrangements. 
In particular, it authorises the Kingdom of Spain to exempt or reduce partially from the AIEM 
tax  certain  products  produced  in  the  Canary  Islands  that  are  listed  in  the  annex  to  the 
Decision. This authorisation applies from 1 July 2014 to 31 December 2020. The difference in 
taxation between products taxed on a regular basis and those to which an exemption or partial 
reduction is applied cannot be higher than 5%, 10%, 15% or 25% depending on the product. 

That Decision replaced Council Decision 2002/546/EC2 of 20 June 2002, which is based on 
Article 349 of the Treaty on the Functioning of the European Union, which confers the status 
of  EU  outermost  region  to  the  Canary  Islands.  This  article  recognises  the  permanent 
constraints  faced  by  the  outermost  regions  -  remoteness,  insularity,  small  size,  difficult 
topography  and  climate,  and  economic  dependence  on  a  few  products  –  and  enables  the 
adoption  of  specific  measures  tailor-made  to  these  regions.  The  reasons  underlying  the 
adoption  of  the  special  arrangements  are  the  problems  faced  by  the  Canary  Islands  by  their 
isolation  and  the  fragmentation  of  the  local  market.  This  causes  various  difficulties  mainly 
connected  with  higher  production  costs  (transport,  energy,  supplies  of  raw  materials, 
treatment  of  waste,  etc.)  and  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 the handicaps faced by the 
Canary Islands and thereby allowing the economy of the Islands to develop. The measures are 
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 Council Decision 377/2014/EU, requires the Spanish authorities to present to the 
Commission  by  30  September  2017  a  report  on  the  application  of  the  arrangements 
concerning the AIEM tax. The purpose of the report is to assess the impact of the measures 
taken  and  their  contribution  to  the  promotion  or  maintenance  of  local  economic  activities, 
taking  into  account  the  disadvantages  affecting  the  Canary  Islands.  Spain  has  submitted  the 
interim report to the Commission in October 2017 (Annex 1). A translation of the Report, in 
English, is also annexed (Annex 2). The Commission was conducting additional analysis and 
had to conduct additional exchanges with Spanish authorities during the year of 2018 in order 
to finalise the assessment. 

In  addition,  Article  2  of  the  Council  Decision  377/2014/EU  requires  the  Commission  to 
present a report to the 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. 

1  Council  Decision  377/2014/EU  of  June  2014  on  the  AIEM  tax  applicable  in  the  Canary  Islands,  OJ  L  182, 
21.6.2014, p. 4. 
2  Council  Decision  2002/546/EC  of  20  June  2002  on  the  AIEM  tax  applicable  in  the  Canary  Islands,  OJ  L  179, 
9.7.2002, p. 22. 

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B. Summary 

The purpose of this report is to examine the impact of the measures taken under the Decision, 
for  the  period  from  1  July  2014  to  the  end  of  2016,  and  to  assess  their  contribution  to  the 
promotion or maintenance of local economic activities. Duly account is taken of the obstacles 
faced by the Canary Islands. 

In  general,  it  would  appear  that  between  2014  and  2016  the  measures  in  place  have 
contributed  to  the  economic  recovery  of  the  outermost  region  concerned.  There  are  visible 
positive trends generated by the exemptions from AIEM, such as the Gross Domestic Product 
(GDP) growth and the positive increase in the number of companies and jobs created. In the 
same period, income from AIEM tax rose. The imports of products subject to the AIEM also 
rose  between  2014  and  2016.  The  comparison  of  local  products,  who  have  benefitted  and 
continue to benefit from the special measures in question with comparable imported products 
subject to AIEM have not revealed measurable negative effects for imported products in the 
categories of goods concerned.  

C. Analysis  

This analysis is based on the data provided by the Spanish authorities in their interim report 
for  the  period  from  1  July  2014  to  the  end  of  2016  submitted  to  the  Commission  in 
accordance  with  Article  2  of  the  Decision.  The  report  describes  various  factors,  including 
changes that took place after the entry into force of the Decision in 2014. 

1.

  Economic growth – activity and employment variables 

During  the  period  analysed,  when  special  arrangements  for  the  AIEM  tax  were  applicable, 
many  positive  tendencies  have  been  observed.  A  number  of  examples  are  provided  to 
evidence the impact of the AIEM-related measures and their contribution to the maintenance 
or  development  of  domestic  economic  activities.  It  is  made  clear,  though,  that  industrial 
activity is influenced by a multitude of factors such as the economic context, the framework 
of other taxes and costs that affect operations, as well as the changing conditions in the market 
and  distribution  systems.  Hence,  isolating  the  direct  impacts  of  the  AIEM  on  industrial 
activity in the Canary Islands is a complex exercise.  

In  general  terms,  the  economic  environment  since  2014  has  experienced  a  period  of  stable 
global growth worldwide and economic recovery at both national and European level. From 
2014  onwards,  the  Canary  Islands’  economy  has  started  to  recover  and  has  continued  to 
expand up to the present date, with real GDP growth accelerated to reach 3.5 % in 2016. This 
rate exceeds that of Spain, the EU-28 and the world average for the same year. Moreover, the 
number of enterprises in the manufacturing, mining and quarrying sectors which benefit from 
the  AIEM  (‘AIEM  industry’  which  represent  67.3%  of  the  total  amount  of  enterprises) 
increased  between  2014  and  2016,  whereas  the  enterprises  not  benefiting  from  the  AIEM 
(‘non-AIEM industry’) decreased between 2014  and 2016.  In quantitative terms,  there were 
14 more enterprises in AIEM industry in 2015 than the previous year, and in 2016 there were 
further 41 new enterprises. 

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As regards employment in the AIEM industry, the data provided in the Report demonstrate a 
successive annual growth of registered employees over the period 2014-2016. In quantitative 
terms,  the  number  of  employments  in  the  AIEM  industry  had  increased  from  20,050 
registered  in  2013  to  21,541  in  2016.  The  only  sectors  that  suffered  a  decrease  were  the 
following: Other mining and quarrying, Manufacture of beverages, Manufacture of tobacco 
products, Manufacture of pulp, paper and paper products, and lastly Manufacture of rubber 
and  plastic  products.  Intra-sectoral  analysis  reveals  the  significant  relative  weight  of 
employment  of  the  Manufacture  of  food  products  within  the  overall  AIEM  industry.  It  is 
followed  by  the  Manufacture  of  metal  products,  except  machinery  and  equipment,  and  the 
Manufacture of beverages.  

Analysing different  sectors, the Spanish  data shows that the services sector, which accounts 
for the greatest share of the Canary Islands’ economy, has performed favourably from 2014 
onwards. Tourism, which contributes nearly 32% of regional GDP, has recovered strongly in 
recent  years  and,  following  a  small  decline  in  2015,  even  achieved  record  figures  in  2016, 
assisted  by  a  context  of  political  uncertainty  in  several  North  African  and  Middle  Eastern 
Mediterranean countries. The dynamism of the tourist sector continues to date; it has resulted 
in an increase of its share in terms of contribution to Gross Value Added and employment in 
the Canary Islands’ overall economy. We can assume that the AIEM measures for promotion 
of local activities have had a positive effect in the sense that local enterprises are prepared to 
offer better quality service, which guarantee a sustained growth of the tourism in this region. 
The Report demonstrates that local enterprises have been consolidating deployment of quality 
management systems to  ensure that the products  and services they offer meet standards that 
instil  confidence  in  consumers.  This  reflects  the  commitment  of  domestic  enterprises  to 
production efficiency and competitiveness. The trend is especially true as regards enterprises 
operating in  the food and packaging sectors, of  which more than 41.9 % hold  external  food 
safety certification and a further 9.3 % were in the process of obtaining it in 2017. 

The average rates applied to imports of products subject to the AIEM, with the exception of 
tobacco products, are approximately 7 % (7.1 % in 2016). This indicates that the average rates 
in  the new period during which the AIEM is  in  force are, in  general,  similar to  the average 
rates of the previous period (7.2%), and therefore there is no change in the burden imposed by 
this charge. 

Further  analysis  by  sectors  and  imports  of  products  subject  to  the  AIEM  reveals  that  the 
majority of industries saw increases in imports after 2014, with the exception of three sectors. 
The  imports  of  Chemical  products  decreased  steadily  between  2014  and  2016;  Building 
materials decreased significantly in 2015 to increase again in 2016, albeit remaining to lower 
levels than in 2014; and Manufacture of food products fluctuated downwards in 2015 before 
increasing  in  2016.  In  general,  the  imports  of  products  subject  to  the  AIEM  rose  between 
2014 and 2016, despite a slowdown in 2015. 

The  evidence  presented  thus  indicates  that  the  Council  Decision  of  12  June  2014  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 3. 

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2.

  Proposal of technical adjustments 

The Spanish authorities mentioned in the mid-term report a limited number of modifications 
to tax rates and tariff codes with regard to the AIEM products specified in the Annex. 

To  be  able  to  resolve  problems  that  arise  from  modifications  in  the  tariff  classification  of 
products,  Spain  requests  the  establishment  of  an  agile  mechanism  that  allows  for  relatively 
easy updating of the list of products for which a tax differential is permitted.  

The necessary amendments to the lists of tax rates and tariff codes as well an agile mechanism 
to amend them, could be considered at a later stage during the renewal of the Decision. 

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

The Canary Islands continue to suffer a series of severe handicaps. For this reason, their local 
industry remains highly vulnerable and requires measures to safeguard a sector that is highly  
strategic, generates wealth and stability and has the capacity to ensure the supply of goods to 
the  market  in  the  event  of  problems  with  external  supply.  In  this  regard,  according  to  the 
Report, the structural constraints indicated in the recitals of the Council Decision persist.  

There  are  certain  permanent  obstacles  of  the  Canary  Islands,  which  hinder  the  economic 
development  of  the  region:  geographic  isolation,  fragmentation  and  the  small  size  of  the 
market.  Those  circumstances  affect  many  important  aspects  connected  with  the  economic 
development of the area. 

One  of  the  obstacle  in  the  Canary  Islands’  economy  continues  to  be  highly  specialised  in 
services  (over  85 %  of  GVA)  a  figure  well  above  the  national  average  in  Spain  (74 %  of 
GVA).  Within  this  sector,  the  predominant  activity  in  the  archipelago  remains  tourism.  Its 
contribution to GDP, when both direct and indirect effects are taken into account, has risen to 
over  34 %  in  comparison  with  a  national  average  of  just  above  11 %.  The  number  of  jobs 
linked directly or indirectly to tourism in the Canary Islands is equivalent to around 40 % of 
the total compared with a national average of 13 %.  

Also, account must be taken of the limitation of the  means of transport of the Canaries that 
restricts the movement of goods, particularly between islands (only by air or sea). According 
to  the  Report,  inter-island  shipping  costs  remain  high  in  comparison  to  freight  between  the 
islands and the continent. That constraint is even greater as regards routes to the islands that 
are not home to provincial capitals as their freight costs are higher than between islands with 
provincial capitals. The cost of freight between capital islands and non-capital islands can be 
higher  than  the  cost  of  freight  between  the  Canary  Islands  and  Spanish  mainland.  This 
reoccurs  in  the  cost  of  supply  of  raw  materials  for  which,  in  general,  and  with  some 
exceptions on certain routes, the cost of supply is greater than that of shipping goods abroad. 
Such a restriction leads to a lower efficiency and higher cost of production in the Region.  

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The  Canary  Islands’  enterprises  bear  high  environmental  costs.  As  a  result  of  the  relatively 
more limited availability of water resources, businesses in the Canary Islands bear a unit cost 
of  water  that  is  significantly  higher  than  the  average  for  Spain  as  a  whole.  In  addition,  the 
disposal  of  industrial  waste  and  the  treatment  of  toxic  waste  continue  to  give  rise  to  high 
environmental costs in the Canary  Islands. There are still no recycling plants, other than for 
certain  products  (which  include  management  of  waste  electrical  and  electronic  equipment), 
and  waste  still  has  to  be  transported  to  the  mainland  and  toxic  waste  still  has  to  be  treated 
outside the Canary Islands. According to 2017 data provided in the Report, the unit costs of 
the various forms  of waste are higher in  the Canary  Islands than in  mainland Spain  and the 
difference is generally in excess of 50 %. In addition, in some cases, such as those of alkaline 
batteries, computer hardware and electronic equipment and sludge, the management costs are 
over  20  times  higher  in  the  Canary  Islands  than  in  mainland  Spain.  These  higher  costs 
incurred by the Canary Islands’ enterprises compared with their competitors on the European 
continent, which are able to use recycled raw materials, results in a loss of competitiveness for 
industry in the Canary Islands. 

D. Conclusions 

The  special  measures  introduced  by  Council  Decision  377/2014/EU  of  12  June  2014  have 
positive effects on the economic and social environment of the Islands. The AIEM measures 
applied  in  the  Canary  Islands  are  necessary  and  proportionate  to  the  objectives  set  by  the 
Decision.  The  handicaps  affecting  the  archipelago  (notably  remoteness,  small  size  and 
fragmentation of the local market) are still present and result in additional costs, which are not 
overcompensated by the application of the allowed exemptions to specified AIEM products.  

Despite  the  economic  slowdown  due  to  the  financial  crisis,  it  appears  that  the  domestic 
economy  started  to  recover  as  from  2014,  also  thanks  to  the  positive  effects  of  the  AIEM 
measures. However, given the handicaps connected with the specific situation of the Canary 
Islands, the continuation of theses measure is still justified. In particular, it appears that their 
situation is still disadvantaged in many ways, despite positive tendencies. 

However, data presented in the mid-term report of the Canary Island is not sufficient to do a 
full  analysis  of  the  economic  and  social  aspects,  so  the  conclusion  is  partially  based  on  the 
statements of the report, which cannot always be verified. 

The Commission has not received any complaint on a possible negative impact of the AIEM 
measures on the functioning of the Internal Market. A possible reduction or elimination of the 
protection granted through the AIEM scheme could  prove detrimental  for the local  industry 
and in general the economic and social development of the Canaries. 

In  the  light  of  the  above,  the  Commission  concludes  that  the  AIEM  measures  currently  in 
place, in accordance with Council Decision 377/2014/EU of 12 June 2014,  are still justified 
and  proportionate.  Furthermore,  the  Commission  believes  that  no  proposal  to  adapt  the 
existing provisions of the Decision is required. 

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