COMMISSION STAFF WORKING DOCUMENT Accompanying the document Proposal for a Council Decision authorising Portugal to apply a reduced rate of excise duty on certain alcoholic products produced in the autonomous regions of Madeira and the Azores
Date: 2020-06-18
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Azores, Madeira, Portugal, derogation from EU law, development aid, excise duty, fortified wine, liqueur, peripheral region, tax relief

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 18.6.2020  SWD(2020) 108 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the document Proposal for a Council Decision authorising Portugal to apply a reduced rate of excise duty on certain alcoholic products produced in the autonomous regions of Madeira and the Azores {COM(2020) 240 final}  
 
 
Table of contents 

1. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ............................................................... 3 

1.1. 
Introduction: Outermost Regions ...................................................................... 3 
1.2.  Portuguese outermost regions ............................................................................ 3 
1.3.  Specific measure for the Portuguese outermost regions .................................... 4 

2. 

PROBLEM DEFINITION .................................................................................................................... 6 

2.1.  Additional costs for spirit drink producers ........................................................ 7 
2.2.  Market Saturation ............................................................................................ 10 
2.3.  How will the problems evolve? ....................................................................... 11 
2.4.  Why should the EU act? .................................................................................. 13 

3.  OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 13 

3.1.  General objectives ........................................................................................... 13 
3.2.  Specific objectives ........................................................................................... 13 

4.  WHAT ARE THE AVAILABLE POLICY OPTIONS? .................................................................... 14 

4.1.  What is the baseline from which options are assessed? .................................. 14 
4.2.  Description of the policy options .................................................................... 14 
4.3.  Options discarded at an early stage ................................................................. 15 

5.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ........................................................... 16 

5.1.  Methodology .................................................................................................... 16 
5.2.  Baseline ........................................................................................................... 17 
5.3.  Option 1 – termination of OR specific support ............................................... 17 
5.4.  Option  2:  Extension  of  the  75%  reduced  rate  to  rum  produced  and 

consumed in the Azores ................................................................................... 18 

5.5.  Option  3  –  Extension  of  the  75%  reduced  rate  to  Azorean  rum 
consumed  in  the  Azores  and  a  50%  reduced  rate  on  the  Portuguese 
mainland for all products ................................................................................. 19 

6.  HOW DO THE OPTIONS COMPARE? ............................................................................................ 20 

7. 

PREFERRED OPTION ...................................................................................................................... 22 

8.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? .................................. 23 

Annex 1: Procedural information .............................................................................. 24 
Annex 2: Stakeholder consultation ............................................................................ 25 
Annex 3: Who is affected and how?.......................................................................... 36 
Annex 4: Analytical methods .................................................................................... 38 
Annex 5: Evaluation .................................................................................................. 41 
Annex 6: Legislation ................................................................................................. 48 

1 

 
 
 
Glossary 

Term or acronym 

Meaning or definition 

ABV 

DG 

EC 

EU 

ESI 

FTE 

GDP 

GRP 

GVA 

HLPA 

ORs 

POSEI 

PPS 

SMEs 

TFEU 

UAA 

VAT 

WHO 

Alcohol by volume 

Directorate General 

European Commission 

European Union 

European Structural Investment  

Full Time Equivalent 

Gross Domestic Product 

Gross Regional Product 

Gross Value Added 

Hectolitres of pure alcohol 

Outermost Regions 

Programme of options specifically relating to remoteness 
and insularity 

Purchasing Power Standards 

Small and medium-sized enterprises 

Treaty on the Functioning of the European Union 

Utilised Agricultural Area 

Value Added Tax 

World Health Organization 

2 

 
 
 
 
 
1.  INTRODUCTION: POLITICAL AND LEGAL CONTEXT 

1.1. Introduction: Outermost Regions 

Several regions of the European Union (EU), known as the outermost regions, are located 
in  areas  that  are  remote  from  Europe.  These  are  the  French  regions  of  Guadeloupe, 
French Guiana, Réunion, Martinique, Mayotte and Saint-Martin; the Portuguese Madeira 
and the Azores; and the Spanish Canary Islands. These regions are an integral part of the 
EU and therefore need to comply with EU legislation. At the same time and unlike the 
rest  of  the  EU  territory,  they  have  to  deal  with  a  number  of  difficulties  related  to  their 
characteristics, in particular to remoteness, insularity, small size, difficult topography and 
climate, and economic dependence on a limited number of products.  

Figure 1: Geographical distribution of EU outermost regions 

The special situation of these regions is recognised under Article 349 of the Treaty on the 
Functioning  of  the  EU  (TFEU).  This  article  allows  for  specific  measures  for  these 
regions  to  be  taken  as  it  acknowledges  that  the  permanent  and  combined  constraints  
affect  their  economic  and  social  situation  and  severely  restrain  their  development.  It 
permits  such  measures  provided  that  they  do  not  undermine  the  integrity  and  the 
coherence of the Union legal order, including the internal market and common policies. 
Such  measures  concern  various  policies,  including  taxation,  support  to  create  jobs, 
boosting competitiveness, and preserving the environment. 

1.2. Portuguese outermost regions 

This report concerns the outermost regions (ORs) of Portugal: The Autonomous Region 
of  Madeira  and  the  Autonomous  Region  of  the  Azores,  both  of  which  are  small  and 
remote groups of islands several hundred kilometres from mainland Portugal. Madeira is 
comprised  of  two  inhabited  islands,  Madeira  and  Porto  Santo  as  well  as  two  smaller 
uninhabited  archipelagos  (Desertas  Islands  and  Selvagens  Islands).  The  Azores  are 
composed  of  nine  inhabited  islands  as  well  as  several  uninhabited  smaller  islands.  The 
population  of  each  region  is  approximately  250,000.  Both  Madeira  and  the  Azores  are 

3 

 
 
autonomous regions of Portugal with their own political and administrative regimes and 
governing bodies1. 

The  economies  of  Madeira  and  the  Azores  are  significantly  below  the  level  of  gross 
domestic  product  of  mainland  Portugal.  In  2017,  gross  domestic  product  (GDP)  for 
Madeira was €4.6 billion and €4.1 billion for the Azores (2.5% and 2.2% respectively of 
total  Portuguese  GDP).  Real  growth  has  been  low  over  the  last  ten  years,  averaging 
0.76%  in  Madeira  and  1.4%  in  the  Azores,  although  above  the  average  of  0.4%  in 
Portugal. Economic development in terms of output per capita in both Madeira (€18,100) 
and  the  Azores  (€16,900)  is  below  the  level  of  mainland  Portugal  (€18,900),  and  each 
OR is significantly below the EU average of €30,0002. 

the  Portuguese  rate  of  unemployment  was  7.1%,  whereas 

The  main  economic  activities  in  Madeira  are  tourism  and  financial  services.  In  2015, 
approximately  17%  of  employment  was  in  the  tourism  industry,  which  accounted  for 
around 22% of Gross Value Added (GVA)3. The Azores’  economy is mostly based on 
services  (40%  of  GVA),  although  agriculture  plays  a  more  significant  part  of  the 
economy  than  in  Madeira  or  mainland  Portugal,  at  8%  of  GVA.  The  rate  of 
unemployment is higher than on the Portuguese mainland in both outermost regions. In 
the  rate  of 
2018, 
unemployment in Madeira and the Azores was 9% and 8.6%, respectively4. Worryingly, 
youth  unemployment  is  significantly  higher  in  the  outermost  regions  compared  to  the 
Portuguese  rate5.  Furthermore  the  percentage  of  the  OR  population  in  the  agricultural 
sector has increased since 2012, possibly due to the financial crisis forcing people to seek 
alternative  sources  of  income  or  returning  to  family  farms.  The  most  recent  data 
estimates  that  8%  and  13%  of  workers  are  employed  in  agriculture  in  Madeira  and  the 
Azores, respectively.  

1.3. Specific measure for the Portuguese outermost regions  

This  report  focuses  on  analysing  the  effects  of  the  existing  derogation  for  the  reduced 
rate  of  excise  duty  on  specific  alcoholic  drinks  produced  and  consumed  in  those  two 
autonomous regions of Portugal, which expires on 31 December 2020.   

Excise  duties  are  indirect  taxes  on  the  sale  or  use  of  specific  products  and  are  usually 
applied  as  an  amount  per  quantity  of  the  product.  All  revenue  from  excise  duties  goes 

1 Their status as autonomous regions allows both ORs to set their own policies, except in foreign policy, 
defence  and  internal  security.  This  includes  the  constitutional  right  to  all  tax  revenues  generated  in  their 
territories in addition to transfers from the state budget. 
2 https://ec.europa.eu/eurostat/documents/2995521/9618249/1-26022019-AP-EN.pdf/f765d183-c3d2-4e2f-
9256-cc6665909c80  
3 Measure of the value of goods and services produced in an area, industry or sector of the economy 
4 https://ec.europa.eu/eurostat/statistics-
explained/index.php/Unemployment_statistics_at_regional_level#Regional_unemployment_rates_and_the
_EU_average  
5 The  most recent data  for youth unemployment is for 2014, when the rate of unemployment in Madeira 
and the Azores was 50.5% and 41.5%, respectively. The overall rate of youth unemployment for Portugal 
for the same time period was 34.8%. Source: Eurostat  

4 

 
 
                                                           
entirely to the Member States, and in the EU, Member States must apply excise duties to 
alcohol, tobacco, and energy products. 

Union  legislation  on  the  classification  and  taxation  of  alcohol  and  alcoholic  beverages 
allows  for  duty  rate  reductions  under  certain  circumstances  and  for  certain  regions. 
Council Directive 92/83/EEC6 allows all Member States to apply a reduced rate of excise 
duty  to  distilled  alcoholic  beverages  produced  by  small  independent  distilleries  not 
producing  more  than  10  hectolitres  of  pure  alcohol  per  year.  In  addition,  Council 
Directive  92/84/EEC  allows  for  a  50%  reduction  of  excise  duty  on  certain  alcoholic 
beverages7 consumed in the Portuguese outermost regions.  

To date, these possible reductions have not been considered appropriate for Madeira and 
the Azores because of their limited scope and excise duty reduction. Therefore, in order 
to assist the economies of these two regions, several tax measures have been adopted in 
accordance  with  Article  349  TFEU  in  the  last  two  decades.  The  first  legislative  act  to 
support the spirit drinks industry was adopted in 2002. This measure8 authorised Portugal 
to apply a reduced excise duty rate of 75% to rum and liqueurs made and sold in Madeira 
and liqueurs and eaux-de-vie made and sold in the Azores (see box 1 for product details). 
Upon  its  expiry  in  December  2008,  the  measure  was  renewed  through  a  second 
legislative  act9.  As  the  measure  was  valid  until  December  2013,  Council  Decision 
376/2014/EU10  was  adopted  in  2014,  which  renewed  the  measure  until  31  December 
2020.  

Box 1 – overview of the spirit drinks at stake11  

Rum  is  an  unflavoured  spirit  drink  produced  exclusively  by  fermentation  and  distillation  of 
molasses or syrup produced in the manufacture of cane sugar or from sugarcane juice itself. Rum 
must have a minimum alcoholic strength of 37.5% alcohol by volume (ABV).  

A liqueur is a spirit drink with a minimum alcohol content of 15% by vol. and a minimum sugar 
content  as  provided  by  point  32(a)(i)  of  Annex  II  to  Regulation  (EC)  No  110/200812.  It  is 
produced using ethyl alcohol of agricultural origin or a distillate of agricultural origin or one or 
more spirit drinks or a combination thereof, which has been sweetened and to which one or more 
flavourings,  products  of  agricultural  origin  or  foodstuffs  have  been  added.  Crème  de 
(supplemented  by the  name  of  a  fruit  or  other  raw material  used) is  a type  of  liqueur  with  a 
higher sugar content.  

6 Article 22 of Council Directive 92/83/EEC of 19 October 1992 on the harmonization of the structures of 
excise duties on alcohol and alcoholic beverages  
7  Article  (7)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  allows  Portugal  to  apply  reduced  rates  to  wine,  rum  and 
liqueurs in Madeira and liqueurs and eau-de-vie in the Azores. See Annex 6 for further details. 
8 Council Decision 2002/167/EC 
9 Council Decision 2009/831/EC 
10 Council Decision 376/2014/EU 
11 Further details of the spirit drinks legislation is provided for in the Annex 6. 
12 Regulation (EC) No 110/2008 of the European Parliament and of the Council of 15 January 2008 on the 
definition, description, presentation, labelling and the protection of geographical indications of spirit drinks 
and repealing Council Regulation (EEC) No 1576/89 

5 

 
                                                           
Eaux-de-vie are spirit drinks produced from the distillation e.g. of wine, fortified wine or grape 
marc. 

The  objective  of  the  existing  Council  Decision  is  to  promote  the  socioeconomic 
development  of  the  Portuguese  outermost  regions.  The  Decision  takes  account  of  the 
higher production costs of specific products in these regions and allows Portugal to apply 
a reduced rate of excise duty taxes to offset the competitive disadvantages faced by the 
producers in these regions, without undermining the integrity and coherence of the Union 
legal order, including the internal market and common policies. The table below shows 
the impact of the derogation to both regions. 

Table 1. Impact of derogation 

Impact of Council Decision No 376/2014/EU for the period 2014-2019 
to the regional economies 
Producers 
Sales  
increase  
% 
25,9 
26,6 

Gross  
Value  
Added  
€ m 
14,2 
10,7 

Producers 
market share 
increase % 

Total  
employment  

2,1 
3,5 

260 

Support to  
employment 

26 
14 

Madeira 
The Azores 
Source: PwC et al, 2020 

The objective of this report is to evaluate the current regime and analyse possible future 
options upon the expiry of the current measure on 31 December 2020. This includes the 
option of extending the regime to include sales of these specific spirit drinks on mainland 
Portugal, as requested by the Portuguese authorities. This report is based on an external 
study  by  PricewaterhouseCoopers13  (“the  study”)  commissioned  by  the  European 
Commission. 

2.  PROBLEM DEFINITION 

The  challenges  noted  in  Article  349  TFEU  result  in  several  problems  for  producers  of 
spirit drinks in the Portuguese outermost regions. The following problem tree outlines the 
problems, the drivers and their consequences. 

13 Study on reduced excise duty rates in the Portuguese outermost regions of Madeira and the Azores, PwC 
et al, 2020 

6 

 
 
 
 
 
 
 
 
                                                           
Figure 2  

2.1. Additional costs for spirit drink producers 

The spirit drinks industry in the Portuguese outermost regions consists of 35 producers, 
all  of  whom  are  small  and  medium  enterprises  (SMEs).  90%  of  the  production  is 
accounted for by the largest five producers. Due to several factors, it is more expensive to 
manufacture  these  spirit  drinks  in  the  Portuguese  outermost  regions  than  on  the 
Portuguese mainland.  

The overarching additional cost  for the producers is  the cost  of the  ingredients used to 
produce rum, liqueurs and eaux-de-vie in Madeira and in the Azores.   

In 2018, sugarcane grown in Madeira cost €11014 per tonne, whereas Brazilian sugarcane 
cost €14,82 per tonne15. Local fruits from the region are the main ingredient used in the 
production  of  liqueurs.  Based  on  information  provided  by  the  producers,  the  Madeira 
Statistics Authority and the Portuguese Authorities, for the wide variety of fruits used in 
liqueur  production,  the  regional  prices  were,  on  average,  77%  higher  than  mainland 
prices.  In  the  Portuguese  outermost  regions,  eaux-de-vie  are  produced  from  wine  or 
grape  marc,  either  local  or  imported.  The  local  wine  from  the  Portuguese  outermost 
regions is four times more expensive, due to higher production cost and lower yield, than 
wines  produced  on  the  mainland.  While  wine  produced  outside  the  islands  may  be 
initially cheaper to buy, the cost of transportation to the outermost regions also results in 
the final cost of this ingredient being four times higher. Producers also noted the cost of 
shipping  production  materials  (such  as  bottles)  within  mainland  Portugal 
is 
approximately one third of the cost of shipping to the ORs.  

14  Sugarcane  producers  receive  a  subsidy  through  the  EU  Programme  of  Options  Specifically  relating  to 
remoteness  and  Insularity  (POSEI).  This  aid  is  directed  at  sugarcane  processing  and  has  been  deducted 
from the full cost of growing sugarcane of €270 per tonne.   
15 OECD-FAO Agricultural Outlook database 2018 

7 

 
 
 
 
                                                           
All producers on the islands are SMEs and noted that the short production season results 
in  the underutilisation of their manufacturing equipment.  On average production was 
47%  of  total  available  capacity  and  economies  of  scale  are  difficult  to  achieve.  This 
results in a 50% increase in capital  cost and depreciation. Producers noted that  general 
costs16 are higher on the islands, which is also reflected in the fact that minimum wages 
in Madeira and the Azores are currently set at 102% and 105%, respectively, of the rate 
paid on the Portuguese mainland.  

The following table provides the additional cost per product and per region. 

Table 2. Ranges of additional cost by product per 70 cl bottle 

Ranges of additional cost by product per 70cl bottle 

MADEIRA 

THE AZORES 

Product 

RUM  
40% ABV 

LIQUEUR 
20% ABV 

LIQUEUR  
20% ABV 

EAUX-DE-VIE  
40% ABV 

Mainland 
base wine 

Local base 
wine 

Additional 
cost (€) 
Source: PwC et al, 2020 

1,60-1,96 

0,80-0,97 

1,68-2,05 

4,23-5,17 

4,30-5,26 

2.1.1. What are the drivers of the additional costs for spirit drink producers? 

Remoteness, insularity, size, difficult topography and volatility of climate 

Remoteness has a negative impact on most sectors because of the transport costs, which 
affect  mobility  of  labour,  capital,  raw  materials,  trade  and  in  general  all  forms  of 
integration with the EU.17 Accessibility issues affect these regions not only in their trade 
and exchanges  with  the  EU but  also  within their geographic areas and within  the same 
archipelago.  

Lying  1,000  km  south  west  of  Portugal,  Madeira  is  comprised  of  two  main  inhabited 
islands.  The  islands  are  spread  over  801.1  square  km  with  a  population  of  just  over 
250,000  (under  2.5%  of  Portugal's  2018  population).  Approximately  40%  of  the 
population are living in the capital, Funchal, on the island of Madeira.  

The Azores are composed of nine inhabited islands in three groups lying approximately 
1500  kilometres  west  of  Lisbon.  The  islands  are  stretched  over  600  km  from  points 
furthest east and west and have a population of just under 250,000. Approximately 28% 
of the population live in the capital  Ponta Delgada on São Miguel,  with  the rest  of the 
population distributed throughout other municipalities. 

Madeira and the Azores are of volcanic origin and are characterised by green landscapes, 
rugged  coastlines  and  mountainous  terrain.  Madeira’s  total  Utilised  Agricultural  Area 

16 Rum producers receive an EU subsidy for aging rum. However as 90% of rum sales are currently unaged 
rum, this subsidy has little impact on reducing costs and has been discarded for the purposes of estimated 
additional costs for rum producers. 
17 http://www.et2050.eu/TechNotes/ET2050_DiscNote16_OutermostRegions_v(27_02_12).pdf  

8 

 
 
  
 
                                                           
(UAA)  is  5,000  hectares,  just  6%  of  the  total  area  of  the  islands18.  The  islands’ 
mountainous  terrain  means  that  farming  typically  takes  place  on  land  with  a  slope 
between 16% and 25%. The terrain makes farming labour intensive because it is difficult 
to  mechanise  given  the  steep  slopes.  In  addition,  a  relatively  large  proportion  of  the 
population are employed in agriculture (8% in 2017). Over half the area of the Azores is 
suitable  for  agriculture  (123,800  hectares).  Livestock  farming  accounts  for  80%  of  the 
UAA with only 20% of the UAA in the Azores being arable. Small scale farming and a 
wetter climate mean that output per hectare is lower in the Azores for many crops than on 
the Portuguese mainland or Madeira19.   

Madeira  enjoys  an  average  annual  temperature  that  varies  between  16°C  and  22°C. 
Precipitation  rates  can  be  high20  and  the  islands  were  hit  by  damaging  floods  and 
mudslides in 2010. The climate of the Azores is maritime temperate and is characterised 
by  very  changeable  weather  with  occurrence  of  severe  phenomena  with  relative 
frequency  (e.g.  storms,  strong  winds,  heavy  rains,  etc.),  affecting  agriculture21.  The 
Azores  have  experienced  the  effects  of  several  storms,  including  hurricane  Lorenzo  in 
2019 which caused an estimated €330 million in damages.22 

The  difficult  topography  and  volatility  of  climate  mean  that  ingredients  grown  in  the 
Portuguese  outermost  regions  are  systematically  more  expensive  than  world  prices. 
Furthermore these factors impact  the quality of sugarcane cultivated in  Madeira, which 
has a lower sugar  yield (approximately 50% less) than sugarcane grown in Brazil. This 
lower  yield  results  in  less  alcohol  being  produced  from  one  ton  of  sugarcane  and 
consequently  producers  in  Madeira  need  more  sugarcane  to  distil  the  same  volume  of 
alcohol as a rum producer using Brazilian sugarcane.     

Small scale of production 

Across both Madeira and the Azores, there are 35 spirit drink producers operating within 
the derogation, and  all are small and medium-sized enterprises.  Three quarters of these 
producers  are  micro  enterprises  and  only  5  producers  have  more  than  20  employees. 
There is a strong seasonal component to employment with some producers only operative 
for two or three months a year due to the short growing season.  

There are substantial variations in output in terms of hectolitre of pure alcohol (HLPA) 
per worker reflecting the variety in  business  models,  beverages produced  and size. The 
smallest  producers  in  the  ORs  make  less  than  10  HLPA  of  spirit  drinks  each  year  and 
labour productivity per employee for these producers is lower than other SMEs.  

SMEs  in  general  face  significant  obstacles  in  terms  of  development.  SMEs  in  the 
outermost regions are further hampered in increasing production and therefore achieving 
economies of scale due to the small scale of the regional markets and seasonal nature of 
production. This results in underutilisation of machinery designed for higher volumes of 
production. A lack of financial and human resources also  impacts  on marketing for the 

18 2016 data 
19 Statistics Portugal. Agriculture and Fisheries - Time Series - 1976-2018 
20 https://ec.europa.eu/regional_policy/sources/policy/themes/outermost-
regions/pdf/rup_2017/rup_eu_lands_world_en.pdf 
21 http://www.euroconsulting.be/wp-content/uploads/2017/01/fullrep_en1.pdf 
22 https://www.jn.pt/local/noticias/acores-grupo-oriental/ponta-delgada/furacao-lorenzo-provocou-
prejuizos-de-330-milhoes-de-euros-11405185.html  

9 

 
                                                           
producers in the outermost regions and pales in comparison to the resources large global 
spirit drink brands have. 

Compliance with EU legislation 

Point  1  of  Annex  II  of  Regulation  (EC)  No  110/200823  on  the  definition,  description, 
labelling  and  the  protection  of  geographical  indications  of  spirit  drinks  sets  out  the 
definition for rum. In general, rum is an unflavoured spirit drink with a minimum alcohol 
content  of  37.5%  produced  exclusively  by  fermentation  and  distillation  of  molasses  or 
syrup  in  the  manufacture  of  cane  sugar  or  from  sugarcane  juice  itself,  with  certain 
sweetening limitations.   

For the outermost region of Madeira, rum is defined as: 

a  spirit  drink  produced  exclusively  by  alcoholic  fermentation  and  distillation  of 
sugar-cane  juice  which  has  the  aromatic  characteristics  specific  to  rum  and  a 
volatile substances content equal to or exceeding 225 grams per hectolitre of 100 
%  vol.  alcohol.  This  spirit  may  be  placed  on  the  market  with  the  word 
‘agricultural’ qualifying the sales denomination ‘rum’ accompanied by any of the 
the 
geographical 
Autonomous Region of Madeira as registered in Annex III. 

the  French  Overseas  Departments  and 

indications  of 

In  order  to  avail  of  the  reduced  rate  for  Madeiran  rum,  producers  must  use  the  more 
expensive sugarcane grown in Madeira and cannot source cheaper sugarcane elsewhere. 

The  reduced  rate  of  excise  duty  is  applicable  to  liqueurs  produced  in  Madeira  from 
regional fruits or plants. These liqueurs must satisfy the definition of liqueurs set out in 
Annex II to Regulation (EC) No 110/2008.  In the Azores, liqueurs made from  regional 
fruit  or  raw  materials  receive  the  reduced  rate.  Compliance  with  the  legislation  means 
that  producers  must  use  local  fruits,  plants  or  raw  materials,  which  drives  up  the 
production costs for the producers24. 

2.2.Market Saturation 

Since  2010,  sales  within  the  derogation  have  grown  significantly.  In  Madeira,  rum  and 
liqueur sales have increased at  an  average  rate of 8% and 6.9%, respectively.  For  rum, 
the average annual growth rate has increased to 12.8% since 2014. In the Azores, sales of 
liqueurs  have  increased  on  average  by  9.7%  per  annum.  In  contrast  to  these  positive 
growth rates, eaux-de-vie sales in the Azores have fallen on average by 2.6% since 2010. 

23 Regulation (EC) No 110/2008 of the European Parliament and of the Council of 15 January 2008 on the 
definition, description, presentation, labelling and the protection of geographical indications of spirit drinks 
and repealing Council Regulation (EEC) No 1576/89 
24 In the Azores, reduced rates are also possible for eaux.de-vie made from wine or grape marc having the 
characteristics  and  qualities  defined  in  categories  4  and  6  of  Annex  II  to  Regulation  (EC)  No  110/2008. 
This legislation does not include a requirement that the wine or grape marc must be from the Portuguese 
outermost regions. 

10 

 
                                                           
The  regional  markets  of  Madeira  and  the  Azores  are  smaller  domestic  markets  than 
Malta,  the  least  populated  Member  State  near  the  mainland  of  EU  with  only  250,000 
people  living  in  each  region.  Given  the  high  levels  of  tourism  seen  in  the  Portuguese 
outermost regions, it is likely that increased consumption of these locally produced spirit 
drinks  is,  to  some  extent,  driven  by  tourists  rather  than  the  population  of  the  ORs.  In 
2018,  1.4  million  tourists  visited  Madeira,  a  slight  fall  on  the  previous  year. 
Approximately 0.7 million tourists visited the Azores during the same period. The local 
population and tourists currently purchase 90% of the production of these specific spirit 
drinks.  

It  is  assumed that growth rates will gradually  converge to  2%, in  line with  the average 
growth  of  the  regional  economies  for  the  period  2010-2018,  suggesting  that  the  local 
markets, even with the tourists, may become saturated in the near future. 

2.2.1. What are the drivers of market saturation? 

The  Madeiran  rum  industry  is  the  main  purchaser  of  local  sugarcane  and  since  this 
regime  was  first  introduced  in  2002,  land  used  to  produce  sugarcane  has  increased 
significantly  from  110  hectares  (2002)  to  the  current  acreage  of  172  hectares  in  2018. 
The  financial  crisis  of  2013  resulted  in  an  increase  in  employment  in  agriculture  of 
approximately 6% and together with the increase in land used for sugarcane, production 
of  sugarcane  in  Madeira  has  increased  from  2,900  tonnes  to  7,600  tonnes.  This  has 
resulted in rum production by the SMEs in the outermost region, exceeding sales by on 
average 40% in each of the last years.    

While  some  production  is  aged  or  used  as  a  base  for  liqueurs,  producers  estimate 
approximately 2,850 HLPA is currently being stockpiled at a cost25.   

Producers  note  the  difficulty  of  accessing  other  larger  markets  due  to  the  competitive 
disadvantage  they  face  as  they  are  unable  to  compete  on  price  against  international 
brands. As outlined above, producers face higher costs for the main ingredients of these 
spirit  drinks.  In  addition  to  this  cost,  remoteness  and  insularity  result  in  significant 
transportation  costs  for  producers,  who  attempt  to  access  the  Portuguese  mainland 
market. The additional shipping costs of freight to the mainland add approximately €0.17 
per bottle26.  

2.3.How will the problems evolve? 

In the 2017 Communication “A stronger and renewed strategic partnership with the EU's 
outermost  regions”27, the Commission  noted that despite progress  made over the  years, 
the ORs continue to face serious contraints, many of which are permanent. Furthermore, 
globalisation  and  climate  change  are  amplifying  theseconstraints.  Diversification 

25 Storage costs of this excess production is included in the global additional costs described in section 2.1 
above. 
26 Based on 9600 bottles in a 20ft shipping container 
27 COM(2017) 623 final 

11 

 
                                                           
opportunities are limited due to the few resources at their disposal and the geographical 
and natural  characteristics specific to their remoteness. Consequently, the economies of 
the  outermost  regions  are  fragile  and  any  sustainable  economic  growth  or  desirable 
structural  changes  insecure.  Economic  crises  are  bound  to  affect  the  economies  of  the 
outermost regions  to  a  greater extent than of mainland Europe, and  recovery is  slower. 
Any  such  effect  and  developments  are  however  difficult  to  determine  as  regional 
statistical data are not always available and if available, unreliable. 

The Communication stresses the need to build on the assets of the ORs, identifying new 
sectors of growth to enable growth and job creation. While this approach is important to 
address  the  numerous  threats  and  challenges  for  the  ORs,  the  traditional  activities  are 
also vital to the development of the regions as any sustainable structural changes to the 
economies of the ORs will take time to materialise.  

The  costs  faced  by  producers  in  the  regions  are  higher  than  the  costs  faced  by  the 
mainland  producers  and  they  are  attributable  to  the  factors  identified  in  Article  349 
TFEU.  Overall,  the  derogation  has  increased  production  levels,  and  as  such,  supported 
employment  in  the  regions.  Along  with  the  benefits  provided  to  producers,  other 
stakeholders in Madeira and the Azores also benefit from this derogation. This includes 
operators  in  the  tourism  sector  along  with  those  involved  in  the  value  chain  of  the 
derogation, such as fruit producers. 

With no change in the derogation, the fiscal costs of the regime are estimated to increase 
by approximately €7.3 million in 2027 (an increase of 45% in real terms since 2018). The 
administrative costs of the regime will remain relatively low, (approximately €38,500 per 
annum) increasing only with inflation.  

As  many  of  the  underlying  drivers,  such  as  remoteness,  insularity  or  climate,  are  of 
permanent nature, they will always act to the ORs’ disadvantage. There are no grounds to 
consider that they would diminish significantly in the near future as they are inherent to 
small  insular  economies  in  general,  as  well  as  the  traditional  methods  of  spirit  drinks 
production in the ORs. Unfortunately, there are no coherent data series assessing all the 
components  of  the  cost  of  these  specific  spirit  drinks  in  a  consistent  way,  making  it 
difficult to predict how these can evolve.  

Transport  infrastructures  have  been  steadily  built  and  a  mildly  positive  trend  in  the 
maritime and air transport of freight could be observed in the last decades in the ORs but 
accessibility issues will always affect the trade and exchanges of the ORs with the EU as 
and within their geographic areas alike. 

What we can carefully conclude from the nature of the costs is that they can fluctuate but 
will never disappear altogether.   

2.4.Why should the EU act? 

On the basis of Article 349 TFEU, the Council can adopt specific measures in favour of 
the  EU  outermost  regions  to  adjust  the  application  of  the  Treaties  to  those  regions, 

12 

 
including  the  common  policies,  because  of  the  permanent  constraints  which  affect  the 
economic  and  social  conditions  of  the  outermost  regions.  In  its  judgement  of  15 
December 201528, the European Court of Justice clarifies the scope of the application of 
Article  349  TFEU  on  the  basis  of  which  the  Council  is  entitled  to  adopt  specific 
measures for the outermost regions. 

The EU has been building a strong partnership with the outermost regions. In 2004, the 
Commission  presented its first  strategy for the regions,  which was renewed in  2008,  in 
2012 when the strategy  was aligned with  the Europe 2020 goals  of sustainable growth, 
social  development  and  creation  of  jobs;  and  in  2017,  when  the  Commission 
strengthened and renewed its strategic partnership with these regions. Access to the EU 
single market is vital for the continued development of the ORs as underlined in the 2017 
Commission Communication 29. 

Maximising the potential  of each outermost  region can only benefit both  the outermost 
regions and the EU as a whole. 

3.  OBJECTIVES: WHAT IS TO BE ACHIEVED? 

3.1. General objectives 

The  situation  of  the  ORs  is  recognised  in  Article  349  TFEU,  which  envisages  specific 
measures  for  those  regions  to  take  account  of  the  structural,  social  and  economic 
situation  of  these  regions.  Measures  adopted  must  mitigate  the  constraints  of  the  ORs 
without undermining the integrity and the coherence of the Union legal order, including 
the internal market and common policies. 

3.2. Specific objectives 

Specifically, the objectives of Council Decision No 376/2014/EU are: 

  Offset  the  competitive  disadvantage  of  producers  of  rum,  eaux-de-vie  and 
liqueurs in the Portuguese outermost regions, which are linked to the permanent 
constraintsof the ORs; 

  Support the spirit drinks industry in the Portuguese ORs, which is important for 
the development of the ORs economy, and diversification of local activities;  

  Ensure the smooth functioning of the single market for spirit drinks. 

4.  WHAT ARE THE AVAILABLE POLICY OPTIONS? 

4.1.What is the baseline from which options are assessed? 

For the purposes of this report, there is a difference between ‘no action’ and the ‘status 
quo’.  Given  that  the  Council  Decision  authorising  the  reduced  excise  duties  expires  in 
2020, a ‘no action’ scenario would imply that the current system of reduced rates expires 

28 Joined Cases C-132/14 to C-136/14 
29 COM(2017) 623 final 

13 

 
                                                           
in  2020  with  no  other  regime  put  in  place.  This  is,  however,  not  considered  to  be  a 
realistic baseline scenario.  

As  such,  we  assess  non-renewal  of  the  regime  as  a  ‘new  policy  option’,  whereas  the 
baseline option for this regime is defined as a ‘business as usual’ scenario, in which the 
derogation  is  renewed  for  a  further  seven  years.  The  baseline  assumes  that  the  75% 
reduced rate for rum and liqueurs on Madeira and liqueurs and eaux-de-vie on the Azores 
continues after 2020.  

4.2.Description of the policy options 

Option 1 – Termination of the OR specific support 

Under this policy option, the existing regime for the Portuguese outermost regions would 
not be renewed and would therefore expire on 31 December 2020. In the absence of the 
specific  regime,  the  Portuguese  authorities  may  apply  Article  7(3)  of  Directive 
92/84/EEC,  which  allows  for  a  50%  reduced  rate  to  certain  spirit  drinks  made  and 
consumed in the Portuguese outermost regions. Small independent distilleries producing 
less  than  10  hectolitres  of  pure  alcohol  per  annum  will  be  subject  to  a  reduced  rate  of 
50%  of  the  standard  Portuguese  rate  of  excise  duty  in  accordance  with  Article  22  of 
Directive 92/83/EEC. These provisions are not cumulative as in both cases the maximum 
relief possible is 50% of the standard Portuguese rate of excise duty. 

Box 2: Application of Article 7(3) of Directive 92/84/EEC 

If the derogation was not renewed, the Portuguese authorities could use Article 7(3) of 
Directive  92/84/EEC  to  apply  a  reduced  excise  duty  rate  of  up  to  50%  of  the  standard 
rate to:  

In Madeira 

rum  as  defined  in  Article  1(4)(a)  of  Regulation  (EEC)  No  1576/89  having  the 
geographical  characteristics  set  out  in  Article  5(3)  and  Annex  II,  point  1,  of  that 
Regulation, 

liqueurs  produced  from  sub-tropical  fruit  enriched  with  sugar  cane  eau-de-vie  and 
having  the  characteristics  and  qualities  defined  in  Article  5(3)(b)  of  Regulation  (EEC) 
No 1576/89; 

In the Azores 

liqueurs  as  defined  in  Article  1(4)(r)  of  Regulation  (EEC)  No  1576/89  produced  from 
passion fruit and pineapple, 

eau-de-vie made from wine or from grape marc having the characteristics and qualities 
defined in Article 1(4)(d) and (f) of Regulation (EEC) No 1576/89. 

This provision applies to a limited number of liqueurs and no crème de in comparisons to 
the Council Decision. 

Option 2 – Extension to rum produced and consumed in the Azores 

The current Decision applies a reduced rate of excise duty on the sale of specific spirit 
drinks  in  Madeira  (rum  and  liqueurs)  and  in  the  Azores  (liqueur  and  eaux-de-vie).  In 
accordance  with  this  policy  option  the  regime  would  be  renewed  as  it  is  with  an 
amendment  to  enlarge  its  scope  to  cover  sales  on  the  Azores  of  locally  produced  rum. 

14 

 
 
This  would  address  the  current  imbalance  between  rum  producers  in  the  Portuguese 
outermost  regions  and  ensure  all  rum  producers  in  both  Madeira  and  the  Azores  are 
treated  equally.  This  option  would  apply  a  75%  reduced  rate  for  rum  and  liqueurs  on 
Madeira and rum, liqueurs and eaux-de-vie on the Azores.  

Option 3 – Extension of the current 75% reduced rate to Azorean rum consumed in the 
Azores and a 50% reduced rate on the Portuguese mainland for all spirit drink products 
(rum, liqueurs, eaux de vie). 

The current Decision applies a reduced rate of excise duty on sales of specific products in 
Madeira  (rum  and  liqueur)  and  in  the  Azores  (liqueur  and  eaux-de-vie).  Under  this 
option, the scope of the regime would be amended in order to extend the existing reduced 
rate of 75% to include rum sold in the Azores and also allow a 50% reduction in excise 
duty on sales of these rum, liqueurs and eaux de vie on the Portuguese mainland. Within 
this option, there are two possible sub-options:  

  Option  3.1  –  The  reduced  rate  of  50%  on  the  mainland  applies  to  a  quota  of 

6,000 hectolitres of pure alcohol per year  

  Option 3.2 – The reduced rate of 50% on the mainland applies to all sales of the 

specific alcoholic beverages, with no annual quota applied.  

The Portuguese authorities requested option 3.1 including a quota of 6,000 hectolitres of 
pure  alcohol  per  year  in  order  to  address  the  issue  of  market  saturation  for  rum  and  to 
remove  the  barriers  facing  producers  accessing  markets  outside  of  the  local  outermost 
regions.  This  volume  was  based  on  projections  from  various  stakeholders  and  is 
approximately 9% of the current total spirits market in mainland Portugal. While this is 
significantly  below  the  current  quota  of  144,000  hectolitres  of  pure  alcohol  per  annum 
applied  to  rum  produced  in  the  French  outermost  regions  and  sold  on  the  French 
mainland in absolute terms, relative to the size of the spirits market in each country it is 
similar.  

4.3.Options discarded at an early stage 

Direct support to production 

Under this alternative, the derogation would not  renewed but  alternative support would 
be  provided  to  the  industry  via  a  direct  subsidy  to  producers.  This  support  could  be 
through an approved EU mechanism for State aid, or a subsidy either with the intention 
of targeting employment or supporting small producers, or regional operating aid.  

While this option could potentially target support better to the producers, it would result 
in  increased  burdens  and  costs  for  stakeholders.  The  current  regime  is  administered 
through  excise  duty  returns,  with  low  costs  for  both  producers  and  authorities.  A  new 
delivery system would be required, which may involve significant costs for little benefit. 
For these reasons, this option would not be a viable option and will be discarded.  

Lower the reduced rate to 50% with extension to Azorean rum and mainland sales  

Under this policy option, the maximum reduction in excise duty would be set at 50% of 
the  standard  excise  duty  (instead  of  the  current  reduction  of  75%).  The  50%  reduction 

15 

 
 
  
 
would apply to the rum, liqueurs in Madeira, rum, liqueurs and eaux-de-vie in the Azores 
and all products on the Portuguese mainland with no quota.   

Producers  in  the  outermost  regions  are  small  medium  enterprises  who  are  faced  with 
additional  costs  which  are  compensated  by  the  existing  regime.  However,  some 
producers, particularly smaller producers and those in the Azores are undercompensated 
by the 75% reduction.  

The  local  outermost  regions’  market  is  vital  to  the  producers  as  currently  90%  of  their 
production is sold in the local market with producers noting the additional freight costs 
associated with mainland sales as a major barrier. The negative impacts of lowering the 
reduced rate to 50% from the current rate of 75% would not be offset by the benefits of 
extending the reduced rate to the mainland. For these reasons, this option would not be 
effective or coherent with OR policy.  

5.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 

5.1.Methodology 

The impacts of the policy options have been assessed mainly on the basis of a study by 
the external contractor, PricewaterhouseCoopers. The study was based on a combination 
of  primary  research,  that  is,  on  data  gathered  from  all  relevant  stakeholders  and 
independent  research  to  triangulate  findings,  review  of  the  existing  literature  and  data, 
and economic and policy analysis. The data collected from institutional stakeholders and 
the producers, across both islands covering approximately 90% of production under the 
derogation, was a key focus of the study.  

Appropriate,  but  limited,  adjustments  were  made  on  specific  points  where  this  was 
warranted  by  newer  information  becoming  available  or  by  fine-tuning  of  the  policy 
option. For the quantitative estimates, the impacts  are measured as the deviation  of the 
variable assessed from the baseline, at the conventional date of 2027. This is sufficiently 
distant to allow short-term effects play out with the exception of the emerging effects of 
COVID-19. Full details on the methodology are provided in Annex 4.  

Effects of the COVID-19 pandemic on the projections underlying the assessment 

It  should  be  noted  that  the  baseline  scenario  as  well  as  the  impacts  from  the  various 
options have been assessed on the basis of the study carried out in late 2019-early 2020. 
As such, the effects of the COVID-19 pandemic are not taken into account. The COVID-
19  pandemic  will  certainly  reduce  tourists  to  the  outermost  regions  and  demand  for 
spirits in the first half of 2020. At the time of writing, it is too early to assess whether the 
impact on the tourism and the demand for spirits will be limited to 2020 or will stretch 
into  the  future.  While  in  the  first  case  the  projected  baseline  may  not  be  affected  to  a 
large extent, in the second case, the baseline scenario may overstate growth. The impacts 
of the options, however, are calculated on the basis of long-term elasticities and should, 
as a result, be less affected than the baseline. 

5.2. Baseline 

Historical  growth  rates  of  all  products,  with  the  exception  of  eaux-de-vie,  have 
significantly exceeded GDP growth rates and tourist expenditure during the period 2010 
and  2018.  In  the  medium  term  this  is  unlikely  to  continue  and  it  is  probable  that  the 

16 

 
growth rate will slow down. It is expected that the growth rate will converge to 2%, the 
average  growth  rate  of  the  economies  of  outermost  regions.  Based  on  this  growth  rate, 
total sales are expected to increase from 4,230 to 6,560 hectolitres of pure alcohol under 
the  baseline  scenario.  Market  distortions  will  continue  to  be  limited  due  to  the  small 
volumes involved.  

Additional  costs  for  producers  will  continue  to  be  broadly  offset  by  the  regime  and 
production  across  the  relevant  spirit  drinks  industry  is  expected  to  grow  by  3.3%  on 
average per  year. An increase in land use for sugarcane production is expected with no 
major environmental effects.    

Compliance costs and minor administrative burdens are assumed to  remain  broadly the 
same in the baseline scenario. The fiscal costs are estimated to increase to €7.3 million by 
2027  and  will  remain  relatively  modest  in  terms  of  its  share  of  tax  receipts  in  the 
outermost regions.  

The  regime  is  expected  to  remain  coherent  with  EU  policies  for  the  outermost  regions 
and State aid guidelines.  

5.3. Option 1 – termination of OR specific support 

Market and employment impact 

Option  1  means  specific  spirit  drinks  produced  and  sold  in  Madeira  and  the  Azores 
would  be  subject  to  50%  relief.  The  relief  in  Directive  92/84/EEC  is  more  limited  in 
scope  compared  to  the  Decision  and  more  than  85%  of  the  liqueurs  produced  in  the 
Azores  would  be  ineligible  for  this  reduced  rate  of  excise  duty  as  they  are  made  with 
fruits other than passion fruit or pineapple. Producers of rum in Madeira and eaux-de-vie 
would still receive relief, albeit at 50% rather than the current 75%. Separate to Directive 
92/84/EEC,  small  independent  distilleries  with  an  annual  production  of  less  than  10 
HLPA would be entitled to 50% relief on all products consumed in all of Portugal. Based 
on  annual  production  only,  21  producers  may  fall  under  this  regime30,  including  7 
distilleries in the Azores producing liqueurs.  

In this scenario, additional costs for products covered by Directive 92/84/EEC would be 
undercompensated on average, particularly in the Azores. Small independent distilleries 
in  the Portuguese outermost regions  would  not  be compensated  for the  additional costs 
they  face  due  to  the  location.  In  response  to  this,  sales  would  decrease  by  510  HLPA, 
with  the  production  of  Azorean  liqueur  declining  by  11%.  This  drop  in  sales  would 
directly  affect  employment  with  an  estimated  loss  of  39  jobs.  This  would  reduce  the 
GVA by 1,533.  

Fiscal and administrative impacts 

Lowering  the  reduced  rate  to  50%  instead  of  75%  and  reducing  the  number  of  eligible 
spirit drinks would result in an additional €3.4 million in excise duty and VAT receipts. 

30 This relief is for legally and economically independent distilleries, who produce less than 10 HLPA per 
annum. Compliance with both criteria is necessary in order to avail of this relief.  

17 

 
                                                           
This  includes  €1.2  million  more  on  Azorean  liqueurs.  Ongoing  administrative  costs 
would be expected to  remain broadly the same as the current derogation. However, the 
change  in  products  scope  may  result  in  new  costs  due  to  uncertainties  regarding 
eligibility.   

Table 3: Comparison of Option 1 with the baseline 

Change in sales 
(HLPA) 

Change in GVA 
(€,000) 

Change in jobs 
(FTE) 

Change in tax paid 
(€‘000) 

-510 

-1,533 

-39.3 

+3,414 

Compared to 
baseline (2027) 

Source: PwC et al, 2020 

5.4. Option  2:  Extension  of  the  75%  reduced  rate  to  rum  produced  and 

consumed in the Azores 

Market and employment impact 

Rum  production  in  the  Azores  is  limited  with  one  producer  distilling  rum  since  2018. 
Sugarcane  is  produced  on  a  low  level  in  the  Azores,  due  in  part  to  the  fact  that  the 
archipelago lies  at  the northernmost  extremity of sugarcane production  and is  not  ideal 
for  cultivation.  Costs  of  sugarcane  production  is  estimated  to  be  30%  higher  than 
the  Azores  would  be 
sugarcane  grown 
undercompensated by the reduced rate. Taking these factors into account, it is estimated 
that production of Azorean rum would reach 589 HLPA by 2027. This would result in 7 
additional jobs and increase GVA by €270,000. 

in  Madeira  and  rum  producers 

in 

Fiscal and administrative impacts 

Extending the 75% reduced rate to rum produced in the Azores would increase the fiscal 
cost by €619,000, a modest increase. Ongoing administrative costs would be expected to 
remain broadly the same as the current derogation. 

Table 4: Comparison of Option 2 with the baseline 

Change in sales 
(HLPA) 

Change in GVA 
(€,000) 

Change in jobs 
(FTE) 

Change in tax paid 
(€‘000) 

+589 

+270 

+7.2 

-619 

Compared to 
baseline (2027) 

Source: PwC et al, 2020 

5.5. Option 3 – Extension of the 75% reduced rate to Azorean rum consumed 
in the Azores and a 50% reduced rate on the Portuguese mainland for all 
products 

Market and employment impact 

The  production  of  Azorean  rum  is  limited  and  the  impacts  of  this  option  alone  are 
presented  in  section  5.4  above.  A  reduced  rate  of  50%  for  all  products  released  for 

18 

 
 
 
consumption on the Portuguese mainland would primarily affect rum producers, who are 
producing more than 10 hectolitres of alcohol per year and therefore not eligible for the 
50% reduced rates for small independent distilleries.  

Land  use  for  sugarcane  production  has  increased  by  40%  between  2010  and  2018. 
During the same period, rum production has doubled indicating an improved cane yield. 
As discussed in section 2.2, this has resulted in the stockpiling of rum as the local market 
is  becoming  saturated.  Access  to  the  Portuguese  mainland  market  with  reduced  rates 
would contribute to resolving this issue. Both options apply a 50% reduced rate, however 
option 3.2 limits this to 6,000 HLPA.  

This  quota  would  have  no  immediate  impact  as  projected  sales  are  well  below  this 
volume. The situation is likely to remain for several reasons including the limited amount 
of Utilised Agricultural Area (UAA) available for sugarcane production the unfavourable 
climate, and the expected negative impact of the COVID-19 pandemic on production and 
consumption  of  alcohol  products.  Therefore,  the  impacts  of  both  sub-options  are 
expected  to  be  the  same.  sales  were  expected  to  increase  by  953  HLPA  by  2027.  This 
would result in 11 additional jobs and increase GVA by €430,000.   

Fiscal and administrative impacts 

The introduction of a 50% reduction in excise duty for specific OR products consumed in 
mainland Portugal will generate new administrative and compliance cost.  

The  costs  of  option  3.1  are  higher  than  option  3.2  as  option  3.1  would  increase  the 
administrative costs due to the costs of setting up an IT system to manage and monitor 
the  application  of  a  quota.  It  is  estimated  that  such  a  system  would  add  a  further  20% 
(€3,600 per year) to the costs faced by the producers, who are SMEs. This system would 
also  create  similar  costs  for  the  authorities,  with  a  larger  proportion  borne  by  the 
authorities in the outermost regions.  

Extending the regime to apply a reduced rate to sales of specific OR spirit drinks sold on 
the Portuguese mainland would increase the fiscal cost of the regime by €805,000. The 
table  below  provides  a  comparison  with  Option  2  to  show  clearly  the  impact  of  the 
mainland extension.  

Table 5: Comparison of Options 3.1 and 3.2 with the baseline* 

  Change in sales 

Compared to 
baseline (2027) 

Compared to Option 
2 (2027) 

(HLPA) 

+953 

+364 

Change in GVA 
(€,000) 

Change in jobs 
(FTE) 

Change in tax paid 
(€‘000) 

+430 

+161 

+11.2 

+4.1 

-805 

-128 

*The impacts of both suboptions are the same. Source: PwC et al, 2020 

The following table provides a comparison of all options with the baseline.  

Table 6: Comparison of all options with the baseline  

  Change in sales 

(HLPA) 

Change in GVA 
(€,000) 

Change in jobs 
(FTE) 

Change in tax paid 
(€‘000) 

19 

 
 
 
Option 1 

Option 2 

Option 3.1 and 
option 3.2 

Source: PwC et al, 2020 

-510 

+589 

+953 

-1,533 

+270 

+430 

-39.3 

+7.2 

+11.2 

+3,414 

-619 

-805 

6.  HOW DO THE OPTIONS COMPARE? 

For  the  purposes  of  this  analytical  report,  all  options  have  been  assessed  whether  they 
have  a  positive,  negative  or  neutral  effect  relative  to  the  baseline  for  effectiveness, 
efficiency and coherence. 

Effectiveness 

Effectiveness is assessed by reference to how successfully an option meets the objectives 
of  supporting  the  development  of  the  outermost  regions,  through  compensating  the 
specific OR spirit drinks industry for the additional costs, while mitigating any negative 
impacts on the smooth functioning of the internal market.  

The baseline is a continuation of the current regime, which has effectively compensated 
the  specific  producers  in  the  outermost  regions  for  the  additional  costs  to  date. 
Maintaining the rate reduction at 75% would mean that additional costs would continue 
to  be  broadly  offset.  Production  levels  of  the  specific  spirit  drinks  would  continue  to 
grow by 3.3% on average each  year and support employment in the outermost regions. 
This  increased  production  means  however,  that  stockpiling  of  excess  production  would 
also continue. The baseline would continue to support other stakeholders in Madeira and 
the  Azores  including  operators  in  the  tourism  sector  along  with  those  involved  in  the 
value  chain  of  the  derogation,  such  as  fruit,  wine  and  sugarcane  producers.  While 
volumes sold under the derogation continue to grow over the period, its overall size as a 
proportion  of  the  Portuguese  market  continues  to  mean  that  the  scope  for  market 
distortions is limited.   

The  effectiveness  of  option  1  would  be  less  than  the  baseline  as  the  derogation  is  not 
renewed and the Portuguese authorities revert to the provisions in Directives 92/84/EEC 
and 92/83/EEC that allow a 50% excise duty rate reduction. This option would not fully 
address the additional costs faced by OR producers of all the current spirit drinks as the 
provisions in these Directives have a narrower product scope as well as a smaller rate of 
reduction.  For  most  products,  the  impact  is  relatively  modest,  however  liqueur 
production  in  the  Azores  would  fall  by  approximately  11%.  Overall  moderate  negative 
effects are expected, reducing the effectiveness of this option.  

By  extending  the  current  regime  to  include  rum  production  on  the  Azores,  option  2 
would  result  in  a  small  increase  in  the  support  to  industry.  Production  levels  would 
increase supporting additional jobs with moderate positive effects expected compared to 
the baseline.  

20 

 
Option 331 would be the most effective option as rum producers in the Azores would be 
supported and a reduced rate of 50% would apply to these specific OR products, if sold 
on the Portuguese mainland. This would offset the additional shipping costs incurred by 
OR  producers  in  accessing  the  Portuguese  mainland  market.  This  access  to  another 
market will allow rum producers in Madeira the opportunity to sell their excess stock at 
competitive prices. Furthermore it will provide access to a larger market for all producers 
in  the  outermost  regions,  enabling  them  to  possibly  increase  their  production  and 
ultimately  revenues.  No  market  distortions  are  envisaged  due  to  the  low  volumes 
involved and overall a moderate positive effect on effectiveness is anticipated. 

Efficiency 

Efficiency is  assessed in terms  of how well the costs of the measure, in  terms  of fiscal 
and administrative costs, translate into benefits for the outermost regions. 

The  baseline  scenario  will  see  a  relatively  modest  increase  in  fiscal  and  administrative 
costs, which will be offset by the benefits for the stakeholders. Option 1 would result in 
a decrease in fiscal costs due to the lower reduced rate of 50%, which is applicable to a 
smaller number of spirit drinks. This would reduce the compensation for producers and 
overall  benefits  of  the  regime.  Overall,  no  effect  on  efficiency  is  expected  with  this 
option as  the change in  the product  scope  could  also  result in  additional  administrative 
costs  and  some  legal  uncertainties  for  producers  and  authorities.  A  neutral  impact  on 
efficiency  is  also  expected  for  option  2,  albeit  for  different  reasons.  Option  2  would 
result in an increase in fiscal costs in the Azores but the benefits would be consistent with 
this  increase.  Option  3.2  with  no  quota  for  mainland  sales  would  have  a  moderate 
positive  effect  on  the  efficiency  of  the  regime.  Option  3.1  with  a  quota  would  be  less 
efficient due to the administrative and IT costs associated with a quota.  

Coherence 
The  baseline  and  option  2  would  continue  to  be  coherent  with  regional  and  economic 
policy. Both scenarios would have only modest impacts on trade and be consistent with 
State  aid  guidelines.  A  moderate  positive  outcome  is  expected  with  option  3  with  or 
without  a  quota,  due  to  the  low  volumes  involved.  Option  1  is  less  coherent  with  the 
overall  EU  policy  approach  to  provide  tailor  made  support  to  the  outermost  regions 
pursuant to Article 349 TFEU, as the policy would no longer compensate some producers 
for  the  additional  costs  they  face  producing  specific  spirit  drinks  in  the  outermost 
regions.  

Table 7: Summary of estimated impacts for each of the options considered (see key below) 

Option theme 

Effective 

Efficient 

Coherent 

31 Both sub options are equally effective as the estimated volumes are significantly below the proposed 
quota of 6,000 hectolitres of pure alcohol.  

21 

 
                                                           
Option theme 

Effective 

Efficient 

Coherent 

Baseline: The derogation is renewed with no 
further policy changes 

Option 1: Termination of the OR specific support 

Option 2: Extension of the 75% reduced rate to 
rum produced and consumed in the Azores 

Option 3.1: Extension of the 75% reduced rate to 
Azorean rum consumed in the Azores and a 50% 
reduced rate on the Portuguese mainland for all 
products with a quota of 6,000 HLPA per year 

Option 3.2 Extension of the 75% reduced rate to 
Azorean rum consumed in the Azores and a 50% 
reduced rate on the Portuguese mainland for all 
products with no quota applied  

 0 

- 

+ 

+ 

+ 

0 

0 

0 

0 

+ 

0 

- 

0 

+ 

+ 

Legend: + moderate positive effect expected; 0 no effect or neutral impact expected; - moderate negative effect 
expected; (all relative to baseline) 
Source: PwC et al, 2020 

7.  PREFERRED OPTION 

Option  3.2  with  no  quota  is  the  preferred  option.  This  would  renew  the  special  rules 
beyond  2020  and  extend  the  scope  of  the  current  regime  of  a  reduced  rate  of  75%  to 
include rum produced and consumed in the Azores. This option would also allow a 50% 
reduced  rates  for  the  specific  spirit  drinks  consumed  on  the  Portuguese  mainland.  This 
50%  rate  would  apply  to  all  sales  of  these  specific  spirit  drinks  on  the  Portuguese 
mainland, without a quota (i.e. it would not be subject to quantitative limits). Due to the 
limited volumes involved, a quota is not necessary to  ensure the smooth functioning of 
the internal market. Therefore option 3.2 with not quota means that unnecessary IT and 
administrative costs, for both authorities and economic operators, are avoided. 

This  option  addresses  the  additional  costs  faced  by  spirit  drinks  producers  in  the 
outermost regions as a result of the specific constraints of the regions as set out in Article 
349 TFEU. Producers of rum in the Azores would be subject to the same reduced rate as 
rum producers in Madeira, removing the current imbalance in treatment and ensuring a 
level  playing  field.  This  option  supports  the  economies  of  the  outermost  regions  with 
little impact  on the smooth  functioning of the internal  market.  Moveover, access  to  the 

22 

 
mainland  market  would  be  possible  under  this  option,  as  the  additional  shipping  costs 
would be compensated to an extent through the reduced rate of 50%. This would address 
the emerging issue of market saturation that was identified in the review of the regime.  

8.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

The monitoring of the implementation and functioning of the derogation will be the role 
of the Portuguese authorities and the Commission, as it has been to date.  

In  accordance  with  Article  4  of  the  current  Decision,  the  Portuguese  authorities  were 
required to submit a report, halfway through the life of the Decision to the Commission. 
This  report  was  to  enable  the  Commission  to  assess  whether  the  reasons  justifying  the 
derogation still exist and whether the fiscal advantage granted by Portugal has remained.  

It is important that the Portuguese authorities continue preparing a monitoring report as 
they  are  best  placed  to  gather  the  precise  information  from  the  impacted  stakeholders. 
Portugal will be asked to submit a report by 30 September 2025 for the period from 2019 
to  202432.  This  report  will  include  any  relevant  information  as  regards  the  additional 
costs involved in the production of the specific spirit drinks in the Portuguese outermost 
regions, economic distortions and market impacts. This report will contain the necessary 
information for the evaluation of the effectiveness, efficiency, coherence with other EU 
policies, continued relevance and EU added value of the new legislation. The evaluation 
should also seek to collect input from  all relevant stakeholders  as regards the level and 
evolution  of  their  additional  production  costs,  compliance  costs  and  any  instances  of 
market distortions. 

To make sure that the information collected by the Portuguese authorities and analysed in 
the  report  contains  the  necessary  data  that  the  Commission  must  know  to  take  an 
informed  decision  on  the  validity  and  viability  of  the  scheme  in  the  future,  the 
Commission  will  draw  up  specific  guidelines  on  the  required  information.  Such 
guidelines will be, to the extent possible, common to other similar schemes to the EU’s 
outermost regions, governed by similar legislation. 

This will enable the Commission to assess whether the reasons justifying the derogation 
still  exist,  whether  the  fiscal  advantage  granted  by  Portugal  is  still  proportionate  and 
whether  alternative  measures  to  a  tax  derogation  system  which  are  also  sufficient  to 
support  a  competitive  spirit  drinks  industry  can  be  envisaged,  taking  into  account  their 
international dimension.  

32 The report should include 2019 data so that a baseline is established and that the Commission is able to 
review the impact of the derogation covering the period post 2020. The report should contain the most up 
to date data up to and including 2024, where possible.  

23 

 
 
                                                           
Annex 1: Procedural information 

1.  Lead DG, Decide Planning/CWP references 

The lead Commission service for this file is the Directorate General for Taxation and the 
Customs Union (DG TAXUD). 

This initiative got the following political agreements: 

-  Agenda  Planning  and  roadmap:  Proposal  for  a  Council  Decision  replacing 
Council  Decision  376/2014/EU  authorising  Portugal  to  apply  a  reduced  rate  of 
excise duty for rum, liqueurs and eaux-de-vie produced in Portuguese outermost 
regions (period post 2020) (PLAN/2019/5285) 

Due  to  its  limited  impacts,  the  file  was  not  included  in  the  Commission  Work 
Programme. 

2.  Organisation  

The  following  Commission  services  were  invited  to  the  Inter-Service  Steering  Group: 
AGRI, BUDG, CLIMA, COMP, DEVCO EMPL, ENV, GROW, HOME, JRC, MOVE, 
REGIO, SANTE, SG, SJ, and TRADE. 

A consortium led by PricewaterhouseCoopers LLP – PwC and CASE - Center for Social 
and  Economic  Research,  (hereinafter  collectively  referred  to  as  “the  Consultant”) 
undertook  the  assignment  titled  “Study  on  reduced  excise  duty  rates  in  the  Portuguese 
outermost regions of Madeira and Azores”. 

The study has established the basis for a so-called back-to-back exercise with evaluation 
and a forward-looking assessment carried out simultaneously in accordance with  Better 
Regulation Guidelines. 

The objectives of the study were to analyse whether the reduced excise duty rate applied 
on  rum  and  liqueurs  produced  and  consumed  in  the  Portuguese  region  of  Madeira  and 
liqueurs and eaux-de-vie produced and consumed in the Portuguese region of the Azores 
is fit for purpose and the scale of the issues or weaknesses encountered in its application. 

The study assessed the evolution of the problems of the current regime and the impacts of 
the possible options to address the problems identified. 

24 

 
 
 
 
Annex 2: Stakeholder consultation 

Background 

The  study  has  been  commissioned  to  evaluate  the  regime  of  reduced  excise  duty  rates 
applied to certain spirit drinks made and sold in the outermost regions of Madeira and the 
Azores  and  to  assess  future  options  for  the  period  after  the  current  regime  expires  in 
2020. Under this derogation, excise duty rates can be reduced by up to 75% on rum and 
liqueurs  made  and  sold  in  Madeira  and  liqueurs  and  eaux-de-vie  made  and  sold  in  the 
Azores. 

The  objectives  of  the  regime  are  to  support  the  production  of  certain  spirit  drinks  in 
Madeira  and  the  Azores  and,  through  that,  the  development  of  the  economies  of  these 
regions.  Specifically,  the  derogation  is  intended  to  provide  compensation  for  the 
additional  costs  faced  by  producers  in  Madeira  and  the  Azores.  The  derogation  is 
permitted  under  Article  349  of  the  Treaty  for  the  Functioning  of  the  European  Union, 
which  allows  for  the  adoption  of  specific  measures  to  take  account  of  the  structural, 
social and economic situation of the ORs33. 

Outline of the consultation strategy 

The  consultation  was  needed  to  provide  information  related  to  the  industry  and  the 
operation  of  the  derogation  in  order  to  inform  both  the  evaluation  and  assessment  of 
impacts. The main objectives of the consultation are set out below: 

  Collect  data  from  relevant  stakeholders  involved  in  the  current  derogation  in 

order to undertake the evaluation;  

  Collect opinions from stakeholders affected by the derogation (both directly and 
indirectly) on the current derogation and on options for the derogation after 2020;  
Identify areas  where the current  derogation is  achieving its  objectives  and areas 
where it could be improved; and, 

 

  Better understand the costs and burdens on relevant stakeholders associated with 

the derogation. 

All  questionnaires  were  issued  with  a  letter  of  introduction  provided  by  the  European 
Commission.  The  questionnaires  were  issued  with  an  initial  four-week  time  frame  for 
responses, with email follow-ups being issued during this period for recipients who had 
not responded. The time period was extended for two further weeks in order to encourage 
responses. Most responses were received in the sixth week of the consultation period. 

33 Article 349 specifies the situation of the ORs ‘is compounded by their remoteness, insularity, small size, 
difficult  topography  and  dependence,  economic  dependence  on  a  few  products,  the  permanence  and 
combination of which severely restrain their development’.  

25 

 
 
                                                           
In  order  to  collect  the  information  set  out  above,  several  groups  of  stakeholders  were 
identified  for  consultation.  The  table  below  sets  out  stakeholders  consulted  and  tools 
used. 

Table 8 Stakeholders consulted and tools used 

Stakeholder 

Method of consultation 

EU Commission 
and Portuguese/ 
regional authority 
officials 

Scoping discussions, 
targeted 
questionnaires 
followed up by ad-hoc 
interviews if required. 

Authorities in 
Madeira and the 
Azores 

Targeted 
questionnaires 
followed up by ad-hoc 
interviews if required. 

Economic 
operators 
(producers and 
distributors) 

Initial discussions, 
targeted detailed 
questionnaires 
followed up by ad-hoc 
interviews if required 
for economic 
operators with 
detailed involvement 
in the working of the 
derogation, alongside 
data gathering. 

Consultation 
period 

Q3 and Q4 2019 

Content 

Language 

The functioning of the 
current system 

EN/PT 

Coherence with wider 
EU/Portuguese policies 

Possible future policy 
options 

The impacts of policy 
options 

Q3 and Q4 2019 

The functioning of the 
current system 

EN/PT 

Possible future policy 
options 

The impacts of policy 
options 

Q3 and Q4 2019 

The functioning of the 
current system 

EN/PT 

Coherence with wider 
EU/Portuguese policies 

Possible future policy 
options 

The impacts of policy 
options 

Consultation activities undertaken 

In  order  to  implement  the  approach  set  out  in  the  above  table,  seven  targeted 
questionnaires  were  developed.  The  table  below  sets  out  the  activities  undertaken  and 
responses received. 

26 

 
 
 
 
 
 
 
 
 
 
 
 
Table 9 Questionnaire response rates 
Target group 

Key topics covered 

Recipients 

Total 
responses 
received 

Response 
rate 

European 
Commission 

Portuguese 
authorities 

Producers in 
Madeira 

Producers in the 
Azores 

Portuguese 
distributors 

Civil society 

Administrative process and costs 
Future of the derogation 
Associated costs 
Expansion of derogation 

Impact of the derogation 
Procedures and costs 
Future of derogation 
Expansion of derogation to mainland 

Administrative process and costs 
Future of derogation 
Associated costs 
Alternative suggestions 

Main distribution activities 
Future of derogation 
Associated costs 
Market size and product quantities 
Market in mainland 

Awareness of derogation 
Impact of ending the derogation 
Potential future options 

8 

3 

1134 

13 

14 

13 

4 

1 

5 

5 

2 

0 

50% 

33% 

45%35 

38%36 

14% 

0% 

Approach and methodology used to process the data: 

The  approaches  used  to  process  questionnaire  responses  were  proportionate  to  the 
response rates. The table below outlines the key approaches used. 

34 Data received from the OR authorities indicated that not all of the recipients of the producer survey were 
active. Comparison suggests that two recipients in Madeira and one in the Azores did not produce alcohol 
within the scope of the derogation. 
35 Estimated percentage of total sales captured by survey in Madeira  - 97.5% Rum, 85.4% Liqueurs, N/A 
Eaux-de-vie 
36  Estimated  percentage  of  total  sales  captured  by  survey  in  the  Azores  -  100%  Rum,  81.3%  Liqueurs, 
98.9% Eaux-de-vie 

27 

 
 
 
 
 
 
 
 
                                                           
Table 10 Questionnaire response rates 
Type of data collected 
Qualitative and 
quantitative 
information on current 
administrative  
processes surrounding 
the derogation 

Questionnaires 
European 
Commission; 
Portuguese and 
regional authorities 

Regional producers 
questionnaires 

European 
Commission; 
Portuguese, Regional 
producers and 
authorities 
Regional producers 
questionnaires 

Regional producers 
questionnaires 

Approach 
Data was collected for each of the stakeholders in terms of the 
steps and costs of overseeing the derogation and in relation to 
the Council Decisions required for the derogation. These data 
were combined across questionnaires (each questionnaire 
related to the costs of a specific department or Directorate-
General) in order to describe the steps and costs required 
across the EC and Portuguese government. Clarification was 
sought via email / phone to clarify responses that were unclear 
and to follow up on questionnaire responses which had not 
been completed to a sufficient standard of detail. 
Data was collected which provided information on the scale of 
their operations, their revenues, and their cost of operations. 
This was used to distinguish between production type, size of 
producer and better understand the cost burdens on different 
producers. 
Thematic analysis of responses was undertaken to understand 
the main opinions for each stakeholder type. Ideas put forward 
were collected. 

Producers provided qualitative data on the impact of 
additional costs on competition, and the importance of the 
derogation in helping to alleviate these factors. There was also 
information related to the advantages and disadvantages of the 
derogation and suggested policy options. 
Quantitative data was collected from regional producers on 
the current scale of their operations, their revenues, and their 
cost of operations, total costs and volumes of inputs used in 
the production of alcohol and an estimation of extra time 
required. 

Thematic analysis of responses was undertaken to identify the 
categories of production costs such as raw materials and 
transportation, as well as the impact of the special 
characteristics of the regions (e.g. the effect of higher prices 
and missed economies of scale) on the costs of production. 

Quantitative data on 
production and 
production costs 

Opinions on the 
current derogation and 
future of the 
derogation 

Qualitative data 
collected on additional 
costs of production 

Quantitative data on 
operations and 
additional costs of 
production 

Summaries of stakeholder consultation 

European Commission  

The  purpose  of  the  stakeholder  questionnaire  was  to  understand  the  impact  of  the 
derogation,  and  to  gather  views  from  the  Commission  on  its  overall  operation.  The 
survey was sent to the following European Commission stakeholders. We had four total 
respondents from DG REGIO, DG AGRI, DG TAXUD and DG COMP. 

o  Significance of the derogation  

28 

 
 
 
 
 
Based  on  the  results  provided  by  the  stakeholders,  two  of  the  respondents  stated  that 
according to their DG/unit’s perspective, the derogation is significant as it impacts on its 
operations. One of the respondents stated that the derogation is very significant, as it has 
a consequential impact on its operations. The final respondent stated that the derogation 
brings  minimal  significance  as  the  derogation  is  of  little  importance  to  its  operations. 
There was a general understanding among the respondents that the end of the derogation 
would lead to negative consequences for the Portuguese ORs and the objectives of their 
DG/unit.  

Some  of  the  possible  consequences  are  that  the  wider  development  aims  of  the 
Portuguese ORs would be inhibited and limitations would be placed on the realisation of 
employment, agriculture and environmental objectives. Other consequences were that the 
stakeholder would stop monitoring the regime. In addition to this, it was noted that if the 
derogation was to end in 2020, the unit would immediately be called upon to find means 
to  mitigate  effects  on  farmers  and  local  businesses  who  rely  on  the  derogation. 
Additionally,  the  unit  would  also  need  to  set  up  a  task  force  to  search  for  alternative 
solutions. 

o  Current procedures around the existing derogation 

Table 11  Steps taken by the DG related to administration of the decision and appropriate 
costs incurred by the unit 

Explanation of the complete steps required to oversee and administer the derogation. 

Question: Please describe each step associated with overseeing and administering the decision whilst it is in force, 
from your section’s perspective? Please indicate the length of this step and insert as many as required. 

Step 

DG TAXUD 

DG REGIO 

DG AGRI 

DG COMP 

1 

Set up study contract 

2 

Manage the 
Interservice Steering 
Group 

Assessment of current Council 
Decision in place, as well as (legal) 
developments in the past 

Comparison of derogation with similar 
derogations in the concerned 
outermost region and in other ORs. In 
case of elaboration of a study, 
contributing to Terms of References 
and participating in Inter-Service 
Steering Group. 

In case of elaboration of a study, 
contribute to feedback on 
questionnaires; take part in 
questionnaires and interviews and 
contribute feedback; Provide input to 
the shaping of the options of the 
forward looking assessment and  

29 

Assessment of 
documentary 
evidence justifying 
the Commission’s 
proposal to the 
Council 

Inter-service 
consultation 

Assessment of the 
Commission‘s 
proposal to the 
Council 

 
 
 
analysis of the impact under each 
option 

Provide input and comments to the 
draft proposal, at the ISSG and 
bilaterally, provide a response to the 
inter service consultation, support the 
adoption of the Commission proposal 

Contribute to the preparation of 
briefings and communication on the 
Commission’s proposal 

Assessment of final proposal and 
forward-looking assessment by lead 
DG and feedback in the framework of 
inter-service consultation 

Assessment of the 
Commission‘s 
proposal to the 
Council 

Follow legislative work in Council and 
if applicable initiative report in 
European Parliament.  

Assessment of final Council Decision 

Follow up of the 
decision (mid-term 
review, 
modifications etc.) 

3 

4 

5 

Draft the Evaluation 
Report and the 
forward-looking 
assessment 

Steer the proposal, 
including the 
Evaluation Report 
and forward looking 
assessment, through 
Interservice 
Consultation 

Negotiate the 
proposal with 
Council and with 
Parliament and the 
Committee of the 
Regions 

Cost and Description of Cost 

Question: For each step, please describe approximate costs (person-days) and any other costs incurred from your 
unit. Please insert as many as required. 

DG 

134 person- days 

15.5 person-days 

2 person-days 

2 person-days 

Total 

o  Ongoing administration the existing derogation 

30 

 
 
 
 
 
 
 
 
 
 
 
Table 12 Steps associated with overseeing and administering the decision whilst it is in force and 
associated costs 

Question: Please describe each step associated with overseeing and administering the decision whilst it is in force, 
from your unit’s perspective? Please insert as many as required. 

Step 

DG TAXUD 

DG REGIO 

DG AGRI 

DG COMP 

1 

2 

Assessment of report 

Assessment of possible 
amendments 

Question: Cost and Description of Cost - For each step, please describe approximate costs (person-days) and any 
other costs incurred in your unit. 

Total 

10 person days 

o  Questions on the future of the derogation 

One stakeholder suggested extending the derogation to spirits produced in Madeira and 
the Azores consumed in mainland Portugal if the study demonstrates added value for the 
outermost regions’ economies. This would be similar to the derogation on excise duty for 
rum produced in four French outermost regions and consumed in mainland France. 

It  was  also  suggested  that,  if  a  quota  is  established,  there  would  be  a  possibility  of 
adapting to this quota without going through the whole special legislative procedure, i.e. 
adapting a potential quota via delegated acts. 

o  Expansion of the derogation for exports to mainland Portugal  

The extent of the implications of the extension of the derogation were subject to the role 
played  by  each  of  the  DG  units.  Two  stakeholders  declared  that  there  would  be  no 
operational implications for the respondents unit and extension of the derogation will not 
significantly affect the operations of the DG/unit, if Portugal uses the possibility offered 
by  the  Council,  DG  COMP  has  to  assess  the  derogation  (including  extension  to 
Portuguese mainland) with regards to State aid rules.  

It  was  also  felt  that  an  extension  would  result  in  increased  competitive  prices  between 
OR and non-OR rums or – given the existing substitution effect – with other spirit drinks. 
It  was  also  noted  that  given  that  financial  support  is  already  granted  under  POSEI  and 
Rural Development, it should be ascertained that the proposed derogation does not result 
in  an  overcompensation  of  the  overall  costs  deriving  from  the  outermost  nature  of 
Madeira  and  the  Azores,  as  such  undue  advantage  would  jeopardize  the  level  playing 
field that should exist among EU spirit drink producers.  

31 

 
 
 
 
 
 
 
 
 
 
 
However,  in  relation  to  quotas  for  consumption  one  stakeholder  stated  that  they  would 
need  to  provide  inputs/comments  in  relation  to  this.  It  was  also  mentioned  that  there 
would be need for some risk assessment in relation to the purchase of concerned spirits in 
mainland  Portugal  under  lower  excise  duty  and  the  further  shipment  to  another  EU 
Member State. 

Portuguese authorities 

Limited responses were received from Portuguese authorities and the questionnaires were 
distributed  to  the  Portuguese  Authorities  respondents.  We  received  a  formal  response 
from  one  of  three  Portuguese  Authorities  which  were  contacted  (the  Azores),  however 
we  received  relevant  data  over  the  course  of  the  study  from  all  authorities,  including 
multiple calls. 

Regional producers 

The  purpose  of  the  producer  questionnaire  was  to  understand  the  impact  of  the 
derogation, and to gather views from the relevant producers on its overall operation. The 
respondents  to  the  questionnaire  were  assured  of  the  confidentiality  of  their  responses 
and that is reflected in the summary below. The survey was sent to a group of producers 
across Madeira and the Azores. 

The table below outlines the share of production that has been captured in the responses 
that we have received to date from producers.  

Table 13 Producer questionnaire coverage 

Liqueurs 

Eaux-de-vie 

Madeira 

Reported total sales received from 
Portuguese Authorities (HLPA) 

Total 2018 sales covered by 
questionnaire responses (HLPA) 

Estimated percentage of total sales 
captured by survey 

Azores 

Reported total sales received from 
Portuguese Authorities (HLPA) 

Total 2018 sales covered by 
questionnaire responses (HLPA) 

Estimated percentage of total sales 
captured by survey 

Rum 

2,455 

2,394 

637 

544 

97.5% 

85.4% 

N/A 

N/A 

N/A 

Rum 

N/A 

7.5 

Liqueurs 

Eaux-de-vie 

846 

688 

280 

277 

100%37 

81.3% 

98.9% 

37 Currently only one producer of Rum in the Azores. 

32 

 
 
                                                           
Total coverage 

92.5% 

Responses came from a range of different sized producers. In Madeira, 2018 production 
reported by respondents varied between 1,300 HLPA and under 2 HLPA. In the Azores, 
it varied between just over 450 HLPA and around 20 HLPA (6,000 bottles). We received 
responses from four producers of rum and liqueurs in Madeira one of just liqueurs.  

In the Azores, we received responses from two producers of liqueurs and eaux-de-vie and 
three who just produced liqueurs. Six respondents sold some products on the Portuguese 
mainland and five in third countries.  

o  Costs of production 

Respondents  provided  details  of  the  costs  of  production  broken  down  by  categories  of 
spend.  All  but  one  producer  reported  that  costs  were  significantly  higher  than  on  the 
mainland, with the other saying they were somewhat higher.  

The most recognised factor driving those costs (by seven out of ten responses) was the 
higher  cost  of  raw  materials  and  labour,  although  there  was  broadly  a  consensus  about 
the  factors  affecting  costs.  We  asked  respondents  to  quantify  these  factors  and  while, 
overall,  the  responses  showed  some  consistency,  with  additional  costs  consistently 
around 25-30% of production costs excluding raw materials, there was some variation in 
how these were attributed. 

o  Future policy options 

Five producers from Madeira and three producers from the Azores stated either that their 
company  would  not  survive  if  the  derogation  ended  in  2020  or  there  would  be  a 
significant impact on the company. In Madeira, one producer mentioned that exporting to 
the continent would be a way of disposing of production as  the regional market did not 
absorb all products produced.  

In the Azores, four producers stated that they expected to increase the level of production 
and,  therefore,  they  would  be  able  to  operate  on  an  equal  footing  to  operators  in  the 
continental  Portuguese  markets.  It  was  also  mentioned  that  applying  the  derogation  to 
products from the Azores was logical in order to remain competitive in the face of higher 
transportation costs.  

In  regard  to  the  extension  of  the  derogation,  three  stakeholders  in  Madeira  stated  that 
they  agreed  with  the  application  of  the  quotas  for  rum  destined  for  the  Portuguese 
market.  

In the Azores, two producers appreciated the introduction of a quota-based system as it 
would allow access to markets which were now currently closed to Azorean companies 
due to an inability to compete on price. It was also felt that this would be advantageous, 
as it would increase the competitiveness of the product and introduce economies of scale. 

33 

 
 
o  Rankings of possible policy options 

In Madeira, all recipients favoured continuing the derogation beyond 2020 and extending 
it to cover all sales of products included in the current derogation in mainland Portugal 
was the most favoured option. Support was less strong in the Azores with the extension 
to  mainland  Portugal  only  being  the  favoured  option  of  two  producers.  Two  producers 
preferred  the  option  where  the  current  derogation  system  ended  and  other  forms  of 
subsidies  were  used  to  support  the  local  spirit  drinks  industry.  One  producer  preferred 
that the derogation continued beyond 2020 in its current form (reduced taxation is only 
applicable to locally produced and consumed spirit drinks).  

There  was  general  support  for  continuing  the  derogation  although  one  producer  in  the 
Azores favoured alternative means of support but did not provide further details. We also 
asked  about  alternative  options  and  improvements  to  the  derogation,  and  two  provided 
responses.  One  mentioned  potential  extensions  to  gin  made  in  the  Azores  and  liqueurs 
flavoured by non-local ingredients in the Azores/Madeira, where those were not available 
in the ORs. 

Portuguese distributors 

There  was  a  limited  response  from  the  Portuguese  distributors,  with  only  two  of  the 
fifteen  distributors  surveyed  providing  a  response:  one  operating  in  Madeira  and  the 
other  largely  on  the  Portuguese  mainland  where  it  is  currently  involved  in  distributing 
Madeiran  rum.  Each  displayed  a  good  awareness  of  the  derogation  and  supported  its 
continued operation.  

The  distributor  operating  in  Madeira  reported  concerns  that  there  would  be  a  sharp 
reduction in consumption if the derogation was not extended. There was limited further 
quantitative information  provided in  this case. Both  distributors supported an extension 
to  the  mainland,  reporting  that  the  higher  cost  of  regional  products  was  the  most 
significant factor affecting sales on the mainland of these products.   

The mainland focused distributor would expect to increase sales in these circumstances. 
The main other factors impacting mainland sales were identified as marketing and quality 
of products. Availability of sufficient products was not seen as a significant factor. Some 
further  information  on  distribution  costs  was  provided.  Follow  up  via  email  and 
telephone was tried multiple times in order to receive a response and increase the sample 
size of distributors contacted. 

Mainland producers 

No response was received from any of the 14 mainland producers which were contacted 
for  a  response.  Follow  up  via  email  and  telephone  was  tried  multiple  times  in  order  to 
receive a response. 

Civil society 

34 

 
Civil society questionnaires were sent to 13 different organisations that were researched, 
however  none  replied.  They  were  followed  up  via  email  and  telephone  and  focused  on 
health and industry related stakeholders. While a promise of responses from two groups 
was received, it was not the case in the end. 

Feedback 

The data collected was instrumental in the evaluation of the derogation over the period 
2014-2019. It formed the basis of the analysis of additional costs, administrative burdens 
and  the  assessment  of  EU  value  added,  coherence,  relevance,  effectiveness  and 
efficiency.  It  also  provided  valuable  context  for  the  analysis  of  the  assessment  of  the 
impacts of various options for the future of the derogation. 

The  analysis  supported  by  the  stakeholder  consultation  will  be  considered  by  the 
European Commission and will form the basis of their recommendations on the future of 
the derogation. 

35 

 
 
 
 
Annex 3: Who is affected and how? 

The  table  below  compares  the  benefits  of  the  Council  Decision  No  376/2014/EU 
derogation  for  each  stakeholder  group  over  the  period  2014-20  against  the  associated 
costs.  It  has  not  been  possible  to  quantify  the  benefits  and  costs  for  every  stakeholder 
group. 

Table 14 (summary of benefits and costs per stakeholder group) 

Stakeholder 
group 

Spirit drinks 
producers 

Madeira 

Azores 

Benefits: Based on data received from the 
Portuguese authorities, the total tax 
benefit in reduced excise tax and 
associated decreases in output VAT was 
€19.6 million over 2014-19. 

Benefits: Based on data received from 
the Portuguese authorities, the total tax 
benefit in reduced excise tax and 
associated decreases in output VAT was 
€7.8 million over 2014-19. 

Costs: spirit drinks producers within the 
scope of the derogation face a total 
administrative cost of around €42,000 over 
the period 2014-19.  

Costs: spirit drinks producers within the 
scope of the derogation face a total 
administrative cost of around €66,000 
over the period 2014-19.  

Agricultural 
producers 

Benefits: The derogation helps support the 
sugarcane industry in Madeira along with 
producers of certain fruits and other 
ingredients such as milk, that are used in 
the production of liqueurs. 

Benefits: The derogation helps support 
the producers of certain fruits and other 
ingredients such as milk and wine, that 
are used in the production of liqueurs in 
the Azores. 

Costs: No evidence of material costs for agricultural producers. 

Distributors 

Benefits: Distributors of OR products will gain from increased sales under the 
derogation. In the Azores, distributors will often carry other local products and the 
increase in sales could help support these industries. 

Costs: No evidence of material costs for distributors.  

Tourism 
industry 

Benefits: By helping maintain the production of unique locally produced spirit drinks, 
the derogation may help encourage interest of tourists in the spirit drinks industry in 
the ORs and allows the products to be priced favourably for tourists.  

Costs: No evidence of material costs for the tourism industry. 

36 

 
 
 
 
Stakeholder 
group 

Madeira 

Azores 

OR authorities  Benefits: The derogation has supported the 

spirit drinks industry and the wider 
economy in Madeira. The derogation 
boosted sales by around 26% over 2014-19.  

The derogation has supported the spirit 
drinks industry and the wider economy 
in the Azores. The derogation boosted 
sales by around 27% over 2014-19.  

Costs: The total fiscal cost of the 
derogation was €16.9 million over 2014-19. 

The administrative costs associated with 
monitoring the derogation are negligible. 

Costs: The total fiscal cost of the 
derogation was €6.7million over 2014-
19.  

The administrative costs associated with 
monitoring the derogation are 
negligible. 

Benefits: The derogation has supported 40 jobs in the spirit drinks value chain and 
related industries across Madeira and the Azores and employment throughout the 
wider economy in each OR.  

Portuguese 
authorities 

Costs: The fiscal costs of the derogation are borne by the OR authorities. However, 
transfers from the national budget could create indirect exposure to the fiscal costs of 
the derogation. 

It was estimated the Portuguese authorities bear an administrative cost of around 
€11,000 per annum to monitor and assess the derogation. These costs include the 
costs of work undertaken by external consultants to support the analytical content of 
the mid-term report. 

European 
Commission 

Benefits: Although no direct benefits would accrue to the European Commission, the 
derogation has supported the achievement of regional policy objectives and has, in 
part, addressed the characteristics unique to ORs outlined in Article 349 TFEU.  

Costs: It was estimated that the European Commission bears an administrative cost of 
€9,500 per annum to assess, evaluate, manage, provide input for feedback and 
evaluation of the derogation.  

37 

 
 
 
 
 
Annex 4: Analytical methods 

Analytical approach and methodology 

The study has been based on a combination of primary research, that is, on data gathered 
from producer and distributor questionnaires, interviews with the authorities in Madeira, 
the  Azores  and  mainland  Portugal  and  independent  research  to  triangulate  findings, 
review  of  the  existing  literature  and  data,  and  economic  and  policy  analysis.  The  data 
collected from institutional stakeholders and primary data collection from the producers 
themselves  was  a  key  focus  of  the  study.  The  study  was  able  to  collect  data  from 
producers across both islands covering around 90% of production under the derogation.  

Consultation activities undertaken 

In order to implement the approach, seven targeted questionnaires were developed. The 
table below sets out the activities undertaken and responses received. 

Table 15 Questionnaire response rates 
Target group 

Key topics covered 

Recipients 

European 
Commission 

Portuguese 
authorities 

Producers in 
Madeira 

Producers in 
the Azores 

Portuguese 
distributors 

Administrative process and costs 
Future of the derogation 
Associated costs 
Expansion of derogation 

Impact of the derogation 
Procedures and costs 
Future of derogation 
Expansion of derogation to 
mainland 

Administrative process and costs 
Future of derogation 
Associated costs 
Alternative suggestions 

Main distribution activities 
Future of derogation 
Associated costs 
Market size and product 
quantities 
Market in mainland 

8 

3 

1138 

13 

14 

Total 
responses 
received 

Response 
rate 

4 

1 

5 

5 

2 

50% 

33% 

45%39 

38%40 

14% 

38 Data received from the OR authorities indicated that not all of the recipients of the producer survey were 
active. Comparison suggests that two recipients in Madeira and one in the Azores did not produce alcohol 
within the scope of the derogation. 
39 Estimated percentage of total sales captured by survey in Madeira  - 97.5% Rum, 85.4% Liqueurs, N/A 
Eaux-de-vie 
40  Estimated  percentage  of  total  sales  captured  by  survey  in  the  Azores  -  100%  Rum,  81.3%  Liqueurs, 
98.9% Eaux-de-vie 

38 

 
                                                           
Civil society 

Awareness of derogation 
Impact of ending the derogation 
Potential future options 

13 

0 

0% 

The study’s objectives 

The  study  had  two  objectives.  The  first  was  to  evaluate  the  current  system  of  reduced 
rates in terms of the fiscal, social, environmental, economic and trade impacts, including 
impacts on small and medium enterprises (SMEs) and competitiveness. This included an 
estimation of the size of the impact of the existing measure. It also included an evaluation 
of  whether  the  fiscal  advantage  was  still  proportionate  and  whether  the  measure  was 
sufficient to enable a competitive production environment, taking into account any cost 
disadvantage of operating in the ORs. 

The second was to assess alternative policy options to address the issues identified in the 
evaluation, including the introduction of a new derogation for rum consumed and sold in 
the  Azores  as  well  as  extending  the  derogation  for  all  products  when  sold  to  the 
Portuguese  mainland.  The  study  considered  how  the  system  interacted  with  other  EU 
trade,  agricultural  policy,  environment,  regional 
policies 
development and, insofar as the regimes subsidised the production of spirit drinks, health 
policy.  When  developing  alternative  policy  options,  the  study  also  analysed  their 
expected impact on these EU policies.  

including  competition, 

Economic analysis 

The  study  results  are  also  based  on  an  economic  analysis  using  three  notions,  pass 
through,  price  elasticity  of  demand  and  tax  elasticity  of  demand,  which  described 
connections  between  consumption,  tax  incidence  and  the  final  price.  The  economic 
analysis focused on the product market analysis and production costs analysis, as well as 
a  few  parameter  values,  which  were  calibrated  using  historical  data  and  the  literature. 
The analysis required also several assumptions for setting the baseline scenario. For this 
purpose, historical trends describing developments of the Azores and Madeira economies 
as well as trends describing market for relevant spirits were used. 

Current derogation and future options 

In order to evaluate the impact of the derogation over the period 2014-19, production and 
fiscal cost data has been compared with counterfactual generated over the same period41.   

The counterfactual assumed that the derogation was not in place over the period 2014-19 
and that all consumption of spirit drinks produced in the ORs attracted the regular rate of 
excise. 

41 Impacts over the period 2014-2018 are based on analysis of historic data. The impacts for 2019 are based 
on projections.  

39 

 
 
                                                           
To assess alternative policy options different options were assessed against the baseline 
of continuing with the current derogation. While this option would require action on the 
part of the EC and Council to extend the derogation post 2020, it continues the status quo 
treatment  and  therefore  did  not  require  a  constructed  counterfactual  to  underpin  the 
assessment of other options 

The current derogation could be potentially replaced by any of a large number of possible 
options. There were policy choices about  the products  covered, the locations where the 
derogation applies, and whether to apply any limits to volumes covered. Several options 
were  identified.  The  combination  of  options  provided  realistic  and  plausible  options.  It 
allowed  significant  policy  questions  to  be  considered  in  isolation,  and  it  avoided  less 
realistic  options  such  as  ending  support  for  sales  on  the  ORs  while  providing  for  an 
extension to mainland sales.  

Assessment of the impact of prospective options 

o  Definition  of  options:  The  option  development  used  research  on  existing 
precedent  in  the  EU,  analysis  of  market  trends,  and  information  gathered  from 
stakeholder  questionnaires  to  translate  a  broad  set  of  option  categories  into  an 
actionable set of options for consideration.  

o  Assessment  of  options:  The  impact  of  each  option  was  assessed  in  terms  of  its 
support  to  the  ORs  and  the  extent  to  which  it  would  allow  producers  to  access 
markets for their products, and wider costs and coherence.  

o  Monitoring framework. A potential monitoring framework was developed, setting 

out the data needed and proposing the frequency and form of collection. 

40 

 
Annex 5: Evaluation 

The  scope  of  the  evaluation  is  a  retrospective  assessment  of  the  derogation  during  the 
period 2014 to 2019.  In  particular, the  evaluation assessed the  extent Council Decision 
376/2014/EU contributed to:  

  Reducing  the  competitive  disadvantage  of  producers  of  specific  spirit  drinks  in 

the ORs, which are linked to the permanent challenges of the ORs;  

  Support the spirit drinks industry, which is important for the development of the 

Portuguese ORs; 

  Ensuring the smooth functioning of the single market for spirit drinks.  

The  evaluation  assesses  the  performance  of  the  Directive  against  the  basic  evaluation 
criteria  of  relevance,  effectiveness,  efficiency,  coherence  and  EU  added  value,  in  line 
with the Better Regulation Guidelines42. The evaluation is based on the external ‘back to 
back’ study with  an evaluation and forward-looking assessment of the Decision carried 
out simultaneously in accordance with Better Regulation Guidelines.  

Relevance  

This  section  evaluates  the  scope  and  objectives  of  Council  Decision  376/2014/EU 
compared to  the current  needs of  all stakeholders. The needs of the ORs  can be linked 
back  to  Article  349  TFEU.  The  Decision’s  objectives  are  to  support  producers  by 
reducing  their  competitive  disadvantage,  which  in  turn  assists  with  the  regional 
development  of  the  ORs,  while  not  impacting  the  smooth  functioning  of  the  single 
market.  

  To what extent does the scope of the Decision still match the current needs of the 

ORs and of the economic operators concerned? 

Based on the study, the costs of production across Madeira and the Azores indicate that 
their  remoteness,  small  size,  insularity  and  challenging  climate  and  topography  drive 
significant additional costs for ingredients, labour and transportation. In the case of rum, 
the  combination  of  these  factors  makes  sugarcane  grown  in  Madeira  around  ten  times 
more  expensive  than  sugarcane  sourced  elsewhere.  Wine  produced  in  the  Azores  is 
around four times more expensive than mainland wine for eaux-de-vie producers. Fruits 
for  liqueurs  are  also  consistently  more  expensive  in  the  Portuguese  outermost  regions 
compared to fruits grown elsewhere. These additional costs faced by producers in the two 
regions  mean  that  they  remain  at  a  competitive  disadvantage  to  producers  on  the 
Portuguese  mainland.  While  ingredients  are  the  main  driver  of  additional  costs  for  the 
producers, other production costs add to their overall costs as shown in the table below. 

Table 16 Additional costs other than ingredients per hlpa (€) 

Madeira 
Rum 

Madeira 
Liqueurs  

Azores 
Liqueurs 

Azores  
Eaux-de-vie 

€ 

238.58 

398.39 

446.05 

277.53 

42 Better Regulation Guidelines  

41 

 
  
                                                           
All these additional costs impact the ability of producers to access markets other than the 
local OR markets. This has resulted in producers relying on the regional markets, which 
are small and are almost at saturation point. This is an area of concern, as the study found 
that  all  producers  currently  have  capacity  to  produce  more  and  in  the  case  of  rum, 
production  of  rum  exceeds  sales  by  approximately  40%.  Underutilisation  of  equipment 
also means that producers are unable to achieve economies of scale, further impacting on 
their  costs.  An  extension  of  the  derogation  to  mainland  Portugal  would  remove  the 
barriers to enter this market and offer the producers the opportunity to utilise their spare 
capacity  and  develop  their  business  further  and  by  default  the  local  OR  economy.  The 
need to ensure the smooth functioning of the single market remains an important element 
for all stakeholders. 

Development  of  the  economies  of  Madeira  and  the  Azores  remains  an  important 
objective  for  all  stakeholders.  Economic  development  in  terms  of  output  per  capita  in 
both Madeira (€18,100) and the Azores (€16,900) is below the level of mainland Portugal 
(€18,900), and each OR is significantly below the EU average of €30,00043. 

Effectiveness 

The effectiveness of Council Decision No 376/2014/EU was evaluated by assessing the 
extent  to  which  the  regime  supported  the  industry,  while  not  undermining  the  integrity 
and coherence of the EU market. The evaluation question was: 

To what extent has the fiscal advantage contributed to realising the objectives of Article 
349 TFEU by 

  maintaining, promoting and developing the local economic activities and 

employment in the different ORs; and, 

  compensating for higher production cost of goods in the different ORs? 

Given the overall small size of the derogation, with the fiscal cost of the excise reduction 
for 2018 of €3.4 million and €1.2 million for Madeira and the Azores respectively, any 
effects will be relatively modest. That aid amounts to only approximately 0.07% of 2018 
GRP in Madeira and 0.03% in the Azores.  

Despite  this  caveat,  the  study  estimated  that  the  current  derogation  increased  the  gross 
value added (GVA) of the local value chain in Madeira and the Azores by approximately 
62.9% and 57.3% respectively over the period 2014-19. Over the period of the Decision, 
this equated to  an increase in  GVA of €14.2 million  for Madeira and €10.7 million for 
the Azores.  

The study estimated that the industry was supported as follows: 

o  The number of producers has increased by 78% and sales increased by 18.2% in 

Madeira and 12.5% in the Azores; 

43 https://ec.europa.eu/eurostat/documents/2995521/9618249/1-26022019-AP-EN.pdf/f765d183-c3d2-
4e2f-9256-cc6665909c80  

42 

 
                                                           
o  Since  2014,  the  market  share  of  OR  producers  has  grown  at  an  average  rate  of 
2.1% and 3.5% for Madeira and the Azores respectively. Only the market share of 
eaux-de-vie in the Azores has declined over this period;  

o  26 jobs in Madeira and 14 in the Azores have been supported by the derogation 

over 2014-19; 

o  production  under  the  derogation  has  increased  by  25.9%  (3,357  HLPA)  for 

Madeira and 26.6% (1,363 HLPA) for the Azores. 

In  terms  of  compensating  the  additional  costs  of  production,  the  study  estimated  the 
additional costs as follows: 

o  Rum produced in Madeira - €573-700 per HLPA 
o  Liqueurs produced in Madeira - €569-696 per HLPA 
o  Liqueurs produced in the Azores - €1,304-1,594 per HLPA 
o  Eaux-de-vie produced in the Azores - €1,511-1,879 per HLPA 

The study concluded that the derogation compensated producers across the ORs for these 
costs. When viewed against the value of the full excise rate reduction (€1,040 per HLPA) 
the  analysis  suggests  that  there  is  a  degree  of  overcompensation  in  Madeira  and  some 
undercompensation  in  the  Azores.  However,  the  full  excise  rate  reduction  is  not 
applicable  to  65%  of  the  producers,  who  are  in  fact  eligible  for  the  reduced  rates  for 
small independent distilleries of €347.73.   

Currently,  the  market  costs  are  generally  close  to  non-OR  competitors.  However,  this 
was not the case when the current derogation was introduced in 2002, suggesting that it 
has supported OR producers to become price competitive in regional markets. 

The  study  found  that  the  regime  is  effective  as  it  has  positively  impacted  the  regional 
economic  activities  and  employment  in  the  regions.  It  has  also  compensated  for  the 
additional costs faced by OR producers.  

Efficiency 

The efficiency of the Decision was assessed by examining the relationship between the 
costs  of  implementing  Council  Decision  376/2014/EU  and  the  resulting  benefits  for  all 
stakeholders.  The  costs  involved  included  the  administration  and  financial  costs  for  all 
stakeholders. To assess the efficiency of the Decision the questions below were used: 

To what extent are the benefits of the fiscal measures compensating for the loss of 
fiscal revenue in Portugal? 
What  is  the  “additional  cost”  by  product  to  which  differentiated  taxation  may 
apply? 

The study estimated the fiscal cost of the Decision was €23.6 million for the period 2014 
–  2019  while  the  total  tax  benefit  was  €27.3  million.  This  suggests  the  derogation  has 
been efficient in providing support to the industry.  

43 

 
 
 
 
 
 
 
In  addition  to  the  net  monetary  gain,  during  the  same  period  the  producers  of  the 
products under the derogation increased their market share. The increase in market share 
is 2.1% in Madeira and 3.5% in the Azores. Given the economic realities of the ORs, and 
the  reliance  on  certain  sectors  of  the  economy,  the  assistance  provided  to  the  various 
spirit drinks producers under the derogation is a valuable support. It allowed the industry 
to  operate  more  effectively  in  the  regional  market,  boosting  sales  by  26.1%  over  the 
period 2014-19 and supporting around 40 jobs on the ORs.  

The additional costs of producing the different spirit drinks varies depending on several 
factors. These factors include the cost of the ingredient for the beverage and the size and 
location of the producer. Given that these costs are aggregated at the producer level, they 
do not take account of the fact that some of these producers are micro entreprises, who 
typically face even higher costs than SMEs, as they are unable to make use of economies 
of scale. Overall, however the evaluation estimates that the 75% reduction in excise duty 
is relatively efficient in compensating the production costs of all producers in the Azores. 
In  Madeira,  this  rate  of  reduction  is  also  efficient  in  compensating  the  additional  costs 
faced  by  small  producers,  however  it  may  overcompensate  those  who  are  producing 
between 500 and 1000 HLPA. Nonetheless, due to data limitations, quantifying the full 
range of additional costs was not always possible. Therefore, this overcompensation may 
be limited in reality.  

The excise rate reduction permitted by Council Decision No 376/2014/EU has generated 
an  administrative  burden  for  all  stakeholders.  The  ongoing  administrative  burden  for 
producers is estimated at approximately €7,000 and €11,000 in Madeira and the Azores 
respectively.  The  study  found  that  the  Portuguese  authorities  and  distributors  faced 
negligible  ongoing  administrative  costs.  The  authorities  in  the  ORs  and  the  European 
Commission  do  have  periodic  administrative  costs,  which  were  estimated  at 
approximately €11,000 and €9,500 respectively.   

Coherence 
The  questions  below  were  developed  to  evaluate  the  extent  to  which  Council  Decision 
No 376/2014/EU is complementary to other EU policies.  

To  what  extent  does  the  current  system  address  EU  regional  and  employment 
policy, State aid aspects and trade issues? 

Which  other  measures  (European,  national  or  regional)  do  the  products  benefit 
from, including measures related to agricultural policy? 

Are there any obstacles arising from the current levels of taxation in other policy 
areas? 

Do  the  current  levels  of  reduced  excise  duties  distort  competition  with  firms 
situated in the mainland or in other EU Member States? 

44 

 
 
 
 
 
 
 
 
 
 
The current system addresses wider EU objectives in the following ways: 

EU  regional  and  employment  policies:  The  derogation  has  helped  maintain  and  grow 
production  on  both  ORs  sustaining  around  40  jobs  in  the  ORs  in  the  direct  production 
and  the  value  chain  (including  through  allowing  greater  diversification  of  income  from 
agriculture).  Related  to  this,  the  derogation  has  also  increased  the  contribution  of  the 
industry to  the local  economies, boosting  GVA  by €14.2 and €10.7 million  in  Madeira 
and the Azores respectively over 2014-19. This continues to meet the needs of the ORs in 
light of their overall economic development relative to mainland Portugal and EU wide 
levels.  More  broadly,  the  derogation  generates  demand  for  a  range  of  locally  grown 
produce,  which  supports  crop  diversification,  and  it  also  helps  to  preserve  distinct 
cultural traditions in Madeira and the Azores aiding the tourist industry.  

State aid aspects: Following the estimates of additional costs, the value of the derogation 
broadly aligns with them and there are no significant State aid concerns. 
Trade issues: The market supported by the derogation is small, currently around 5.0% of 
the Portuguese spirits market in 2016. Consumption of non-OR spirits has been broadly 
flat  over  the  period  and  the  vast  majority  of  OR  products  are  consumed  in  the  local 
market, and do not impact sales outside Madeira and the Azores. 

Health  aspects:  The  World  Health  Organization  (WHO)  lists  increasing  excise  duty  as 
one  of  the  most  cost-effective  ways  of  reducing  harmful  alcohol  consumption.  It  ranks 
Portugal above average for the use of pricing to reduce alcohol harm. The derogation has 
boosted  sales  of  OR  products  by  26%  over  2014-19  and  overall  spirit  consumption  by 
around  3%  per  year.  While  consumption  by  tourists  would  account  for  a  significant 
proportion  of the uplift,  this suggests there may  be some health impacts. The mortality 
rate due to alcoholic-related diseases is higher in Madeira per 100,000 inhabitants (77.2) 
than  it  is  in  the  Azores  (56.4)  and  mainland  Portugal  (55.8).  Consumption  patterns 
among  Portuguese  drinkers  indicate  that  spirits  account  for  around  8%  of  total  alcohol 
consumption  in  terms  of  litres  of  pure  alcohol  while  wine  and  beer  account  for  around 
80%.  Assuming  consumer  preferences  remain  unchanged;  this  suggests  that  the  health 
impacts across the population of the ORs would be modest. 

Regarding other measures (European, national or regional) that the products benefit from, 
including  measures  related  to  agricultural  policy,  there  are  a  range  of  other  measures 
supporting the ORs, including aid from the EU, aid from the Portuguese government and 
regional  aid.  EU  policy  towards  the  ORs  has  thus  been  designed  to  aid  their  economic 
development through a variety of measures, largely funded through European Structural 
Investment (ESI) funds44.   

44 Outermost Regions. Available at: http://www.europarl.europa.eu/factsheets/en/sheet/100/outermost-
regions-ors- (page accessed on December 10, 2019). 

45 

 
 
 
 
 
 
                                                           
While the aid strategy for the regions have broad and far-reaching goals, there are certain 
types of aid, largely driven by the agricultural support, POSEI, which have direct impacts 
on the spirit drinks production value chain. This measure supports the primary sector and 
the production of raw foodstuffs, including sugarcane, fruits and wine. The derogation’s 
position at the end of the value chain in the ORs helps to create a market for a product 
which  relies  on  locally  grown  raw  materials.  This  makes  it  coherent  with  the  goals  of 
promoting economic diversification and self-sustainability in the ORs. 

Concerning any obstacles arising from the current levels of taxation in other policy areas, 
the only significant area of tax that stakeholders highlighted as providing obstacles to the 
aims  of  the  derogation  was  the  application  of  normal  excise  rates  on  mainland 
consumption. This was raised explicitly by 50% of respondents who indicated that this, 
in  their  view,  renders  them  less  price  competitive  in  the  mainland  market  due  to 
additional costs incurred in the ORs. 

In  relation  to  distortion  of  competition  study  found  that  Madeira  and  the  Azores  had  a 
more  challenging  overall  economic  environment,  which  significantly 
increased 
production  costs.  The  reduced  rate  mitigates  these  additional  costs  and  enables  OR 
producers to access the regional market and as such 90% of the products within the scope 
of the derogation are consumed in the regional market.  

These  specific  spirit  drinks  are  generally  of  unique  characteristics  with  strong 
connections to the local environment in which they are produced. It is unlikely that they 
are  in  direct  competition  with  non-OR  products.  The  study  found  that  these  products 
were most likely not considered as substitutes for generic mainstream brands of common 
spirit drinks such as vodka or gin and distortion of competition was therefore limited. 

EU value added 
The question below is used to evaluate the EU value added, that is, the extent to which 
the  outputs,  results  and  impacts  generated  by  Council  Decision  No  376/2014/EU  were 
enhanced  by  intervention  at  the  EU,  rather  than  the  Member  State  level.  As  set  out  in 
Article 349 TFEU, only the Council is authorised to adopt specific measures in favour of 
the outermost regions. Therefore the costs and benefits of the Decision measure its added 
value.  

To  what  extent  did  the  Decision  generate  benefits  for  the  regional  markets  of  the 
Portuguese outermost regions and the EU Internal Market? 

The  benefit  of  the  derogation  to  Madeira  and  the  Azores  has  been  expressed  both  as  a 
benefit  to  producers  through  increased  revenue,  and  as  an  overarching  benefit  which 
provides  support  throughout  the  value  chain.  Producers  have  noted  that  it  has  allowed 
them to compete more successfully on price, something they indicated is crucial for their 
success in the OR market.  

46 

 
 
 
 
 
 
 
The fiscal  cost  of the derogation for the period 2014-2019 was €23.6 million while the 
total tax benefit was €27.3 million. Given the small size of the producers, the derogation 
supports an industry which does not benefit from economies of scale to the same extent 
as mainland competitors and one that operates in a very small consumer market. In light 
of  the  goals  surrounding  Article  349  TFEU  and  the  general  EU  policies  surrounding 
support to the ORs, the derogation has provided measurable benefits to Madeira and the 
Azores overall. 

The  Decision  allows  for  a  reduced  rate  excise  duty  in  Portugal  only.  There  is  minimal 
impact on the EU internal market. 

47 

 
 
 
 
 
Annex 6: Legislation 

Council Directive 92/83/EEC on excise on duties sets out the structures of excise duties 
on alcohol and alcoholic beverages and the basis on which the excise duty is calculated. 
Article 22 of Directive 92/83/EEC allows all Member States to  apply a reduced rate of 
excise duty to distilled alcoholic beverages produced by small independent distilleries not 
producing more than 10 hectolitres of pure alcohol per year. 

Council Directive 92/84/EEC sets out minimum rates that must applied to each category 
of alcoholic beverage as well as reduced rates for certain Greek, Italian and Portuguese 
regions. Article 7(3) of Directive 92/84/EEC allows for a 50% reduction of excise duty 
on the certain alcoholic beverages consumed in the Portuguese outermost regions.  

Regulation  (EC)  No  110/2008  lays  down  rules  on  the  definition,  description, 
presentation  and  labelling  of  spirit  drinks  as  well  as  on  the  protection  of  geographical 
indications of spirit drinks. This Regulation defines rum, liqueurs and eaux-de-vie.  

From  25  May  2021,  the  new  Spirit  Drinks  Regulation  (EU)  2019/78745  will  become 
applicable. From 25 May 2021 rum may not contain more than 20 grams of sweetening 
product  per  litre,  expressed  as  invert  sugar.  However,  in  the  case  of  geographical 
indications, the legal name rum may only be supplemented by the terms ‘tradicional’ or 
‘agricultural’  if  it  complies  with  the  provisions  laid  down  in  point  1(g)  of  Annex  I  to 
Regulation (EU) 2019/787, among which it is provided that it is not sweetened at all. 

45  Regulation  (EU)  2019/787  of  the  European  Parliament  and  of  the  Council  of  17  April  2019  on  the 
definition, description, presentation and labelling of spirit drinks, the use of the names of spirit drinks in 
the  presentation  and  labelling  of  other  foodstuffs,  the  protection  of  geographical  indications  for  spirit 
drinks, the  use of ethyl alcohol and distillates of agricultural origin in alcoholic beverages, and repealing 
Regulation (EC) No 110/2008 

48