COMMISSION STAFF WORKING DOCUMENT Tax relief for Canary islands on certain local products (review) Accompanying the document Proposal for a Council Decision on the AIEM tax applicable in the Canary Islands
Date: 2020-08-04
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Canary Islands, Spain, derogation from EU law, indirect tax, originating product, peripheral region, regional aid, tax exemption, tax relief

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 4.8.2020  SWD(2020) 154 final  COMMISSION STAFF WORKING DOCUMENT Tax relief for Canary islands on certain local products (review) Accompanying the document Proposal for a Council Decision on the AIEM tax applicable in the Canary Islands {COM(2020) 355 final}  
 
 
Contents 

1. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ............................................................... 4 

Introduction: Outermost Regions ...................................................................... 4 
1.1. 
1.2.  Spanish outermost region .................................................................................. 4 
1.3.  Specific measure for the Spanish outermost region .......................................... 6 

2. 

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

2.1.  Problem 1: Additional costs for local industries ............................................... 7 
2.2.  Problem 2: The regime does not function properly ........................................... 9 
2.3.  How will the problems evolve? ....................................................................... 12 
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 ........................................................................................................... 16 
5.3.  Option 1 - Termination of the OR specific support ......................................... 17 
5.4.  Option 2 - Revision of the current regime ....................................................... 18 

6.  HOW DO THE OPTIONS COMPARE? ............................................................................................ 21 

7. 

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

8.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? .................................. 24 

ANNEX 1: PROCEDURAL INFORMATION ............................................................................................ 25 

ANNEX 2: STAKEHOLDER CONSULTATION ....................................................................................... 26 

ANNEX 3: ANALYTICAL METHODS ..................................................................................................... 34 

ANNEX 4: EVALUATION ......................................................................................................................... 38 

1. 

2. 

3. 

4. 

5. 

COHERENCE ..................................................................................................................................... 38 

RELEVANCE ..................................................................................................................................... 39 

EFFECTIVENESS .............................................................................................................................. 39 

EU ADDED-VALUE.......................................................................................................................... 42 

EFFICIENCY...................................................................................................................................... 43 

1 

 
 
 
 
Glossary 

Term or acronym 

Meaning or definition 

Arbitrio sobre las Importaciones y Entregas de Mercancías 

Combined Nomenclature  

European Union 

Euro 

Gross Regional Product 

Gross Domestic Product 

InterService Steering Group 

Outermost Region 

Régimen Económico Fiscal 

Small and medium Enterprises 

Treaty on the Functioning of the European Union 

AIEM 

CN 

EU 

EUR 

GRP 

GDP 

ISSG 

OR 

REF 

SMEs 

TFEU 

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. Spanish outermost region 

This report concerns the outermost region (OR) of Spain: the Canary Islands, which is a 
Spanish autonomous community comprising the provinces of Las Palmas and Santa Cruz 
de Tenerife, as well as seven insular councils. The archipelago is formed by eight main 
islands and various islets located in the Atlantic Ocean, at a distance of about 1,800 km 

3 

 
 
 
 
 
from  the  capital  of  Spain.  The  Canary  Islands  have  a  population  of  almost  2.1  million 
inhabitants,  mostly  concentrated  in  the  two  capital  islands:  Gran  Canaria  (40%)  and 
Tenerife (43%).  

The  Canary  Islands  are  the  8th  largest  regional  economy  in  Spain  by  nominal  GDP, 
worth EUR 46 billion in 2018 (corresponding to a GDP per capita of EUR 21,000). The 
service sector accounts for the greatest share of the economy, namely 85% of total value 
added.  In  particular,  the  regional  economy  is  largely  based  on  tourism,  which  in  2018 
totalled some 15.5 million visitors (of which 89% were internationals), and accounts for 
30% of total employment. However, data from 2018 register a decline in the arrivals. As 
regards the secondary sector, construction makes up 6.2% of the value added and 5% of 
total employment, while manufacturing industries account for 3.8% of value added and 
4%  of  total  employment.  The  primary  sector  contributes  only  1.2%  of  the  GDP.  The 
main  agricultural  products  are  bananas  and 
tomatoes,  which  are  grown  for 
dispatch/export to Europe and the Americas. Overall, the productive sectors addressed by 
AIEM represent some 8% of the total GDP of the Canary Islands.  

The private sector of the Canary Islands comprises some 117,000 enterprises (excluding 
agriculture and  financial services). Trade  and business services account  for nearly 28% 
and 24% of the business population. Food and accommodation services and construction 
are other important economic activities, each accounting 14% of all firms. Manufacturing 
accounts for nearly 4% of the total.  

The  economy  of  the  Canary  Islands  is  heavily  dependent  on  trade  of  goods  with 
mainland  Spain,  which  accounts  for  68%  of  the  total  value  of  Canarian  external  trade. 
Excluding  oil  and  petroleum  products,  the  Canarian  imports  totalled  some  EUR  14.06 
billion in 2018 (30.5% of GDP), largely driven by vehicles (18% of total), machinery and 
electrical  equipment  (14%),  and  agri-food  products.  Canarian  exports  of  goods 
(excluding  fuels)  reached  some  EUR  2.79  billion  in  2018,  including  machineries  and 
equipment  (10%),  vehicles  (5.6%),  boats  (3.7%),  fruits  (5.5%),  tobacco  (5.2%),  fish 
(4.4%), oils and cosmetics (3.5%).  

In  2018,  the  unemployment  rate  in  the  Canary  Islands  amounted  to  20%  of  the  active 
population, with particularly high incidence among young people (ca. 37% in the 20-24 
years cohort). Unemployment soared in 2009 (+9% points), in connection with the global 
financial crisis which severely hit the local economy. In 2013, unemployment reached its 
peak at nearly 34% (more than 60% in the 20-24 years group), then it started declining in 
line  with  the  economic  recovery  trend  and  the  positive  growth  rates  registered  in  the 
2014-18 period. 

Table 1 – Canary Islands: Key socio-economic data (2018) 
Indicator 

Sector  

Distance from Spanish mainland (Madrid, km 
– average of all the islands) 
Population (000’ people) 
Unemployment (% of labour force 15-74) 
GDP (billion EUR) 

GDP per capita (in 000’ EUR) 
Primary (% of value added) 
Industry and Construction (% of value 

Mining 

Manufacturing   
Construction  

Trade  

Transport 
Food and accommodation 

1,800 

2,127 
20.1% 
46.0 

21.0 
1.4% 
13.9% 

4 

# of 
firms 

50 

4,808 
15,938 

33,196 

9,110 
16,558 

 
 
 
 
 
added) 
Service (% of value added) 

84.7% 

Import of goods (million EUR) 
Export of goods (million EUR) 
Number of tourists (000’ visitors) 
Sources: ISTAC and Eurostat; *provisional figures.  

17,375* 
3,711* 
15,560 

Professional and 
administrative services 
IT 
Real Estate 
Total 

27,756 

2,570 
7,044 
117,030 

1.3. Specific measure for the Spanish outermost region  

This  report  focuses  on  analysing  the  effects  of  the  existing  derogation  for  the  AIEM 
(‘Arbitrio  sobre  las  Importaciones  y  Entregas  de  Mercancías’)  tax  to  certain  products 
produced locally in the Canary Islands, which expires on 31 December 2020. 

The AIEM is an indirect tax levied on the production in and import of certain goods into 
the Canary Islands. The AIEM tax is one of the components of the Economic and Fiscal 
Regime of Canary Islands (Régimen Económico Fiscal – REF), which encompasses the 
various special measures in place to promote the social and economic development of the 
region  and  to  cope  with  its  structural  constraints.  The  origins  of  REF  date  back  to  the 
XIX century, but its modern version was defined in the legislation adopted in the early 
90s1. 

Council Decision No 377/2014/EU of 12 June 20142 on the AIEM tax applicable in the 
Canary  Islands authorises Spain to apply, until 31 December 2020, exemptions from or 
reductions in  the AIEM  tax to  certain  products  produced locally in  the Canary  Islands. 
The difference between the taxation of locally manufactured products and the taxation of 
products  manufactured  outside  the  Canary  Islands  may  not  exceed  5,  10,  15  or  25 
percentage points, depending on the product. 

The  objective  of  the  existing  Council  Decision  is  to  support  local  production  of  the 
Spanish outermost region by reducing the competitiveness gap of local products against 
third country imports and products from ‘mainland’ Spain and the EU that is caused by 
additional production costs. 

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  report  is 
based on an external study by Economisti Associati3 (“the study”) commissioned by the 
European Commission. 

2.  PROBLEM DEFINITION 

The constraints noted in Article 349 TFEU result in several problems for local producers 
in the Spanish outermost region. The following problem tree outlines the problems, the 
drivers and their consequences. 

1 Ley 20/1991, de 7 de Junio, de Modificación de los Aspectos Fiscales del Régimen Económico Fiscal de 
Canarias, followed by ley 19/1994, more recently modified by Ley 8/2018.   
2 OJ L 182, 21.6.2014, p. 4–8 
3 Study on specific tax regimes for outermost regions belonging to France and Spain, Economisti Associati 
et al, 2020 

5 

 
        
 
                                                           
Figure 2. Problem tree 

2.1. Problem 1: Additional costs for local industries 

Quantitative  assessments  of  additional  costs  incurred  by  local  industries  in  the  Canary 
Islands  are  carried  out  periodically4.  The  latest  assessment  was  completed  in  2019  and 
estimated the total  additional costs of the private sector in  Canary  Islands at  EUR 5.23 
billion,  of  which  EUR  1.04  billion  is  attributable  to  the  AIEM  supported  sectors 
(manufacturing  and  primary  sector).  The  freight  cost  of  inputs  is  the  major  source  of 
additional  costs,  with  an  incidence  of  4.4%  on  the  aggregated  turnover  of  local 
producers,  followed  by  the  effects  of  idle  production  capacity  and  the  related 
diseconomies  of  scale,  which  account  for  ca.  1%  of  their  turnover.  The  estimated 
additional costs vary by industrial branch, ranging from the 36% of the food industry to 
7.3% of the mining sector5. 

The incidence of additional costs varies across islands: the most affected are the western 
islands,  where  additional  costs  reach  10%  of  the  total  turnover  (especially  because  of 
freight  costs),  whereas  in  capital  islands  the  estimated  incidence  is  6.4%.  The  gap 
between capital and non-capital islands has reportedly reduced by 0.9% points between 
2008 and 2016. Similarly, the incidence is inversely proportional to firm size: for micro-
enterprises  with  less  than  10  employees  the  additional  costs  account  for  11.3%  of  the 
turnover,  while  for  enterprises  with  more  than  250  employees  their  incidence  is  ‘only’ 
4.8%. 

Table 2. Evolution of the estimated additional costs for Canary Islands, by cost factor 
2008 
Cost Factor 

1999* 

2016 

€ 

% of 

% of 

% of turnover 

  % of 

  western 
islands 

1-9 
employees 
% of 

4  Despite  the  efforts  deployed,  the  exercise  remains  subject  to  intrinsic  methodological  limitations,  so 
estimates have to be taken with due caution. 
5 The low degree of granularity of the analysis means there are uncertainties in the attribution of costs to 
specific CN categories of product 

6 

 
 
 
                                                           
turnover 

turnover 

turnover 

turnover 

million 
(2016) 
2,860 
347 
326 
631 

48 
344 
575 

Freight costs 
Keeping stocks 
Business travels 
Idle production 
capacity 
Water 
Energy 
Multiple 
establishments 
Financial costs 

4.4% 
0.5% 
0.5% 
1.0% 

0.07% 
0.5% 
0.9% 

3.7% 
0.7% 
0.3% 
1.1% 

0.1% 
1.0% 
0.3% 

1.5% 
0.8% 
0.1% 
n/a 

n/a 
n/a 
0.1% 

98 

0.1% 

0.3% 

6.8% 
0.8% 
0.5% 
1.1% 

0.12% 
0.4% 
n/a 

6.9% 
1.0% 
1.3% 
1.1% 

0.1% 
0.6% 
0.1% 

0.12% 

0.2% 

10.0% 

11.3% 

0.8% 
1.3% (human 
resources) 
0.5% (marketing) 
5.1% 

TOTAL 

5,228 

8.0% 

7.6% 

Source: UTE Eco-CoRe 2018; CEET 2002, 2010. 
Note: (*) the structure of costs in the 2002 study differ from the following. Overall, 1999 data are not fully 
comparable with later estimates, for methodological differences.    

What are the drivers of the additional costs for local industries? 

Remoteness, insularity, size, difficult topography and volatility of climate (exogenous to 
the economy) 

The remoteness  of the Canary  Islands  and their distance to  the European  continent  and 
Spain, the main supply market, affects the economy of the outermost region. The Canary 
Islands form an archipelago 2,000 km from mainland Spain. Within the Canary Islands, 
which  comprise  eight  islands,  the  distance  between  the  two  most  remote  islands,  El 
Hierro and Lanzarote, is 460 km.  As far as the archipelagos are concerned, there is the 
additional  problem  of  land  fragmentation.  With  a  total  area  of  7,249  km2,  the  Canary 
Islands remain a small territory. 

Moreover,  the  outermost  region  is  marked  by  a  complex  and  fragmented  territorial 
topography  that  limits  internal  accessibility  and  constrains  the  development  and 
economic  development  of  the  territories.  These  are  mostly  high  mountain  areas  of 
volcanic  origin,  where  steep  slopes,  collapse  zones  and  gullies  are  significant.  Coastal 
coasts are often rugged and inhospitable. The Canary Islands, with the exception of the 
two  low-lying  islands  of  Fuerteventura  and  Lanzarote,  have  a  very  rugged  terrain, 
consisting  of  cones,  calderas,  peaks  of  more  than  2000  meters  and  steep  cliffs.  The 
highest  point  of  the  archipelago  is  the  peak  of  Teide  (3,718  m),  a  volcano  in  Tenerife 
which  is  also  the  highest  peak  of  Spain.  Nearly  80%  of  the  archipelago's  area  has  an 
average slope of more than 20%, which poses problems in terms of soil erosion. 

Adverse climate conditions are also a strong feature of the outermost region constraining 
its development. In the Canary Islands, there is great variability between the islands and 
within  the  islands.  The  climate  varies  between  a  dry  subtropical  and  dry  or  humid 
tropical climate depending on the island and the location. For example, in some parts of 
Tenerife,  rainfall  does  not  reach  100  millimetres  per  year,  whereas  a  few  kilometres 
away, it can exceed 2 metres per year. This precipitation may even increase due to fog. 
The  easternmost  islands,  Lanzarote  and  Fuerteventura,  are  almost  desert  because  they 
have a lower land surface. Water scarcity is one of the most significant problems in the 
Canary Islands. 

7 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       
It should also be mentioned that the outermost region is highly exposed to natural seismic 
hazards  that  regularly  cause  significant  damage  and  require  continuous  vigilance.  The 
last volcanic eruptions took place in Tenerife in 1909 and on the island of La Palma in 
1949 and 1971. Volcanic activity is also visible in the sulphuric emissions of the Teide 
Crater and Lanzarote, where a chain of volcanoes continues to emit heat  today after an 
eruption, which lasted 6 years, in the 18th century. 

These natural factors lead to higher operating costs and less competitiveness. 

Small scale of production and dependence on few economic activities (endogenous to the 
economy) 

The concept of endogenous handicaps of the outermost regions was developed by LL&A 
20066  with  reference  to  a  set  of  socio-economic  features  that  constrains  local 
development and drives up production costs in the outermost regions. These constraints 
may derive directly from structural features (or a combination thereof) or stem from other 
specificities of local economies. 

One  of  these  constraints  is  the  economic  reliance  on  a  limited  number  of  activities  (or 
limited  diversification  of  the  economy),  and  in  particular  on  the  service  sector,  both 
commercial  (especially  trade  and  tourism)  and  non-commercial  (public  service),  which 
makes  the  outermost  regions  more  exposed  to  the  adverse  effects  of  shocks.  In  the 
Canary Islands, the service sector accounts for approximately 85% of the economy and 
tourism accounts for 30% of employment.  

In  addition,  the  outermost  region  is  marked  by  the  small  size  of  the  local  market,  as  a 
consequence of its structural and geographic features. The local demand is weak because 
of both a small population and limited purchasing power, which is on average lower than 
in the EU.  

The  supply  side  is  also  weak  and  atomised.  The  vast  majority  of  firms  in  the  Canary 
Islands are either individual businesses (55% have no employees) or micro undertakings 
(41%  have  between  1  and  9  employees).  Small  firms  (with  10  to  49  employees)  and 
medium-large companies (with more than 50 employees) account for 4% and 1% of the 
total business population, respectively.  

SMEs in general face significant obstacles in terms of development. SMEs in the Canary 
Islands are further hampered and the main cause of the competitiveness ‘gap’ is linked to 
the absence of  economies of scale:  while, on the continent,  industries grow in  size and 
degree  of  specialisation,  with  falling  unit  production  costs,  in  the  Canary  Islands,  the 
growth is further constrained by the need to produce a larger variety of products with the 
same  production  lines.  This  has  a  significant  impact  on  costs  including  higher 
maintenance  and  depreciation  costs.  The  lower  degree  of  specialisation  reduces 
productivity  of  labour  and  requires  larger  stocks.  This  requires  extra  storage  capacity. 
Increased financial costs can also be also noted as a result of this.   

6 LL&A et al., Etude sur l’identification et l’estimation des effets quantifiables des handicaps spécifiques 
propres aux régions ultrapériphériques ainsi que des mesures applicables pour réduire ces handicaps, 2006 
(for the European Commission). 

8 

 
 
                                                           
2.2. Problem 2: Certain shortcomings of the current regime 

The most critical implementation concerns of the AIEM special tax regime are linked to 
the  eligibility  of  products  to  differentiated  AIEM  rates.  In  the  Council  Decision  No 
377/2014 such criteria are not explicitly mentioned but, as confirmed by the competent 
authorities,  they  are  based  on  the  existence  of  a  substantial  local  production  that  is 
threatened by imports which are not  constrained by the same additional operating costs 
faced by local producers. The key indicator is the ‘market share’ of local production, but 
no  specific  threshold  for  the  triggering  of  the  exemption  has  been  established. 
Analogously,  the  special  treatment  is  justified  by  additional  costs  which  have  always 
been estimated at sectoral / branch level but never at the level of individual product. 

Stakeholders  note  that  the  policy  process  leading  to  the  selection  of  products  and  the 
application of tax differentials is not fully transparent7 and there appears to be a disparity 
of  treatment.  This  creates  legal  uncertainty  for  stakeholders  and  is  a  potential  cause  of 
disputes.  This  is  a  recurrent  criticism  raised  by  enterprises  (both  importers  and  local 
producers) against the special tax regime. 

It is therefore not surprising that a significant share of both local producers (20%) and trade 
and  service  businesses  (40%)  expressed  limited  or  no  knowledge  of  the  criteria  for 
inclusion  of  certain  products  in  the  AIEM  lists,  and  more  than  half  of  the  respondents 
admitted a poor knowledge of the methods used to establish the tax differential applicable 
to AIEM products (see Figure 3). Moreover, the lack of transparency is possibly fuelling 
the mistrust towards the AIEM regime. 

Figure 3 – Stakeholders knowledge of the criteria underlying AIEM implementation  
A) Respondents knowledge of the criteria 
for  inclusion  of  certain  products  in  the 
AIEM lists  

B)  Respondents  knowledge  of  how  the 
to  AIEM 
tax  differential  applicable 
products are established* 

Source: Business survey of the Study. 
Note:  the  question  did  not  refer  to  specific  official  guidelines  that  are  not  publicly  available  in  Canary 
Islands, but more generally to the process that lead to the establishment of a tax differential, e.g. from the 
additional  costs  assessment  (many  enterprises  participate  to  the  periodical  surveys  conducted  in  this 
respect), to the policy decision and negotiations at EU level. 

7  The  absence  of  more  articulated  criteria  to  determine  the  eligibility  emerged  also  from  an  official 
response  of  the  competent  service  of  the  local  administration  to  a  recent  parliamentary  request  (October 
2018). To a series of questions concerning the selection criteria and the establishment of the appropriate tax 
rates,  the  answer  was  that  reference  is  made  to  local  production  level  and  of  imports,  but  no  further 
explanation  was  provided  on  the  benchmarks  triggering  the  application  of  the  special  regime.  Source: 
Stakeholder consultation    

9 

 
 
 
 
 
                                                           
Furthermore,  the  current  policy  arrangements  and  the  governance  system  are  overly 
complex  or  rigid,  causing  unnecessary  burden  for  the  European  Commission  and  the 
national  authorities.  One  such  aspect  is  the  impossibility  to  revise  the  list  of  products8 
which benefit from the regime and the exemptions extended to specific products without 
a legal amendment of the Council Decision, triggering a full special legislative procedure 
according to Article 349 TFEU. This hampers a smooth adaptation of the regime to the 
evolving market and sectoral needs in the Canary Islands, reducing its effectiveness and 
imposing administrative burden on the authorities and the stakeholders involved. Finally, 
the  current  monitoring  requirements  involve  significant  efforts  from  competent 
authorities,  but  the  lack  of  a  proper,  harmonised  monitoring  framework  and  the  poor 
timing of the monitoring reports affect their informative value and utility for the policy 
process. 

What is affecting the smooth functioning of the regime? 

Complex list of products referring to CN classification (8 – 10 digits) (lack of flexibility) 

The  eligible  products  for  reduction  or  exemption  to  the  tax  are  fixed  for  a  seven  year 
period  and  some  of  them  are  listed  in  the  Annex  to  the  Decision  using  8  –  10  digit 
Combined Nomenclature codes (hereinafter ‘CN codes’)9, which are very specific. This 
list covers products such as building materials, chemicals, beverages, food, textiles, paper 
or agricultural and fishery products.  

Table 3. Example of products which benefit from the regime related to the metal-working 
industries sector. 

CN codes 
7309 00 

% applicable 
10 

7604 
7608 
7610 10 00 00 

9403 20 80 90 

5 
5 
10 

10 

Description 
Reservoirs,  tanks,  vats  and similar containers for any 
material  (other  than  compressed  or  liquefied  gas),  of 
iron or steel, of a capacity exceeding 300 l 
Aluminium bars, rods and profiles 
Aluminium tubes and pipes 
Doors,  windows  and  their  frames  and  thresholds  for 
doors 
Other metal furniture 

The  legislation  for  CN  codes  is  amended  periodically  and  as  a  result  specific  products 
that were included originally in the Decision may unintentionally ‘fall’ off the list. Due to 
the  use  of  8  –  10  digits  CN  and  TARIC  codes  respectively,  new  emerging  local 
productions  that  were  not  in  place  when  the  Decision  was  adopted  are  not  covered. 
Changes in the level of compensation extended to certain industries to cope with changed 
conditions of competition (e.g. to cope with aggressive importation) cannot be addressed 
and  removal  of  products  no  longer  relevant  (i.e.  no  longer  produced  locally)  is  not 
possible.     

8 The list of products is in the annex of the Council Decision No 377/2014/EU 
9 CN codes are a tool for classifying goods. CN codes can be divided into 4, 6, and 8 digits. TARIC 
classification contains 10 digits. 4 digit CN codes are used for products of a kind, whereas each specific 
product has an 8 digit CN code.  

10 

 
 
                                                           
Unclear legislation (lack of transparency) 

The Council Decision No 377/2014 provides no information on which criteria are used 
for including the products on the list. It is therefore not surprising that a significant share 
of  both  local  producers  and  trade  and  service  businesses  expressed  limited  or  no 
knowledge of the criteria for inclusion of certain products  in  the AIEM lists, and more 
than half of the respondents admitted a poor knowledge of the methods used to establish 
the tax differential applicable to AIEM products. This lack of transparency may fuel the 
perception of subjectivity and disparities of treatment.  

Inefficiencies of the monitoring and impact evaluation system 

The  Council  Decision  No  377/2014  contains  specific  provisions  requiring  Spain  to 
submit periodical reports to the Commission on the implementation of the AIEM regime 
and  its  impacts  on  local  economic  activities.  These  ‘mid-term’  reports  are  the  basis  of 
Commission’s reports to the Council.  

The monitoring and evaluation arrangements of the regime are very burdensome both for 
the economic actors and for the administrations. Considering the number of products at 
stake, the efforts deployed to implement these reviews have been significant, but despite 
the general adequacy of the approach and methodology used, the results should be taken 
with caution, because of various limitations and constraints.  

The monitoring and evaluation arrangements are not always in line with the information 
needs, as concerns timeliness, quantification and scope. The information provided did not 
give  a  complete  picture  of  the  economic  and  social  impact  on  local  production  in  the 
Canary Islands of the AIEM regime.  

Overall,  a  picture  emerges  where  approximations,  uncertainties  and  theoretical 
assumptions are abundant. In most cases, these cannot be removed or huge efforts would 
be required to obtain marginal improvements in the reliability of the assessment. 

2.3.How will the problems evolve? 

In the 2017 Commission Communication “A stronger and renewed strategic partnership 
with  the  EU's  outermost  regions”10,  the  Commission  notes  that  despite  progress  made 
over the years, the outermost regions continue to face serious constraints, many of which 
are  permanent.  Furthermore,  globalisation  and  climate  change  are  amplifying  these 
constraints.  Diversification  opportunities  are  limited  due  to  the  few  resources  at  their 
disposal  and  the  geographical  and  natural  characteristics  specific  to  their  remoteness. 
Consequently,  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,  not 
always reliable. 

10 COM(2017) 623 final 

11 

 
                                                           
The Communication stresses the need to build on the assets of the ORs, identifying new 
sectors to enable growth and job creation.  

While this approach is important to address the numerous threats and constraints 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.  

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.  On  the  contrary,  with  global  trade  growing 
increasingly  competitive,  the  ‘gap’  of  outermost  regions  might  become  even  more 
difficult  to  bridge  overtime.  Numerous  cases  were  reported  of  imported  goods  sold  at 
retail at a price (tax included) lower than the production cost of the same good locally-
made. Hence, the AIEM is generally viewed by enterprises as tools to help mitigating / 
slowing down the inevitable loss of competitiveness of local production rather than as a 
development tool.  

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, 
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 201511, 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 EU outermost regions. 

The EU has been building a strong partnership with its 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 

11 Joined Cases C-132/14 to C-136/14 

12 

 
                                                           
Commission  Communication  “A  stronger  and  renewed  strategic  partnership  with  the 
EU's outermost region” 12. 

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

3.2. Specific objectives 

The  AIEM  special  regime  is  part  of  the  overall  EU  policy  approach  for  the  Canary 
Islands  as  an  EU  Outermost  Region,  and  in  this  sense  its  coherence  is  ensured  by  the 
substantial alignment of its objectives with the broad strategic framework.  

 In  particular,  the  objectives  of  the  AIEM  are  to  promote  and  sustain  local  production 
activities,  which,  in  turn,  contribute  to  attracting  investments,  building  capacity  and 
skills, and reducing the dependency from the Spanish ‘mainland’.  

Moreover, another objective of the AIEM in  the Canary  Islands is  to  support industrial 
activities, which in  turn promote the development  and diversification of local  economy 
and, in particular, foster activities with high value-added and job creation potential.  

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 
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  current 
products  listed  in  the  Annex  of  the  Council  Decision  produced  locally  in  the  Canary 
Islands continue benefiting from total exemptions or partial reductions of the AIEM after 
2020.  

12 COM(2017) 623 final 

13 

 
                                                           
4.2.Description of the policy options 

Option 1 – Termination of the OR specific support 

Under this policy option, the existing regime of reduced rates or exemptions of the AIEM 
for  local  products  in  the  Spanish  outermost  region  would  not  be  renewed  and  would 
therefore expire on 31 December 2020. All products would be subject to the AIEM.  

This option would mean no further specific relief would be provided after 31 December 
2020  to  the  OR  local  producers  to  mitigate  the  additional  costs  they  face  due  to  their 
location. 

Option 2 – Revision of the current regime 

This  option  involves  prolonging  the  current  regime  introducing  a  series  of  revisions  to 
the policy and its implementation arrangements. The proposed changes regard three main 
aspects,  described  in  the  following  paragraphs.  The  proposed  changes  are  not  mutually 
exclusive  and  are  technically  independent  of  each  other,  although  in  some  duly 
highlighted cases there are interconnections. 

Option  2A  –  Revision  of  criteria  for  the  identification  of  eligible  products  and 

updates 

The  proposed  option  envisages  a  shift  in  the  method  used  for  the  identification  of  the 
products  supported  through  the  special  tax  regime,  namely  from  the  current  approach 
where  each  specific  product  is  explicitly  identified  in  the  Decision  (based  on  a  coding 
ranging  from  CN4  to  TARIC10)  to  a  system  where  the  Decision  indicates  only  the 
eligible product categories (CN4) while specific products (CN8 or higher) are detailed by 
national authorities in their legal and administrative frameworks. 

This measure would allow for a more flexible management of the regime by competent 
authorities removing the needs for EU-level legal amendments for ordinary revisions and 
updates of product lists. Secondly, it is proposed to adopt clearer and verifiable criteria 
for the selection of products benefitting from the AIEM support. In line with the current 
practice  such  criteria  should  take  into  consideration  inter  alia  the  market  share  of  the 
product, and in the case of products in residual or largely dominant position on the local 
market  a proper justification for support should be transparently provided. Overall, this 
provision  would  prevent  the  risks  that  a  greater  flexibility  in  the  management  of  lists 
translates into unwarranted extension of the scope of the policy, and would respond to the 
demand of greater clarity and objectivity expressed by most of AIEM opponents.    

The  proposed  option  would  respond  to  one  of  the  main  comments  expressed  by 
competent authorities and private sector stakeholders in order to allow for a more flexible 
modification and updating of product lists since, at present, any change would require a 
legal amendment of the Council Decision. 

Option  2B  –  Revision  of  mechanisms  to  establish  the  maximum  permitted 

differential 

14 

 
 
      
 
 
This  proposed  option  is  articulated  into  three  specific  measures.  The  first  intends  to 
simplify the arrangements regarding the establishment of tax differentials, replacing the 
current  four different  product  lists with  only one list  with  a single maximum  permitted 
threshold of 15% as the maximum permitted differential for all the products listed in the 
Annex  of  the  new  Decision.  The  Spanish  authorities,  in  line  with  the  principle  of 
subsidiarity, will decide the specific percentage applicable to each product, ensuring that 
the  specific  percentage  equals  or  is  less  than  the  additional  costs  associated  with 
producing the product in the outermost regions.  This will facilitate amendments by the 
Spanish authorities without the need for a legislation amendment to the Decision. 

The  benefits  of  this  measure  would  consist  in  a  more  flexible  management  of  the 
differential  rates  applied  by  the  competent  authorities,  allowing  revisions  without  a 
formal  amendments  of  the  Council  Decision.  To  prevent  the  risk  that  this  measure 
enables an unwarranted greater intensity of the support and, at the same time, to facilitate 
the coordination with other support schemes avoiding an excessive cumulation of aid, the 
second proposed measure consists of introducing in the policy a global reference value, 
i.e.  a  monetary  ceiling  referred  to  the  estimated  ‘foregone  tax  revenue’  that  competent 
authorities  shall  respect.  The  third  proposed  measure  aims  at  improving  the  utility,  for 
policy purposes, of additional cost assessments, disaggregating the estimates at the level 
of CN4 product categories, and ensuring that the tax differentials applied do not exceed 
such estimates (account taken of the other compensations addressing the same additional 
costs). 

Option 2C – Revised monitoring arrangements 

The proposed revision has the parallel objectives of reducing the burden of unnecessarily 
frequent  re-assessment  and  renewal  of  the  policy  and  enhancing  the  utility  and 
effectiveness  of  monitoring  and  evaluation  activities.  As  regards  monitoring,  the 
proposed revision consists of the adoption of a standardised structure for reporting based 
on a harmonised set of indicators common to all EU outermost regions benefitting from a 
special tax regime, and deemed sufficient to properly assess the impact of the regime.  

Additionally, the timing of submission of monitoring report could be moved back to the 
fifth year since the adoption of the policy, in order to ensure (a) a greater availability of 
monitoring data, and (b) a closer alignment with the needs of the policy renewal process. 
The current monitoring system can be made more effective and informative moving the 
timing of the mid-term report to Y+5 (where ‘Y’ stands for the first year of application of 
the Council Decision).  In practice,  for the period 2021-27, the report would  have to  be 
submitted by the end of 2025 and spanning, ideally, the period 2019-24. 

4.3. 

Options discarded at an early stage 

Replace with other EU measures 

Under  this  alternative,  the  regime  would  be  replaced  with  another  EU  measure  to  the 
same effect. This approach can be further specified considering two main aspects: (a) the 
fiscal  or  non-fiscal  nature  of  the  replacement  measure;  and  (b)  the  type  of  funding 
envisaged. In fact, the current AIEM regime is a fiscal measure entailing no expenditure 

15 

 
 
 
of EU funds and replacing it with a different kind of measure is not a suitable option for 
two main reasons:  

-  Replacing the current regime with a non-fiscal equivalent measure would de facto 
entail extending the support through one of the existing EU schemes for the ORs 
(i.e. the regional development policies and/or the other schemes mapped in Annex 
D),  increasing  the  allocations  and  possibly  creating  ad  hoc  lines  for  the 
compensation of local  production costs (to ensure the equivalence of the  effects 
with the current regimes). This would have implication both at the level  of EU-
level  policy  design  as  well  as  specific  programming  and  implementation  of  the 
aid. The responsibility for it would fall outside of the remit of the fiscal services 
of the Commission and would involve the other line services responsible for the 
regional  development  and  cohesion  policy.  This  option  would  add  unnecessary 
complexity to the regime with poor feasibility.     

-  Currently, the estimated budget for the AIEM special regime (measured in terms 
of non-collected taxes) according to the corresponding State aid fiche amounts to 
€ 80 million  /  year.13  At  present,  the measure is  implemented at  no cost  for the 
EU budget as it consists of ‘non-collected’ taxes. Replacing it with an expenditure 
scheme  of  equivalent  impact,  would  therefore  require  additional  monetary 
transfers of up to € 560 million for the next EU programming period (2021-27). 
This approach would evidently be very cost-inefficient and is therefore discarded.       

Based on the above considerations, this option is discarded.  

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 “the study”, 
which 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.  

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 3. 

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 
Coronavirus pandemic will certainly reduce tourists to the outermost regions and demand 

13 SA.40255 (2014/X) - HAC - Arbitrio sobre importaciones y entregas de mercancías en las Islas Canarias        

16 

 
 
                                                           
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 

In  this  context,  the  ‘no  change’  scenario  consists  of  the  renewal  of  the  special  regime 
without  any  significant  modification.  In  this  sense,  this  scenario  corresponds  to  the 
baseline situation.   

The current  AIEM regime compensates only  a  portion of the estimated  additional cost. 
On  average,  tax  differentials  address  about  one-fourth  of  additional  costs,  but  in 
monetary terms the total compensation - measured in relation to the total tax charged on 
imports  –  accounts for only 14% of the overall additional costs. This  limited incidence 
combined with fairly irregular compensation patterns at product level make the impact on 
the  competitiveness  gap  rather  uncertain:  according  to  the  majority  of  beneficiaries  the 
AIEM support has been essential to sustain the competitiveness of local products, but the 
data suggest that such competitiveness has nonetheless slightly declined overtime. In this 
sense,  and  as  confirmed  by  statistics,  the  AIEM  emerges  as  primarily  effective  in 
mitigating  such  decline  rather  than  for  development  and  growth:  the  value-added  of 
AIEM-supported  industries  since  2008  has  remained  substantially  stable,  but  since  the 
value of imports has been growing at a faster pace, the market share of AIEM-supported 
industries has fallen by ca. 1% point over the past decade.   

The results of the survey of the study suggest that, in the absence of the AIEM support, 
the  performance  of  the  local  production  sectors  would  have  been  significantly  worse. 
About  one  third  of  the  value  of  AIEM-supported  products  (ca.  EUR  570  million)  was 
theoretically enabled by the tax differential mechanism, with positive repercussions also 
on employment - which registered an increase of nearly 2,000 units in the AIEM sectors 
since 2014 – and on the number of active enterprises, which has grown by ca. 300 units 
in the same period. There is instead no evidence on the benefits in terms of the total value 
of investments and on the diversification of productions.  

Overall, the impact of the AIEM is regarded as more significant in terms of support to the 
local  production,  investment  and  employment,  while  respondents  are  less  persuaded  of 
the AIEM positive effects in terms of local market share. In particular, as summarised in 
Figure 4:   

  almost three  fourths of the respondents maintained that the  AIEM had a  moderate to 
major impact in boosting local production activities in the Canary Islands. This share 
includes 83% of the tax beneficiaries, assessing the impact as ‘major’, but also about 
40% of the enterprises active in sectors other than manufacturing; 
the  perceived  influence  of  the  AIEM  in  supporting  employment  and  investments  in 
local  production  activities  is  comparatively  more  controversial.  The  vast  majority  of 
local  producers  (about  or  over  90%)  believe  that  by  supporting  the  viability  of  their 

 

17 

 
 

business the AIEM is also helping maintaining and possibly creating jobs, as well as 
fostering  investments.  Such  an  opinion,  however,  is  not  shared  by  non-producers, 
considering the impact of the tax as minor or absent; 
the replies on the AIEM impact on reducing the local economy reliance on imports are 
the  least  enthusiastic,  even  among  local  producers,  which  are  conscious  that  other 
factors influencing competitive dynamics are at  play.  Less  than one third of the tax 
beneficiaries  assessed  this  impact  as  ‘major’,  and  this  share  declined  to  50%  in  the 
case of producers not directly benefitting from the tax.  

Figure 4. Business perception of AIEM impacts on economic performance  

local 
A)  AIEM 
production activities (% of respondents)  

impact  on  boosting 

B)  AIEM  impact  on  investments  in  local 
production activities (% of respondents) 

C) AIEM contribution to the creation and 
maintenance of jobs (% of respondents) 

D)  AIEM  support 
local 
economy’s  reliance  on  imports  (%  of 
respondents) 

reduce 

to 

Source: Business survey of the Study. 

Additional  indications  on  the  extent  to  which  the  AIEM  contributed  to  promoting  local 
economic  activities  were  drawn  by  comparing  the  tax  impact  on  price-competitiveness 
with  firms’  past  performance.  As  shown  by  Figure  5  below,  the  strength  of  the  AIEM 
price-competitiveness  impact  features  a  positive  linkage  with  other  dimensions  of  the 
firms’ performance. Consistently with the self-reported assessments presented above, this 
seems to be especially true in the case of production and employment: a ‘very positive’ tax 
impact  in  terms  of  price-competitiveness  is  associated  with  almost  three-fourth  of  firms 
reporting  a  positive  past  trend.  On  the  contrary,  the  majority  of  the  firms  reporting  a 
lacking/small price competitiveness impact recorded a negative performance. In the case of 
market  share  and  profitability,  the  importance  of  other  factors  at  play  is  also  confirmed: 
although  a  positive  relationship  is  detected  in  the  case  of  firms  experiencing  a  ‘very 

18 

 
 
 
 
 
 
 
 
positive’  price-competitiveness  impact,  the  majority  of  firms  with  a  positive  impact 
recorded a negative performance.   

Figure 5. AIEM price-competitiveness impact and business performance  

Source: Business survey of the Study. 

5.3. 

 Option 1 - Termination of the OR specific support 

The ‘do nothing’ scenario entails that the current EU Decision for AIEM is not renewed 
after its  expiration in  2020, and is  not  replaced  by other EU support mechanisms. This 
would  lead  to  the  removal  of  tax  differential  system  based  on  the  origin  of  products, 
although not necessarily to the withdrawal of the AIEM as a ‘budgetary’ measure.  

The estimated impact of the existing regime is globally positive, so its plain withdrawal 
would  predictably  not  lead  to  an  improvement  but  rather  to  a  worsening  of  the  current 
situation.  

First  and  foremost,  the  removal  of  AIEM  tax  differentials  would  severely  affect  the 
competitiveness of local firms engaged in production activities – manufacturing activities 
in  the  first  place,  then  enterprises  in  the  agriculture  and  fisheries  sectors.  The 
overwhelming majority of the affected firms would be SMEs. It has been estimated that 
the  AIEM  special  regime  compensate  some  14%  of  the  additional  costs  of  local 
producers (EUR  125 million), which is  tantamount  to  assume that  ceteris paribus local 
products would become some 5% more expensive than imports.  

The  loss  of  competitiveness  would  evidently  have  repercussions  on  sales  and  market 
share  of  local  products,  whose  extent  depends  on  the  characteristics  of  the  demand  for 
each specific product affected. Assuming – for analytical purposes – a proportional and 
linear elasticity of the demand, the demand for local products would decrease by 5% and 
the average market share would decline by 2.7%, on average.14 Eventually, several local 
producers  would  be  no  longer  competitive  and  would  interrupt  activities.  According  to 
the  results  of  the  survey  of  the  study,  this  may  happen  to  some  54%  of  the  currently 

14 Note: the market share in value terms would actually not change, but it would change in volumetric 
terms.    

19 

 
 
 
                                                           
supported  enterprises  (self-employed  excluded).  As  a  consequence,  the  competition 
would reduce and the market would become more oligopolistic, with possible long-term 
boosting effects on retail prices and a worsening of consumer welfare.  

For  the  macroeconomic  indicators  of  regional  economy,  the  following  impacts  can  be 
expected: 

  Reduction in the production value, largely proportional to the 5% reduction of sales 
anticipated (i.e. EUR 107 million). The contribution of industrial sector to the local 
economy would be reduced, increasing the dependence on the service sector. 

  Similarly,  a  parallel  decrease  in  the  number  of  employees  engaged  in  the  industrial 

sector, as well as in the level of investment mobilised can be expected.  

  The  trade  balance  of  Canary  Islands  would  further  worsen,  as  the  loss  of  local 

production shall be substituted by imported goods.  

The  budgetary  effects  of  this  policy  change  are  rather  unpredictable  as  they  depend  on 
the actual policies deployed by competent authorities in response to the discontinuation 
of the special regime. In essence, if the removal of differentiated rates translates into an 
increase  of  internal  rates  to  the  same  level  of  external  AIEM  rates,  the  tax  revenues 
collected would evidently increase – and precisely by the current amount of the tax not 
collected because of exemptions (assuming the demand stable). If, conversely, the AIEM 
is removed altogether on internal and external delivery a loss of tax revenue is expected, 
equal to the AIEM receipts currently collected (EUR 160 million). The first approach is 
unrealistic as it would lead to a price level increase hardly acceptable by consumers. On 
the other hand, the second approach would deprive the regional administration of part of 
its  budget  (some  5%  of  total  indirect  tax  receipts),  which  could  be  nonetheless 
compensated by an increase of IGIC or other local taxes. A ‘halfway’ solution seems also 
possible, i.e. at the same time decreasing external rates and increasing internal rates until 
reaching the point of equilibrium that would offset any budgetary impact.  

For  the  same  reasons,  the  impact  of  the  discontinuation  scenario  on  price  levels  is 
unpredictable, as it depends on the approach chosen by competent authorities to eliminate 
AIEM  tax  differentials.  In  the  extreme  case  of  bringing  internal  rates  to  the  level  of 
external  rates,  the  cost  for  consumers  would  be  equal  to  the  extra  tax  receipts  levied 
(EUR 166 million) and would increase household expenditure by 0.8%.15 In the event of 
a complete removal of AIEM (offset by an increase of IGIC) or of an adjustment of rates 
to equal the current burden, no marginal aggregated effects would be registered on price 
levels.    

15 Based on an estimated total household expenditure of EUR 19,875 million (2017). Source: Informe 
Anual del CES, 2019.   

20 

 
 
                                                           
Table 4. Summary and rating of expected impacts of option 1 
Impact area 

Subject 

Impact 

Rating  and 
magnitude  

Operating costs/ 
competitiveness 
of business 

Severe reduction of 
competitiveness of local 
products vis-à-vis import 

Beneficiary 
firms 

-2 

Budgetary 
effects 

Functioning of 
the market and 
competition 

Macroeconomic 
impacts  

Unpredictable, but 
potentially significant 
depending on authorities’ 
decisions  

Major changes in the 
market structure 
(increase of import) and 
reduced competition  
Worsening of trade 
balance, and possible 
negative effects on 
employment, 
investments.  

MS 
authorities 

-1/+1 

All 
economic 
operators 

MS 
authorities 

-2 

-1 

Notes 

From (+1) if 
harmonised on 
external rates 
to (-1) if 
removed (and 
not 
compensated)  

Effects on 
consumer 
prices would 
depend on the 
policy adopted 

Legend:  rating  scale:  +2  major  positive  impact;  +1  minor  positive  impact;  0  neutral  impact;  -1  minor 
negative impact; -2 major negative impact. 
Source: Analysis of the Study. 

5.4.Option 2 - Revision of the current regime 

2A – Revision of criteria for the identification of eligible products and updates 

One of the most tangible impacts of this proposed sub option is the removal of the need 
for legal amendments to modify product lists and of the regulatory burden connected to 
it.  A  reduction  of  the  private  sector’s  regulatory  burden  is  also  envisaged,  but  on  a 
smaller scale. These benefits  would stem from  the timelier fixing of any issue deriving 
from the periodical revision of the CN customs classification. For a rough appreciation of 
the magnitude of benefits it should be considered that 37% of the enterprises surveyed in 
the Study reported a change of CN code for at least one of the AIEM products in their 
portfolio,  and  for  nearly  20%  of  respondents  the  time  spent  on  identifying  the  correct 
coding is a source of ‘major burden’. 

For  the  concerned  products,  the  advantage  of  greater  flexibility  is  clear  and  direct:  a 
timelier  adoption  of  the  special  regime,  and  therefore  an  enhanced  impact  on 
competitiveness  and,  possibly,  growth.  More  specifically,  compared  to  the  current 
situation,  new  products  might  have  access  to  special  treatment  a  few  years  before  the 
next policy renewal (up to 7 years). Assuming that local enterprises would schedule the 
launch of new production activities taking into consideration the entry into force of the 
special regime, the proposed option might reduce the time-to-market of new products by 
3-4  years,  on  average.  Similarly,  competent  authorities  would  also  be  able  to  remove 
products no longer relevant from the list, but no marginal impact is expected in this case 
because  also  in  the  present  situation  authorities  may  at  any  moment  set  the  AIEM  rate 
and/or the differential at 0% for products that no longer require support.  

The general functioning of the market would also benefit, in principle, from more timely 
and  flexible  updates  of  product  lists.  In  particular,  facilitating  the  development  of  new 
productions, which would contribute to the diversification of the local  economy; where 

21 

 
 
 
 
 
 
this translates  into  greater market  competition,  an improvement of  consumer welfare is 
assumed. 

Whether the abovementioned benefits would lead to tangible macro-impacts, such as on 
the growth of industrial value-added or employment is difficult to say, but based on the 
results  of  the  retrospective  evaluation  it  seems  unlikely.  The  proposed  option  would 
regard only  a small fraction  of the supported products  and with  low magnitude effects. 
Nevertheless,  it  can  occasionally  lead  to  non-negligible  sectoral  impact,  especially  in 
emerging  economic  sectors  for  which  there  are  currently  no  activities  in  the  Canary 
Islands. 

The adoption of well-calibrated and verifiable criteria would be beneficial for all public 
and private sector stakeholders, as follows:  

  EU  authorities.  The  establishment  of  binding  criteria  provides  a  safeguard  against 
possible  distortive  uses  of  the  policy,  at  the  same  time  facilitating  the  supervision 
tasks.  

  Competent authorities. The proposed criteria are coherent with the existing policy so 
they  would  not  cause  any  friction  at  administrative  level.  In  fact,  they  would  help 
competent  authorities  to  cope  with  the  possible  increased  pressure  from  private 
sectors that might accompany the proposed greater flexibility of implementation. The 
option may also lead to removing the special treatment on products for which there is 
no or negligible local  production, thus  addressing the concerns frequently  raised by 
importers and possibly reducing / eliminating one of the major causes of complaints 
and disputes.   

  Economic operators. The adoption of objectively-verifiable criteria would respond to 
the  need  for  transparency  and  accountability  emerged  from  field  work  interviews 
with private sector stakeholders from both productive sectors (i.e. the beneficiaries of 
the  regime)  and  trade  sectors  (i.e.  the  ‘taxpayers’).  In  this  sense,  this  option  would 
improve the implementation of the policy, preventing/removing the application of the 
special  regime  to  products  that  do  not  arguably  meet  the  required  conditions,  and 
ultimately  contributing  to  eliminate  competition  distortions  and  to  the  proper 
functioning of the market.       

As concerns the impact on the competitiveness of local firms, the proposed option is in 
principle neutral, in the sense that it does not intend to modify the current scope of the 
special  regime  and  the  tax  treatment  of  any  particular  products.  If  some  currently 
supported product loses the requisites for the support, the option implies its removal from 
the list, but this is already envisaged by the current provisions, so the option would not 
have  different  or  additional  effects.  Still,  making  the  justification  of  support  more 
transparent  and  verifiable  could  lead  to  an  improved  assessment  of  the  real  needs  of 
producers  and  a  timelier  detection  and  fixing  of  possible  incongruences  in  the  product 
lists.  The  ensuing  benefits  of  removing  from  the  list  products  that  do  not  meet  the 
eligibility criteria would regard, again, the general proper functioning of the market but 
the  impact  on  the  competitiveness  of  local  enterprises  would  be  negligible,  since  the 

22 

 
market  share  of  the  excluded  products  would  be  either  not  significant  or  so  large  that 
arguably no support for competitiveness is required.16   

Table 5. Summary and rating of expected impacts of option 2A 
Impact area 

Subject 

Impact 

Rating 
and 
magnitude  

Governance and 
good 
administration 

Enhanced 
transparency and 
accountability in the 
selection of supported 
products   

EU / MS 
authorities 

+1 

Regulatory costs 
and savings for 
public 
authorities  

Increased burden, 
related to the required 
ad hoc justification for 
special cases 

MS 
authorities 

Operating costs/ 
competitiveness 
of business 

Neutrality of effects 
on the current state of 
play should be ensured  

Beneficiary 
firms 

Functioning of 
the market and 
competition 

Reduced complaints 
and disputes over 
unjustified disparities of 
treatment and unduly 
distortion 

All 
economic 
operators 

-1 

0 

+1 

Notes 

Delegating the 
establishment of 
thresholds to MS 
authorities 
enhances 
subsidiarity but 
possibly fuels 
disparities 

Except for non-
eligible products, 
which have to be 
removed anyway  

Legend:  rating  scale:  +2  major  positive  impact;  +1  minor  positive  impact;  0  neutral  impact;  -1  minor 
negative impact; -2 major negative impact. 
Source: Analysis of the Study. 

2B – Revision of mechanisms to establish the maximum permitted differential 

The  budgetary  impact  of  the  proposed  option  would  be  neutral  ‘by  design’:  the  option 
has  not  the  objective  of  increasing  tax  differentials  and,  in  general,  of  modifying  the 
intensity of the aid but to allow revisions  – where needed  - without a legal amendment 
procedure. In this sense, the amount of tax levied would not be affected by the option. In 
practice,  to  prevent  the  risk  of  a  generalised  increase  of  tax  differentials,  this  option 
should  be  accompanied  by  the  establishment  of  a  global  ceiling  for  the  cost 
compensation.           

For  the  competitiveness  of  individual  local  production,  the  proposed  option  could  be 
beneficial as it would enable timelier modification of the differential applied, i.e. without 
the restriction of periodical renewal or interim legal amendments. However, this typically 
regards a limited number of products (i.e. only 8 products were moved to a higher list in 
the 2014 renewal of the policy) and an improved timeliness of 3-4 years compared to the 
present  situation,  so  from  a  general  market  perspective  and  in  aggregated  terms 
(including macro-economic aspects) the expected impacts would be hardly noticeable. 

This option is also aimed at simplification and greater flexibility in the implementation of 
the policy. Importantly, it does not intend to modify the intensity of the support extended 

16  It  is  important  to  remind  that,  according  to  the  proposed  option,  the  compliance  with  the  prescribed 
market  share  window  can  still  be  derogated,  if  duly  justified,  so  products  falling  above  or  below  the 
established thresholds would not be automatically excluded.       

23 

 
 
 
 
 
 
                                                           
to the products benefitting from tax differentials but only to facilitate those revisions that 
currently  imply  moving  a  product  from  a  list  to  another  one  with  a  higher  permitted 
differential.  In  fact,  the  proposed  option  regards  essentially  procedural  aspects  and 
therefore  its  fundamental  impacts  fall  in  the  category  of  governance  and  good 
administration.     

The current subdivision into four distinct lists does not add value to the efficacy or the 
relevance of the policy and constitutes an unnecessary complexity that can be removed 
and  replaced  with  a  single  list  with  a  single  maximum  permitted  differential.  The 
maximum permitted differential applicable to the single list would be 15%, which is the 
currently highest differential actually applied under the AIEM regime.17  

In practical  terms, the option would  eliminate the need for any administrative action to 
move  products  across  lists  and  the  related  burden.  On  the  other  hand,  this  option  can 
result  advantageous  for  competent  authorities  only  if  there  are  effective  administrative 
rules and procedures in place to cope with the possible increase of pressures from private 
sector.  

Table 6. Summary and rating of expected impacts of option 2B 

Impact area 

Impact 

Subject 

Rating 
and 
magnitude  

Notes 

Governance and 
good 
administration  
Regulatory costs 
and savings for 
public 
authorities  

Operating costs/ 
competitiveness 
of business 

Improved alignment with 
needs, but enhance risk 
of increased pressures   

Reduced burden, for 
revising the differentials 
applied straightforwardly 

More timely revision of 
support for specific 
products requiring higher 
differentials   

EU / MS 
authorities 

+1/-1 

depending on 
ORs rules of 
procedure   

MS 
authorities 

+1 

Beneficiary 
firms 

0/+1 

greater 
magnitude (+1) 
for the few 
specific products 
concerned 

Legend:  rating  scale:  +2  major  positive  impact;  +1  minor  positive  impact;  0  neutral  impact;  -1  minor 
negative impact; -2 major negative impact. 
Source: Analysis of the Study. 

2C – Revised monitoring arrangements 

The  heterogeneous  content  of  the  interim  implementation  report  submitted  by  the 
national  competent  authorities  to  the  Commission  creates  difficulties  for  the  data 
analysis.  For  this  reason,  option  2C  proposes  to  harmonise  the  structure  and  the 
indicators provided in those reports in order to: (a) enhance their consistency overtime; 
and  (b)  prevent  and  address  the  information  ‘gaps’  characterising  some  of  the  past 
reports. All these outcomes would contribute to a better design and administration of the 
policy, providing the EU and the Spanish  authorities with  more robust evidence on the 
effects  of  the  special  regime  on  the  local  socio-economic  structure  (including  in  the 
medium/long-term).  This  would  include  dimensions  poorly  investigated  so  far  due  to 
insufficient data, such as the impact on market structure, on trade flows, on price levels 

17  The  ‘List  D’  would  allow  a  differential  of  up  to  25%  but  since  2015  the  only  product  in  this  list, 
manufacturing tobacco, has a tax differential of 15%.  

24 

 
 
 
 
 
                                                           
and  other  macroeconomic  indicators.  To  ensure  compliance,  the  harmonised  structure 
and the indicators for the report should be annexed to the Council Decision.   

The benefits of the improved arrangements would go beyond institutional oversight. The 
mainstreaming  of  more  robust  and  comprehensive  impact  evidence  into  the  policy 
design,  can  eventually  improve  its  efficiency  and  help  competent  authorities  to  correct 
possible  distortions  in  the  market,  thus  responding  to  the  concerns  raised  by  various 
stakeholders and preventing the emergence of disputes. The ‘knowledge’ areas that might 
particularly  benefit  from  the  proposed  overhaul  of  the  system  include:  (a)  the  specific 
impact  of the AIEM special regime on sectoral  value-added (and  employment); (b) the 
impact of the tax differentials on price levels; and (iii) the assessment of the intensity of 
the aid, taking into account the other support measures.      

The costs of this proposed option are those imposed on the competent authorities for the 
collection  and  processing  of  data  and  the  preparation  and  transmission  of  the  revised 
interim  report.  However,  as  monitoring  obligations  already  exist  in  the  current 
framework,  the  actual  burden  would  be  limited  to  the  additional  information 
requirements  introduced  with  the  revision.  More  specifically,  the  additional  burden 
would consist of two activities:  

 

 

the  ‘one-time’  familiarisation  with  the  harmonised  structure  and  the  indicators 
requested; 
the recurrent collection and elaboration of data that are not currently included in the 
periodical monitoring reports.  

To  minimise  the  additional  burden,  the  proposed  indicators  have  been  selected 
considering the information that is already collected and reported by Spanish authorities - 
or  easily  available,  such  as  customs  data  -  and  introducing  modifications  only  where 
deemed important.  

No  additional  burden  for  enterprises  is  expected.  All  the  indicators  listed  derive  from 
information  collected  by  public  authorities  or  statistical  data.  Some  data  do  require  the 
consultation of enterprises (e.g. the estimation of additional production costs) but this is 
information that is being collected anyway and not an obligation introduced by the policy 
option.            

Table 7. Summary and rating of expected impacts of option 2C 
Impact area 

Subject 

Impact 

Rating 
and 
magnitude  

Governance and 
good 
administration   

Regulatory costs 
and savings for 
public 
authorities 

Functioning of 
the market and 
competition 

More informative 
monitoring, and better 
stock-taking of impacts 
also in comparative terms   
Increased burden, for 
filling information gaps 
and elaborating few new 
indicators  
Improved policy design 
and implementation, 
preventing market 
distortions, and the risk of 

EU/MS 
authorities 

EU 
authorities 

All economic 
operators 

+2 

-1 

+1 

25 

Notes 

assuming the 
results of the 
analysis are 
fed back into 

 
 
 
 
 
 
policy design  
Legend:  rating  scale:  +2  major  positive  impact;  +1  minor  positive  impact;  0  neutral  impact;  -1  minor 
negative impact; -2 major negative impact. 
Source: Analysis of the Study 

overcompensation   

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 

Overall,  the  policy  aims  at  enhancing  the  competitiveness  of  local  industries  and 
production  activities  mitigating  the  constraints  caused  by  the  outermost  status  of  the 
regions concerned. The proposed options 2A and 2B, and especially the measures aimed 
at  facilitating  the  updating  of  the  special  regime  to  the  evolving  needs,  could  prove 
beneficial in this respect, in particular as concerns the support to emerging activities. The 
majority of beneficiaries of special regimes are SMEs, so the benefits would be apparent 
especially in that segment. Conversely, the discontinuation of the policy (option 1) would 
have, by definition, severe adverse effects on the competitiveness of local producers.  

The proposed policy revisions (options 2A, 2B and 2C) are also expected to improve the 
functioning of the market, mitigating the risk of unduly distortions of competition, which 
is the second overall objective of the policy. This result would be achieved by a series of 
specific  measures  concerning  the  selection  of  eligible  products,  the  application  of  tax 
differentials  in  line  with  needs,  the  prevention  of  overcompensation  risks,  and  the 
effective  monitoring  of  the  regime.  Individually,  all  proposed  measures  would  have 
moderate effects, but altogether they might effectively respond to various concerns raised 
by trade and service sectors over the fairness and proportionality of the special regime. 
Also  in  this  case,  the  effects  of  a  discontinuation  of  the  regime  (option  1)  would  be 
markedly negative: various local producers would no longer be able to compete, and the 
market would become even more oligopolistic, with adverse effects also for consumers.  

Ultimately, the policy aims at contributing to the social and economic development of the 
Canary Islands. The proposed revisions of the current system would have limited effect 
in this area, first and foremost because they do not intend to modify the current scope and 
intensity  of  the  support  extended  through  the  special  regime.  The  improvements 
described  above  might  have  beneficial  effects  in  few  specific  product  areas  –  e.g. 
improving the alignment with needs or redressing existing distortions – but at the macro-
economic level these effects would be hardly noticeable. Instead, the negative impacts of 
discontinuation  would  be  probably  visible  on  the  industrial  value-added  indicators  and, 
possibly, on investments and employment.          

Efficiency 

26 

 
 
  
     
 
 
 
 
The policy options examined do not envisage modifications that might affect the amount 
of  tax  revenues  collected  and,  therefore,  the  budget  of  the  regional  administrations 
concerned.  The  budgetary  effects  of  the  proposed  options  would  be  either  neutral,  by 
design, or ambivalent and unpredictable since they would depend on the policy decisions 
taken at local level.  

In terms of regulatory burden for EU and MS authorities, the specific measures proposed 
for the revision of the policy are expected to have differentiated effects. Compared to the 
baseline  situation,  the  impact  of  option  2A  would  contribute  to  the  reduction  of  the 
current  burden  -  especially  because  of  the  simplification  and  the  greater  flexibility 
introduced in the system. Conversely, certain aspects of  options 2B and 2C such as the 
establishment  of  a  global  reference  value  for  the  policy,  the  revised  mechanisms  for 
additional costs estimation, and the improvement of the monitoring system, could imply 
an increase of the efforts required. At any rates, the additional burden anticipated would 
remain limited and largely offset by the benefits of the proposed revisions. 

The  regulatory  burden  imposed  on  enterprises  would  possibly  decrease  -  although 
moderately - under option 2A and primarily as a consequence of the shifting of the policy 
focus from specific products to broader categories, facilitating and alleviating the efforts 
for  additional  cost  assessments  and  the  justification  for  the  application  of  tax 
differentials.                    

Coherence 

For the coherence of the proposed options with the EU policy, the primary reference is 
the impact on governance and good administration. This included – where relevant – also 
the coherence with the parallel State aid policy on AIEM and its possible evolution. As 
most of the proposed revisions explicitly address policy governance and implementation 
arrangements,  a  generalised  improvement  can  be  expected  under  this  scenario.  In 
particular, they would enhance the subsidiarity in the implementation of the policy, while 
reinforcing the monitoring and making rules and conditions clearer and easily verifiable. 

Table  8.  Summary  of  estimated  impacts  for  each  of  the  options  considered  (see  key 
below) 

Option theme 

Effective 

Efficient 

Coherent 

Baseline: The derogation is renewed with no 
further policy changes 

Option 1: Policy discontinuation 

Option 2A: Revision of criteria for the 
identification of eligible products and updates 

Option 2B: Revision of mechanisms to 
establish the maximum permitted differential 

0 

- 

+ 

+ 

0 

- 

+ 

+ 

0 

-- 

++ 

+ 

27 

 
Option theme 

Effective 

Efficient 

Coherent 

Option 2C: Revised monitoring arrangements  

+ 

- 

+ 

Legend: ++ positive effect expected; + moderate positive effect expected; 0 no effect or neutral impact expected; - 
moderate negative effect expected; -- negative effect expected; (all relative to baseline) 
Source: Analysis of the Study 

7.  PREFERRED OPTION 

Option  2  which  entails  a  combination  of  sub  options  2A+2B+2C,  which  renews  and 
revises  the  current  regime  is  the  preferred  option.  This  would  renew  the  special  rules 
beyond 2020 with the following modifications: 

a)  The  establishment  of  criteria  for  the  identification  of  eligible  products  and 

updating of product lists.  

b)  The  revision  of  the  mechanisms  for  establishing  the  maximum  permitted  tax 

differential.  

c)  The revision of the duration of the policy and of monitoring arrangements.  

The three sub options are not mutually exclusive and are technically independent of each 
other.  Each  sub  option  addresses  a  specific  problem  effectively  and  efficiently. 
Nevertheless implementing all sub options together, rather than in isolation, has overall a 
greater  positive  impact.  These  options  enable  the  Spanish  authorities  to  manage  the 
regime effectively at Member State level to amend the regime in line with the set criteria. 
In comparison, option 1 is ineffective as the termination of the regime would mean that 
the objectives of the regime would not be achieved and could lead to economic and social 
instability in the Canary Islands.  

Legal certainty would be increased for all stakeholders and the monitoring of the regime 
would be greatly enhanced by this option. Finally all sub options  of option 2 would be 
more  coherent  with  other  EU  policy,  whereas  option  1  would  be  incoherent  with  EU 
policy for the outermost regions.   

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 Spanish authorities and the Commission, as it has been to date.  

In  accordance  with  Article  4  of  the  current  Decision,  the  Spanish  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 existed.  

It is important that the Spanish authorities continue preparing a monitoring report as they 
are best placed to gather the precise information  from the impacted stakeholders. Spain 
will  be  asked  to  submit  a  report  by  30  September  2025  for  the  period  from  2019  to 

28 

 
202418. This report will include any relevant information as regards the additional costs 
involved  in  the  local  production,  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 Spanish  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 setup on the same principles as those for other similar schemes in the 
EU’s outermost regions, where they are governed by similar legislation. 

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

18 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.  

29 

 
 
 
                                                           
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  authorising 
Spain to apply a reduced rate of the AIEM tax on some locally produced products 
in the Canary Islands (PLAN/2019/5284) 

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, TRADE, MARE. 

A  consortium  led  by  Economisti  Associati,  (hereinafter  collectively  referred  to  as  “the 
Consultant”)  undertook  the  assignment  titled  “Study  on  specific  tax  regimes  for 
outermost regions belonging to France and Spain” (“the Study”). 

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

The  objectives  of  the  Study  were  to  analyse  how  these  regimes  contributing  to  the 
analysis of the policy scenarios available for the way forward, or more specifically: a) to 
collect and elaborate evidence on the past performance of these special tax regimes in the 
regions concerned; b) to identify and assess possible revisions of the current policy, and 
c)  to  provide  conclusions  and  recommendations  on  the  different  policy  scenarios 
available. 

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

30 

 
 
 
 
 
 
ANNEX 2: STAKEHOLDER CONSULTATION  

1. Overview of consultation activities  

The stakeholder consultation strategy has been developed to ensure a wide and balanced 
coverage of the different entities involved in, subject to, or concerned by the design and 
implementation of the special tax regime, by means of tailored tools and questionnaires. 
The  perspectives  and  positions  on  the  AIEM  were  expected  to  vary  significantly  (a) 
across  the  groups  of  stakeholders  considered  –  i.e.  policy-makers,  tax  and  customs 
administrations,  enterprises,  professionals,  etc.;  (b)  geographically  –  i.e.  ‘mainland’  or 
Canary Islands residents; and (c) in the case of the private sector stakeholders, between 
the local producers benefitting from the regime, the enterprises that are instead subject to 
direct  tax  charges  (e.g.  importers),  and  the  enterprises  that  are  indirectly  affected  (e.g. 
local manufacturers using production inputs falling inside or outside the tax differential 
regime).  

To  address  all  different  perspectives  and  positions  comprehensively,  the  stakeholder 
consultation consisted of the following two main pillars:  

 

 

targeted  interview  programme,  involving  field  visits.  In-depth  interviews  were 
conducted with selected stakeholders, including EU institutions, Spanish government 
authorities at national and local level, and economic operators and trade organisations 
representing  both  the  local  productive  sectors  -  i.e.  the  beneficiaries  of  the  special 
regime - and the trade and service sectors, which are directly or indirectly affected. A 
total of 58 stakeholders were interviewed, of which 38 in the Canary Islands; 
focussed online survey of economic operators active in the Canary Islands. A web-
based survey of the economic operators located in the Canary Islands was carried out 
between November 11 and December 20, 2019. The survey enabled to collect firms’ 
views  on  the  key  features  of  the  AIEM,  i.e.  positive  impacts,  side  effects,  changes 
needed, etc., and to gather structured information on the conduct and performance of 
local businesses which are affected by the special tax regime to different degrees. The 
survey questionnaire was available in English and Spanish, and customised to reflect 
the  different  effects  of  and  views  on  the  special  tax  regime  based  on  the  different 
groups  of  local  businesses  involved,  namely:  (i)  local  producers,  and  (ii)  importers 
and distributors. A total of 182 valid replies were received from the Canary Islands. 
Table 2.1 provides a summary of the responses to the survey by size of the firm and 
respondent economic activity.  

Table 2.1 – Response summary to the business survey  

Firm size 

Number of 
respondents 

Main economic activity 

Number of 
respondents 

Between 1 and 9 employees -
firms (micro enterprise) 
Between 10 to 49 employees 
(small enterprise) 
Between 50 to 249 
employees (medium-sized 
enterprise) 

28 

81 

50 

Productive activities 

112 

Of which beneficiaries of 
the AIEM regime 

70 

Non-productive activities 

70 

31 

 
 
 
 
 
 
 
 
 
More than 250 employees  
(large enterprise) 
No answer 
Total 

20 

3 
182 

Of which traders / 
importers 

Total 

40 

182 

Altogether, the consultation allowed to gather three main kinds of information:  

(1) factual information on the legal  and administrative arrangements  for the  special tax 

regime in the Canary Islands; 

(2) evidence on the performance of the tax regime, including the benefits delivered, the 
contribution  to  the  local  development,  and  any  possible  issue  or  unintended  effect 
registered;   

(3) the stakeholders’ expectations and views on possible policy scenarios for the future – 
including the revision of the current regime, and their forecasts concerning the effects 
of different possible EU actions.  

2. Overall evaluation of the AIEM regime   

  ON THE COHERENCE AND RELEVANCE OF THE REGIME   

The  results  of  the  study  indicate  that  the  scope  of  the  AIEM  regime  is  fairly 
comprehensive,  satisfactorily  addressing  the  needs  of  the  economic  operators  concerned. 
This  was  confirmed  by  the  majority  of  the  key  stakeholders  consulted,  even  though 
private sector representatives reported some gaps. About half the local producers involved 
in  the  survey  maintained  that  some  products  should  be  added  to  the  AIEM  list.  In  this 
regard, the main problem lamented by stakeholders was the system’s slowness to respond 
to  the  emerging  needs  of  the  local  economy  and  to  correct  errors  and  omissions,  when 
relevant.  The  lack  of  flexibility  is  due  to  the  fact  that  the  list  of  products  with  a  tax 
differentiated rate is laid down in the Council Decision, and, hence, any revision – e.g. 
the inclusion of a new emerging production or the modification of the extent of the tax 
support  –  requires  a  burdensome  legal  amendment  process  or  its  postponement  to  the 
next renewal of the policy.  

Another main issue with  reference to  the AIEM  scope was typically voiced by traders’ 
representatives  and  concerned  the  application  of  tax  differentials  to  products  for  which 
there was no ‘equivalent’ local production in strict terms. In some cases, CN categories 
included in the AIEM list cover heterogeneous products, some of which are not produced 
locally.  The  results  of  the  business  survey  confirm  the  existence  of  this  issue:  the 
majority of the respondents (60%), including a relevant share of local producers (38%), 
reported the existence of products  with negligible production in the Canary  Islands that 
should be removed from the list. 

The criteria adopted by competent authorities to  establish the list of products benefitting 
from  fiscal  advantages  and  determine  the  level  of  support  are  not  articulated  in  a  clear 
and  very  detailed  manner. Consistently, about one fifth  of the local producers  and  some 
40% of the firms active in other sectors reported limited or no familiarity with the criteria 
for the inclusion of certain products in the AIEM lists. As for the methods used to establish 

32 

 
 
 
 
 
 
 
 
 
 
 
 
 
the tax differential applicable to AIEM products, respondents are even less knowledgeable: 
over  60%  of  the  non-producer  firms  and  44%  of  the  local  producers  declared  to  have 
little/no information about these methods.  

Table 2.2 – Stakeholders knowledge of the criteria underlying AIEM implementation  

Share of respondents with no/limited knowledge of the 
criteria for inclusion of certain products in the AIEM lists 
Share of respondents with no/limited knowledge of the 
methods used to establish the tax differential applicable to 
AIEM products 
Source: Business Survey.  

Total 

Non 
producer
s 

Producer
s 

28% 

40% 

21% 

51% 

63% 

44% 

  IMPACT OF THE AIEM ON PRICE-COMPETITIVENESS 

The  importance  of  the  AIEM  regime  in  redressing  the  price-competitiveness  of  local 
productions  was  widely  acknowledged  by  representatives  of  the  relevant  private  sector 
associations  and  manufacturing  firms  met  during  fieldwork,  even  though  the  price  gap 
between locally-produced goods and imported ones was not fully closed.  

The  local  producers  involved  in  the  survey  attributed  great  importance  to  the  AIEM  in 
shaping  the  conditions  for  competition:  the  majority  (54%)  of  the  relevant  respondents 
qualified  the  tax  role  as  ‘essential’,  adding  that  without  the  AIEM  they  could  not 
compete, and another 42% assessed the impact of the AIEM as ‘moderate’. Likewise, the 
majority  (57%)  of  the  importers  maintained  that  the  AIEM  affected  ‘significantly’  the 
competitiveness of their imported products with AIEM differential rate. 

Table 2.3 – Stakeholders assessment of AIEM impact on price-competitiveness 

% of local 
producers  

54% 

Essential, without AIEM we 
could not compete with 
imported goods 
Moderate, AIEM helps us 
being competitive but there 
are other factors 
Limited, AIEM is only a minor 
factor in the dynamic of price   
Source: Business Survey (excluding ‘don’t know’ answers). 

Significantly, AIEM makes our 
main imported product much 
less competitive 
Moderately, AIEM does affect 
competitiveness but there are 
other factors at play 
Limitedly, AIEM is only a minor 
factor in the dynamic of price   

42% 

4% 

% of 
importers  

57% 

32% 

11% 

  PERCEIVED ADVANTAGES OF THE AIEM REGIME 

The business survey investigated the respondents’ views on the potential positive impacts 
of  the  AIEM  regime  on  the  local  economy,  in  general,  and  on  production  activities, 
specifically. Views substantially differed between enterprises engaged in the production 
of goods with AIEM differential rate and businesses operating in non-productive sectors: 
the former are inevitably much keener to assess the importance of the AIEM as critical, 
while the latter are much more sceptical. More specifically:  

33 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  almost three fourths of the respondents maintained that the AIEM had a moderate / 
major  impact  in  boosting  local  production  activities  in  the  Canary  Islands.  This 
share  includes almost all local producers of AIEM goods (96%), but also a relevant 
share (38%) of the firms active in other sectors; 
the  opinions  concerning  the  impact  of  the  AIEM  in  terms  of  supporting 
employment, increasing investments in local production activities and reducing the 
local  economy  reliance  on  imports  are  more  polarized.  About  90%  of  the  local 
producers attributed a positive role of the AIEM regime to these ends, while such 
an opinion was shared by a tiny minority of non-producers; 
the  effects  of  the  AIEM  on  the  expansion  of  the  range  of  products  available 
locally and the promotion of R&D and innovation in the local industry were those 
assessed as least positively. 

 

Table 2.4 illustrates the share of respondents assessing the positive impacts of the AIEM 
regime as ‘moderate’ or ‘major’. 

Table 2.4 – Stakeholders perception of the positive impacts of the AIEM  

% of respondents assessing 
impact as moderate or major 

Positive Impact 

Total 

Boosting local production activities  
73% 
Encouraging the diversification of local production activities  66% 
Reducing the local economy’s reliance on imports 
62% 
Contribution to the creation and maintenance of jobs 
64% 
Fostering investments in local production activities  
66% 
Expanding the range of products available in the local 
market 
Fostering research and development and innovation in the 
local industry 
Source: Business Survey (excluding ‘don’t know’ answers). 

58% 

56% 

Non 
producer
s 
38% 
24% 
22% 
18% 
24% 

Producers 
of AIEM 
goods 
96% 
92% 
89% 
92% 
93% 

13% 

88% 

11% 

85% 

  PERCEIVED ADVERSE EFFECTS OF THE AIEM REGIME 

The  business  survey  also  investigated  the  respondents’  views  on  the  potential  negative 
effects  of  the  AIEM  regime  on  the  local  economy,  market  competition,  regional  trade, 
local consumption, and price level. As shown by Table 2.5 below, also in this case views 
largely  differed  between  enterprises  engaged  in  the  production  of  AIEM  goods  and 
businesses  operating  in  all  other  sectors,  but  in  a  reverse  order.  In  particular,  the  table 
illustrates  the  share  of  respondents  within  each  group  assessing  negative  impacts  as 
‘moderate’ or ‘major’.  

The salient results can be summarised as follows: 

 

the majority of non-producer firms, ranging between 51% and 83%, assessed all 
the negative impacts as significant. Oppositely, only a tiny minority of the local 
producers (barely exceeding 10%) provided a similar assessment of the different 

34 

 
 
 
 
 
 
 
 
 

impacts of the AIEM regime. Overall, the inflationist effect exerted by the tax and 
its negative impact on trade between the Canary Islands and neighbouring countries 
attracted the highest degree of consensus; 
the  polarisation  of  the  stakeholder  views  on  the  AIEM  distortive  effects  on 
competition  is  comparatively  more  marked:  for  over  80%  of  trade  and  service 
businesses  the  cumulation  of  the  AIEM  with  other  aids  caused  a  ‘moderate’  to 
‘major’  distortion  of  competition,  whereas  only  7%  of  local  producers  held  a 
similar opinion. Similar shares of respondents within the two groups lamented the 
negative  effects  exerted  by  the  tax  on  local  economic  activities  importing  raw 
materials and supplies on which the AIEM is levied; 

  a  smaller  share  of  non-producer  firms  assessed  as  significant  the  potential 
negative  effects  of  the  tax  concerning  the  efficiency  of  local  producers,  which 
might  be  discouraged  to  make  efforts  to  boost  productivity,  and  the  fact  that  the 
AIEM tended to draw resources towards existing ‘supported’ sectors, hampering 
the development of new ones.  

Table 2.5 – Stakeholders perception of the negative impacts of the AIEM  

Negative Impact 

% of respondents assessing 
impact as moderate or major 
Producers 
of AIEM 
goods 

Non 
producer
s 

Total 

Because of AIEM support, local firms are not encouraged 
to boost efficiency and productivity 
The AIEM drives most of investments and human 
resources to the ‘supported’ sectors, thus hampering the 
emergence of new activities in ‘non-supported’ sectors 
The AIEM influences the demand, switching consumption 
from more taxed products to substitute products  
The addition of AIEM and other aids to local production 
produces an excessive distortion of competition 
By taxing certain raw materials and supplies, the AIEM 
indirectly affects local production activities and services 
(such as tourism etc.) 
The AIEM translates into higher prices for consumers 
The AIEM hampers trade with neighbouring countries 
(e.g. Portuguese islands and West Africa) 
Source: Business Survey (excluding ‘don’t know’ answers).  

34% 

69% 

9% 

29% 

58% 

9% 

35% 

51% 

22% 

37% 

82% 

7% 

36% 

76% 

8% 

39% 

79% 

40% 

83% 

12% 

11% 

  EFFICIENCY OF THE AIEM REGIME  

The AIEM regime does not create major problems in terms of implementation or major 
administrative burdens on competent authorities. Coherently, public authorities generally 
agree  that  the  tax  enforcement  burden  arising  from  activities  concerning  products  with 
AIEM  differentials  can  be  considered  as  acceptable  and  justified  by  the  benefits 
produced. On the other hand, at a broader level, the revision of the list and the exemptions 
extended  to  specific  products  through  a  legal  amendment  of  the  Council  Decision  is 
regarded  as  overly  complex,  thus  causing  unnecessary  burdens  to  EU  and  national 
authorities.  Likewise,  national  competent  authorities  reported  that  the  current  monitoring 

35 

 
 
 
 
 
requirements  require  significant  efforts,  possibly  disproportionate  compared  to  their 
informative value and utility for the policy process.  

The  administrative  and  compliance  costs  of  the  AIEM  regime  are  considered  as  rather 
limited  by  private  sector  representatives.  The  majority  of  the  importers  involved  in  the 
survey  assessed  compliance  with  AIEM-related  obligations  as  not  particularly 
burdensome. In this context, the most burdensome task is considered the identification of 
the applicable customs codes and the corresponding AIEM rates, sometimes uncertain and 
potentially  a  cause  of  disputes  and  disparity  of  treatment.  In  particular,  this  task  was 
assessed as a major burden by about one about three fourths of the relevant respondents.  

The  negative  assessment  concerning  the  customs  classification  of  imported  raw 
materials/supplies subject to the AIEM was confirmed by the feedbacks provided by local 
firms operating in the manufacturing industry as well as in other sectors that import part of 
the  raw  materials  and  supplies  used  in  their  business  activity.  About  half  of  these  firms 
reported  at  least  one  change  in  the  customs  code  and/or  definition  of  the  raw 
materials/supplies usually imported. 

3. Stakeholder views on future policy scenarios   

  ATTITUDE TOWARDS THE RENEWAL OF THE AIEM REGIME 

The consultation of the public authorities gave a clear picture with regard to the future of 
the current tax regime. On the one hand, with the AIEM considered as important both for 
the  public  budget  of  the  Canary  Islands  and  to  support  local  production  activities,  the 
renewal  of  the  regime  enjoys  a  widespread  consensus.  On  the  other  hand,  the  local 
competent  authorities  consulted  highlighted  the  need  for  greater  flexibility  and  a  less 
cumbersome  procedure  to  update  the  supported  products  list  and  the  tax  differentials 
applied.    

The  views  of  the  private  sector  with  regard  to  the  renewal  of  the  AIEM  regime  are 
strongly  polarized,  depending  on  the  business  activity  and  the  different  effects  of  the 
AIEM  on  this  activity.  As  expected,  respondents  engaged  in  production  activities, 
typically  benefitting  from  tax  differentials,  largely  supported  the  renewal  of  the  policy 
(95%).  Still,  the  majority  of  them  (75%)  deemed  that  the  current  mechanism  needed 
some change.  

Conversely, the majority (70%) of the businesses operating in other sectors (i.e. different 
from  production  activities)  would  prefer  the  current  policy  to  be  discontinued.  In 
particular, one third of the respondents would like the policy to be replaced with different 
forms of support for local production activities. Interestingly, opponents to the renewal of 
the  AIEM  regime  are  more  common  in  the  tourism  sector  than  among  traders.  This 
substantiates a point frequently made during field interviews: the main problem with the 
AIEM regime concerns its impact on the ‘inputs’ for which there is no or insufficient (for 
quantity or quality) local production. 

36 

 
 
 
 
 
 
 
 
 
Table 2.6 – Stakeholders attitude toward the renewal of the AIEM regime 

Scenarios 

Renew the Decision without major changes 
Renew the Decision, introducing some revisions 
Not renew the Decision, and introduce alternative support 
mechanisms 
Not renew the Decision 
Source: Business Survey (excluding ‘don’t know’ answers). 

% of respondents 

Non 
producer
s 
6% 
24% 

Total 

16% 
55% 

14% 

33% 

15% 

37% 

Producer
s 

22% 
73% 

3% 

2% 

  STAKEHOLDER VIEWS ON POSSIBLE POLICY REVISIONS  

Revisions to the current policy and its implementation arrangements were discussed with 
different  stakeholders.  The  business  survey  also  investigated  the  respondents’  positions 
on  the  possible  areas  for  improvement.  The  Table  2.7  below  shows  the  share  of 
respondents  fully  or  partly  agreeing  with  a  set  of  proposed  areas  for  revision  of  the 
policy, distinguishing between enterprises engaged in production activities and all other 
sectors.  

The salient results can be summarised as follows:  

 

  all the proposed revisions were assessed positively by a majority of the respondents, 
irrespective of the sector of activity. The ‘producers’ group generally expressed more 
favourable feedbacks but, for most of the proposed options, differences between the 
two groups are limited; 
local producers are more interested in improving the flexibility of the system, making 
modifications  of  the  tax-supported  products  lists  and  the  tax  differentials  applied 
more  frequent  and  easier.  In  this  regard,  several  enterprises  specified  that  this 
flexibility was needed to better align with evolving needs but should not translate into 
too  frequent  changes  of  the  rates  by  local  authorities,  which  would  undermine  the 
stability and the predictability of the markets;         

 

  conversely, non-producers expressed a more favourable view compared to producers 
on the possibility to adopt measures aimed at mitigating the impact of the AIEM on 
imported production inputs (raw materials, supplies etc.);   
the  improvement  of  the  monitoring  system  on  the  whole  and  the  price  levels 
specifically  encountered  a  large  degree  of  support  in  both  groups  (and  especially 
among local producers);  
likewise, both groups substantially agree on the need for more transparent and clear 
criteria for both selecting the supported products and establishing the applicable rates. 
From  the  perspective  of  non-producers,  improved  and  transparent  criteria  should 
ensure  that  products  for  which  no  local  production  exists  are  excluded  from  the 
special regime.  

 

37 

 
 
 
 
 
 
 
 
Table 2.7 – Stakeholders attitude toward proposed revisions of the AIEM regime 

Purposed Revisions 

It should be possible to amend the list of supported 
products more frequently and easily 
It should be possible to modify the tax rates applied more 
frequently and easily 
The criteria for updating the list of supported products 
should be clearly and precisely laid down in the EU policy      
The criteria for modifying the differentiated tax rates 
applied to AIEM products should be clearly and precisely 
laid down in the EU policy      
The AIEM monitoring system should be improved, with the 
regular collection of market data on local production, 
import, employment etc.  
The price levels of AIEM products imported and locally-
produced should be periodically monitored 
Mechanisms to reduce the impact of AIEM on the import of 
production inputs (e.g. raw materials and supplies) should 
be considered   
Source: Business Survey.  

% of respondents agreeing 
with 

Total 

Non  
producer
s 

Producers 

80% 

69% 

88% 

76% 

70% 

79% 

75% 

74% 

76% 

75% 

71% 

77% 

82% 

74% 

88% 

73% 

71% 

74% 

73% 

80% 

68% 

Additional  suggestions  were  occasionally  made  by  stakeholders:  (a)  to  improve  the 
enforcement  of  product  classification  to  avoid  the  practice  of  incorrect  coding  for  tax 
circumvention; (b) to exclude freight costs from the tax base of imported products; and 
(c) to consider mechanism to ensure benefits are extended primarily to small companies.         

38 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 3: ANALYTICAL METHODS 

The sources of evidence used in the Study are of three main types:  

1.  desk research and review of documentary sources; 
2.  stakeholder consultation activities, consisting of in-depth qualitative interviews and 

of questionnaire surveys; 

3.  quantitative  data  analysis,  based  on  existing  datasets  and  statistics  elaborated  with 

appropriate analytical tools in order to produce quantitative evidence. 

1.  Desk Research 

The variety of the analytical objectives of the Study and the multiple geographical region 
covered by the policies  required  a comprehensive mapping and  review of documentary 
sources,  which  was  conducted especially in the structuring phase of the Assignment. A 
total of +300 documents19 in English, French and Spanish language have been retrieved 
in  the course of the Study including to  a large extent non-published administrative and 
implementation  documents  provided  by  the  competent  authorities  as  well  as  market 
analyses and other reports and papers provided by private sector stakeholders.  

For classificatory purposes, the various types of documentary sources can be gathered in 
four main groups, as described below.    

  The  first  category  of  documents  included  EU  policy  for  special  tax  regimes  and 

related documents.  

  The  second  group  regards  the  broader  EU  policy  framework  for  ORs,  including 
the overall EU strategic approach to the ORs as enshrined in a 2017 Commission 
Communication  on  a  stronger  and  renewed  strategic  partnership  with  the  EU 
outermost regions, and sectoral / thematic policies, including 

  The third group concerns specific national and regional documents on the special 

tax regime  

  The  fourth  group  includes  a  variety  of  relevant  academic  and  ‘grey’  literature 

published by several scholars, ‘think-tanks’ or private sector bodies.  

2.  Stakeholder consultation  

Overall,  some  120  stakeholders  were  interviewed  in  the  framework  of  the  Assignment, 
largely exceeding the initial minimum target of 70. The interview programme was partly 
conducted  in  the  initial  structuring  phase  of  the  Study  –  involving  the  relevant 
Commission  services  and  the  representatives  of  the  Spain  -  and  partly  through  on-site 
visits in the Canary Islands.  
The second pillar of the stakeholder consultation strategy consisted of a targeted online 
survey of economic operators in the ORs. The targeted survey responded to the need for 
structured and homogeneous information on firms’ conducts and performance, allowing 
to  connect  the  outcomes  of  qualitative  stories  collected  via  interview,  with  the 
quantitative  statistical  data  gathered.  Full  details  of  the  stakeholder  consultation  are 
available in Annex 2, 

19  Conservative  estimate  not  inclusive  of  the  several  EU  policy  documents,  Operational  Programmes, 
implementation reports, State aid decisions etc. regarding other supports for ORs, and not including OR-
level administrative and informative documents on the tax rates applied.      

39 

 
 
 
 
 
 
 
 
 
                                                           
3.  Quantitative data analysis 

  DATASETS 

The  Study  required  a  robust  foundation  of  quantitative  data  and  statistics,  and  several 
datasets  have  been  collected  and  gathered  from  a  variety  of  sources.  Publicly-available 
data regarding specifically the ORs and the sectors benefitting from special regimes were 
limited, so to a large extent the raw data used in the Study have been provided directly by 
the competent authorities (i.e. customs and tax administrations, statistical institutes, local 
governments etc.) and by the Commission.  

Despite efforts, several  data gaps  and inconsistencies remained, inevitably affecting the 
significance of the quantitative analysis. Such limitations regarded, in particular: (a) the 
limited availability of local production data (at the level of disaggregation required); (b) 
the  difficult  matching  between  product  data  based  on  customs  classification  and  on 
NACE  classification;  (c)  the  limited  availability  of  monitoring  data  on  the  other  aid 
measures implemented in the ORs; and (d) the unavailability of cost-price data. The data 
gaps regarded primarily the early period of implementation of the special regime, while 
in recent years the amount and the quality of the data collected at local level have largely 
improved. The type of data collected for the Study are summarised in Table 3.1 below.  

  Table 3.1 – Datasets collected for the Study 
Analytical areas 
Policy implementation 

Additional costs 

Trade and market impacts 

Macroeconomic impacts 

Input-output data at ORs and mainland level 

Datasets  
  Data on permitted AIEM differentials 
  Data on actual AIEM differentials 
  Data on fiscal revenues 
 
  Micro-data from regional level estimates  
  Data on imports, by product / origin 
  Data on local production, by product / sector 
  Other ‘control’ data for gravity modelling (distance etc.) 
  Macroeconomic data on employment  
  Macroeconomic data on industrial added-Value 
  Data on price levels 

Source: Author’s Study elaboration 

  QUANTITATIVE DATA METHODS 

A summary of the approach adopted for the quantitative analysis is provided here below. 

Review of policy implementation. The analysis focused on collected AIEM tax revenues, 
broken down by external (on imports) and internal (on local production) tax receipts, as 
well as on the estimation of the ‘foregone’ AIEM revenue (i.e. the tax not collected due 
to exemptions/reductions). 

  The  collected  revenues  data  were  provided  for  most  of  products/years  by  customs 
authorities  or  other  competent  authorities.  When  not  available,  the  revenues  have 
been estimated applying the relevant tax rate to the tax base, i.e. the value of imports 
or local production. 

40 

 
 
 
 
 
 
 
 
 
 
 
 
 
  For  the  foregone  AIEM  revenue  the  official  estimates  have  been  triangulated 
calculating the amount of exemptions at product level (multiplying the value of local 
production by the corresponding tax differential applied) and aggregating the results.  

Analysis  of  additional  costs  and  competitiveness.  Additional  costs  provided  at  the 
micro-level  (i.e.  in  product  fiches  or  reports)  have  been  at  first  triangulated  using 
input/output  tables  available  for  the  ORs.20  The  matching  allowed  showing  disparities 
both in the total additional costs for a given sector but also on the distribution of the cost 
factors  (i.e.  transports,  labour,  energy,  etc.).  Secondly,  the  compiled  and  systematised 
micro-data  have  been  used  to  assess  how  much  of  these  costs  were  compensated  by 
AIEM  differential  rates  (with  reference  to  the  value  of  ‘foregone  revenues’).  This 
analysis was done at the product level as well as the aggregated level. 

Analysis  of  trade  and  market  impact.  Using  two  separate  models,  imports  and  local 
production have been modelled as a function of the actual AIEM differentials rates and 
of the internal AIEM rates. The main difficulty consisted in the comparability of value of 
local  production  and  imports  for  different  products.  To  overcome  this  difficulty,  three 
measures  were  adopted:  (i)  using  the  logarithm  of  variables  so  that  impact  of  AIEM 
differential was expressed in percentage terms, (ii) aggregating the products (dependent 
variable) at  the 4-digit CN level,  (iii) applying individual  fixed effects  for each 4-Digit 
CN level products. 

  The impact on trade is estimated based on gravity modelling of imports of products 
(CN4  level)  between  ORs  and  other  countries  (including  mainland).  In  addition  to 
AIEM  rates,  other  variables  including  economic  weight  and  distance  of  the  trading 
partners are used as explanatory variables to predict trade flows. 

  The  impact  on  local  production  was  estimated  based  on  data  panel  modelling.  To 
overcome the data gaps, only products (CN4 level) for which comprehensive data on 
local production were considered. 

Analysis  of  macroeconomic  impacts.  The  impact  on  added-value  and  employment  of 
AIEM  differential  rates  have  been  estimated  by  extrapolation  of  the  impact  on  local 
production. For each economic branch, ratios  of added-value over local  production and 
employment over local production are estimated using data from economic accounts. The 
impact  on  added  value  and  employment  are  then  derived  from  the  impact  on  local 
production  assuming  that  these  ratio  are  constant.  Finally,  to  estimate  the  impact  of 
AIEM on retail prices, it was assumed that the tax paid was fully passed onto consumers. 
Then,  the  tax  receipts  -  increased  by  retailer  margins  -  were  related  to  household 
expenditure  to  derive  an  index  of  the  maximum  additional  price  borne  by  final 
consumers. The results were triangulated with the official statistics on price index in the 
ORs  elaborated  by  national  statistical  institutes  as  well  as  with  other  literature  sources.  

20 In input-output tables, payments  made by a sector to other sectors (for example: agricultural products, 
energy, water, transportation) and to production factors (for example: labour, capital, land) are valued for a 
given year, in effect providing its cost structure. The resulting estimates of additional costs for each sector 
can therefore be compared with estimated additional costs based direct micro-level estimates used for the 
Canary Islands. 

41 

 
 
 
 
 
                                                           
ANNEX 4: EVALUATION 

The  scope  of  the  evaluation  is  a  retrospective  assessment  of  the  derogation  during  the 
period  2014  to  2019.  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 Guidelines. 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. 

1.  Coherence 

The  AIEM  special  regime  is  part  of  the  overall  EU  policy  approach  for  the  Canary 
Islands as an EU Outermost Region, and its coherence is  ensured  prima facie by the 
substantial alignment of its objectives with the broad strategic framework. In particular, 
the  AIEM  special  regime  addresses 
the  2017 
two 
Communication as follows: 

interrelated  objectives  of 

 

 

‘Building on the ORs’ assets’: The AIEM concurs to this objective by promoting and 
sustaining  local  production  activities,  which,  in  turn,  contributes  to  attracting 
investments,  building  capacity  and  skills,  and  reducing  the  dependency  from  the 
‘mainland’.   
‘Enabling growth and job creation’: The AIEM aims at promoting the diversification 
of local economy and, in particular, fostering activities with high value-added and job 
creation potential.   

The  third  pillar  of  the  EU  strategy  consists  of  scaling  up  ORs’  cooperation  with  their 
neighbourhood,  through  policy  dialogue,  territorial  cooperation  programmes,  trade 
agreements etc. The AIEM special regime is not contributing to this goal, conversely – as 
regards  regional trade  –  it may even  constitute an obstacle to  a  greater integration. But 
this is an inevitable effect due to the nature of the scheme and to its underlying rationale. 

EU policy includes a number of other measures for ORs – financed under the European 
structural and investment funds (ESIF) and/or through a series of specific regional State 
aid measures. The study notes that various other measures address the same targets of the 
AIEM  regime.  At  a  general  level,  these  measures  are  coherent  with  the  objective  of 
AIEM  of  strengthening  the  competitiveness  of  local  producers  in  the  manufacturing 
sector as well as agriculture and fisheries. Overlap is minimised and overcompensation is 
limited, if any. 

The  AIEM  regime  constitutes  a  derogation  from  the  EU  general  policy  on  internal 
market and competition but its legal basis is firmly anchored to Article 349 TFEU. The 
differentiated rates regime constitutes regional State aid and is, therefore, subject to the 
relevant EU legislation and controls. In 2017, the General Block Exemption Regulation 

42 

 
 
 
 
 
 
(GBER)  21was  amended,  and  the  permitted  cumulated  aid  per  beneficiary  moved  from 
10% in  2014 to  30% of the turnover, making the highest  tax differentials of the AIEM 
regime  compatible  with  the  GBER  thresholds.  The  compliance  is  controlled  by  the 
competent tax authority.  

The study notes the  current  mechanisms  allow for verification the compliance  with  the 
State aid proportionality rule. Furthermore the study found that, the extent of AIEM tax 
differentials, which in most of cases is limited to 5%, appeared well below the estimated 
additional  costs  of  production  in  Canary  Islands  –  i.e.  30%  on  average  -  so  the  risk  of 
product-level ‘overcompensation’ was, in practice, very limited. 

2.  Relevance 

This  section  evaluates  whether  the  criteria  used  to  select  the  product  for  reductions  or 
exemptions to AIEM are still relevant compared to the general needs of all stakeholders. 

The study found that:  
 

the AIEM regime covered almost evenly local productions holding the majority and the 
minority of market shares; 
there  was  no  substantial  change  overtime  in  the  structure  of  the  distribution;  minor 
changes could be attributed to margins of error in the measurement;   
local  products  with  less  than  20%  of  market  share  accounted  for  some  30%  of  the 
AIEM list, while local products with less than 5% of the market accounted for ca. 15% 
(slightly decreasing overtime); 
less  than  20%  of  products  in  the  AIEM  list  held  more  than  85%  of  the  respective 
markets; for some 10% the market share exceeded 95%.  

 

 

 

The above data indicates  that there are  cases  where the market share criteria may not be 
sufficient  to  justify  the  inclusion  of  certain  products  in  the  AIEM  list  where  the  local 
production  level  is  marginal  or,  conversely,  where  local  producers  are  in  a  largely 
dominant  position.  The  results  of  the  stakeholder  consultation  also  suggest  that  there  are 
some  gaps  in  the  scope  of  the  AIEM,  with  half  of  the  local  producers  involved  in  the 
survey maintaining that there are products that should be added to the AIEM list. This is 
due to the lack of flexibility in the process of revision of the lists, which makes it difficult 
to timely respond to emerging needs of local economy and  – where relevant – to correct 
errors and omissions. 

However regarding the overall relevance of the scope of the AIEM, the main reported issue 
with regard to the application of tax differentials to products is that certain CN categories 
of the AIEM list include heterogeneous products of which only some are produced locally. 
This  issue  is  somewhat  mitigated  by  the  competent  authorities,  who  have  added  further 

21 The GBER (Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of 
aid compatible with the internal market in application of Articles 107 and 108 of the Treaty) is the EU legal 
base on which the AIEM State aid scheme is allowed under EU rules. 

43 

 
 
 
 
 
 
 
                                                           
specifications to the standard definition to better distinguish between products falling in the 
same category but requiring a different tax treatment.  

Furthermore  the  AIEM  regime  does  not  envisage  exemptions  for  the  import  of  ‘inputs’ 
used  in  other  production  activities,  i.e.  raw  materials,  packaging  and/or  other  supplies. 
There are only few cases where an AIEM tax refund (‘devolución’) is permitted and regard 
the  categories  of  AIEM  products  that  are  subject  to  the  ‘internal  tax’.  But  these  remain 
rather  sporadic  events.  The  approach  adopted  in  Canary  Islands  to  mitigate  the  lack  of 
exemptions for imports of ‘inputs’ on production costs is to add  ad hoc specifications to 
the CN definitions to distinguish products for retail sales from products sold in bulk and 
exempt the latter. This approach is, in certain respects, more straightforward for businesses, 
who do not have to carry out any additional administrative activity to demand exemption or 
refund of the AIEM paid. On the other hand, it makes product identification more complex 
and requires a constant revision of the definitions by the competent authorities.  

3.  Effectiveness 

The  effectiveness  of  AIEM  was  evaluated  by  assessing  the  extent  to  which  the  regime 
supported industry.  
The establishment and the periodical renewal of the AIEM regime have been underpinned 
by  a  series  of  external  studies  estimating  the  nature  and  the  extent  of  the  additional 
costs  caused  by  Canary  Islands’  structural  constraints.22  Overtime,  the  catalogue  of  cost 
factors possibly affected by ‘outermost-ness’ has remained substantially stable. 

Freight costs have remained the major source of additional costs. They are followed by the 
‘idle production capacity’, that is fairly stable around 1% of the total turnover. Overall, the 
impact  of  additional  costs  has  seemingly  grown  overtime.  In  monetary  terms,  the  total 
impact  of  outermost-ness  on  private  sector  is  worth  some  EUR  5.23  billion  (2016). 
However, there are significant differences between islands, firm size, economic sectors and 
specific branches. The results of the latest external study (2018) indicate that the bulk of 
the  additional  costs  are  borne  by  productive  sectors,  namely  industry  (29.7%  of  sectoral 
turnover, i.e. EUR 889 million) and the primary sector (18%, EUR 148 million).  

The final part of the answer to this evaluation question examines the extent to which the 
additional costs faced by local producers are ‘compensated’ by the AIEM special regime. 
The extent of the compensation does not correlate with the extent of the additional costs, so 
some productions are compensated for more than 50% of the estimated costs while others 
less than 15%, as seen in Figure 4.1 below. 

22 Centro de Estudios Económicos Tomillo,  “Los costes de  ultraperiferia de la economía  canaria”, 2002; 
Centro de  Estudios Económicos Tomillo,  “Los costes de  la ultraperiferia en la economía canaria”, 2010; 
and UTE Eco-CoRe (consortium), “El coste privado de la ultraperiferia y la doble insularidad en Canarias”, 
2018 

44 

 
 
 
 
 
 
 
                                                           
Figure 4.1 – Average compensation of additional costs by NACE division23 

NACE divisions 

01: Crop and animal production, hunting and 
related service activities 
08: Other mining and quarrying 
10: Manufacture of food products 
11: Manufacture of beverages 
12: Manufacture of tobacco products 
13: Manufacture of textile 
14: Manufacture of wearing apparel 
17: Manufacture of paper and paper products 
20: Manufacture of chemicals and chemical 
products 
22: Manufacture of rubber and plastics product 
23: Manufacture of other non-metallic mineral 
products 
24: Manufacture of basic metal 
25: Manufacture of fabricated metal products, 
except machinery and equipment 
31: Manufacture of furniture 
32: Other manufacturing 
58: Publishing activities* 

Source: Author’s Study elaboration. 
Note: (*) depending on the CN: NACE conversion table used, these products may be classified under NACE 
division 18: Printing and reproduction of recorded media  

The  extent  of  the  compensation  roughly  corresponds  to  the  amount  of  tax  revenue 
collected,  i.e.  EUR  160  million  in  2018  or  –  more  accurately  –  ca.  EUR  125  million, 
deducting  the  receipts  collected  from  AIEM  products  with  no  differential  rate.  So, 
considering global additional costs of EUR 889 million for AIEM sectors altogether  – in 
line with the ad hoc study completed in 201824 - the overall extent of the compensation of 
additional cost would amount to ca. 14%. This figure is correlated with the value of local 
productions and imports, which influence respectively the extent of additional costs (which 
is function of enterprise’s turnover) and the tax collected.  

Impact of AIEM on competitiveness  

The analysis of market data did not return conclusive evidence on the effects of the special 
regime  on  the  competitiveness  of  local  production.  The  business  survey  provides  some 
additional  evidence  on  the  effectiveness  of  the  AIEM  regime  in  redressing  the 
competitiveness gap affecting local producers. A ‘positive’ or ‘very positive’ impact of the 
AIEM can be assumed for two-thirds of respondents. Still, in most of the cases (58%), the 
price-competitiveness  is  restored  only  partially,  as  the  retail  price  of  imported  products 
remains lower than that of local ones.  

The  AIEM  impact  on  competitiveness  differs  for  products  with  a  higher  tax  differential 
compared  to  products  with  lower  tax  differentials  and  also  for  economic  operators  of 
different sizes. 

23 The figure illustrates the disparities in the extent of the compensation by NACE sector. The analysis is 
done by NACE sector for consistency with the approach used for additional costs estimation.  
24 Source: UTE Eco-CoRe, 2018, unpublished. The reconstructed additional costs estimated in this Study 
are only moderately higher, i.e. EUR 967 million in 2017.   

45 

 
 
 
 
 
 
 
                                                           
 
Local production activities  

In the sectors benefitting from the AIEM the downward growth trend has been milder and, 
based  on  provisional  data,  a  positive  growth  was  possibly  registered  in  recent  years.  In 
2018, some additional 200 firms were recorded in the AIEM industries, mainly in the food 
& beverage, manufacture of structural metal products and printing sectors. As a result, the 
total number of active firms reached 3,260. According to regional statistics, the estimated 
total number of employees in AIEM industries has remained comprised between 20,000 
and 25,000 units since the introduction of the special regime, representing ca. 60% of the 
employment in the manufacturing and mining sectors. The average number of employees 
in AIEM industries increased from 5.7 units in 2008 to 7.2 units in 2017.  

Almost  three  quarters  of  the  respondents  maintained  that  the  AIEM  had  a  moderate  to 
major  impact  in  boosting  local  production  activities  in  the  Canary  Islands.  The  vast 
majority  of  local  producers  believe  that  by  supporting  the  viability  of  their  business  the 
AIEM  is  also  helping  maintaining  and  possibly  creating  jobs,  as  well  as  fostering 
investments.  About  70%  of  the  AIEM  beneficiaries  that  recorded  an  increase  in  the 
production volume also reported an improvement in their profitability.  

The possible influence of the AIEM regime on the diversification of productive activities 
is controversial. By its nature, the scheme is fairly conservative: the existence of a non-
negligible local production is a pre-condition for the application of tax differentials and 
amending  the  list  to  insert  new  products  requires  a  lengthy  and  burdensome  process. 
However, tax beneficiaries were not concerned by the ‘rigidity’ of the mechanism: over 
90%  of  local  producers  of  AIEM  goods  did  not  consider  this  tax  as  an  obstacle  to  the 
emergence of new activities, and a similar share even attributed to the AIEM a positive 
effect in terms of diversifying productions. 

Overall, however, the performance of AIEM producers in terms of profitability looks rather 
modest. The local production has been exposed to increasing competition from imports in 
the  past  years:  the  value  of  imports  of  products  subject  to  the  AIEM  differential  regime 
increased  by  ca.  50%  in  8  years  (between  2009  and  2017)  while  in  the  same  period  the 
local  production  has  grown  by  only  24%.  Based  on  the  respondents’  feedback  –  and  as 
largely confirmed by direct interviews – the contraction of the profitability is the result of 
the increased competitive pressure registered in the last years.  

The  efforts  made  by  local  producers  to  bridge  the  competitiveness  gap  with  imported 
products and remain profitable are also witnessed by the fact that the vast majority of the 
surveyed businesses purchased some fixed assets, such as machinery or equipment, in the 
past five years, and some 30% set up new establishments. The statistical data suggest that 
investments in AIEM industries have not recovered at the same pace as in other industry. 
Before the crisis, AIEM industries used to account for more than 60% of the investments, 
while in the past few years their share remained well below 40%. 

4.  EU Added-value 

46 

 
 
 
 
 
 
 
The benefits for local economy 

The baseline assumption made by the majority of local producers consulted is that without 
AIEM it would not be possible to maintain industrial activities in Canary Islands able to 
compete with external products.  

The AIEM regime is mainly viewed as a tool for preventing and mitigating the decline and 
disappearance of local industry rather than a development tool. The industry sector – which 
is to a large extent formed by AIEM supported enterprises  – performed better than other 
sectors  in  terms  of  sectoral  GDP  growth,  especially  in  the  past  three  years,  whereas  in 
terms of employment it witnessed a decline but not as marked as other sectors.   

The  quantitative  model  suggests  that  an  increase  of  1%  point  of  tax  differential  is 
correlated with an increase of 4.6% of production value. The compensation ‘gap’ - i.e. the 
part of the additional costs not covered by AIEM differential – is negatively correlated with 
the production value – as predicted – but with effects of very limited magnitude, possibly 
explained  by  the  fact  that  additional  costs  estimates  present  a  significant  degree  of 
approximation. 

If the above estimate is applied to the overall value of production of concerned goods, the 
‘virtual’  effects  of  AIEM  can  be  associated  to  nearly  one-third  of  the  value  of  local 
production of the supported goods, i.e. ca. EUR 570 million.  

Impact on import substitution 

In accordance with the State aid policy, one criterion to measure is the impact on imports 
and the extent of their substitution with locally-manufactured products.  

The total value of import in the Canary Islands had recovered quickly from the 2009 drop 
and, in the 2010-16 period, has  remained fairly  stable.  In the same period, the import of 
AIEM products (i.e. some 10-12% of total imports) recovered at a slower but steadier pace, 
and, in 2016, it was well-above the pre-crisis levels. In other words, despite the charging of 
the tax, import of AIEM products has kept growing, suggesting that the special regime did 
not have dramatic impacts in terms of import substitution.       

Coherently, the market share of local AIEM products vis-à-vis imported ones has slightly 
reduced overtime, on  average, although the situation varies significantly  across products: 
some 30% of local products have lost more than 10% of their market share, nearly 20% 
have  instead  acquired  more  than  10%  points,  while  for  the  majority  of  products  no 
significant change has occurred.  

Overall,  the  results  indicate  that  tax  differentials  do  affect  imports  and,  specifically,  1% 
point  increase  of  tax  differential  is  associated  with  a  0.41%  decrease  of  import,  but  the 
explanatory  power  of  the  model  is  fairly  low,  so  other  factors  are  at  play.  Based  on  this 

47 

 
 
 
 
 
 
      
 
 
 
 
estimate, in the hypothetical scenario of removal of AIEM differentials, the value of import 
of AIEM products could be some 2.5% point greater than today (i.e. ca. EUR 50 million).        

Integration in the EU and in the regional market  

The statistics on external trade of Canary Islands show a trade balance worsening overtime, 
especially  in the exchanges with mainland Spain  and, to a lesser  extent, with the EU.  In 
2018, the import from mainland Spain accounted for 87% of total import, i.e. 15% points 
more  than  ten  years  before.  Globally,  the  exchange  with  EU  countries  (including  Spain) 
exceeds EUR 16 billion, which is some EUR 2.5 billion more than 2008 and nearly EUR 5 
billion  more  than  2012.  As  the  incidence  of  AIEM  tax  differentials  has  remained 
substantially stable in the period, it seems that the special regime is not creating significant 
obstacles to the participation of Canary Islands to the EU internal market.     

Conversely,  the  commercial  exchanges  in  the  geographical  region  remains  limited.  The 
imports from Africa has fallen in 10 years from some EUR 1.7 billion (primarily fuels) to 
nil,  while  exports  remain  below  EUR  100  million  (mainly  to  Morocco,  Cape  Verde  and 
Mauritania).   

By far, the main reason for importing inputs is the unavailability of the required inputs on 
the  local  market  in  sufficient  quantity,  indicated  by  almost  85%  of  the  respondents.  The 
unsuitable quality of the locally-produced goods and – despite AIEM – the lower price of 
imported  goods were indicated as main reasons for buying imported  goods by only 27% 
and 22% of the relevant local firms, respectively.  

5.  Efficiency 

Administration and enforcement burden 

The  administrative  arrangements  for  the  implementation  of  the  AIEM  regime  are  fairly 
straightforward  and  do  not  impose  particularly  complex  or  burdensome  procedures  to 
competent  authorities  and  firms  alike.  The  most  critical  aspects  are  linked  to  the 
classification of products, which is sometimes uncertain and a potential cause of disputes 
and disparity of treatment. The burden for local authorities to deal with this system can be 
estimated as follows:  

  Two  full-time  staff  within  the  competent  service  of  Canarian  administration, 
primarily responsible for identification and classification of AIEM products.  
  The  Canarian  tax  authorities  have  some  90-100  staff  in  the  indirect  tax  sector. 
Using  a  pro-quota  distribution  based  on  revenues,  some  5%  of  them  can  be 
virtually attributed to the administration of AIEM. 

As regards the administrative burden for private sector, less than half of importers surveyed 
qualified  the  compliance  with  AIEM  requirements  as  a  ‘major  burden’.  Still,  the 
identification  of  the  applicable  customs  codes  and  the  corresponding  AIEM  rates  is 

48 

 
 
 
 
 
 
 
 
 
 
regarded as a more burdensome task, representing a moderate or major burden for about 
three quarters of the relevant respondents.  

As regards the quantification of the administrative burden for the importers, the estimated 
staff time spent by these firms to deal with the management of the AIEM varies  greatly, 
from  one-two  working  days  per  year  to  a  full-time  staff  year-round.  The  working  time 
required to comply with the AIEM-related declaration and accounting obligations has been 
converted in monetary values based on the gross salary paid to salaried staff in the Canary 
Islands.25  Additionally,  40%  of  the  respondents  reported  having  incurred  external  costs 
related to AIEM, i.e. the fees  paid  to  external  service providers to  which compliance is 
delegated in full or in part. The amount paid typically ranges between 0.1% and 0.7% of 
the  firm’s  turnover.  Based  on  these  figures,  the  total  incidence  of  administrative  and 
compliance  burden  on  the  turnover  of  importers  can  be  roughly  estimated  at  0.3%,  on 
average. Still, this estimate seems excessive, and possibly inflated by attributing to AIEM 
also administrative activities that  would be incurred anyway, such  as  customs clearances 
procedures,  filling  of  quarterly  tax  declarations  etc.  In  this  sense,  the  ‘extra’  activities 
performed exclusively because of the AIEM tax are probably limited to the calculation and 
payment of the tax due.    

 The monitoring arrangements   

In addition to the ordinary administration and enforcement duties, the competent national 
authorities are periodically required to submit to the Commission monitoring reports on the 
implementation  of  the  AIEM  regime,  its  impact  and  contribution  to  the  promotion  or 
maintenance of local economic activities.26 Since 2002, three Mid-term Reports (Informe 
Intermedio)  have  been  submitted,  namely  in  2005,  in  2010  and  in  2017.  The  Mid-term 
Reports constitute, at the same time, monitoring documents and evaluation documents, as 
they contain:  

  an update review of the applicable legal framework; 
  a  product-by-product  review  of  the  relevant  tax  rates  and  their  evolution  during  the 
monitoring period, considering also the changes occurred in the CN classification; 

  a review of the evolution of the economic context;   
  an  assessment  of  the  degree  of  achievement  of  the  objectives  of  the  measure,  as 
concerns:  enterprise  demography,  production  levels,  market  shares,  investment  and 
employment generated and price trends; 

  an  assessment  of  the  constraints  affecting  local  production,  their  evolution  and 

persistence. 

25 Data on the gross monthly salary paid to a full-time employee in year 2018 are provided by the INE (see, 
Insee,  Encuesta  de  Población  Activa,  2019).  The  monthly  value  of  EUR  1,820  reported  by  the  INE  has 
been incremented to include 25% overheads, in line with the SCM methodology.  
26 Art. 2 of Council Decision No 377/2014/EU. 

49 

 
 
 
 
 
 
                                                           
While the first part of the Mid-term Reports deal with monitoring information, the parallel 
evaluative  nature  of  the  documents  emerges  clearly  in  the  second  part.  In  this  sense,  the 
Mid-term  Reports  appear  more  articulated  and  burdensome  than  a  standard  monitoring 
document, but also lighter and less rigorous than a fully-fledged impact assessment.  

The estimated additional costs caused by regional structural constraints are not in the scope 
of  the  Mid-term  Reports  because  they  are  the  subject  of  separate,  external  studies.  In 
particular,  since  the  establishment  of  the  AIEM,  three  studies  measuring  the  additional 
costs  have  been  implemented:  in  2002,  2010,  and  2018,  as  noted  above.  A  monetary 
quantification of the burden of monitoring is not feasible, but the double nature of the Mid-
term Report may not be the most cost-efficient approach: 

  As  a  monitoring  document,  the  Mid-term  Report  lacks:  (1)  detail  (e.g.  product-level 
data  on  volume,  value  and  market  share  of  product  by  origin,  the  number  of  active 
players, the estimated forgone revenues etc.); and (2) timeliness, as up to 7 years may 
pass from one report to the next (and delays in the delivery reportedly occurred).   
  As  an  evaluation  document,  the  Mid-term  Report  lacks  of  (1)  robustness  (the 
conclusions  are  based  mainly  on  descriptive  statistics,  no  quantitative  analysis  is 
carried out); and (2) focus (no ad hoc primary data collection is carried out).   

However, the main limitation of the current monitoring system is the lack of background 
data  on  various  aspects  of  the  implementation.  Only  recently  (November  2019),  the 
regional statistical office (ISTAC) was able to complete and publish the results of the first 
Survey  of  Industry  in  Canary  Islands  (Encuesta  de  la  Industria  en  Canarias  –  EICAN), 
which  specifically  aimed  at  measuring  the  impact  of  special  regimes  on  the  market 
structure of AIEM products. The published data refer to the 2015-17 period, and there are 
plans to conduct this exercise periodically, so the problem of ‘data gaps’ will be reasonably 
addressed in the future.  

The amendment of AIEM lists   

The  process  for  updating  the  lists  is  far  from  straightforward,  as  any  revision  requires  a 
legal amendment of the Council Decision. The process shall follow the ordinary rules of 
procedure,  with  a  significant  investment  of  time  and  resources  from  national  and  EU 
administrations.  The  AIEM  regime  has  never  undergone  an  interim  revision  because, 
reportedly, the complexity of the procedure and the efforts required were not worth the few 
changes  that  local  authorities  wanted  to  introduce.  In  this  sense,  the  burden  of  the  legal 
amendment process acted as a deterrent preventing authorities to demand for such changes. 
The  direct  consequence  was  that  AIEM  has  progressively  lost  part  of  its  relevance,  not 
being  able  to  keep  pace  with  the  evolving  needs  of  the  local  context.    Lighter  and  more 
flexible mechanisms for the revision of lists constitute the main request for policy revision 
expressed by local competent authorities.  

The budgetary impacts of AIEM 

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The amount of forgone revenue is difficult to calculate precisely. An accurate estimation 
would require data on the market value of locally-produced goods delivered internally (i.e. 
not exported), for all the products subject to a differentiated regime.  

The analysis covers two time periods (2009-11) and (2015-17), whose datasets are not fully 
comparable because of disparities in the methodology and different scope (changes in the 
AIEM lists). In various instances, the market value of local production had to be inferred 
triangulating  market  share  data  with  tax  authority’s  data  on  the  import  value  of  AIEM 
products. The outcomes of the analysis can be summarised as follows:  

  The  amount  of  tax  collected  on  the  import  of  AIEM  product  has  been  steadily 
increasing  overtime.  However,  its  average  incidence  on  the  value  of  import  has 
possibly declined of 0.5% point, so it can be assumed that the upward trend of receipts 
has been primarily driven by the growth of imports and not by a greater tax charge.  
  The  amount of  foregone  revenues from AIEM products  has  remained fairly  stable  in 
the range of EUR 155-165 million/year. The figure is possibly inflated by the inclusion 
of exports in the amount, especially in the case of tobacco, whose export accounts for 
ca.  40%  of  the  total.  Another  major  source  of  foregone  revenue  is  the  production  of 
beer  that  benefits  from  a  virtual  AIEM  compensation  of  ca.  EUR  23  million/year 
(2015-2017 average).    

  The ratio between foregone revenues and the value of local production has seemingly 
increased overtime from ca. 7.5% in the 2009-11 period to more than 8.5% in the 2015-
17 period. The underlying cause seems the decline in the value of production registered 
with several products.            

Another way to look at the budgetary efficiency of the AIEM regime consists in assessing 
what share of the overall tax applicable to the concerned products is actually collected. In 
practice, the indicator reflects the ratio between the tax receipts and the overall amount due 
if  tax  differentials  were  not  in  place.  The  results  are  shown  in  Figure  4.2  below  and 
indicate  that  overtime  the  balance  between  tax  collected  and  not  collected  has 
progressively moved towards the former (albeit the latter still account for the majority of 
the virtual tax revenue). As the average level of taxation has not changed significantly, this 
trend seems again a consequence of the loss of market share value of local production.      

Figure 4.2 – Share of AIEM tax collected on the (virtual) total  

Source: Author’s Study elaboration based on GoC, ATC and ISTAC data. 

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Notes:  The  comparison  between  the  two  periods  displayed  (2009-11)  and  (2015-17)  requires  caution 
because of disparities in the collection methods. Differences are also due to changes in the composition of 
the AIEM list across the two periods.  

The efficiency of AIEM 

How well the budgetary  effects of the AIEM regime has converted into benefits remains 
very complex to quantify, due to the data validity limitations reported, and the absence of a 
clear baseline for a counterfactual analysis. Still, the results of the analysis conducted in the 
previous section allow the elaboration of a general efficiency index for the AIEM special 
regime.  The  index  is  calculated  as  the  ratio  between  the  additional  production  virtually 
enabled  by  tax  differentials  and  the  cost  of  the  special  regime  in  terms  of  foregone  tax 
revenues.  As  shown  in  Table  4.1  below,  such  ratio  is  of  1  :  2.9  –  that  is  one  Euro  of 
foregone revenue can be roughly associated with nearly 3 Euro of local production.  

Similarly, it is possible to estimate the efficiency in terms of  employment, by estimating 
the extent of foregone revenue associated to the number of jobs hypothetically enabled by 
AIEM  (i.e.  based  on  the  additional  value-added  generated).  As  table  4.1  shows  the 
efficiency of the scheme can be roughly estimated at less than EUR 30,000 per job. 

Table 4.1 – Efficiency indexes of the AIEM regime  
AIEM foregone 
revenues 

Associated 
jobs  

Production value 
associated to 
AIEM 

EUR per job 

Monetary 
Ratio 
(efficiency 
index) 

EUR 165 million 
  Source: Author’s Study elaboration 

EUR 570 million 

5,522 

1 : 2.9 

29,880 

One of the possible ‘externalities’ of the AIEM regime concerns its repercussion on retail 
price  of  consumer  goods  and,  therefore,  on  the  cost  of  living  in  Canary  Islands  and  the 
purchasing power of residents. According to survey results, almost 80% of non-producer 
firms maintained that the AIEM translated into higher  consumer prices. On the contrary, 
the  large  majority  (84%)  of  local  producers  denied  the  existence  of  a  similar  inflationist 
effect  of  the  tax  or  assessed  it  as  minimal.  These  opposed  views  require  a  more  factual 
assessment.  The  first  element  to  consider  is  the  actual  incidence  of  the  tax  on  imported 
products: 

  The majority of AIEM receipts (53%, in 2016) come from products in List A, i.e. with 
a tax rate on import of 5%. The weighted average rate, as estimated by the competent 
authorities,  has  been  fluctuating  between  7.0%  and  7.3%,  with  minimal  changes 
overtime.  

  The AIEM products account for approximately some 10%-12% of total import, which 
means that the tax charge accounts for some 0.7%-0.9% of the total value of imports.  
  Assuming that imports represent some 75%-85% of the sales of consumer goods, the 
total incidence of the tax would  further reduce to  0.5%-0.75%.  However,  some local 
producers are subject to the payment of the tax on certain production inputs. The most 
realistic estimates collected indicate that the tax represents some 0.5%-1.5% of firms’ 
turnover (evidently only of companies purchasing inputs subject to AIEM).     

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  So,  the  order  of  magnitude  of  the  possible  impact  of  AIEM  on  retail  prices  remains 
roughly  comprised  between  0.5%  and  1.0%  -  assuming  that  100%  of  the  tax  paid  is 
entirely passed-on to the consumer.          

The analysis of consumer price index, elaborated by the national statistical institute (INE) 
does not show any relevant disparity between the Canarian trend and the overall Spanish 
trend, and this applies to both the general index and the indexes of goods mostly affected 
by AIEM, namely industrial goods, and specifically the food, beverage and tobacco macro-
category. Actually, in various instances the price increases registered on mainland appear 
higher than in the Canary Islands.  

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