Turnover taxes in the Canary Islands
The Canary Islands and Community VAT legislation
The Canary Islands are not part of Community territory for the purposes of VAT (Article 6 of Directive 2006/112/EC).
The harmonised rules on VAT do not apply to the Canary Islands and the application of turnover taxes is a matter for the national or local authorities subject to respect for the general principles of the treaty and, notably, the absence of discrimination in the taxation of products.
VAT does not exist in the Canary Islands but there is a local consumer tax known as the IGIC (Impuesto General Indirecto de Canarias - Canaries General Indirect Tax) applied at several different rates. There is also another consumer tax known as the AIEM, which is discussed below.
AIEM tax (Arbitrio sobre Importaciones y Entregas de Mercancías en las Islas Canarias - Tax on imports and deliveries to the Canary Islands)
In principle, the Treaty does not permit differences in taxation between local products and products imported from Spain or the other Member States. However, the specific nature of the outermost regions, one of which is the Canary Islands, is laid down in Article 299(§2) of the EC treaty, which permits specific measures to be taken, particularly in the tax field, so as to take account of the particular characteristics and constraints of these regions.
Local manufacturers have to contend with a number of handicaps, caused especially by their remoteness, the effect of which is to push up the cost prices of their products, thereby making them uncompetitive with products from elsewhere (especially mainland Spain and the other Community Member States). This has justified the implementation of a specific measure, which, by means of tax exemptions or reductions for local products, serves to
- encourage productive industrial activity,
- safeguard their competitiveness with outside products, and
- thus increase the proportion of the Canaries' GDP accounted for by industrial activity.
This is why, on a proposal from the Commission, the Council adopted Decision 2002/546/EC of 20 June 2002 (Official Journal L 179 of 9/7/2002, page 22), authorising the Spanish authorities to apply total exemptions or reductions of the local AIEM tax in respect of a limited list of locally manufactured products specified in the annex to that decision until 31 December 2011. These tax exemptions or reductions may not result in tax differentials of more than 5, 15 or 25% depending on the product and with the proviso that the 25% rate only applies to tobacco.
This decision therefore permits the application, subject to the authorised limits, of tax differentials between local products and products from outside the Canaries.
In 2008, the Commission submitted a report to the Council (COM(2008) 528 final of 28/08/2008) which contained an analysis of the economic and social aspects of the application of those special arrangements concerning the AIEM tax which concluded that the tax, as introduced under the Council Decision of 20 June 2002, is still justified in its present form and, therefore, no proposal from the Commission for adapting the existing provisions is required.