The Canary Islands are not part of Community territory for the purposes of VAT (Article 6 of VAT Directive).
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 on the Functioning of the European Union 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.
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 349 of the Treaty on the Functioning of the European Union, 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 EU Member States). This has justified the implementation of a specific measure, which, by means of tax exemptions or reductions for local products, serves to
This is why, on a proposal from the Commission, the Council adopted Decision 377/2014/EU of 12 June 2014 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 2020. These tax exemptions or reductions may not result in tax differentials of more than 5, 10, 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.
The decision contains a review clause according to which Spain shall submit a report to the Commission by 30 September 2017, indicating the impact of the AIEM scheme and its contribution to local economic activities.