Pursuant to Article 3 of Decision 89/688/EEC, the Commission had to submit a report on the implementation of the arrangements in order to ascertain the impact of the measures adopted and decide whether to maintain the possibility of exemptions. In the report that it sent to the Council on 24 November 1999, the Commission concludes that the four DOMs are in a much more fragile economic and social situation compared with the rest of the European Union by virtue of being outermost regions. The Commission underlines the importance of dock dues and exemptions for local production in terms of the social and economic development of these regions.

According to the Commission report of 14 March 2000 on the measures to implement Article 299(2) of the Treaty, this Article must be implemented in partnership with the Member States concerned on the basis of detailed requests from them.

On 14 April 2003 France sent a further request to the Commission, in response to the above requirements. In this request, the French authorities asked for the Council Decision to apply for a period of 15 years, subject to a three-yearly review of the need to adjust the scheme. France sought to apply a scheme of differential taxation of dock dues enabling goods from outside the DOMs to be taxed more heavily that products from the DOMs in question. The differential of 10 percentage points would apply mainly to basic products and those for which a balance has been achieved between local and external production. The 20-point differential would cover products requiring substantial investment which had an impact on the cost price of goods manufactured locally for a limited market. The 30-point differential would apply mainly to products manufactured by large-scale enterprises and to products which are extremely vulnerable to imports from the DOMs' neighbouring countries. The 50-point differential would apply, in Guyana and Réunion, to alcohol, in particular to rum. The French request sought additional measures such as permission not to require payment of dock dues on products manufactured locally by enterprises with an annual turnover of less than EUR 550 000, permission to apply a 15 % reduction in the taxable amount to dock dues for products manufactured locally, and permission for local authorities to take emergency measures to amend the list of products covered by a tax differential in respect of dock dues.

The Commission has assessed this request in the light of the scale of the handicaps affecting industrial production activities in the DOMs. The main handicaps found to affect the DOMs are the result of the factors listed in Article 299(2) of the Treaty: remoteness, insularity, small size, difficult topography and climate, economic dependence on a few products. From time to time these areas are also affected by natural phenomena such as cyclones, volcanic eruptions and earthquakes.

The remoteness of these regions considerably hinders the free movement of people, goods and services. The dependence on air and sea transport is compounded by the fact that these modes of transport are not fully liberalised and, as they are less efficient and more costly than road, rail or trans-European networks, they have a knock-on effect on production costs.

Higher production costs are not only due to isolation but also to raw material and energy dependence, the obligation to build up stocks and difficulties affecting the supply of production equipment.

The small size of the market and the low level of export activity because of the low purchasing power of the countries in the region, and the obligation to maintain diversified but small production lines in order to meet the requirements of a small market restrict the opportunities for economies of scale. ‘Exporting’ products made in the DOMs to metropolitan France or the other Member States is difficult because transport costs force up the cost of these products and hence their competitiveness. The weakness of the local market also leads to overstocking, which again affects firms' competitiveness.

The need to bring in specialised maintenance teams that have been properly trained and are capable of intervening swiftly and the virtual impossibility of subcontracting, also raise firms’ costs and affect their competitiveness.

The combination of these handicaps means, in financial terms, that the cost price of goods produced locally is increased, so that without specific measures they could not compete with those produced elsewhere without such handicaps, even taking into account the cost of transporting such goods to the DOMs. If local products cannot compete it will become impossible to sustain local production, with harmful consequences in terms of employment for the inhabitants of the DOMs.

Products from the DOMs face the additional handicap of having European cost prices which make it hard for their local products, especially agricultural products, to compete with those produced in neighbouring countries where labour costs are very much lower.

The French request has been considered in the light of the principle of proportionality in order to ensure that, overall, the tax differentials which the French authorities would like to apply will not significantly exceed the scale of the handicaps faced by local products, in terms of cost price, compared with external products.

In the light of these considerations, the Commission therefore proposes to authorise the implementation of a tax applicable to a list of products for which tax exemptions or reductions can be envisaged for local products from the DOMs. The effect of this differentiated taxation is to restore the competitiveness of local production and so to enable employment-generating activities to be maintained in the DOMs. A separate list of products for each DOM must be drawn up because the local products from each DOM are different.

However, it is necessary to meet a combination of the requirements of Article 299(2) and Article 90 of the Treaty and also to ensure the coherence with Community law and the internal market. This means only taking measures that are strictly necessary and proportionate to the objectives pursued, in the light of the handicaps of the DOMs’ remoteness. The scope of the Community framework therefore consists of a list of sensitive products whose local production costs have been demonstrated to be significantly higher than the production costs of similar products from elsewhere. The level of taxation must, however, be modulated so that the sole purpose of the tax differential in dock dues is to offset the handicaps and not to turn this tax into a protectionist weapon that undermines the operating principles of the internal market.

The products which could be entitled to tax exemptions or reductions in favour of local production can be divided into three categories, according to the size of the tax differential that it is proposed to authorise: 10, 20 or 30 percentage points.

However, it should be possible to exempt local producers with an annual turnover of less than EUR 550 000 from payment of the tax. For this purpose, where the products they manufacture are subject only to a tax reduction, it should be possible to exceed the maximum differentials authorised. This provision should not, however, result in an increase of more than five percentage points in the ceilings set.

For the sake of consistency, the planned exemption from dock dues on locally manufactured products not listed in the Annex for firms with an annual turnover of less than EUR 550 000, should be such that the tax differential for such products depends on whether or not such products are locally manufactured. As in the previous case, this tax difference should not exceed five percentage points.

The objectives of supporting the social and economic development of the DOMs, already provided for in Decision 89/688/EEC, are confirmed by the requirements regarding the purpose of the tax. It is a legal obligation that the revenues from this tax are to be incorporated in the resources of the DOMs' economic and tax regime and allocated to an economic and social development strategy involving aid for promoting local activities.

The importance of updating the lists of products in the Annex, made necessary by the possible emergence of new production activities in the DOMs, of safeguarding local production if it is threatened by certain commercial practices, and, consequently, of the need to change the amount of exemptions from or reductions in the dues applicable mean that the Council itself must be able to adopt the measures necessary for the application of this Decision, particularly as such measures may have a major budgetary impact for the recipients of dock dues revenue. Furthermore, the need for action concerning such measures to be taken as a matter of urgency justifies the Council's adopting the relevant provisions in accordance with an accelerated procedure, acting by qualified majority on a Commission proposal.

France should notify the Commission of any arrangement adopted in the light of this Decision.

The arrangements are set to last for 10 years. It will nevertheless be necessary to evaluate the proposed system at the end of a five-year period. The French authorities should therefore present a report to the Commission by 31 July 2008 on the application of the arrangements authorised, in order to assess the impact of the measures taken and their contribution to promoting or maintaining local economic activities, in the light of the handicaps affecting the DOMs. On this basis, the lists of products and the authorised exemption will be revised as necessary.

To ensure continuity with the arrangements provided for in Decisions 89/688/EEC and 2002/973/EC this Decision should apply from 1 January 2004. However, in order to enable the French authorities to adopt a national law in order to implement this Decision, it is proposed that the provisions of the Decision concerning the products entitled to a tax differential and the adoption of the measures necessary for the implementation of the Decision should take effect on 1 August 2004, and to avoid any sort of legal vacuum, the application of Decision 89/688/EEC should be extended until 31 July 2004,