In the 19th Century the Spanish Government made the Canary Islands a free trade area to promote economical development. Later the Canary General Indirect Tax (IGIC) was introduced which is similar to VAT but with lower rates (zero 0%, Reduced 2%, General: 5% and Incremented: 9% and 13%. For tobacco it is between 20% and 35%).
When Spain joined the EU in 1986 the IGIC and other special fiscal measures were deemed incompatible with the European laws. For these reason the Canary Islands parliament decided to stay out of the European VAT area.
Ceuta y Melilla
In a similar way Ceuta and Melilla do not have VAT but have the tax for Production, Services and Importation (IPSI).
Ceuta y Melilla do not form part of the customs territory of the EU and have two separate autonomous statutes approved respectively by article 144.b of the Spanish Constitutional Laws 1/1995 and 2/1995 of 13th March.
Merchandise that enters or leaves Ceuta and Melilla is considered as imported or exported even when they are consignments directed at the mainland Spain, the Balearic Islands and the Canaries, and vice-versa.