Report on the system of own resources
The report proposes a generalised mechanism for correcting budgetary imbalances and the replacement of the current VAT resource with a genuinely tax-based own resource in order to guarantee budgetary autonomy, a link with citizens and simplicity. To this end, the Commission proposes three options: fiscal resources related to energy consumption, a fiscal VAT resource and a resource based on corporate income.
Commission report of 14 July 2004, "The financing of the European Union - Report on the operation of the own resources system" [COM(2004) 505 final - Not published in the Official Journal].
In response to the call in the current own resources decision of 2000 for a general review of the own resources system before 1 January 2006, the Commission committed itself to presenting a report before the end of January 2004. This follow-up document sets out the two key issues, namely the need to reform the existing mechanism for correcting negative budgetary imbalances and the insufficient transparency of the system for citizens, combined with limited financial autonomy for the EU in relation to national treasuries.
The current own resources system
At present, the system is divided into three main categories of own resources:
- traditional own resources (TOR), mainly customs duties;
- the VAT-based resource, which is levied on the statistical, "notional" and harmonised bases of Member States;
- the GNI-based resource, which is the residual resource used to balance the budget of each Member States and currently constitutes the system's main resource.
The total amount of all own resources may not exceed 1.24% of the European Union's GNI.
Before proposing its reforms, the Commission assesses the current own resources system. It considers that, although the system satisfies the sufficiency and stability criteria, it fails the visibility and simplicity test and does not contribute to more efficient allocation of economic resources. Moreover, financial autonomy is becoming more and more limited.
The correction of budgetary imbalances
Following the observation that some countries contributed more to the Community budget than they received, the Fontainebleau European Council in 1984 introduced a correction mechanism in favour of the United Kingdom, which is reimbursed to the extent of some two thirds of its net contributions.
Over time, enlargement and changes in the structure of the budget have modified the unique position of the United Kingdom and so the existing mechanism should be transformed into a generalised correction mechanism. For the Commission, this reflects the twin goals of:
- preventing excessive negative budgetary deficits and reducing the differences between net contributors;
- ensuring that the financing costs of the mechanism are kept at a reasonable level.
At present, the net British position has improved significantly. If the current mechanism remains in force, the correction will increase by more than 50% after enlargement, accentuating the existing differences between net contributors. Further consequences of enlargement are the deterioration of the net balances of all the old Member States and the increased cost of the correction mechanism.
The generalised correction mechanism proposed by the Commission involves:
- setting a threshold level, expressed as a percentage of gross national income (GNI), above which a Member State would be entitled to reimbursement of part of its contribution;
- capping the total volume of corrections;
- simplifying the financing of the corrections, with all Member States participating in proportion to their GNI.
By comparison with the current system, the proposed mechanism would reduce the differences between net contributors and lighten the financing burden of those Member States that do not benefit from it.
The modification of own resources
Before proposing the reform of the own resources system, the Commission reviewed three possible alternatives for the financing of the EU budget, while safeguarding traditional own resources. The alternatives are:
- maintaining the present financing system unchanged. The Commission rejects this option because, in its present form, the system lacks a direct link to citizens, who tend to judge EU policies and initiatives exclusively in terms of their national allocation;
- adopting a purely GNI-based financing system: The EU would depend entirely on contributions from Member States. This would be simple and easy to understand but does not reflect the status of the EU, which is more than an international organisation. It would imply an idea of the Union in which citizens would be only indirectly represented by their Member State, something which is unacceptable to the Commission;
- adopting a financing system based on fiscal own resources: This system could increase the financial autonomy of the EU and introduce a direct link to citizens. The participation of citizens and economic operators in the EU budget would go hand in hand with a reduction in the level of contributions by Member States and ensure higher visibility and increased political accountability for expenditure decisions. However, a fully tax-based system does not appear appropriate to the Commission because of the threat to balanced budgets. Therefore, the retention of a limited GNI resource together with an increase in the share of taxed-based resources seems preferable.
The Commission proposes the introduction of a new taxed-based own resource accounting for up to half of the budget. This resource requires sufficient prior harmonisation of the tax base. The increase of tax-based own resources does not call for any new taxes because the EU share could be levied as part of the national rate paid by taxpayers. The Commission proposes three options, which all maintain the current GNI-based resource and traditional own resources but replace the statistical VAT-based resource with a new fiscal resource. The three options are:
- fiscal resources related to energy consumption: Under the new directive on energy taxation, most energy products are subject to Community taxation. However, the Commission proposes limiting the Community levy to the tax base related to motor fuel used for road transport, which is already harmonised at a Community level. It could be supplemented with a levy on aviation fuel or the related emissions. This option could be implemented within a short period of time (around 3 to 6 years);
- a fiscal VAT resource: In place of the present statistical VAT resource, the EU rate would be levied as part of the national VAT rate paid by taxpayers, together with the national rate on the same taxable base. Citizens would not have to bear an additional tax burden as the EU rate would be offset by an equivalent decrease in the national VAT rate. The main stumbling block to this measure is the incomplete harmonisation of Member States' VAT systems. Technically, the introduction of this option would be possible within a period of up to 6 years;
- a resource based on corporate income. This option would require a prior definition of a common consolidated tax base, thereby boosting cross-border economic activity, which is hampered by 25 national tax systems and a myriad of laws. This option would imply setting a minimum tax rate for the harmonised tax base and would be the longest to implement.
The Commission invites the Council to examine the proposed options in order to achieve a genuinely tax-based own resource by 2014. It recommends the introduction of a generalised correction mechanism to correct excessive budgetary imbalances as a short-term solution.
- For additional information on own resources, please consult the website of DG BUDGET