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Algirdas Šemeta

Commissioner responsible for Taxation and Customs Union, Audit and Anti-fraud

"EU Revenue: The Future of Own Resources"

Conference on EU Multiannual Financial Framework 2014-2020

Brussels, 20 October 2011

Honourable Members of the European Parliament and the National Parliaments,

Ladies and Gentlemen,

I am honoured to be invited here today to discuss the funding of the European Budget with the members of the European and National Parliaments, as well as representatives of the Member States.

The European Parliament has taken important initiatives in recent years. The progress on this topic is a shared priority for the Parliament and the Commission. The Council is a legislator for any reform of the EU financing. Last but not least, the National Parliaments hold the sovereign right to ratify the decisions on the funding of the EU budget. Therefore, it could not be a better setting than what we have here today.

In my short introductory address to this panel session, I will summarize the main proposals of the Commission. I will also explain why the reform we propose to the financing rules of the EU budget is necessary.

Motivations for a reform of the EU budget financing

During the intensive consultation process of the last years, it became obvious that the current financing system suffers from a number of weaknesses:

First, the financing system is opaque and very complex. In fact, nobody really knows how it works except of a handful of specialists.

Second, except for the traditional own resources (customs duties and agricultural levies), the EU resources have no link to the EU policy objectives. Own resources to finance the EU budget should support commonly agreed EU policy objectives. In this respect, taxes can play an important role as a tool to achieve policies at national but also at EU levels.

Third, many Member States find the system unfair referring either to their limited capacity to pay or to comparisons what others contribute in similar position. The existence of correction mechanisms is also perceived as a source of unequal treatment. In other words, the current financing system undermines both solidarity and fairness in the EU.

Finally, most importantly perhaps, national budgets and the EU budget compete for the same tax revenues. The way the EU budget is financed (with contributions of the Member States to the EU being seen as mere expenditures in the national balance sheets by many national politicians) inevitably creates a tension which poisons every debate on the EU Budget. There are two symptoms of this problem:

  • The progressive development of increasingly complex correction mechanisms, and

  • the pressure to pre-determine in which Member States certain categories of expenditure will be made.

The added-value of investments in EU public goods and the fundamental principle of EU solidarity enshrined in the Treaty disappear behind what is perceived as a mere national accounting exercise.

Ladies and gentlemen,

the Treaty is clear: the EU budget should be financed from real own resources. The time has come for a reform based on autonomy, transparency and fairness. But at the same time, we should promote a reform that can help to consolidate public finances throughout the European Union.

Overview of the proposals made by the European Commission

The EU financing reform covers three main elements:

  • the simplification of the Member States' contributions,

  • the introduction of new own resources, and

  • the reform of correction mechanisms.

Taken together these proposals constitute a balanced package which must be looked at as a whole in the context of a single decision.

1. Simplifying Member States' contributions

The Commission proposes that the VAT-based own resource be eliminated. The existing one is complex. It requires a lot of administrative work to achieve a harmonized base, and offers little or no added value compared to the GNI-based own resource.

2. Introducing new own resources

The Commission proposes the creation of two new own resources based, respectively, on a part of the proceeds of a Financial Transaction Tax (FTT) and the national VAT receipts.

First, a directive on the EU FTT has been proposed on 28 September 2011 to make sure that the Financial sector makes a fair contribution to public finances. The FTT will apply on the territories of the 27 Member States. But it will not concern transactions involving private households or small and medium enterprises such as house mortgages, bank borrowing by SMEs, or insurance contracts. Currency exchange transactions and the raising of capital by enterprises or public bodies will not be taxed either.

I would like to take this opportunity to recall that financial transaction taxes already exist in 10 Member States. Therefore, action at EU level is justified to avoid distortions and reduce fragmentation of the Internal Market. This initiative is also closely connected with the EU policy objectives. It complements the regulatory framework aiming at improving the financial market efficiency and limiting the risky behaviours that are at the source of the current bank crisis. Therefore, a part of the proceeds from the FTT could go to the EU budget in reduction of the Member States contributions to it.

Second, the development of a new VAT own resource would bring a new impetus to the development of the Internal market by reinforcing harmonization of national VAT systems. The proposed new own resource would consist in a single rate. It will be applied on all the goods and services currently subject to standard rate VAT in every EU Member States. The tax base would correspond to the smallest common denominator of national VAT systems. This would mean that a supply subject to national VAT at the standard rate in a Member State would be subject to the new VAT own resource unless the same supply is subject to a reduced rate or an exemption in another Member State. In practice, tax administrations would regularly transfer a share, corresponding to such a rate, of the VAT receipts collected and stemming for transactions subject to the standard rate. In this way, the new initiative would not eliminate all national specificities that are justified for different reasons. It would encourage enlarging the base and addressing those exceptions which are detrimental to the proper functioning of the Internal market and the measures to reduce VAT fraud in the EU.

In anticipation of our discussion, I would like to address two possible misunderstandings which often arise in debates on own resources.

First, proposing new own resources does not mean increasing the size of the EU budget. As a matter of fact, it is proposed in parallel with a stabilisation of our budget in real terms. The own resources system will contribute to the wider budgetary consolidation efforts undertaken by Member States. The progressive introduction of new resources opens the door for other resources to be reduced, phased-out or dropped. As a result, Member States' contributions to the EU budget will diminish. The Member States will have an additional degree of freedom in managing scarce national resources. Introducing new own resources "is not an argument about the size of the budget – it is a debate about the right mix of resources".

Second, new own resources are not a transfer of new fiscal competences to the EU. It is the Council which unanimously decides on the introduction of a new own resource and the rate to be applied. Furthermore, as today, all the National Parliaments will have to ratify any decision in this respect. Under the Lisbon Treaty, the power to raise taxes independently at the European level is not possible. National tax sovereignty is not at stake.

3. Reforming the correction mechanisms

Time has also come to reform the system of rebates and corrections. In the new EU financing system that we propose, there is no place for the logic of "juste retour". At the same time, in a spirit of fairness, one should avoid that national net contributions become disproportionate in relation to relative prosperity. That is why the Commission, following the long-time agreed Fontainebleau principle, proposes to contain the contributions of 4 Member States that would otherwise face a budgetary burden "excessive in relation to their relative prosperity".

The proposed new system of lump sums is considerably more simple and transparent than the current mechanisms. Contrary to the current mix of corrections it also ensures transparency, fairness and equal treatment of Member States.

Concluding remarks

The proposals on EU financing made by the Commission in June are probably the most comprehensive and ambitious since the own resource Decision in 1970.

We invite the Member States and the elected representatives of EU citizens in the European and national parliaments to examine our proposals in detail. You will find that our approach is underpinned by serious analysis, deep economic arguments and also reflects the demands expressed by many to reform our financing system.

Support at all level, in the European Parliament, in the Council but also in National Parliaments, will be necessary for this necessary reform to succeed. I hope that today's discussions will contribute to a common understanding and facilitate future work towards this goal. It will be good for Europe and for its Member States.

Thank you for your attention.

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