ANNUAL REPORT concerning the financial year 1992

(93/C 309/01)

The report, together with the institutions' replies to the Court's

observations, was transmitted to the authorities responsible for giving

discharge and to the other institutions

André J. MIDDELHOEK

(President)

Josep SUBIRATS

Carlos M. MORENO

Richie RYAN

Ole Joergen WARBERG

Constantinos ANDROUTSOPOULOS

Daniel STRASSER

Bernhard FRIEDMANN

Maurice THOSS

Roger CAMUS

John WIGGINS

Giorgio CLEMENTE>TABLE>

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INTRODUCTION (*)

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(*) The Commission's replies are on page 255

ACCOUNTING AND CONTROL

0.1. Ratification of the Maastricht Treaty requires the Court of Auditors to provide the budgetary authorities with a statement of assurance as to the reliability of the accounts and the legality and regularity of underlying operations. The Court, since its creation, has devoted a substantial part of its audit resources to audit of accounts and to matters of legality and regularity. Its reports have included numerous financial audit findings and recommendations. This report draws further attention to problems of administration and control which adversely affect the reliability of the accounts and increase the risk of illegal or irregular transactions. Problems of this type and importance will certainly have a significant bearing on the Court's conclusions, when the moment arrives for it to draw up the statement of assurance.

0.2. Examples of insufficient checking by the Commission of legality and regularity aspects of transactions are to be found throughout this report.

0.3. Chapter 13, which includes all the Court's observations concerning the financial audit, reveals that significant amounts of expenditure were charged to an inappropriate financial year and that neither the provisions of Article 7 of the Financial Regulation with regard to carrying forward commitment appropriations nor those for making appropriations available again when commitments have been cancelled are strictly observed. Independently of the irregularities uncovered by the Court, these findings once again illustrate the need for simplification to which the Court has moreover drawn attention in its opinion on the Financial Regulation ()

.

0.4. In the Structural Funds, several programmes were in general poorly controlled by the Commission, both on records and on the spot. Much ineligible expenditure had been financed. In the case of certain measures in the social field directly managed by the Commission, subcontracting supervision to a specially created consultancy partnership proved conspicuously unsuccessful.

0.5. The Commission allowed an intermediary, using interest earned on excessive advances for food aid operations, to set up an irregular fund; this operated, in contravention of the financial regulation, entirely outside the budget and accounts of the Community. Application of the rules for calculation of the European Development Funds (EDF) Stabex transfers proved to be inconsistent; structural adjustment programme funds were in several cases released without any check as to whether the beneficiaries had fulfilled the necessary conditions; the EDF accounts did not correctly reflect risk capital operations and there were serious delays in accounting for emergency and humanitarian aid.

0.6. Many cases were identified where projects or actions had been effectively terminated for some time but the unused commitments had not been cancelled. In two cases, although the national authorities had brought fraud to the attention of the Commission, steps to recover Community funds had not been taken.

0.7. Considerable expenditure was incurred on the authorizing signature of officers who did not have explicit delegated authority. Neither the Financial Controller nor the Accountant rejected the commitment proposals or payment orders concerned.

0.8. The Commission needs to take urgent action to raise the level of financial competence and awareness of those officials to whom it has delegated authorizing officer powers, as well as improving their knowledge of the correct procedures and practices. When they act in breach of rules and regulations, disciplinary action should be taken.

0.9. The Court once again reports many instances of inadequate control of Community expenditure by national agencies. In the case of the Guarantee Section of the European Agricultural Guarantee and Guidance Fund (EAGGF-Guarantee) there are in addition the risks for Community funds that result from the complexity of the national systems, insufficient coordination between regional organizations and the central paying agencies and the need to strengthen the control of export refunds and related guarantees. National controls of the common market organization for cotton were found to be ineffective in one Member State and totally unsatisfactory in another. These are a few examples showing that the Commission and Member States have generally not succeeded in establishing clear, coherent and effective administrative and control systems for the EAGGF-Guarantee.

0.10. Structural Funds payments are made on the basis of national authorities' declarations and certificates of expenditure. Many certificates had been issued without the issuing authorities exercising any significant control of the reality of operations. Many national managing authorities' files were incomplete and the Court identified significant amounts to be recovered.

0.11. The report describes weaknesses in Customs regimes and in the methods of establishment of the VAT and GNP revenue bases. The Court draws particular attention to the level of uncertainty involved in the statistical methods on which the calculations of the VAT and GNP own resources are based.

0.12. Achieving satisfactory accounting and control of Community operations is made particularly difficult when regulations are complex. The Court would strongly recommend that greater attention be given to accounting and control aspects when legislating in these areas. The inability of the present accounting arrangements to distinguish between advances of funds and final payments is a major handicap to proper financial management.

0.13. There is thus a great deal that the Commission still has to do to improve its supervision, accounting and control of Community finances. There is also much room for improvement in the Member States' own accounting, internal control and audit of those EC financial operations which are managed by national agencies. The Court can only encourage the Commission's efforts both to secure the necessary action by the appropriate Member State bodies and to make maximum use of its own powers and resources to safeguard Community funds.

ECONOMY, EFFICIENCY AND EFFECTIVENESS

0.14. In this report the Court draws attention to weaknesses noted during the course of the 1992 audit and which have serious implications in terms of the economy, efficiency and effectiveness of the implementation of Community policies. The Common Market Organization (CMO) for flax and hemp has failed to stabilize the market. The CMO for cotton has similarly failed to achieve market stability, whilst large producers have broken up their holdings so as to qualify for aid to small producers. The ponderous and complex administrative arrangements of the school milk programme have discouraged many schools from participating.

0.15. The specific Community regional development actions known as 'non-quota measures` were precursors of the general reform of the Structural Funds and received total Community aid of some 900 Mio ECU. Lessons should have been learned from the many problems encountered in the preparation and implementation of these measures. However, the Court's examination of the post-reform Structural Funds reveal little evidence of real improvement.

0.16. The Court notes that the considerable increase in the transfer of Community structural funds to Member States has not been accompanied by any significant improvement in the way in which programmes are managed. Weaknesses of planning, co-ordination, monitoring and evaluation are accompanied by delays in carrying out programmes and, quite frequently, in modifications to financial plans whereby Member State contributions are reduced or deferred. The management problems seriously reduce the impact, in regional development terms, of the Community funding. Similarly, aid to Central and Eastern Europe has been adversely affected by poor preparation and problems of implementation, resulting in part from excessively centralized Commission management and sometimes ponderous administrative arrangements. Unnecessary or inappropriate humanitarian aid was supplied to Russia.

LACK OF REMEDIAL ACTION

0.17. Many of the findings of the 1992 audit share certain features with similar cases quoted in the Court's previous reports. Many errors and weaknesses mentioned in this report, which concern questions of legality and regularity as well as sound financial management, had already been brought to the attention of the Commission, the Council and the Parliament more than two years ago, with little or no subsequent improvement. In such cases the Commission has had sufficient time either to act directly or to launch any necessary legislative initiative.

FINANCIAL SIGNIFICANCE OF AUDIT RESULTS

0.18. The total amounts of Community funds identified by the Court's audit as having been wrongly disbursed or not received is only a first - and imperfect and partial - indication of possible savings. Thus, apart from amounts indicated in the Court's special reports ()

, this report mentions excessive payments of more than 115 Mio ECU and a shortfall in revenue received of about 47 Mio ECU.

0.19. Much larger sums could be saved if more account were taken of the Court's observations concerning the requirements in terms of the accounting, control and financial management. By way of illustration, mention need only be made of the fact that the Court's Special Report No 5/88 ()

, on the management and control of public storage, showed clearly that the system of physical inspection, of both the quantitative and the qualitative aspects of the storage of cereals bought into intervention, proved in practice to be significantly different from what had been presented as the official system and was judged by the Court to be both weak and dangerous. It is regrettable that after the publication of this report five years had to elapse before significant irregularities were uncovered by the administrative authorities.

0.20. The Court's own expenditure for the financial year 1992 amounted to 34,84 Mio ECU (of which 31,93 Mio ECU, or 92 %, was made up of staff appropriations, and 2,91 Mio ECU, or 8 %, consisted of operating appropriations).>REFERENCE TO A FILM>

Observations on the Commission's revenue and operating appropriations and on the European Development Funds

PART I

CHAPTER 1 (*) Own resources

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(*) The Commission's replies are on page 257

1992 IMPLEMENTATION OF THE BUDGET

1.1. As can be seen from Table 1.1, the outturn for revenue for the financial year 1992 was 97,7 %.

(a)The amount of agricultural levies collected was 10,8 % less than the budgetary estimates because the level of imports, especially in Belgium, Italy and Portugal, was lower than forecast. The levy rates themselves were also lower than expected;

(b)the amount of customs duties collected was 97,6 % of the budgetary estimates. The value of the imports of raw materials was 11 % lower than the forecasts, but the other categories were slightly higher;

(c)the amounts collected in respect of own resources deriving from value-added tax (VAT) and Member States' gross national products (GNP) were slightly lower than forecast. The changes made in September 1992 to exchange rates led to a specific loss for the budget of 71 Mio ECU for VAT and 8 Mio ECU for GNP. The VAT balances totalled 148,9 Mio ECU and the GNP balances 22,1 Mio ECU. Negative adjustments for VAT were P84,2 Mio ECU and for GNP P15,0 Mio ECU;

(d)the monetary reserve was not used in 1992; the surplus for the financial year 1991, entered in 1992, was 2 762,6 Mio ECU (see also paragraph 13.32 of this report).

CALCULATION OF THE VAT BASE BY THE REVENUE METHOD>TABLE>

1.2. The VAT own resource is a proportion - at most 1,4 % - of each Member State's annual VAT base; this base may not exceed 55 % of the gross national product at market prices ()

. The Member States have to make this base uniform by applying the provisions of Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 ()

. It is still necessary to impose a uniform method for calculating the basis of assessment because of the number and variety of the exceptional arrangements still applied in the Member States, which may or may not comply with the Community guidelines.

1.3. Under the method, known as the revenue method, applied by all the Member States since 1985 and adopted by the Council in 1989 as the sole method, the 'intermediate base` is obtained by dividing the net revenue collected by the rate at which the tax is levied. Where a Member State applies more than one VAT rate in the course of the year in question, it calculates the weighted average rate of its VAT, with the weighting of each rate being equal to the relationship between the value of the transactions subject to this rate and the aggregate value of all the taxed transactions for which the VAT is not deductible.

1.4. The harmonization of the base results in 'corrections` being made to the net revenue collected and in 'compensations` being applied to the intermediate base. Depending on the data available, the same type of adjustment may sometimes take the form of a correction or a compensation.

THE WEIGHTED AVERAGE RATE OF VAT

1.5. The weighted average rate (WAR), examined by the Court in 1991 and 1992, is the crucial part of the VAT resource mechanism. Any fluctuation in a Member State's WAR results in a change in its VAT base and may, if need be, lead to a change in its situation with regard to the capping ceiling of 55 % of the GNP.

1.6. The importance of the WAR explains why it has to be expressed exactly to four decimal places ()

. Table 1.2 shows for each Member State the main factors of the formula for calculating the intermediate base for the financial year 1991 and, by way of example, indicates how this intermediate base can be affected by a fluctuation of as little as 1 % in the value of the WAR.

The formal obligation to determine a WAR

1.7. In Denmark there are two rates of VAT in force, the normal rate and the zero rate, the latter applying only to sales of newspapers. Although Council Regulation (EEC, Euratom) No 1553/89 (Article 3) stipulates that in a case of this kind a weighted average rate must be calculated, for practical reasons the Commission allows Denmark, instead of calculating the weighting of the rates, to make an adjustment to the revenue, calculated as if the normal rate were applied to newspapers.

The VAT rates to be used for the calculation

1.8. According to Article 4(1) of Council Regulation (EEC, Euratom) No 1553/89, the rates to be used for the purposes of such a calculation are those which affect the VAT revenue collected during the year in question. This stipulation has the logical aim of allowing the WAR to be calculated exactly by ensuring that rates and revenue are consistent.

1.9. For the purposes of applying this Regulation, however, the Member States have not deemed it necessary to break the revenue down according to the financial year in which the tax became chargeable ()

. The revenue for a given year therefore contains elements which concern previous financial years and which may relate to outdated VAT rates, such as refunds or payments of tax arrears or adjustments of deductions made previously.

1.10. This being so, the rates used for calculating the WAR never tally exactly with the net revenue collected, despite the principle stated in the regulations. The Member States' WARs are thus somewhat artificial, and the resultant VAT bases cannot be regarded as wholly in keeping with the Member States' true bases of assessment for tax.

Transactions subject to non-deductible VAT

1.11. In order to calculate the exact weighting of the rates, it is necessary to have, for each rate, complete statistics on the transactions which are taxable at that rate and which do not entitle the customer to deduction of VAT. Since the work of measuring and analysing the bases can be carried out only on the basis of statistical data, the Regulation lists seven categories for which the breakdown by rate of VAT must be applied ()

:

(a)final consumption of private households, including consumption on the farm by flat-rate farmers and their direct sales to final consumers;

(b)intermediate consumption of private non-profit institutions and general government;>TABLE POSITION>

(c)intermediate consumption of other sectors;

(d)gross fixed-capital formation of private non-profit institutions and general government;

(e)gross fixed-capital formation of other sectors;

(f)improved and unimproved building land;

(g)transactions involving gold other than gold for industrial use.

1.12. It is not always an easy matter to apply this classification and most Member States diverge from it; in most cases, the difficulty arises in connection with the expenditure of private non-profit institutions and of the exempted sectors, and with transactions involving gold which is not for industrial use. It has been found, in fact, that a harmonized presentation is impossible and that the selection of the statistical categories depends on the availability of data.

1.13. The statistical nature of some categories, in particular those relating to intermediate consumption, has little in keeping with the real tax situation. According to the Sixth Council Directive ()

, the main chargeable event of the tax is the supply of goods; statistics for intermediate consumption, however, are based on the actual consumption of goods and consequently take account of net variations in stocks.

1.14. In all the Member States, the expenditure attracting non-deductible VAT falling in the categories 'intermediate consumption of other sectors` and 'gross fixed-capital formation of other sectors` is confined to some 'exempted` sectors, such as banks, insurance companies and hospitals. This sector-based approach gives a very simplified picture of the real situation and offers no assurance that all the activities which the Member States exempt under the Sixth Directive are taken into consideration. Furthermore, inconsistencies are sometimes found in the way in which the Member States treat these few exempted sectors: for example, the exempted sectors used for calculating intermediate consumption are not exactly the same as those used for calculating the gross fixed-capital formation; another example is where the Member States regard as 100 % exempted sectors which are not exempted under the tax regulations and for which a deductible proportion therefore needs to be calculated.

1.15. The transactions of small undertakings to which exemption arrangements apply and for which, by definition, VAT is not deductible cannot be isolated in the statistics. Most of their production is therefore included in the statistical category 'final consumption of private households`, whereas it ought to be excluded from it; by contrast, the investments and intermediate consumption of these small undertakings are not included in the aggregates used for calculating the WAR, whereas in fact they ought to be because they are subject to non-deductible VAT. This double distortion may above all affect the accuracy of the WAR in Member States where the registration threshold is relatively high (Ireland, the United Kingdom). Furthermore, in all the Member States which make use of the option allowed to them of calculating their uniform VAT base without taking into account transactions carried out by taxable persons with an annual turnover not exceeding 10 000 ECU, the revenue adjustments are calculated on the assumption that they are totally neutral in respect of the WAR.

1.16. There is considerable diversity in the approach to statistics on improved and unimproved building land. The Member States refer to building sites where work has commenced or to completed sites or to sites where the electricity supply is in place. In Italy, transactions are considered to relate solely to land already built on; the value of the land is estimated by taking a flat-rate percentage of the value of the buildings.

The sources of the data

National accounts and other sources

1.17. The taxed transactions are usually broken down into statistical categories by using data from national accounts prepared in accordance with the European System of Integrated Economic Accounts (ESA). For the purpose of identifying transactions subject to non-deductible VAT and effecting the breakdown by rate of VAT, the Member States may refer to data taken from sources complementary to the ESA and capable of being adapted thereto.

1.18. The national accounts are not themselves designed for tax purposes and are from the outset ill-suited as a basis for calculating the WAR:

(a)the national accounts do not enable all the expenditure subject to non-deductible VAT to be clearly identified; hypotheses and estimates have to be made, for example in order to determine the deductible proportions which have to be applied to the exempted sectors;

(b)the ESA national accounts and the internal national accounts are frequently not sufficiently detailed for the purposes of fiscal analysis; the breakdown of VAT bases of assessment then becomes global or else is carried out on the basis of data not related to the national accounts;

(c)since the scheme for flat-rate farmers is a purely fiscal concept, the national accounts do not provide any information about the on-farm consumption and direct sales of these farmers;

(d)improved and unimproved building land, as defined in the Sixth Council Directive, and transactions involving non-industrial gold are not specific ESA categories.

1.19. All the Member States, except Greece and Belgium, are able to draw up their national accounts in accordance with the ESA. In some Member States, however, the national accounts do not fully conform to the ESA; moreover, whilst the ESA does guarantee that a uniform principle is applied to the definition of the aggregates, it does not impose any method of calculating these aggregates and there are disparities in the way they are determined.

1.20. France and Portugal are the only Member States able to calculate their weighted average rate using only one source, an econometric model developed for the purposes of their domestic fiscal policy. Even though these 'VAT models` are fully integrated into the national accounts and the input-output tables, estimates and global breakdowns have to be used for a significant proportion of the taxable bases.

1.21. The other Member States use a great variety of sources in addition to the national accounts: household budget surveys, statistics based on VAT returns, professional accounts, State budgets and accounts, the accounts of public institutions or companies, surveys, letters, specific documents, etc. In any case, the tremendous diversity of the sources makes it very difficult to compare the Member States' methods of statistical breakdown one with another.

1.22. Often these subsidiary sources have no link with the ESA norm and are not capable of being adapted thereto as required by Council Regulation (EEC, Euratom) No 1553/89. Furthermore, the information they provide often relates to only a sample of the overall amount to be broken down into rates which is given by the national accounts, even though in exceptional cases amounts of expenditure may be found in external sources that are higher than those in the national accounts. The way in which this problem is solved is not uniform; most of the Member States nevertheless charge the differences to the accounts proportionally between the various rates. For example, for the purposes of breaking down (into normal rate, reduced rate and exemption) the ordinary expenditure of general government, Italy uses data relating only to the State, i.e. around 40 % of the total; the expenditure of local communities and other public authorities is allocated by simple extrapolation; the same system is applied to the breakdown of public investments, as here too the basic data represent only 40 % of the total.

1.23. Member States with a complex structure of rates find it difficult to make a complete breakdown of some items of expenditure on household consumption, such as 'Other goods and services` of the ESA nomenclature. Whereas the general trend is for the part of expenditure that is not broken down to be divided up proportionally between the rates, some Member States (Denmark, the United Kingdom and the Netherlands) make a more detailed analysis in order to identify solely the exempted bases and the bases taxed at the reduced rate and, by deduction, classify all transactions which are not clearly identified under the normal rate.

1.24. The input-output tables are of particular interest for the purposes of dividing up intermediate consumption and gross fixed-capital formation by type of transaction and by rate of VAT. These input-output tables are drawn up by all the Member States except Luxembourg. Some Member States, whose input-output tables are not sufficiently detailed for the requirements of the WAR (Ireland, Italy, the United Kingdom), however, have to rely on other sources, such as VAT returns or direct surveys.

1.25. The frequency with which the input-output tables are drawn up varies considerably from one Member State to another. Only France and the Netherlands produce annual tables; for the other Member States, the most recent tables which were available and which were used for the 1991 WAR were as follows (the frequency with which they are drawn up is given in brackets): Germany 1986 (every two years), the United Kingdom 1984 (every five years), Spain and Portugal 1986 (every five years), Italy 1986 (every six years), Belgium and Greece 1980 (every 10 years), Ireland 1975 (every 10 years).

1.26. The Commission has stipulated the criteria which the statistics used must meet: they 'must be public in nature, i.e. they must be published. In principle, this rules out the use of special surveys conducted solely for the purpose of establishing own resources. Finally, they must be available when the statement of the base is produced. No corrections are made in the light of new statistics; otherwise, adjustments would be never-ending` ()

.

1.27. In fact, some Member States are obliged to have recourse to special surveys or polls in order to obtain the requisite information; in Ireland, for example, specific enquiries are made at the local authorities. In any case, it is often impossible to avoid using unpublished information.

Aggregates of the reference year

1.28. The weighted average rate for the year n has to be calculated by using the statistical aggregates of the year n P2 as a reference. A Member State may, however, be authorized to use data relating to another year, which may not be earlier than the fifth year before the financial year in question. Two Member States (Germany and Portugal) make use of this option.

1.29. Portugal did not apply for authorization to use the 1986 national accounts for calculating its weighted average rates and VAT bases for 1989 and 1990 until October 1990. The proper procedure, whereby the application for the authorization must be made not later than 30 April of the financial year from which the authorization is to apply ()

, was not followed. The Commission granted Portugal ex post facto authorization in February 1992.

1.30. It should be noted that even the accounts of the year n P2, used by most of the Member States, do not contain definitive data. However, according to Article 10(8) of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 ()

, changes to the Member States' national accounts are no longer taken into account after 30 September of the fourth year following a given financial year, except on points notified within this time-limit either by the Commission or by the Member State.

1.31. The successive versions of the national accounts for the same year may contain changes on a scale that is in some cases sufficient to affect the WAR if they were to be taken into account. The most obvious differences concern the private consumption items. The Court found that in some Member States (Spain, Italy) changes in the base or in the statistical definition were sufficient to cause disparities of around 10 %, 20 % or 40 % upwards or downwards between the definitive figures for certain headings and the estimated figures used for the WAR.

1.32. Moreover, the fact that the national accounts of the year n P2 are used as the reference does not mean that all the factors in the calculation relate to that year. It has already been pointed out that the input-output tables of some Member States are more than 10 years old; and the other instruments of fiscal analysis very often relate to previous financial years, sometimes considerably earlier, and in some cases updated by means of global indexes.

1.33. The two to five year disparity between the VAT rates used and the aggregates applied for weighting them would have no effect on the VAT base if the structure of expenditure attracting non-deductible VAT were entirely stable. This hypothesis is not in fact valid: it disregards the impact of the normal short-term variations and, all the more so, the effect of exceptional events such as the Gulf War or the reunification of Germany. Furthermore, some sectors of expenditure, such as the construction industry or the car industry, react very rapidly to cyclical fluctuations or to frequent decisions to change the VAT rates.

Special territorial feature

1.34. In Portugal, the net revenue collected includes that relating to the autonomous regions of Madeira and the Azores Islands, but the weighted average rate is calculated according to statistical data which relate solely to mainland Portugal. Furthermore, since Portugal's VAT base includes the islands and is more than 55 % of its GNP, which does not include them, Portugal has, since its accession, regularly been basing the calculation of both its capping and its GNP contribution on an underestimated GNP aggregate. Following the Court's intervention, the Commission initiated a recovery procedure.

Changes in rates or in the tax treatment

1.35. A change in rate during the financial year implies that the calculation of the weighted average rate takes account of the time-lag between the moment when the change takes effect and the moment when the revenue arising from this change is collected. It does, however, seem contradictory for Member States to be allowed to round the period off to a complete month and yet the WAR is required to be calculated to four decimal places; in some cases the booking of a time-lag rounded off to one or zero months may affect at least the fourth decimal place.

1.36. This possibility of rounding off to a complete month has in fact always been used by all the Member States, although in the initial phase of the system some of them (in particular Belgium and Italy) calculated the exact time-lag in days. Others were late in calculating their time-lag (Spain) or omitted to take it into account in their calculations (Greece, the WAR for 1988).

Checks on the weighted average rate

1.37. The weighted average rate, being a key factor in the VAT resource, should, in principle, be the subject of scrupulous checks both by the Member States and by the Commission.

1.38. The supporting documents for each Member State's most recent WARs show that accidental inaccuracies occur frequently, mainly in the fiscal analysis. The correction of an error discovered by the Court after the Commission's checks meant that the Member State concerned (Italy) had to pay an extra 12 Mio ECU for its contribution to the VAT own resource for the financial year 1989.

1.39. The Commission's task of checking is complex because of the diversity of the national situations and because amendments are continually being made to fiscal legislation. This being so, the checks that it makes usually on an annual basis can obviously not include an exhaustive fiscal analysis.

1.40. The reliability of the WAR is therefore based to a large extent on the internal control of transactions in the Member States. In some Member States, this internal control on the drawing-up of the VAT statements and more particularly on the calculation of the WAR has shortcomings which are incompatible with the size of the amounts involved: concentration of all the (WAR) calculation operations in the hands of one single national official, defects in the handling of statistical tools, inadequacy of the checks on the accuracy or plausibility of the results.

1.41. The Commission's checks on the weighted average rate ought to include a systematic study of the discrepancies, for the same year, between the theoretical bases of assessment evaluated on the basis of statistics and the bases of assessment calculated by means of the weighted average rate ()

. The checks made on the most recent data ()

show that the situation varies considerably from one Member State to another: in some Member States (Belgium, Germany, Greece, Spain, Italy, the United Kingdom), the theoretical revenue greatly exceeds the revenue collected, by between 12 % and 48 %; in other Member States (France, Ireland, the Netherlands), there is virtually no disparity; two Member States (Luxembourg and Portugal) are in an unusual situation where the actual revenue is over 20 % higher than the theoretical revenue. These situations may admittedly arise because of a combination of factors, which vary considerably from one country to another. Such cross-checks do, however, prompt questions about the realistic nature of the tax bases of assessment reconstructed for the various rates of VAT and, consequently, about the reliability of the resultant weighted average rates.

Conclusion regarding the weighted average rate

1.42. The weighted average rate of VAT is fundamentally much more of a statistical concept than a fiscal one. Its basic weakness is that the national accounts offer limited possibilities with regard to fiscal analysis; for most Member States this results in great diversity in the origin of the data and considerable complexity in the way the data is handled.

1.43. The accuracy of the weighted average rate largely depends on the level of statistical development in each Member State. This level has been found to be very unequal. The present system for calculating the VAT base is valid only if it forms part of a voluntary policy of improving and harmonizing Community statistical tools.

1.44. Some elements of the system affect the accuracy of the estimates: such as the disparity of two to five years between the rates taken into consideration and the aggregates used for weighting them; the fairly large role played by estimates where data are unavailable; and the way of calculating and rounding off the time-lags. The Member States' approach to these matters is not identical and this adversely affects the uniformity of the calculation of the base.

1.45. Lastly, the weighted average rate poses serious problems of control. Even though its calculation system is complex and cumbersome, the WAR is of crucial financial importance, and it should be a matter of priority to minimize the margin of uncertainty relating to it. This would require a more active policy on the part of the Member States to prevent errors and would justify the stepping-up of checks by the Commission.

CORRECTIONS AND COMPENSATIONS

1.46. In 1992, as part of its audit of the own resource deriving from VAT, the Court examined the following areas of VAT corrections and compensations:

(a)the common flat-rate scheme for farmers;

(b)the transactions of small undertakings;

(c)the supply of buildings and building land;

(d)the restrictions on the right to deduct VAT.

Financial impact

1.47. The four areas of corrections and compensations examined by the Court totalled 53 933 Mio ECU or 2,16 % of the 1991 VAT basis of assessment. For the two preceding years they were 57 933 Mio ECU or 2,67 % of the 1989 basis of assessment and 53 555 Mio ECU or 2,27 % of the 1990 basis of assessment. Table 1.2 shows the amounts of these corrections and compensations in the context of the data from the Member States' statements on the 1991 VAT base, which were submitted in 1992.

Common flat-rate scheme for farmers

1.48. The Member States are allowed to apply a flat-rate scheme to farmers which is intended to offset the VAT charged on their purchases of goods and services. Flat-rate compensation percentages are fixed for this purpose. These percentages are based on macroeconomic statistics for flat-rate farmers alone for the preceding three years. The flat-rate compensation is paid either by the public authorities or by the taxable person to whom the goods or services are supplied, who deducts from the VAT for which he is liable the amount of the flat-rate compensation he has paid to the flat-rate farmers ()

.

1.49. The revenue collected by a Member State is corrected if the flat-rate compensation percentage does not correspond to the percentage of the input VAT charge which was actually applied during the year in question to the flat-rate farmers' transactions, with the exception of that relating to consumption on the farm and direct sales to final consumers. The amount of the correction is equal to the difference between the two percentages ()

.

1.50. Some Member States do not include the data from all the agricultural sectors concerned in the calculation of their correction. This applies to Germany for freshwater fishing, Ireland for fishing, forestry and agricultural services, the Netherlands for forestry and cattle traders and Portugal for forestry.

1.51. Ireland does not exclude direct sales to final consumers. Moreover, even though the flat-rate scheme prohibits all other forms of deduction, in Ireland the VAT levied on the construction of farm buildings can be refunded. This situation is, however, correctly taken into account when the compensation is being calculated.

1.52. Member States are required to determine their corrections in accordance with a common method of calculation ()

. However:

(a)some Member States (Spain, Italy) use statistics which deviate from the European Communities Statistical Office's concepts of the economic accounts for agriculture;

(b)the national statistics used in accordance with 'the common method of calculation` do not always make it possible to identify the transactions which are subject to the tax arrangements in force;

(c)these statistical data do not distinguish between transactions carried out by flat-rate farmers and those by tax-paying farmers;

(d)other sources or estimates have to be used, the reliability of which varies considerably;

(e)some components of the calculation are outdated or are of inadequate quality.

1.53. The Court detected an error in the flat-rate percentage used for calculating the correction to Spain's VAT basis of assessment for 1991. Faulty data on the final production of a category of cattle ('cattle reared exclusively indoors`) were used. As a result, the negative correction should be reduced from 3,6 Mio ECU to 1,4 Mio ECU.

Transactions of small undertakings

Graduated tax relief

1.54. France, the Netherlands and Luxembourg are the only Member States that apply graduated tax relief ()

, which is VAT relief depending on the turnover of the taxpayer. These Member States add to the amount of revenue they collect the equivalent of the revenue of which they have deprived themselves. France and the Netherlands have a computerized accounting system that contains details of the recipient undertakings' tax returns, thus ruling out the possibility of major risks in the calculation of their positive correction.

1.55. As the Commission has pointed out, Germany, which applied this system until 1989, did not include the effect of the 80 % relief for undertakings with a turnover not exceeding 20 500 DM. On the basis of data from German statements and a Bundesrechnungshof report, the tax advantage may be put at 300 Mio DM and the corresponding underestimation of Community resources at 15 Mio ECU in 1989.

Undertakings with a turnover below 10 000 ECU

1.56. Member States have the option of leaving out of account, for the purpose of determining VAT resources, the transactions of taxable persons whose annual turnover does not exceed 10 000 ECU ()

. Six Member States make a correction (Belgium, Denmark, Spain, France, the Netherlands and, in part, Greece) and four calculate compensation (Germany, Italy, the United Kingdom and Greece for the remaining part).

1.57. There is no uniformity in the way this adjustment is calculated as each Member State has difficulties in identifying the undertakings in question. Moreover, there are still problems in distinguishing, on the one hand, supplies and services to final consumers and to other small undertakings and, on the other, supplies and services to taxable persons.

1.58. In addition to these general difficulties, there are specific areas of vagueness, for example:

(a)in Spain since 1986 the transactions of small undertakings in Alava, Guipuzcoa, Vizcaya and Navarra have not been taken into account;

(b)in Greece the correction takes no account of the input VAT paid; the same is true in Belgium for undertakings subject to the 'equalization` tax;

(c)in Germany and in Greece profit margins are applied without any reasons being given;

(d)the input-output tables used are often obsolete;

(e)in Denmark, Spain and Italy, the corrections are drawn up on the basis of the taxable amounts declared, without taking account of the disparity (usually of one quarter) between what is declared and what is collected.

Undertakings with a turnover in excess of 10 000 ECU

1.59. Ireland and the United Kingdom continue to apply exemption to undertakings with a turnover exceeding 10 000 ECU. This is also the case in the Netherlands for some small undertakings which receive graduated tax relief.

1.60. The main difficulty in determining positive compensation that takes account of these undertakings' transactions is the lack of information in their respect. The calculation is therefore often artificial or even hypothetical.

1.61. In the Netherlands there is still no agreement with the Commission on the method to be followed and each party has been upholding its reservations since 1985.

1.62. The method used in the United Kingdom for assessing the number of undertakings concerned by the correction is likely to result in an underestimation.

1.63. Ireland has kept to its scheme and has even extended it by increasing the exemption. The Irish compensation is based on incomplete statistics. The suppliers of services and the undertakings that have opted to pay tax are disregarded and no distinction is made between supplies made to final consumers and those to taxable persons.

Supply of buildings and building land

1.64. Belgium, Denmark, Germany, Greece, Portugal and the United Kingdom continue to exempt the supply of building land and, except in Belgium and the United Kingdom, the supply before first occupation of buildings and the land on which they stand ()

. The basis of assessment for the VAT resource of these Member States has to be determined as though these transactions were taxed.

1.65. In Greece and Portugal compensation is determined on the basis of data taken from the declarations of direct tax made by companies which sell building land or which construct or sell buildings. But no fiscal definition can be sufficiently precise to identify these undertakings. The other Member States use statistical data that are, if need be, updated by price indexes and supplemented by estimates. In Denmark the same ratios have been re-used in the calculations every year since 1979.

1.66. In the 1990 statements, Greece failed to include supplies to the exempted sector, and the United Kingdom has not taken supplies in Northern Ireland into account.

1.67. In Germany the percentage determining the supplies to final consumers is applied only to supplies to natural persons. The same percentage applied to all supplies of building land would increase the German contribution by some 5 Mio ECU per year.

Restrictions on the right to deduct VAT

1.68. During a transitional period, Member States are authorized to retain all the exclusions to the right to deduct VAT provided for under their national laws when the Sixth Directive came into force ()

. For the purchase of petroleum products and passenger cars used for business purposes and for expenditure relating to the leasing and hiring and also the maintenance and repair of such cars, the VAT resources base may be determined as if the exercise of the right to deduct had not been restricted ()

.

1.69. All the Member States except Germany, the Netherlands and Luxembourg make use of this possibility. Instead of determining compensation, Belgium calculates a correction.

1.70. The sources of information differ considerably. To varying degrees, the national statistics often have to be supplemented by other data from various public services, producer associations, leasing firms or household budget surveys. These more specific data may, however, be unreliable, as Belgium uses ratios dating from 1959, Denmark and the United Kingdom from 1979, and Spain from 1980.

1.71. Very approximate estimates were found in Ireland for the assessment of leasing costs and in Italy for the average price of cars and for the number of cars purchased by the public sector, banks and insurance companies.

1.72. In Spain, it is impossible to identify in the calculation the effects of the national law which places no restriction on the right to deduct VAT for taxi companies, driving schools and hire firms. Furthermore, the percentage of sales of second-hand cars is only 5 %. Comparable inaccuracies have been found for the purchase prices of company cars (the United Kingdom) and for the percentages of purchases by the exempted sectors (Denmark, the United Kingdom) and by small undertakings (Denmark).

1.73. The percentage for private use of company cars, which is a key element in the calculation of the compensation, fluctuates considerably: 15 % in Spain and Italy, 20 % in the United Kingdom and Greece, 33 % in Denmark and 35 % in Ireland. In Belgium, for the purposes of calculating the 'refusal rate` (for deductible VAT), it is considered that cars belonging to legal persons are 100 % for professional use.

1.74. Shortcomings were found in all the Member States that apply compensations of this type. Whilst in many of the cases referred to they are detrimental to the Community resources, they may also be to the detriment of the Member States.

Conclusion regarding corrections and compensations

1.75. The corrections and compensations that have been examined confirm the complex, artificial nature of the reconstruction of the uniform basis of VAT assessment as well as the other weaknesses observed by the Court in the past. Taken as a whole, these corrections and compensations concern a total flow of 282 900 Mio ECU in terms of the basis of assessment.

1.76. All the examples referred to in previous paragraphs clearly indicate that in order to achieve satisfactory results in this field, it would be necessary not only to be perfectly familiar with the various fiscal systems in force in the Member States, to understand them and be able to implement them, but also to be able to correct, in terms of the basis of assessment, any divergent effects they might have in relation to the Community directives, i.e. by financial amounts of corrections to revenue collected or by compensations in the intermediate basis of assessment.

1.77. These amounts can sometimes be determined on the basis of fiscal data. But very often, when it is a case of, for example, calculating amounts that have not been collected by the national tax authorities, use has to be made of the national accounts and macroeconomic data. This is an area where methods of assessment predominate and where often subjective hypotheses and interpretations are involved.

1.78. The remedy is obviously to define uniform methods of calculation that are suited to each type of correction and compensation, and indeed this is the path which the Commission has recently taken, even though this method comes up against the problem that this subject is heavily dependent on the national context.

CONCLUSION COMMON TO THE WEIGHTED AVERAGE RATE AND CORRECTIONS AND COMPENSATIONS

1.79. Despite the obstacles represented by the complexity of the calculations and the heterogeneity of the data, the Commission and the Member States seem to have made headway in improving the comparability of the data and the uniformity of the methods. Nevertheless, it would appear from the Court's current observations on corrections and compensations, together with the remarks on the consistency of the statistical instrument used for the calculation of the WAR, that the degree of reliability of the base of the largest Community resource is still inadequate. High priority must be given to reducing this degree of uncertainty.

GROSS NATIONAL PRODUCT (GNP)

Introduction

1.80. The GNP aggregate resulting from the accounts of the Member States is important for the system of Community own resources because it conditions the GNP resource itself and the VAT resource of those Member States whose basis of assessment is capped ()

.

1.81. The GNP aggregates are not the product of traditional accounting procedures, but of a statistical system of national accounts that makes use of macro-economic data. For the Court's audit, it therefore seemed preferable to refer to specific criteria like exhaustiveness, comparability and compliance with the European System of Integrated Economic Accounts (ESA). For the purposes of this Annual Report, the Court's audit enquiries were carried out only within the Commission and have not yet examined the question of the actual composition of the GNPs.

The Commission's management

Compilation and presentation of GNP

1.82. The way in which GNP is compiled by the Member States is by no means homogeneous and there are various inadequacies (some have already been pointed out by the Court ()

) which adversely affect the reliability of the statistical figures sent to the Commission.

1.83. For example, the ESA is still not applied by Belgium and Greece. An examination of the inventories reveals that the data forwarded to Eurostat still contain marked discrepancies in relation to the ESA. Lastly, the Member States differ in terms of the sources used and how up to date they are:

(a)Portugal and Greece keep referring to old data from the early 1970s;

(b)Portugal has not updated its data on the financial years 1988, 1989 and 1990 with regard to its economic territory; France has updated its data with regard to overall GNP but not for each of its components.

1.84. Furthermore, it should be noted that the definition of GNP from the expenditure point of view contained in the Commission questionnaire refers to national final consumption and not to final consumption on the economic territory, as required by Council Directive 89/130/EEC, Euratom of 13 February 1989 ()

. In more general terms, in 1991, only five Member States (Spain, France, Italy, the Netherlands and Portugal) complied with the provision requiring that gross domestic product at market prices (GDPmp) be presented in terms of the three points of view of output, expenditure and income, even though the purpose of this was to provide a better guarantee of the validity of the figure for GNP by comparing assessments held to be independent.

Verification of GNP data

1.85. In order to make it possible to assess the reliability and comparability of GNP data, Article 4 of Council Directive 89/130/EEC, Euratom stipulated that the Member States should provide the Commission with an inventory of the procedures and basic statistics used to calculate their GNPs and the components thereof. The Directive also sets up a committee (the GNP Committee) whose main role is to examine the data concerning the aggregates and the information contained in the afore- mentioned inventories.

1.86. In fact, these inventories were not all collected until the financial year 1991. For the financial years 1988, 1989 and 1990, the GNP Committee therefore confined itself to establishing the availability of the data required. For the financial year 1991, the data for which were available by 1 October 1992, the Committee considered that the figures supplied reflected at the time the best possible efforts on the part of the Member States to produce comparable and representative data. However, it did not qualify its judgment in terms of the degree of comparability and representativity that had been achieved.

1.87. By contrast, in its role as advisory body for the improvement of GNP data, which was also conferred upon it by the aforementioned Directive, the GNP Committee found that a number of measures still needed to be taken in the following fields:

(a)greater compliance with the ESA on the part of all Member States;

(b)greater standardization in the statistical bases and assessment methods and the use of recent data;

(c)inclusion of the 'black` economy;

(d)standardization of the evaluation of housing services and agricultural activities;

(e)standardization of the procedures for converting GDP into GNP.

1.88. Up to now, only one question has been solved - the one concerning economic territory. This is evidence that simple solutions will not be easy to find. Moreover, there is nothing to indicate that the above list can be regarded as comprehensive or even adequate as a means of rendering the GNP figures as reliable and as comparable as might reasonably be expected from data that are to be used as the basis for a Community own resource.

Overall issuing of 'reserves` in 1992

1.89. The GNP data forwarded by the Member States may be amended, just as the VAT statements may be rectified, during a period of no more than four years following the financial year in question. This time-limit does not, however, apply to points that are notified by the Commission or a Member State. With regard to VAT bases, such rectifications, together with the relevant notifications, are widespread. These 'reserves`, as they are known, interrupt the aforementioned four-year prescription ()

.

1.90. The Commission has, to date, notified no rectifications concerning GNP. In September 1992, it issued, for the first time, a total of 128 'reserves`, some of which were common to all the Member States and others of which concerned only some of them. The ones relating to all of them concerned the following points:

(a)the exhaustiveness of the measurement of GNP and, in particular, the question of the inclusion of the 'black` economy;

(b)the conversion of GDP into GNP;

(c)the way in which housing services are treated;

(d)the inclusion of subsidies and the classification of taxes;

(e)the way in which private non-profit institutions and general government are treated;

(f)the way in which financial institutions are treated;

(g)the borderline between final use and intermediate consumption.

1.91. The number of these 'reserves` and the general nature of some of them back up the fears expressed with regard to the reliability of the data forwarded and hence to the accuracy of GNP and VAT resources calculated by using the GNP base. Furthermore, the financial year 1992 corresponded to the four-year deadline applicable to the first year of implementation of the GNP resource (1988) after which no amendments were possible. The issuing of these general and specific 'reserves` therefore looks like a useful precautionary measure, but its effect, however, is to allow all the GNP data to be deferred.

1.92. Finally, in spite of the extent of the field covered by these 'reserves`, the Court feels that certain points have not been considered. For example, there is the question of the updating of national accounts, with regard to which there is considerable disparity between Member States and for which 'reserves` should have been issued concerning GNPs that were determined on the basis of data that were too old (Greece and Portugal). There is also the case of the GNP of the former German Democratic Republic, whose previous planned economy is bound to pose problems in terms of assessment and integration into the GNP of the Federal Republic of Germany. Despite the fact that the four-year time-limit has not yet expired (Germany was unified in 1990), it is still astonishing that the Commission has not issued a 'reserve` with regard to this question.

The operation of the system

1.93. Article 10 of Council Directive 89/130/EEC, Euratom stipulates that the Commission must submit a report on the application of the said Directive. This report was not submitted until March 1992 ()

, chiefly because the inventories stipulated in Article 4 needed to be available before it could be drawn up.

1.94. In submitting this report the Commission had the opportunity to make a preliminary assessment of the implementation of the GNP system. This assessment reviewed the enactment of the Directive, the comparability of the Member States' GNP data and, finally, the achievement of the Directive's objectives.

1.95. The Commission's opinion may be summarized in three points:

(a)the GNPs of the majority of the Member States are reasonably comparable;

(b)however, some Member States' assessments contain inadequacies;

(c)a greater degree of comparability needs to be achieved.

1.96. Consequently, the Commission suggests a three-fold plan of action:

(a)achieve more homogeneous compliance with ESA rules;

(b)continue efforts to improve the accuracy of assessments;

(c)take steps to ensure that national accounts give a more complete picture of economic activity.

1.97. Presented in this way, the Commission's conclusions do not make it possible to form a clear opinion of the degree of reliability of the data currently supplied by the Member States. Indeed, despite the degree of comparability achieved, which is regarded as reasonable, improvements are deemed necessary but no benchmark is given making it possible to discern what level has been achieved and what progress still needs to be made. Moreover, the representativity criterion for GNP, which is explicitly stipulated by the Directive and is an essential safeguard against the risk of distortion, has not been looked at specifically.

Assessment

1.98. Although the ESA statistical frame of reference has been well defined, the Member States' systems of national accounts, on the basis of which the GNP aggregates are calculated, have not been standardized. There are important differences with regard to the sources used, how recent they are, the calculation methods employed and the assessment of certain aggregates.

1.99. At the same time, certain Member States (Den- mark, Greece, Luxembourg and Portugal) have decided to carry out an extensive revision of their statistical base. This has not yet been completed and will doubtless lead to significant amendments.

1.100. In this context, neither the existing control mechanisms nor the progress that they have achieved suggest that there will be a speedy improvement in the situation. The GNP Committee has a considerable workload; it does not plan to examine rectifications to account for the 'black` economy until 1994. As for the national audit bodies, they do not examine statistical and macroeconomic data.

1.101. It would therefore seem to be rather unrealistic to think that a pronouncement can be made, with the necessary rigour, on the reliability and comparability of the GNP aggregates that the Member States supply to the Commission. As the margin of error is difficult to estimate, it is possible to obtain an idea of the variations that occur by looking at the GNP revisions submitted by the Member States. For the financial year 1989, for example, the disparities between the initial data and the last revisions available vary from P1,6 % (United Kingdom) to + 2,4 % (Netherlands). These variations affect the total amount of GNP and VAT own resources recovered by the Community and, above all, the allocation of the burden of these own resources among the Member States.

1.102. The points raised throughout this analysis might give the impression that, at the present stage, the GNP tool is no more than an index system that indicates, with some degree of probability, the capacity of the Member States to contribute towards financing the needs of the Community. Of course, it is not a base that is as accurate and verifiable as the basis of assessment of a tax. Besides, national accounts were not designed to satisfy fiscal needs.

1.103. However, even though the GNP figure that it produces has numerous methodological flaws, the shortcomings, by virtue of the objectives pursued at the macroeconomic level, do not necessarily mean that the figure arrived at is lower than the real one.

Conclusion

1.104. In view of the importance of the GNP in determining the Member States' contributions fairly, steps need to be taken to ensure that this tool is improved in terms of its most important aspects in such a way as to bring it as close to reality as possible. The progress achieved in this direction during recent years seems to indicate that the Commission has not given sufficient attention to the fundamental role that has been entrusted to it in the field in question.

TRADITIONAL OWN RESOURCES

Simplified customs clearance procedures

Objectives and principles of the scheme

1.105. The purpose of the 'simplified` procedures is to make the clearance of goods easier for importers who carry out a continuous flow of operations. These procedures allow importers to submit global summary declarations covering several import operations rather than having to submit declarations for one operation at a time.

1.106. The conditions for access to the scheme are not particularly restrictive. They relate mainly to the customs authorities' ability to carry out their checks to the full, in particular on the basis of the accounts of the undertakings involved. Only occasional traders or those who have previously committed offences are excluded. The amounts involved are significant. In the Netherlands, they make up 50 % of collected duties, in Germany 40 %, in Belgium 29 %, in France 25 % and in the United Kingdom 11 %. Greece and Italy do not apply the procedures in question.

The implementation of the scheme

1.107. Germany and France take rather a liberal attitude towards issuing authorizations; in particular, they may be granted to shipping firms and customs agents. The approaches taken by the other Member States are more restrictive. The United Kingdom requires successful candidates both to have authorized consignee status and to have a computerized system of data management. In Spain, all the goods have to have been shipped by the same exporter from the same country of origin. In general, because of the need to compare partial and global declarations, simplified procedures, despite their name, make for rather complex management and are also time consuming.

1.108. Even where the accounting and control obligations specified in the authorizations granted to traders turn out to be sufficiently restrictive, they are not always strictly enforced. In Germany, for example, the usual completeness checks were not carried out at all and the ex post facto documentary checks were carried out only after long delays. In Denmark, there is no real exploitation of risk analysis with regard to the value of goods. In the Netherlands and in France, the system of automatic computerized checks has not been adapted to the case of global declarations. Moreover, despite the fact that they would be well-suited to this end, computerized clearance systems generally do not cover simplified procedures.

Conclusion

1.109. In order to ensure equal access to the simplified procedures, the practical procedures for granting access should be standardized at European level by abolishing certain rather unjustified national restrictions. Computer technology should be exploited as a means of improving customs checks. Finally, physical checks, on whose frequency, in principle, the risk of fraud depends, should be adapted to the particular case of these procedures which, it should be remembered, often involve the direct delivery of goods to the premises of the undertakings involved in the scheme.

The customs value of perishable goods

Objectives and principles of the scheme

1.110. The general principle of customs value as laid down under the GATT is that goods must be declared at their transaction value. However, a special scheme has had to be introduced with regard to perishable fruit and vegetables imported 'on consignment` (i.e. without a fixed sales price). This scheme is optional for importers. For this purpose, Commission Regulation (EEC) No 1577/81 ()

of 12 June 1981 set up a procedure for establishing standard average values free at Community frontier.

1.111. In the Common Customs Tariff, several of the products in question are taxed at duty rates of between 18 % and 25 %, which are among the highest in the Community. The total amount of duties collected can be estimated at around 354 Mio ECU. Commodities originating from the Maghreb (Algeria, Morocco, Tunisia) and Mashreq (Egypt, Jordan, Libya, Syria) countries, which are not dutiable, are outside the system as are Spanish and Portuguese fruit and vegetables, which were integrated into the single market as from 1 January 1993.

Establishing values and the application of the scheme

1.112. Standard customs values are established once a fortnight for 64 products on the basis of the average unit prices of 19 marketing centres in the Community. The relevant information is collected by the national authorities on the basis of market price lists, auction prices or the prices of certain large wholesalers. As the list of commodities involved has become progressively longer (from 40 to 64 articles), a choice should be made between restricting the system only to widely sold products or to extending it to a wide variety of different ones.

1.113. In the Hamburg free zone, a local agreement allows a fruit-importers association to benefit from the advance fixing of standard values whilst at the same time being able to use current values instead where these have gone down in the meantime.

The optional nature of the scheme

1.114. Pursuant to Commission Regulation (EEC) No 1577/81, the standard value scheme is optional. However, once the importers have made their choice, they are required to comply with a minimum validity period of one calendar year in order to limit their possibility of exploiting varying price levels. In fact, importers who go through an agent or have more than one firm can easily get round this measure. Agents can clear goods using standard or transaction values as they feel fit. In order to avoid this situation, there needs to be stricter observance of the principle whereby the scheme is authorized only in cases where it is necessary, i.e. for imports 'on consignment`, where there is no declared transaction value at the time of importation.

Conclusion

1.115. Current procedures for establishing standard values, upon which the scheme is based, do not make it possible to establish really representative prices for import transactions. In order to achieve this, the list of marketing centres used should be kept up to date and the information gathered should be weighted in terms of the volume of goods imported. It would also be preferable to restrict the list of eligible products to commodities for which there is a sufficiently large flow of trade.

1.116. However, taking account of the changes in the conditions governing the taxation of fruit and vegetable imports into the Community, due in particular to the effects of the preferential agreements currently in force, it would be useful to reconsider whether these procedures ought not to be limited to a number of special cases, such as sales 'on consignment`, or even whether the scheme should be discontinued, so as to prevent importers from having a de facto possibility of choosing which value to declare.

Reduced levies for the importation of cattle

Objectives and principles of the scheme

1.117. The importing of young bovine animals, subject to reduced levies, originating in Hungary, Poland, Yugoslavia (until 15 November 1991) and Czechoslovakia (from 1 January 1992) enabled a quota of 198 000 and 214 500 head of cattle to be imported in 1991 and 1992 respectively. These quotas went mainly to Italy and Greece (194 220 head per year), where the Court's audit was carried out.

1.118. The reduction in the levy was 65 % or 75 % according to the weight and origin of the animals. The latter had to be fattened for a period of at least 120 days after import, otherwise an amount equivalent to the reduction granted would be recovered. The total of the amounts in question can be estimated at 53,5 Mio ECU per year.

1.119. The procedure provided for in Commission Regulation (EEC) No 612/77 of 24 March 1977 ()

requires importers to comply with various formalities. They must, for example, obtain import licences, supply the names of the places where the animals are to be fattened, fix marks on the animals and supply proof of having complied with their commitments. Finally, 10 % of the quota has to be reserved for traders who are new to the market.

Implementation of the scheme

1.120. In Greece, the one-month deadline for supplying information about the place where the animals were to be fattened was not enforced, nor was the requirement that the animals should bear the importers' identification marks.

1.121. In Italy, the proof of compliance with the condition that the animals be fattened and not slaughtered for a period of 120 days after being imported took the form of certificates issued by the local authorities, which each adopt their own procedures. The lack of more exact instructions may put compliance with the eligibility conditions in jeopardy. In Greece, three cases were found in which guarantees had been released without the required proof being submitted. In neither Italy nor Greece were guarantees or parts of them forfeited because the requirements laid down in the regulations had not been complied with.

1.122. Finally, the quality of the information forwarded by Italy and Greece, with regard to the number and origin of the animals imported for each period, did not enable the Commission to manage the quotas properly.

The calculation of import levies

1.123. Levies are calculated on the basis of the weight of the goods. In Italy, at the customs office visited, a weighing report was issued for each animal. However, the weight per animal was rounded off. In Greece, at the customs offices visited, the animals were weighed in groups rather than individually.

Justification of the scheme

1.124. Schemes of this nature would appear to have little justification in view of the Community's public finances. Livestock requirements as regards young bovine animals are more than satisfied by Community supplies, as there is a surplus of 600 000 head. Reduced-levy imports amounting to one third of this surplus not only mean a decrease of some 53,5 Mio ECU in the own resources but also cause deferred supplementary expenditure, for example, for export refunds for live cattle (a total of 122 Mio ECU in 1992).

Conclusion

1.125. The cumbersome procedures that were set up to manage the importing of the quotas in question were poorly complied with, without either national or Community control systems detecting these shortcomings. No supplementary control systems, based, for example, on the accounts of the undertakings concerned, were set up. The management and control systems of these specific schemes could usefully be reviewed.

Imports of cattle under Community transit arrangements

1.126. A fraudulent trade in bovine animals and sheep originating in Poland was discovered in Germany in December 1990. Instead of paying the levies due at the frontier, the traders placed the goods under the Community transit procedure, whereby importers are allowed to pay the import duties after transportation, subject to these duties being covered by a bank guarantee. In fact, the guarantee required was lower than the amount of duty payable, which made it less expensive to leave the transit papers uncleared than to pay the duties in question. Specific checks were made at national level by the German authorities.

1.127. The Commission looked at this trade in 1991. Its reports contain 800 cases of non-clearance and the own resources at stake are estimated at about 15 Mio ECU. In December 1991 it sent a telex to the Member States suggesting that a comprehensive guarantee of at least 100 000 ECU should be required (50 000 ECU in certain cases). Commission Regulation (EEC) No 2560/92 of 2 September 1992 ()

made this measure compulsory. Thus, it took nearly two years, during which the same trade was able to grow in the other Member States, for an essential Regulation to be produced.

1.128. With regard to trade with EFTA countries, identical provisions were adopted in October 1992 and then replaced, as from 1 January 1993, by the old rules: i.e. the minimum level of guarantee is no longer fixed at 100 000 ECU. Transit operations carried out in EFTA countries are still subject to the risks that enabled the fraudulent trade described above to develop.

FINES AND PENALTIES

1.129. The Court examined the penalties imposed by the Commission on undertakings that contravene the rules on free competition ()

. In 1992, 34,53 Mio ECU were collected and 258,84 Mio ECU held over as the result of Court cases (19 cases involving 105 undertakings). Since 1985, the recovery rate for fines has been 11,7 %.

1.130. The situation observed previously by the Court has hardly changed ()

. New delays of up to three months were observed in the notification of decisions and inconsistencies were found between decisions and notifications. In one case, the Commission favoured some debtors by spreading out their payment terms over four years and by granting interest rates for late payments of 8 % rather than the legal rate of 13,75 %. Delays were observed of up to 17 months for the issuing of recovery orders, or orders reducing or cancelling amounts outstanding. Finally, interest on late payments is always entered under the same Article of the budget as the principal. The Commission should therefore be more rigorous in complying with its own internal rules and in its management of fines imposed in the field of free competition.

1.131. In another case, on 27 February 1992 ()

the Court of First Instance ruled that the decision imposing fines totalling 23,5 Mio ECU was cancelled. Some of these fines had been paid beforehand and entered as budgetary revenue by the Commission. In order to refund them, the authorizing officer, on 9 October 1992, eight months after the Court's decision, drew up three payment orders for 7,9 Mio ECU, including 1,9 Mio ECU of interest on arrears that was granted even though this is not provided for in the regulations. As no budgetary funds were available, these payment orders were charged, outside the budget, against liquid assets. This procedure is irregular pursuant to the provisions of Articles 1 and 5 of the Financial Regulation and ought to have been refused by the Financial Controller (see paragraph 13.34 of this report). Moreover, the Commission was not able to regularize the situation because its successive proposals for inclusion in the budget did not produce successful results either at the Council on 15 December 1992 in the context of a supplementary and amending budget or at the Parliament on 25 January 1993 in the context of a transfer of appropriations. The Court therefore asks the Commission to indicate when this situation is likely to be regularized.>REFERENCE TO A FILM>

CHAPTER 2 (*) The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) - Management and budgetary control

>TABLE>

(*) The Commission's replies are on page 270

BUDGETARY ASPECTS

Evolution of the budget

2.1. Total appropriations made available for subsection B1 amounted initially to 36 022 Mio ECU. An amount of 35 022 Mio ECU concerned operational expenditure under titles B1-1 to B1-4 and 1 000 Mio ECU were entered as the monetary reserve under title B1-5. As a result of amending and supplementary budgets No 2 and 3 of 1992 and transfers to and from other sub-sections of the general budget final appropriations for the operational expenditure were much lower and amounted to 32 023,5 Mio ECU.

2.2. Against the initial budget the most important modifications were made in cereals (B1-10) -870 Mio ECU; wine (B1-16) -635 Mio ECU and milk (B1-20) -1603 Mio ECU. Financial information on the implementation of the EAGGF Guarantee Fund is presented in Tables 2.1 to 2.4.

Accounting

2.3. European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) payments to Member States in the context of monthly advances are first registered in the computer system of the Commission's EAGGF directorate. The payment files are transferred to the Commission's financial controller for his approval after which the accounting officer charges the amounts to the accounts in the central accounting system of the Commission.

2.4. Due to a computer problem the approval of the financial controller and the booking to the accounts of the Member States' declarations for August, September and October 1992 were delayed considerably. Only at the end of January 1993 were they finally executed after the Court had contacted the Commission services because of the non-availability of the information in the accounts.

Carry-overs

2.5. From 1991 to 1992 the Commission made non-automatic carry-overs under Article 7(1) (a) of the Financial Regulation of 166,0 Mio ECU in order to finance food aid for East European countries and the former Soviet Union (see paragraphs 2.71 to 2.109 below). Other carry-overs under Article 7(1) (b) of the Financial Regulation from 1991 to 1992 amounted to 24,1 Mio ECU of which 11,2 Mio ECU were finally spent.

2.6. At the end of the 1992 budget year the Commission carried over 50,7 Mio ECU under Article 7(1) (b) of the Financial Regulation. These carry-overs principally concern headings B1-1221 (schemes related to consumption of olive oil) 11,8 Mio ECU; B1-1890 (food aid for Eastern Europe) 17,3 Mio ECU and B1-3600 (measures to combat fraud) 15,9 Mio ECU. As in previous years the Commission also made non-automatic carry-overs under Article 7(1) (a) of the Financial Regulation totalling 175,5 Mio ECU for emergency aid to the countries of Central and Eastern Europe.>TABLE POSITION>

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Public storage

2.7. The total cost of public storage (technical costs, financial costs, gains and losses on sales, depreciation) in 1992 was 4 500 Mio ECU, which is slightly lower than in 1991 (4 877 Mio ECU). Of the 1992 total, depreciation for cereals and beefmeat was 2 115 Mio ECU and 1 747 Mio ECU respectively.

2.8. As Table 2.5. shows, the total value of the stocks at 30 September 1992 remained the same as in the previous year. Stocks of cereals increased by some 400 Mio ECU, whereas milk product stocks decreased by some 500 Mio ECU. The increase in cereals stock was due to a combination of high production in Member States and falling exports to Eastern Europe, where no funds were available to finance the purchase of cereals.

2.9. Stocks are valued by the Commission at estimated world market prices. In this context, for milk products, the price estimates are based on GATT minimum prices. For beef meat the estimates are based on prices realized on the world market for Community exports. The estimates for the cereals are based on information from the Chicago Exchange, the International Wheat Council and experts in cereals and traders.

2.10. In the course of its audit the Court asked to see the Commission's records of how the cereals prices were estimated. The Commission was unable to produce any.>TABLE>

2.11. Comparison of actual prices for milk products and cereals with the estimates for the years 1991, 1992 and 1993 revealed that the latter are consistently lower. For 1992 the differences varied between 20 % and 40 %. As these estimates are used for establishing the budget, this implies over-provision of budgetary appropriations. Furthermore it may generate negative expenditure.

Budgetary discipline

2.12. In Council Decision 88/377/EEC of 24 June 1988 ()

concerning budgetary discipline, annual limits known as 'guidelines` for EAGGF expenditure were fixed. The guideline for 1992 was 35 039 Mio ECU. Against this background total commitments amounted to 31 118,3 Mio ECU which is 89 % of the maximum amount. By including new commitments made on non-automatic carry-overs from 1991 to 1992 the total commitments amounted to 31 275,7 Mio ECU.

2.13. The favourable outturn in 1992 was due to lower than estimated expenditure in the cereals, wine, milk and beef meat sectors. In regard to cereals, butter, beef and pork meat from the former German Democratic Republic, a reimbursement of 307 Mio ECU from Germany for exports, which was not properly chargeable to EAGGF-Guarantee but had been prefinanced by the Commission, contributed to the lower level of expenditure.

Expenditure forecasting

2.14. The Court has commented in previous annual reports that the monitoring of the execution of the EAGGF-Guarantee section of the budget cannot function adequately as long as Member States' forecasts are not reliable. During 1991/92 the Commission made a major effort to improve the quality of Member States' forecasts through a seminar for the Member States and by computerizing part of the information flow between the Commission and the Member States. Although some of the new mechanisms will only start to have an effect on forecasts in 1993, some Member States have already managed to improve the quality of their 1992 forecasts. Graph 2.1 shows that the overall three months' forecasts in 1992 tended to come in line with the actual expenditure.

2.15. At the level of the specific markets, however, the differences between the three-month forecasts and outturn were still substantial. For two categories of products, cereals and oil and fat, for which these forecasts were mostly between 400 Mio ECU and 600 Mio ECU, actual expenditure often differed by some 150 Mio ECU.

2.16. Table 2.6 illustrates the substantial differences which can exist between Member States in any one period in regard to the reliability of their forecasts.

Clearance of accounts

2.17. The clearance of accounts decision for the EAGGF-Guarantee year 1989 was taken in September 1992 ()

. The amount to be reimbursed to the Commission by all Member States totalled 964 Mio ECU. Out of this amount 536 Mio ECU concerned corrections for the milk superlevy in Italy and 168 Mio ECU in Spain.

2.18. Both countries had not fulfilled their obligation to implement the milk quota system. Italy had not assigned individual quotas to farmers or dairies nor had it established figures for milk production per farmer or per dairy. Therefore, it was not in a position to collect the superlevy. In regard to Spain, although it has assigned quotas to producers, the collection of the levy was not enforced.

2.19. It was agreed between the Member States concerned and the Commission services that these countries would make their reimbursements for 1989 in three instalments to be paid in January, February and March 1993. The Commission should ensure prompt payment of all outstanding amounts. However, only the first instalment (53,2 Mio ECU for Spain and 93,2 Mio ECU for Italy) was paid to the Commission in early 1993 and since then no further repayment has been registered. For the EAGGF-year 1993/94 the Council decided to increase the milk quotas for Spain, Italy and Greece by Council Regulation (EEC) 1560/93 of 14 June 1993 ()

. In view of the Council's decision the Commission decided on 28 July 1993 to reduce considerably the amounts to be paid by the Member States concerned in respect of 1989 by means of a modification ()

of the 1989 clearance decision which involved the overruling by the Commission on 27 September 1993 of the Financial Controller's refusal to approve the reduction for Italy. Clearly the Council regulation cannot be the basis for adjusting the amounts for previous years. The legality of the modification and its impact will therefore be carefully examined by the Court.

Nomenclature

2.20. EAGGF-Guarantee expenditure is based on regulations directly applicable in the Member States and there is a legal obligation on the Community to finance it. It is against this background that the budget nomenclature includes a number of 'pour memoire` (p.m., i.e. token entries) items in order to provide the necessary flexibility in the case of unforeseen expenditure. These items cover:

(a)possible payments for existing schemes for which an assessment of expected expenditure is not possible, for instance, in the case of old schemes which are being phased out;

(b)new regulations proposed by the Commission not yet approved by the Council but which are likely to be approved during the budgetary year;

(c)new policies which are being formulated but which have not yet been the subject of a formal draft regulation.

2.21. In the 1992 budget there are 51 p.m. items in the EAGGF budgetary nomenclature but often only a poor or no explanation is given for the existence of the item. For 12 of the p.m. items there is no legal or other justification written into the budget and no explanation is given by the budgetary authority for the implementation of these items. This is not compatible with general budgetary rules.

2.22. An example of a non-acceptable use of a p.m. item occurred in 1991 and 1992. Under chapter B1-18 'other plant sectors or products`, article 189 'other`, the Commission booked various expenditure for food aid for East European countries. Although these actions started in 1991 and will continue in 1993 there are no specific budget headings established for this action. The current practice can hardly be excused by claiming urgency for the measures because the same type of action is being carried out for the third consecutive year. The Court notes that, in the Preliminary Draft Budget for 1993, the Commission had proposed a distinct chapter for food aid, but that this proposal was rejected by the budgetary authority.

2.23. Certain budget items include 'negative` and 'positive` operations, for example the profits and losses on public storage for which the Member States declare the net value only. This leads to a lack of budgetary transparency. For such cases separate budget lines should be used and Member States should be instructed to declare income and expenditure separately.

2.24. Some budget items are mixed items under which the Commission books traditional 'Guarantee` expenditure as well as 'direct` expenditure. These budget lines are thus used for payments executed by the Member States during the period 16 October of the year 'n-1` to 15 October of the year 'n`, as well as for the expenditure directly executed by the Commission from January to 31 December of the year 'n`. Such a situation, by which the same budget line is used for recording expenditure, executed in different periods under different management systems, leads to a lack of budgetary transparency and complicates the management of the budget.

Conclusion

2.25. The budget nomenclature for EAGGF-Guarantee expenditure requires urgent revision as follows:

(a)p.m. items should be limited to cases where either there is an existing legal basis or where it is most likely that a new regulation will come into force in the budgetary year;

(b)there should be no offset between income and expenditure;

(c)there should be separate budget lines for expenditure through Member States' paying agencies and direct expenditure by the Commission;

(d)for all new actions, not covered by existing headings, specific budget headings should be introduced, accompanied by adequate justifications.

NATIONAL CONTROLS OVER EAGGF-GUARANTEE EXPENDITURE

Introduction

2.26. The Court's programme of financial audit in Member States, which began in 1989, was continued in 1992 in France and Ireland. France accounted for 6 952 Mio ECU and Ireland for 1 452 Mio ECU, corresponding to 22 % and 4 % of all guarantee expenditure for 1992. The aim of the audit is to test the accuracy of the national declarations and to evaluate the national control systems over guarantee expenditure. The programme will be finished in 1993 with corresponding audits in Germany and Denmark.

2.27. The Commission has taken action to reorganize the clearance procedure taking into account the Court's previous audit work at paying agencies. The central feature of the new procedure is the reliance to be placed on controls and audits to be executed at Member State level. Consequently the organization and functioning of a number of paying agencies must be improved considerably.

Controls over guarantee expenditure in France

The paying agencies

2.28. In France, nine paying agencies, structured by market, are responsible for the administration of EAGGF-Guarantee expenditure and are coordinated by the 'Agence centrale des organismes d'intervention dans le secteur agricole` (ACOFA). Their status is that of public bodies, with representatives of the sectors concerned on the management board. Table 2.7 shows the structure of the existing paying agencies in France.>TABLE>

2.29. The Court audited five paying agencies which administer 85 % of all EAGGF guarantee expen- diture in France which were the 'Office national interprofessionnel des viandes de l'élevage et de l'aviculture` (OFIVAL), the 'Office national interprofessionnel des céréales` (ONIC), the 'Office national interprofessionnel du lait et des produits laitiers` (Onilait), the 'Société interprofessionnelle des oléagineux, protéagineux et cultures textiles` (SIDO) and the 'Office national interprofessionnel des vins` (Onivins). All of them have delegated certain expenditures to other organizations which act as sub-paying agencies. These account for 26 % of expenditure of the five organizations audited.

2.30. As the EAGGF-Guarantee expenditure is outside the French national budgetary control procedures, there is no systematic control of paying agencies by an external audit body. While in 1992 the French Court of Auditors completed an audit of the paying agencies, this was the first national audit carried out in France on EAGGF-Guarantee expenditure.

Organization and follow-up of control activities

2.31. The French system is relatively complex because of the distribution of functions, which may involve up to four or five different organizations or administrative departments for a single measure. The reason for this diversification in structure is not always apparent. The livestock premiums are a case in point, with the Treasury also acting as a paying agency for EAGGF-Guarantee. Two of the stock premiums are paid by Ofival, and the third, the suckler cow premium, is paid directly by the Treasury. A uniform system of administration would help to improve the follow-up of all the measures.

2.32. On-the-spot checks of aid applications are carried out in various ways, depending on the payment agencies and Community measures concerned, namely:

(a)by the control departments of the paying agencies;

(b)by regional departments of the paying agencies;

(c)by organizations to which certain functions have been delegated;

(d)by the 'Directions départementales de l'agriculture et de la forêt` (DDAF), which are answerable to the Ministry of Agriculture;

(e)by officials of the Ministry for the Budget (customs, Directorate General for Taxation, Directorate General for Competition, Consumption and Fraud Prevention).

2.33. The absence of standard control units at local level, which is partly due to the diversity of the responsible organizations, makes it difficult to form an overall opinion on the efficiency of controls. The weaknesses and errors discovered during the audit of the five organizations illustrate that the complexity of the French system has attendant risks for Community funds.

2.34. The distribution of butter to organizations concerned with the socially disadvantaged, which is administered by Onilait, is another interesting example. Both the Ministry of Agriculture and the municipal authorities are involved in following up the use of the butter supplied to welfare organizations by 'Société interprofessionnelle du lait et des produits laitiers` (Interlait). There is no coordinated system of scrutiny to check that the butter reaches its destination.

2.35. Onilait delegated to the 'Centre national pour l'aménagement des structures des exploitations agricoles` (Cnasea) the administration of the premium for abandonment of milk production. It is paid by Cnasea, primarily on the basis of a decision by staff of the local DDAF. Onilait does not, in fact, supervise Cnasea which, in turn, does not supervise the DDAF.

2.36. Furthermore at the DDAF at Rennes, one and the same official is responsible for examining aid applications, putting them forward for acceptance and then, at a later stage, deciding what controls should be carried out. This cumulation of functions is a risk to the security of the system. The on-the-spot controls by the DDAF should normally have taken place in the year in which production ceased, in 1986 or 1987, in accordance with the national instructions. In the area for which the DDAF Rennes is responsible they were not carried out until 1990. Out of a sample of 90 farmers, 83 were checked and the others were, apparently, absent when the auditor called. None of the organizations concerned took the initiative of completing the control programme.

2.37. ONIC's 'service d'appui et d'inspection` is responsible for coordinating and monitoring the audits which are to be carried out by the regional services. The service does not, however, have any information concerning the nature of the audits carried out (administrative controls, on-the-spot audits, further checks). There is no risk analysis and no overall knowledge of the possible shortcomings that are likely to occur in particular areas.

2.38. Seed aids are paid by the 'Groupement interprofessionnel de semences fourragères` (GNIS), under an agreement with ONIC. GNIS carries out controls through its regional offices, which are also responsible for seed certification. However, GNIS does not have any documentation regarding the global results of its controls.

2.39. In the case of olive oil, SIDO has a regional department in Marseille, which, in November 1991, discovered an irregularity in purchases of olive oil within the framework of consumption aid. The recipient was informed immediately, to enable him to determine the causes of the errors. However, the regional department did not pass on this information to the auditor who carried out his annual audit on the recipient's premises one month later. The auditor did not detect the error, although he did check all the invoices for purchases of oil by the recipient undertaking. SIDO did not take appropriate action when it found the error in question and, almost two years after the first error was committed, a reimbursement to EAGGF-Guarantee of some 0,23 Mio ECU is still outstanding. Furthermore SIDO did not add interest to the amount to be reimbursed by the recipient and no consideration was given to withdrawing the recipient's approval ()

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2.40. Ofival assigned to 'Société interprofessionnelle du bétail et des viandes` (SIBEV) responsibility for carrying out intervention in the form of public storage and SIBEV also provides the data for the public storage costs declaration. There are doubts as to the reliability of that data. There is, in fact, a discrepancy between the figures used for the end-of-March declaration of public storage costs (carcases, beef and veal) and the declaration dated 15 October 1992, which was for the same period (October 1991 to February 1992). Ofival declared for this period, in March 1992, 88 868,5 tonnes entered and in October 1992, 84 521,3 tonnes. Similarly for the quantities outwards, for the same period, 55 882,4 tonnes were declared at the end of March and 62 490,6 tonnes at 30 September 1992.

2.41. In the context of private storage for pigmeat, it was noted that there are very few surprise checks; Ofival's administrative conditions do not specify a minimum rate of surprise checks. Ofival's central office does not have a record of any such checks. On the other hand officials do attend stock counts systematically, but the value of the checks is limited, because they are carried out only at the storekeeper's request.

Specific observations concerning the measures examined

Export refunds

2.42. Most of the Onivins controls concern cross-checks to establish that the wine for which authorization is requested conforms to the analysis results stated by the exporter concerned, but the latter always choses the samples himself.

2.43. Checks on exporters' premises are very rare. Onivins' checks are not made on the batches under Customs' control ready for export: they take place before the goods go to Customs. Consequently there is no assurance that the batches checked are the batches actually exported. Furthermore, Onivins is not informed of the results of checks carried out by Customs. This lack of cooperation is detrimental to the administration of export refunds.

2.44. File processing needs to be improved. At the time of the Court's audit one and same person was responsible for examining files, calculating the aid due and issuing the request for authorization without any cross-check by another person. Furthermore, the date and signature of this official were nowhere on these files.

Premium for the abandonment of vineyards

2.45. As there are no precise rules in either the Community ()

or the national regulations, the Onivins staff use varying methods to evaluate the yield of vineyards which are to be grubbed up. The Court noted significant differences in the yields that were adopted, depending on the calculation methods used by the Onivins experts. Onivins should adhere to a single calculation method because the amount of aid is determined in steps and a slight over-valuation of the yield can result in a significantly higher level of aid ()

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2.46. The following system weaknesses underline the need for improved controls:

(a)Onivins' auditors do not have up-to-date maps by which to check the plots concerned. The maps used often date from the 1950s and do not always show the true situation;

(b)on the maps used, there is no official indication of the land area and ownership as a consequence of which t