ANNUAL REPORT concerning the financial year 1995 (96/C 340/01)

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

Bernhard FRIEDMANN (President)

John WIGGINS

Giorgio CLEMENTE

Barry DESMOND

Patrick EVERARD

Armindo de Jesus de SOUSA RIBEIRO

Antoni CASTELLS

Jan O. KARLSSON

Hubert WEBER

Aunus Olavi SALMI

Joergen MOHR

Kalliopi NIKOLAOU

François COLLING

Maarten B. ENGWIRDA

Jean-François BERNICOT

TABLE OF CONTENTS

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Introduction 5

Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 23

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Budgetary management and direct expenditure 58

Chapter 3 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Organization and management of agricultural markets 75

Chapter 4 - Common policy on fisheries and the sea 102

Chapter 5 - Regional sector 123

Chapter 6 - Social sector 149

Chapter 7 - The European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) 187

Chapter 8 - Financial instruments and banking activities 204

Chapter 9 - Research and technological development 214

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 235

Chapter 11 - Cooperation with developing and third countries (except Central and Eastern Europe) 264

Chapter 12 - European Development Funds 290

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND BODIES OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 334

Chapter 14 - Court of Auditors 348

Chapter 15 - The Economic and Social Committee, the Committee of the Regions and their common organizational structure 349

ANNEXES

Annex I - Reports and opinions adopted by the Court of Auditors during the last five years 353

Annex II - Annex in respect of the abbreviations and symbols used in the report and background information on the general budget 363

THE COMMISSION'S REPLIES

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Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 45

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Budgetary management and direct expenditure 70

Chapter 3 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Organization and management of agricultural markets 95

Chapter 4 - Common policy on fisheries and the sea 117

Chapter 5 - Regional sector 141

Chapter 6 - Social sector 169

Chapter 7 - The European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) 199

Chapter 8 - Financial instruments and banking activities 212

Chapter 9 - Research and technological development 228

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 255

Chapter 11 - Cooperation with developing and third countries (except Central and Eastern Europe) 283

Chapter 12 - European Development Funds 313

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND BODIES OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 342

Chapter 15 - Economic and Social Committee, Committee of the Regions and their common organizational structure 352

SUMMARY OF DIAGRAMS (D)

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D I. General budget 1995 - estimated revenue 10

D II. General budget 1995 - estimated expenditure - appropriations for payment 11

D III. General budget 1995 - appropriations for commitment 12

D IV. Appropriations for commitment available in 1995 and their utilization, by sector and institution 13

D V. Appropriations for payment available in 1995 and their utilization, by sector and by institution 14

D VI. Financial perspective: breakdown of appropriations for commitment available from the 1995 budget and implementation; total appropriations for payment available from the 1995 budget and implementation 15

D VIIA. The consolidated revenue and expenditure account and the balance calculated for the 1995 financial year 16

D VII B. Summary of the consolidated balance sheet of the European Union as at 31 December 1995 17

D VIII. Payments made in 1995, by sector 18

D IX. Payments made in 1995, by Member State 19

D X. Evolution and utilization of appropriations for payment for the period 1991 to 1995, by sector 20

D XI. Utilization rates of appropriations for payment from 1991 to 1995, by sector 21

D XII. Annual payments during the period 1991-95 by sector and by institution 22

D XIII. Estimated and actual revenue in 1995 54

D XIV. Estimated and actual own resources in 1995, by Member State 55

D XV. Actual own resources in 1995 56

D XVI. Actual own resources, by Member State (1991-95) 57

D XVII. EAGGF-Guarantee - payments made in 1995, by market 73

D XVIII. EAGGF-Guarantee - payments made in 1995, by market and by Member State 74

D XIX. The Structural Funds: commitments entered into and payments made in 1995, by Member State 185

D XX. Structural aid - commitments entered into and payments made in 1995, by Member State and by objective 186

D XXI. Aid to the countries of Central and Eastern Europe and to the Newly Independent States of the former Soviet Union: PHARE and TACIS programmes 263

D XXII. Basic information on the European Development Funds (EDFs) (position as at 31 December 1995) 329

D XXIII. The sixth EDF - allocation, financing and distribution of aid, overall utilization 330

D XXIV. The seventh EDF - allocation, financing and distribution of aid, overall utilization 331

D XXV. The sixth and seventh EDFs - utilization of aid by economic sector (situation at 31 December 1995) 332

D XXVI. The seven EDFs - evolution of annual payments (1960-95) 333

INTRODUCTION

0.0. CONTENTS Paragraph reference

Accounting and financial management 0.1

Member States' management of Community funds 0.2 - 0.5

Member States and the Commission acting together 0.6 - 0.11

The Commission's own management 0.12 - 0.27

Improvements in financial management 0.28 - 0.32

ACCOUNTING AND FINANCIAL MANAGEMENT

0.1. Improving financial management in particular cases may depend largely or exclusively on action to be taken by the Commission alone, by one or more Member States or, quite frequently, on combined action by the Commission and the Member States working together to find appropriate solutions. The Annual Report and the statement of assurance for the financial year 1995 provide numerous illustrations of unsatisfactory accounting and financial management, in many cases identical, or closely similar, to those reported in previous years. Although the Court, in the introduction to its 1994 Annual Report, welcomed the launch of the Commission's new financial management improvement programme, entitled 'Sound and efficient management (SEM 2000)`, the Court also acknowledged that rapid results could not be expected.

MEMBER STATES' MANAGEMENT OF COMMUNITY FUNDS

0.2. With regard to revenue, Chapter 1 mentions failure to collect several millions of ecus of own resources, because of weak application of legislation relating to inward processing. Considerable variations in methods and frequency of customs checks and incorrect application of the Community external transit procedure were also observed. With regard to VAT own resources, new risks arising from the abolition of tax frontiers necessitate close follow-up of management procedures, requiring appropriate national control methods and closer co-operation between Member State authorities.

0.3. Chapter 3, on the organization and management of agricultural markets, also draws attention to a Member State's failure to recover amounts owed to the Community, in this case export refunds of at least 16 Mio ECU. In the same chapter, follow-up of observations in the Court's Annual Reports for 1990 to 1992 revealed that, although both Council and Parliament had supported the Court's view that the olive cultivation register required urgent completion, this had still not been done in the main olive oil producing Member States four years later. For another essential control mechanism, the introduction of land registers for rice-growing areas, there was a similar lack of progress. In its special report in support of the statement of assurance for the financial year 1995 (), the Court concludes that, at the level of the Member States, the control procedures required by the regulations for each individual measure need to be implemented more rigorously. These controls should be considered as minimal requirements to secure an efficient and effective execution of the EAGGF budget. The effectiveness of administrative controls and physical inspections on the spot need to be increased. For hectare-based schemes, the proper implementation of a mandatory system of integrated controls is essential for the purposes of ensuring that fraudulent duplicate declarations are prevented or detected.

0.4. Despite advances of 50 % of the Community aid for investments for fishing surveillance (see Chapter 4), the implementation of annual investment programmes in several Member States was considerably delayed. Moreover, in the field of aid for investments in the processing and marketing of fisheries and aquaculture products, stricter analysis of projects and of the financial situation of beneficiaries could have prevented the financing of some failures.

0.5. Problems in Member State management of Structural Funds operations, mentioned in Chapter 6, include unreliable accounting systems for the Social Fund and lack of information about beneficiaries. These lead to delays in the flow of money, malfunctioning of monitoring committees, inadequate internal audit and unreliable expenditure certificates. Chapter 7 describes how the EAGGF-Guidance initiative, Leader, was introduced in different ways in different Member States, how cooperation and coordination between the Leader groups and national intermediary bodies varied greatly and how the considerable autonomy of the groups, together with their diverse interpretations of the basic concept, resulted in procedural failures. Ineligible expenditures were found and unreliable technical and financial information was supplied by groups.

MEMBER STATES AND THE COMMISSION ACTING TOGETHER

0.6. With regard to own resources, the system of reporting of Member States' write-off or non-recovery of debts to customs needs to be strengthened. The Commission and the Member States should also study the possibility of developing appropriate tools to measure the comparability and reliability of GNP figures. They should, in any case, continue their efforts to make national GNP statistics more reliable, comparable and accurate.

0.7. The failure of Member States and of the Commission to monitor and control the declaration of costs for Community co-financed schemes to combat irregularities and fraud in EAGGF-Guarantee has led to ineligible payments of 16,6 Mio ECU, while some of the actions financed had limited or unsatisfactory results.

0.8. Inconsistent treatment of the eligibility of particular costs for Community aid was again found, both in the common policy on fisheries and in the Social Fund. Regional Fund management is affected because the various criteria used to determine which areas are eligible for aid mean that more than 50 % of the Community's population may be covered by one or other objective. As a result, aid is widely scattered and it has become difficult to reconcile such aspects as the principle of concentration of aid, territorial enlargement, the effect of previous aid, continuity of projects and changes in needs, and to relate objective criteria to specific situations, particularly with inadequate statistics. Planned measures to improve regional statistics need to be implemented to provide a firm basis for policies and the assessment of results.

0.9. In its special report in support of the statement of assurance for the financial year 1995 (), the Court concludes that the high incidence of errors in the Structural Funds underlines the need for improved systems and controls within Member States, rigorous and strictly applied deadlines for the submission of final claims, timely clearance procedures by the Commission and complete and clearly drafted regulations covering the management of the funds. Particular attention should be paid to the certification procedure to ensure that declarations of eligible expenditure are correctly prepared and fully supported.

0.10. Community grants are often allocated to revenue-generating industrial projects. Greater caution is desirable in using grant aid for projects with a high, direct financial return. Loan finance is sometimes more appropriate, although grants might still be used where it appears investments would not be made without additional incentives.

0.11. New programmes of social expenditure do not have sufficiently clear and measurable objectives. Moreover, the audit of Community programmes for education and vocational training revealed that the launch of the new Leonardo and Socrates programmes had resulted in delays to and interruptions of their predecessors. To achieve coherence and complementarity of Community measures and prevent double funding of individual actions, coordination structures between and within the administrations concerned have to be improved.

THE COMMISSION'S OWN MANAGEMENT

0.12. The Commission's own management is criticized in most chapters of the report and, as might be expected, more frequently with regard to directly managed expenditure. Chapter 3 recognizes that the Commission acted swiftly to monitor the implementation of measures applied following an outbreak of swine fever in Belgium and Germany, but points out that it did not ensure that the conditions of implementation of veterinary and exceptional measures were clearly specified from the beginning in the texts of regulations. This failure increased the cost to the Community budget and meant that Member States were treated differently.

0.13. Chapter 4 notes that the Commission did not fix precise criteria for determining which Member States could benefit from the Community contribution to national expenditures on fishing surveillance nor for setting the level of aid. Equipment which was not exclusively used for monitoring fishing was awarded the maximum rate of grant. No evaluation of the cost-effectiveness of proposed investments was made, even for aeroplanes. Moreover, in the case of aerial surveillance, the Commission failed to take initiatives to improve the essential cooperation between Member States.

0.14. Under the PACTE and Recite programmes, described in Chapter 5, similar projects for exchange of experience between local and regional authorities are financed. Their management is entrusted to bodies whose administrative structures are not always geared to the proper implementation, monitoring and checking of projects.

0.15. The Commission urgently needs to introduce clear rules to govern the very widespread practice of sub-contracting of social fund operations. Measures to combat poverty and social exclusion did not have clearly defined objectives; overall cohesion was lacking and there was an absence of assessments for most such operations. The Commission does not have clear procedures for the allocation of grants and there is a lack of transparency. To strengthen the control system, a central unit for contract management, harmonized procedures and a separation of financial and project management are desirable.

0.16. The audit of aid for production and broadcasting of programmes in wide-screen format (16:9), within the framework of the action plan for the introduction of advanced television services in Europe (see Chapter 9), found that Community management was problematical. Neither financing mechanism could be consistently applied. Although the action plan has helped broadcasters and programme producers to become familiar with the format, it has had no discernable impact on sales of receivers.

0.17. The Court concluded that if the action plan were to be continued, aid for the production of television programmes ought to be simplified or even abandoned and, in the field of aid for broadcasting, more technical checks on broadcasters' facilities to ensure picture and sound quality would be desirable. As the market has so far been more interested in the quantity of services offered than in the wide-screen format, any further financial commitment should be decided only after detailed market research and clear definition of objectives.

0.18. Chapter 10 covers aid to Central and Eastern Europe, the newly independent States of the former Soviet Union and Mongolia. Many of the weaknesses noted result from inadequate management of human resources by the Commission, which urgently needs to better define and fully exercise its responsibilities as authorizing officer, to stop delegating to third parties a part of its public authority role, to clarify the role of external experts and in-house contract staff, and to inform the budgetary authorities of the means which it considers necessary for satisfactory execution of the programmes which it has to manage. Somewhat similar difficulties have resulted from the use of intermediary organizations for managing some structural operations (see paragraphs 0.14 and 0.15 above) and from the development aid management capacity problem which is mentioned in paragraph 0.21 below. A further example of the problems of delegation of the Commission's powers is mentioned in the Court's Special Report No 1/96 on the MED programmes ().

0.19. Although the Commission has started to overcome delays in establishing contracts, accounting commitments not yet covered by contracts at the end of 1995 were still 1 970 Mio ECU for PHARE and 644 Mio ECU for TACIS. The efficiency of TACIS operations is often hindered by the multiplicity of management levels which result in duplication of actions, confusion in the chain of command and lack of accountability.

0.20 Precipitate commitment of food and medical aid to Kyrgyzstan led to an inadequate distribution plan, difficulties is setting up counterpart funds and waste of resources. In both Poland and Kirghistan counterpart funds were used in ineligible or low priority sectors. Similar problems with the constitution, utilisation and follow-up of counterpart funds have frequently been reported by the Court, most recently in its annual reports for 1990 to 1994 and in special reports 1/91 (), 2/94 () and 2/95 (). Moreover, chapter 12 points out that although the Lomé Convention insists that the use of counterpart funds should pay particular attention to the most vulnerable social categories (the poor, the unemployed, women and children), in some countries significant amounts have been used to pay off the debts of public sector organisations. There are clearly a number of aspects of counterpart fund design and supervision that require the Commission's urgent attention.

0.21. Chapter 11 points out that outstanding commitments for cooperation with developing countries increased considerably in 1995 and that a high proportion of commitments for several key areas were made in December 1995. An imbalance is developing between the size and diversity of the programmes that the Commission has to implement and its capacity to implement them satisfactorily.

0.22. When Community aid contributes to a programme of actions co-financed by other donors and it is difficult - or even impossible - to distinguish separate components of the programme, the Commission should not restrict the use of Community funds by the beneficiary to specific parts of the programme. Examples of such excessive earmarking occurred in certain humanitarian aid actions and in financial assistance to the Palestine National Authority. Funding mechanisms and control and reporting requirements should, in cooperation with other donors, be adapted to the nature of the operations being financed.

0.23. Chapter 11 also draws attention to the need for the Commission to develop and consistently apply criteria for the treatment of interest earned on unused balances of advances paid to organizations within the framework of external actions. Previous eports of the Court, in particular the Special Report No 1/95 on the cohesion financial instrument, paragraph 3.17 (), and the Annual Report of the Court of Auditors concerning the financial year 1993, paragraphs 6.11 to 6.14, have shown that this observation applies, mutatis mutandis, to many Structural Fund operations and to other policy areas where advance payments are made by the Commission, either to intermediary organizations or to final beneficiaries.

0.24 Chapter 12 notes that the Commission's policy with regard to EDF support for structural adjustment has been carried out in accordance with the international financial institutions' evaluation of the specific situation of each beneficiary country and the role ascribed therein to the different suppliers of funds. The Commission accepts that there is only one structural adjustment programme for each beneficiary country under the conditions agreed with the international financial institutions. It nevertheless wishes to have some independent role in judging the progress of reforms and therefore introduces its own conditions for release of EDF support. The actual system is both too complex and too rigid. Two different kinds of conditions - basic and complementary - should be introduced, bearing in mind peculiarities of different countries.

0.25. The importance of the EDF contribution to structural adjustment has not been matched by the quality of follow-up of operations. Improvements must be sought both in the Commission's delegations and in beneficiary countries' administrations, which need institutional technical assistance support to help achieve the envisaged sectoral reforms. It has, however, to be recognized that the extent to which the Commission, with the other donors, can really influence the preparation, implementation and ex post evaluation of programmes in the target sectors is quite limited by considerations of the sovereignty of the ACP States.

0.26. Chapter 13 points out that the increase in the number and the development of decentralized Community organizations make it necessary for the Commission to give more attention to their activities, particularly with regard to a transparent presentation of budget appropriations, the strengthening of internal control and harmonization of management procedures. The Court also comments on weaknesses of the Commission's real estate policy and again suggests the creation of a multiannual investment budget. Moreover, the payment of taxes in the case of rented premises appears to be in contradiction with the agreements on tax exemption which govern the Commission's relation with Member States.

0.27. Chapter 11 (see paragraphs 11.68 to 11.72) raises the possibility of the Commission making wider use for control purposes of the work of other auditors. This suggestion also has potential for areas other than Community cooperation aid to developing and third countries, notably the Structural Funds. The practice of using the work of other auditors is already becoming established for EAGGF-Guarantee operations under Commission Regulation (EC) No 1663/95 of 7 July 1995 () which provides for the audit of Member States' annual accounts for EAGGF-Guarantee by independent national certifying bodies. All such initiatives are to be welcomed if they increase the real extent of the Commission's audit and control. Nevertheless, users of the work of other auditors must, according to generally accepted auditing standards (), satisfy themselves as to the auditors' independence and professional competence in the context of the audit concerned as well as the adequacy of the procedures used for that specific audit.

IMPROVEMENTS IN FINANCIAL MANAGEMENT

0.28. This report also mentions several cases, confirmed during the audit, where the Commission has either made progress towards necessary improvement of accounting and financial management or has undertaken steps, with Member State cooperation, to secure such improvements.

0.29. Following the Court's observations in Chapter 3 of its 1992 Annual Report, both Council and Parliament recognized that effective control measures were needed for the cotton market. After the Commission's examination confirmed widespread abuse, it introduced new regulations which should improve control arrangements from 1995/6. In its 1990 Annual Report the Court criticized the way in which compensation was paid to whisky distillers for their exports; a follow-up audit in 1995 noted improvements in the control of these subsidies.

0.30. Although there is still a high level of accounting commitments for PHARE and TACIS which are not yet covered by contracts at the end of 1995, the Commission has started to reduce the backlog. The Commission has also taken some initial steps to deal with the various weaknesses in managing its own fixed assets to which the Court has drawn attention (see Chapters 13 of the 1994 and 1995 Annual Reports). Furthermore, in the own resources chapter, the Court welcomes the improvements made to the Value added tax Information Exchange System.

0.31. Moreover, a number of questions regarding the eligibility of projects for Structural Fund support are being discussed by representatives of the Commission and of Member State administrations within the SEM 2000 framework, together with an examination of other possible ways of inciting national authorities to ensure both the effectiveness of Community structural aid and proper accounting for it at national level. The Court endorses the objectives of these discussions which offer some prospect of dealing with important and longstanding weaknesses. There is, however, a long way to go and considerable efforts are needed by both the Commission and the Member States.

0.32. Finally the Court would again like to emphasize that prevention of fraud and waste is much more cost-effective than detection followed by, often problematical, punishment and recovery. Administration and control arrangements and costs should always be considered when drafting legislation and when preparing specific programmes or actions. The periodic revision of agricultural market management and of Structural Fund legislation are major opportunities to improve accountability and the quality of financial management of Community operations at all levels.

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

CHAPTER 1 (*) Own resources

1.0. CONTENTS Paragraph reference

General introduction 1.1 - 1.3

Implementation of the budget 1.4

Traditional own resources 1.5 - 1.63

Management of definitively irrecoverable debts (write-offs) 1.5 - 1.16

Introduction 1.5 - 1.10

Management by the Commission of write-offs of which it has been notified by the Member States 1.11 - 1.12

Treatment of cases of suspension 1.13 - 1.14

Conclusion 1.15 - 1.16

Inward processing procedure 1.17 - 1.38

Definition 1.17

Evolution of the legal framework 1.18 - 1.19

Re-export and release for free circulation of products obtained under the inward processing suspension (IP/S) system 1.20 - 1.24

Miscellaneous observations 1.25 - 1.33

Incorrect application of the EEC-Turkey agreement 1.34 - 1.37

Conclusion 1.38

Customs warehouses 1.39 - 1.54

Introduction 1.39 - 1.40

Legal procedure 1.41

Stock records 1.42 - 1.44

Shortcomings of the customs checks 1.45 - 1.48

Irregular national re-export procedures 1.49

Incorrect application of the Community external transit procedure 1.50 - 1.52

Contradictory Community provisions governing taxation elements 1.53

Conclusion 1.54

Customs union agreements 1.55 - 1.63

Conclusion 1.63

VAT own resources 1.64 - 1.103

Introduction 1.64 - 1.67

The detection of violations of Community legislation 1.68 - 1.71

The transitional system for VAT on intra-Community transfers 1.72 - 1.103

The exchange of information on VAT numbers and the value of transfers 1.72 - 1.79

Interconnection between and limits on the utilization of sources of information 1.80 - 1.88

Changes in verification methods 1.89 - 1.91

VAT revenue 1.92 - 1.97

Conclusion 1.98 - 1.103

Gross national product 1.104 - 1.128

The need to measure the quality of the statistical GNP calculation 1.104 - 1.109

The concept of quality as applied to the statistical GNP 1.110 - 1.111

Measuring the comparability of the GNP 1.112 - 1.118

Measuring the reliability of the GNP 1.119 - 1.125

Conclusion 1.126 - 1.128

GENERAL INTRODUCTION

1.1. This chapter deals with all own resources. In the field of traditional own resources, the Court examined certain areas: the management of irrecoverable debts, some aspects of the inward processing procedure, the implementation of the customs warehousing procedure and the financial consequences of the customs union agreements. As regards VAT, the Court continued to check the implementation of the detection of infringements of Community legislation as well as the implementation of the transit procedure for the payment of VAT on intra-Community trade. Lastly, it carried out a critical examination of the establishment of the statistical GNP, which is the basis for assessing this own resource.

1.2. The structure of the following observations does not reflect the relative financial importance of each of the own resources. The fact is that, with regard to the management of the traditional own resources for which the Commission is responsible, the Court must examine all procedures which are designed to lead to the collection of these resources and the protection of the Community's financial interests. The risks of irregularities are particularly high in some of these areas (transit, inward processing, the management of Community entitlements, etc.). Although the observations on traditional own resources are more numerous, they are also more diverse in nature. Owing to the nature of the observations on the other types of own resources (VAT, GNP), they focus more on accounting principles (macroeconomic and statistical) or aspects.

1.3. An examination of the development since 1986 of the financing of the Community budget reveals certain trends (see Figure 1.1): the proportion derived from the GNP own resource increased throughout the period in question, the share provided by the VAT own resource fluctuated between 50 and 60% and the proportion attributable to traditional own resources (customs duties, agricultural levies and sugar levies) tended to fall (see Table 1.1).

Figure 1.1 - Evolution of the distribution of actual own resources

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IMPLEMENTATION OF THE BUDGET

1.4. Table 1.2 shows that:

(1) actual revenue in 1995 amounted to 75 077,1 Mio ECU, which is 99,5% of the revenue provided for in the final budget. This was an increase of 13,7% compared with the financial year 1994 (66 002,1 Mio ECU);

(2) traditional own resources, net of collection costs (1 605,9 Mio ECU), were 14 453,2 Mio ECU, i.e. 19,2% of total actual revenue. These resources comprised:

(a) customs duties of 13 898,2 Mio ECU gross, or 86,5% of gross traditional own resources (16 059,1 Mio ECU) ();

(b) agricultural levies of 844,3 Mio ECU gross, or 5,3% of gross traditional own resources;

(c) sugar and isoglucose levies of 1 316,4 Mio ECU gross, or 8,2% of gross traditional own resources;

(3) the own resource based on value-added tax (VAT) (after inclusion of balances and adjustments: P521,3 Mio ECU) amounted to 39 127,3 Mio ECU (), or 52,1% of actual revenue;

(4) the GNP resource (after inclusion of balances and adjustments) amounted to 14 172,6 Mio ECU () (including reserves of 247,6 Mio ECU), i.e. 18,9% of actual revenue.

TRADITIONAL OWN RESOURCES

Management of definitively irrecoverable debts (write-offs)

Introduction

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1.5. The Member States make available to the Community established customs duties and agricultural levies that have been recovered or guaranteed. They use separate accounts known as the B accounts () to enter established entitlements to be recovered for which no security has been provided. They may enter in these accounts established and guaranteed entitlements where these entitlements are in dispute.

1.6. Table 1.3 summarizes the situation on 30 June 1995 as regards entitlements that have been established but not recovered, as compared with established entitlements as a whole. These percentages vary, depending on the Member State concerned, between 0,13% and 1,54%.

1.7. The Member States may write off certain entitlements, i.e. they are free from the obligation to make the established entitlements available to the Commission where, for reasons of force majeure, it has not been possible to recover these amounts or if it transpires that recovery is impossible for reasons which cannot be attributed to them.

1.8. The Court examined the Commission's files on cases of write-offs.

1.9. The Commission must be notified of the total value of write-offs by means of the quarterly statement. Furthermore, all write-offs corresponding to specific cases of amounts greater than 10 000 ECU are submitted to the Commission in the twice-yearly report. Where appropiate, the Commission sends its observations to the Member State concerned within six months.

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1.10. Cross-checks in respect of both types of notification revealed inconsistencies, such as write-offs which were included in half-yearly reports whereas the quarterly reports covering the same period mention no amount, or considerably smaller amounts (see Table 1.4).

Management by the Commission of write-offs of which it has been notified by the Member States

1.11. Since the write-off procedure was introduced () on 1 January 1989 (), five Member States (Germany, Spain, France, the Netherlands and the United Kingdom) have reported cases of write-offs in respect of amounts greater than 10 000 ECU. Table 1.5 summarizes the situation on 30 June 1995 in respect of the 28 cases declared by these five Member States, totalling 5,6 Mio ECU.

1.12. At the time of the Court's enquiry (December 1995), the Commission had not yet drawn up the inventory of national recovery instruments even though this inventory is needed to determine the financial responsibility of the Member States, also in the event of write-offs. Only in September 1994 did the Commission begin to question the Member States with a view to drawing up this inventory.

Treatment of cases of suspension

1.13. On 13 July 1995, the German authorities informed the Commission that the cases of write-offs of which it had so far provided notification were actually cases of suspension. According to German legislation, the authorities may take decisions temporarily to suspend the recovery procedure, but these decisions do not lead to the cancellation of the debt. Consequently, all cases of suspension of which notification has been provided since 1989 should be re-entered in a separate account. However, these amounts to be recovered do not appear in the Community accounts. At the time of the Court's enquiry, the Commission had not yet taken steps to ensure that the German authorities took the requisite action.

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1.14. Furthermore, before 1989, Germany made available to the Commission all established amounts, including amounts that had not been recovered. On 1 January 1989, the amounts made available to the Commission that had been established and not recovered totalled 93,8 Mio ECU (). Although this sum was not repaid with a view to being entered in a separate account, the Commission did not object to the German authorities deducting from current established amounts the amounts they had written off. Neither the Commission nor the German authorities has set up a monitoring system so as to make it possible to ascertain the cumulative total of these deductions.

Conclusion

1.15. The procedure for declaring write-offs is not a decisive aid to the Commission in its analysis and comparison of the performances of the Member States in recovering difficult debts (see paragraphs 1.10 and 1.12).

1.16. In most of the Member States, the procedure provided for has still not been applied (see paragraph 1.11) and in the other Member States it is not implemented in a uniform manner. The Commission should endeavour to eliminate the reasons which, in certain Member States, lead to higher rates of non-recovery (see paragraph 1.6). In order to make the management of recovery more transparent, the Commission should take adequate measures so as to:

(a) ensure the notification referred to in paragraphs 1.9 to 1.10 is consistent;

(b) make it compulsory to provide periodic notification of all amounts owed which it has not been possible to recover at the end of a specific period;

(c) publish in an annex to the annual balance sheet the situation in each Member State in respect of the debts to the Community referred to under (b) that have not been recovered.

Inward processing procedure

Definition

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1.17. The inward processing procedure () is a customs procedure with an economic impact which makes it possible to subject the goods defined hereafter to one or more 'processing` operations in the Community customs territory. The inward processing procedure may be applied to the following goods:

(a) non-Community goods intended to be re-exported from the Community customs territory in the form of processed or 'compensating` products. These goods are not subject to import duties or to trade policy measures (the inward processing procedure suspension system, known hereafter as 'IP/S`);

(b) goods released for free circulation (), in respect of which the corresponding import duties are repaid or waived where the goods are exported from the Community customs territory in the form of compensating products (the inward processing procedure repayment system, known hereafter as 'IP/R`).

Evolution of the legal framework

1.18. In its Annual Report concerning the financial year 1988, the Court criticized misuse of the IP/S and recommended the introduction of compensatory interest where goods that had benefited from this suspension procedure were released for home use () in the Community territory. The compensatory interest aims to remove the 'unjustified financial advantage due to a postponement of the date on which a customs debt arises ()`. Commission Regulation (EEC) No 731/90 of 26 March 1990 () was a response to the Court's observations ().

1.19. In four Member States (Belgium, Germany, France and the United Kingdom) the Court examined the application of these amendments. This examination made it possible to formulate certain observations on the implementation of the IP/S in the Member States (see paragraphs 1.25 to 1.37).

Re-export and release for free circulation of products obtained under the inward processing suspension (IP/S) system

1.20. The granting of authorization for the IP/S procedure is subject to the existence of concrete intentions to re-export the compensating products. However, in three of the Member States which were visited (Belgium, Germany and France), up to 90% of the compensating products were not re-exported by some traders for several years. The customs office responsible for carrying out checks did not criticize this misuse of the IP/S procedure and the authorizations in question were regularly renewed by the national authorities.

1.21. The authorizations for the IP/S procedure, under which a high percentage of main compensating products or goods in the unaltered state is released for free circulation for several years, do not comply with the applicable Community provisions. Where, as a result of an administrative decision, the date on which a customs debt arises is postponed, a twofold misuse of the procedure occurs: the aims and rules of the IP/S are infringed and national revenue is generated by means of the compensatory interest mechanism, to the detriment of the Community budget. The fact is that, pursuant to the provisions of Article 2 of Council Decision 88/376/EEC, Euratom of 24 June 1988 on the system of the Community's own resources (), compensatory interest does not constitute own resources. These failures to comply with the provisions of the IP/S procedure result in delays in making available the own resources in question.

1.22. The effect on the Community budget of these failures to comply with the provisions in force may be estimated by calculating the amount of compensatory interest collected by the Member States. For 12 Member States, this amount was 7,2 Mio ECU for the first 10 months of 1994.

1.23. In December 1991, the French authorities, pursuant to Article 27 of Regulation (EEC) No 1999/85 () and with the Commission's agreement, authorized a trader to switch within the framework of the inward processing procedure from the repayment system (IP/R) to the suspension system (IP/S). As a result of this decision, the sum of 29,1 Mio ECU () was repaid to the trader. When the trader switched to IP/S, the French authorities granted additional time for the submission of the statement of clearance in respect of all goods which had previously been placed under the IP/R procedure. The resulting average period of 28 months is 10 months longer than the 18-month period established by the French authorities for carrying out inward processing operations ().

1.24. According to the first bill of discharge, 90% of the compensating products that were being processed when the suspension system was adopted were released for free circulation and generated compensatory interest (national revenue) of more than 3 Mio ECU. These releases for free circulation, which were carried out in breach of Community Regulations, resulted in own resources totalling 25,6 Mio ECU being established and made available after a 10-month delay (see paragraph 1.28).

Miscellaneous observations

1.25. In Belgium, an examination of the bills of discharge submitted for the financial years 1993 and 1994 by a major trader showed that the discharge procedures were incorrectly applied. This trader exported the main compensating product, which, by definition, is a non-Community commodity, by using customs documents applicable to the export of Community goods. This procedure does not provide proof that the goods in question have actually left the Community customs territory. The compensating products concerned account for total duty of more than 1 Mio ECU.

1.26. The bill of discharge must be submitted no later than 30 days after the re-export deadline has expired. This deadline applies where the inspection office draws up the bill of discharge itself (). In three Member States (Belgium, Germany and the United Kingdom), the monthly or quarterly declarations were submitted late as the customs authorities had failed to take appropriate measures to ensure that the own resources were established and collected by the deadlines laid down in the Regulations (). In Germany, one inspection office had drawn up the bill of discharge after an average delay of eight months. The duties concerned were estimated to be 13,3 Mio ECU () per year.

1.27. Although the Regulations authorize only monthly or quarterly globalizations (declarations) (), two Member States (Belgium and the United Kingdom) authorized globalization periods of up to one year. Consequently, for 1992, 1993 and 1994 alone, own resources totalling 3,6 Mio ECU were established and made available with an average delay of six months (Belgium).

1.28. In the cases mentioned in paragraphs 1.24 to 1.27, a delay was observed in making customs duties available to the Community. As a result, the provisions of Article 11 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (), which provides for the payment of interest on delays in making own resources available, must be applied.

1.29. The external Community transit procedure applies to all forms of transport of non-Community goods from one point of the customs territory to another (), except where the goods are subject to a customs procedure of economic impact and providing the specific provisions of this economic procedure makes it possible to facilitate distribution in this way. However, the inward processing procedure allows for transport only from the place of processing to the discharge office.

1.30. Nevertheless, where goods are re-exported without entering the territory of another Member State, German national instructions allow for compensating products and goods in the unaltered state to be transported to the exit point of the customs territory (not the discharge office), where an entry to this effect is made in the trader's records. In such a case, there is no need to observe the formalities required by the transit procedure (as regards the provision of security and the submission of document T1).

1.31. Where goods are re-exported by sea, this national procedure allows for them to be trans-shipped when vessels put into Community ports. This procedure is open to fraud as regards the identification of the customs status of goods. The fact is that when vessels put into a Community port () non-Community goods may, in the absence of a transit document, be placed on the Community market without payment of the corresponding import duties.

1.32. Where goods under the IP/S procedure switch to another suspensive procedure (transit, customs warehouses), the customs document which accompanies these goods must clearly indicate 'IP/S` in the section where the goods are to be described (). This reference does not appear in the corresponding document in any of the Member States that were visited. Without this specific reference, it is possible that compensatory interest may not be collected if goods are subsequently released for free circulation.

1.33. In Germany, ex post checks in respect of the IP/S procedure were carried out over periods of up to 13 years, whereas the Regulations limit the period for any subsequent recovery to three years.

Incorrect application of the EEC-Turkey agreement

1.34. Pursuant to the additional protocol to the EEC-Turkey agreement (), until 18 March 1995 ATR1 certificates could be issued in respect of goods released for free circulation. A compensatory levy () for goods re-exported to Turkey after being released for free circulation was introduced only when Decision No 1/94 () of the EC-Turkey Association Council came into force on 19 March 1995.

1.35. The national instructions sent to the Court by 10 Member States reveal that only the United Kingdom collected import duties on compensating products and goods in the unaltered state before validating ATR1 certificates. All of the other Member States apart from Spain (since November 1993) and Ireland (since 1994) have issued ATR1 certificates without collecting customs duties. However, the goods should have been released for free circulation and full customs duties should have been levied on components from non-Member States before the ATR1 certificates were issued. As the Member States may not retrospectively recover customs duties that should have been collected when the ATR1 certificates were issued, they must invalidate and rescind these latter and inform the Turkish authorities that they were issued regularly.

1.36. The Court noted in the case of two traders (in Germany and Belgium) that ATR1 certificates were validated until 18 May 1995 in respect of compensating products even though the corresponding customs duties (250 000 ECU for the period 1992-93) were not paid.

1.37. The value of the goods (whether in free circulation or not) re-exported by the European Union to Turkey by way of discharge of the inward processing procedure totalled more than 1 780 Mio ECU for 1993 and 1994. However, in the absence of sufficiently accurate data, the Court estimates the amount of own resources not collected from 1973 to 95 to amount to at least several tens of millions of ECU.

Conclusion

1.38. The Commission should ensure that Community legislation is correctly applied, in particular, by:

(a) introducing a system for actively monitoring the implementation of the IP/S procedure. This system should monitor, in particular, the percentages of compensating products released for free circulation (see paragraphs 1.21 - 1.24), the deadlines for discharge (see paragraphs 1.26 - 1.28) and the frequency and findings of ex post checks (see paragraph 1.33);

(b) establishing with the Member States concerned the amounts of own resources to be recovered following the incorrect application of the EEC-Turkey agreement (see paragraphs 1.34 - 1.37) and by invalidating and rescinding certificates issued regularly;

(c) subjecting to a critical examination all of the Community or national legislation which may create uncertainty when the status of non-Community goods is being determined, in particular where these goods are transported by sea from one point of the Community customs territory to another (see paragraphs 1.29 - 1.32);

(d) applying Article 11 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (), on the payment of interest in the event of delays in making own resources available, where the customs debt arises as a result of tolerance by the administration (see paragraphs 1.21 - 1.22).

Customs warehouses

Introduction

1.39. In the European Union, about 13 000 customs warehouses have been authorized, pursuant to Article 100 of the Community Customs Code (). Six types of warehouses are defined in the provisions for implementing the Code (), 35% of which were of the type examined by the Court (). Owing to a simplification of procedure (local clearance () when goods are released for free circulation), the warehouses selected by the Court may occasion delays in the establishment of the own resources. As these warehouses are reserved for private storage, the warehouse keeper does not necessarily own the goods concerned ().

1.40. The Court's enquiry concerned this specific type of warehouse in the five Member States (Belgium, Germany, Spain, France and Italy) which have authorized warehouses of this kind.

Legal procedure

1.41. The customs warehouse procedure allows for the storage under customs supervision of:

(a) non-Community goods, which are not subject to import duties or trade policy measures;

(b) Community goods, which, pursuant to specific regulations, may benefit from measures concerning the export of goods ().

Stock records

1.42. In order to obviate the possibility of delays in the establishment of own resources, stock records must, pursuant to Community legislation (), indicate at all times the actual situation of the stock of goods. In view of the simplication of procedures (see paragraph 1.39), these stock records must contain all of the information needed to apply the customs warehouse procedure, as well as the information required by customs to carry out the corresponding checks (). These records are a key aspect of customs checks. The aspects of taxation (type, quantity and customs value of goods) declared and entered in the records when the goods are placed in warehouses are taken into account when duties are established following the subsequent release of goods for free circulation.

1.43. The person designated by the customs authorities must keep these stock accounts in an officially approved manner (). The on-the-spot enquiries revealed the diversity of the requirements imposed by the national authorities in respect of stock accounts. These requirements vary from a simple inventory list to a detailed account of all movements of goods. In many cases, these stock records must be complemented for audit purposes by information which is available only from traders.

1.44. The Court also observed certain anomalies in the keeping of the stock records which were such as to cause delays in the establishment of own resources. Where the computerized stock records are not based on tariff headings (), it is impossible for the customs authorities and the Community authorities to monitor movements of goods in big warehouses by cross-checking arrivals in the warehouse with the corresponding dispatches. Similarly, the movement of goods cannot be accounted for and the physical inventory cannot be monitored if the warehouse-keeper manages several warehouses located throughout the national territory (Germany) and does not indicate in the customs entry document the warehouse in which the goods are stored. In one case (Italy), the stock records began only four months after the warehouse was set up. The actual initial status of the goods stored in the warehouse (valued at 1,8 Mio ECU) was not correctly entered in the stock records, as a result of which it was not possible to check the physical inventory or the movements of goods.

Shortcomings of the customs checks

1.45. The frequency of and methods adopted for the checks, the aim of which is to ensure, in particular, that own resources are established at the same time as goods are released for free circulation, vary considerably from one Member State to another.

1.46. In Germany, two types of check are made: checks that are carried out in a regular manner in respect of customs documents concerning isolated operations and thorough ex post checks which, in the case of a single warehouse, are often spread over three years, after which period outstanding customs duties may no longer be claimed (). In two of the offices which were visited no ex post checks had been carried out before the time-barring period expired in respect of 58 of the 146 warehouses for which these offices were responsible. In some of these warehouses, the most recent ex post check had been carried out in 1988, even though the total own resources concerned may be put at several million ECU per year. However, ex post checks are the main instrument which makes it possible to ensure that customs documents tally with trade documents and thus to detect late or incorrect establishments of own resources.

1.47. In France and Belgium, there are no national instructions concerning ex post checks in customs warehouses.

1.48. In Italy, sample survey-based checks were carried out by the national authorities, which compared the data contained in the arrival and dispatch documents. According to these authorities, although ex post checks, in particular in respect of trade documents and physical inventories, had been carried out, no inspection report could be produced at the time of the on-the-spot checks.

Irregular national re-export procedures

1.49. The national re-export procedures described and criticized in paragraphs 1.29 to 1.31 are also implemented in respect of goods re-exported from customs warehouses.

Incorrect application of the Community external transit procedure

1.50. The national regulations adopted in Spain pursuant to Articles 397 et seq. of the instructions for implementing the Community Customs Code () enable the warehouse-keeper to apply simplified transit procedures.

1.51. As a result, contrary to Community legislation, the warehouse-keeper is not required to send back to the competent customs office the copy of the transit document which is sent to him (). Furthermore, the transit documents issued by the warehouse-keeper are neither prenumbered nor pre-recorded by customs, with the result that the customs authorities do not have any documentary records which enable them to ensure that the transit procedure is functioning correctly. These simplified procedures, which are generally observed in Spain, were implemented in two big warehouses that were inspected by the Court.

1.52. In the warehouses the Court visited, it examined the register of transport documents kept by the warehouse-keeper. This register shows that, in certain cases, the deadlines for discharge considerably exceeded the deadline laid down in the Regulations. Pursuant to Article 379 of the instructions for implementing the Community Customs Code, recovery in respect of transactions that have not been cleared should have begun no later than 14 months after the date the Community transit declaration was registered. A number of transit documents issued between 1992 and 1993 had still not been cleared at the time of the Court's audit in June 1995 and the corresponding procedure for recovering the customs duties had not commenced.

Contradictory Community provisions governing taxation elements

1.53. The provisions of Article 278(3)(c) of the implementing instructions () contradict the provisions of Articles 214(1) and 112(3) of the Community Customs Code. On the one hand, the trader concerned may, when goods are released for free circulation, benefit from taxation elements other than those established or recognized when goods enter the warehouse and, on the other hand, the taxation elements that are established or recognized when goods are subject to this procedure are the ones to be applied when the goods are released for free circulation. Consequently, the choice made possible by the implementing instructions may lead to a systematic reduction in the amount of established own resources.

Conclusion

1.54. The Commission must take the requisite measures to ensure that:

(1) Community legislation concerning stock records is applied (see paragraphs 1.42 - 1.44);

(2) checks carried out by customs warehouses safeguard the Community's financial interests (see paragraphs 1.45 - 1.48);

(3) access to supporting documents is guaranteed when the Community institutions carry out checks (see paragraphs 1.42 - 1.44 and 1.51), in particular where:

(a) customs procedures are entrusted to economic operators;

(b) operators are authorized to employ the simplified procedure;

(c) customs offices delegate some of their powers to certain operators;

(4) national re-export procedures comply with Community legislation (see paragraph 1.49);

(5) Article 112(3) of the Community Customs Code clearly applies (see paragraph 1.53) ().

Customs union agreements

1.55. A customs union is characterized by:

(a) a common customs tariff (CCC), which applies to imports of goods from non-Member States;

(b) the free circulation of all goods obtained on the territory of the Union () and of goods that have been subject to customs formalities in respect of their release for free circulation by one of the contracting parties.

1.56. The proceeds of import duties may either be kept by the contracting party which has collected them (the accounting method) or may be shared out, irrespective of the contracting party which has collected them, on the basis of economic activity criteria (the macroeconomic method).

1.57. The European Economic Community (EEC) has concluded three customs union agreements, with the Principality of Andorra (), the Republic of San Marino () and Turkey (). In these three agreements, the accounting method was chosen for the purpose of sharing out duties collected.

1.58. In the case of the customs unions with San Marino and Andorra, the financial impact on the Community's own resources is minimal and will remain so (see Table 1.6). The impact on the Community's own resources of the customs union agreement concluded with Turkey, which has applied from 1 January 1996, may well be significant but cannot be illustrated as the agreement makes no provision for producing the requisite data. There are other customs union agreements planned for other countries (the Visegrad States) which may have a significant effect on own resources. The Court chose to examine the financial aspects of the implementation of the interim trade and customs union agreement between the EEC and the Republic of San Marino so as to illustrate the difficulty of using the accounting method (see paragraphs 1.60 - 1.62) to share out equitably the collected import duties between the signatories to the agreement.

1.59. Table 1.6 summarizes the distribution of duties collected during the financial year 1993 in accordance with the agreements concluded with San Marino and Andorra. Furthermore, the table shows the negative effects on the Community budget of the accounting method chosen in the two agreements. If, taking San Marino as an example, these effects are compared with the consequences of employing a macroeconomic approach (for example, by distributing duties on the basis of GNP), it can be seen that the accounting method is detrimental to the Community's own resources.

1.60. One of the main problems intrinsic to the accounting method is that the quantities of certain products which are imported and cleared through customs on behalf of a contracting party considerably exceed the potential consumption of these products. As a result, the import duties collected are divided up unevenly between the signatories to the agreement.

1.61. The reason for this imbalance may be found by examining the declarations for release for free circulation. For example, in the case of San Marino, this examination revealed that a significant proportion of the import duties is paid by a handful of importers, some of whom, owing to their trading presence, have exclusive control over part of the Community market.

1.62. As the import duties for a given item of merchandise are identical for all traders operating in the territory of the customs union, a trader's decision to locate his business in one or other contracting party is generally influenced by non-customs criteria. If traders are free to benefit from comparative economic or legal advantages enjoyed by one of the contracting parties, imbalances in the share of duties collected by each party to the agreement may appear or indeed increase, with the result that the Community's own resources suffer the consequences. These latter tend to depend, in particular, on the respective economic size of the contracting parties and on the real differences in their respective comparative advantages.

Conclusions

1.63. In the case of customs union agreements, the Commission should study more closely the consequences for own resources and should include in the agreements the redistribution of the duties collected by each of the parties to the agreement on the basis of one or more macroeconomic criteria.

VAT OWN RESOURCES

Introduction

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1.64. The joint VAT system was set up to ensure the creation of a uniform tax assessment base throughout the Member States. It is also the basis for the calculation of the VAT own resources owed by each Member State. For this reason, any deviation from the joint system of own resources or any malfunctioning thereof may result in a reduction in this basis and therefore of the VAT own resource.

1.65. The following paragraphs look, on the one hand, at the Court's audits of the compliance of national VAT legislation with Community law, and, on the other hand, at the question of the transitional VAT regime applicable to intra-Community transfers since the elimination of tax frontiers on 1 January 1993 ().

1.66. In view of the importance of the intra-Community transitional procedure for the collection of VAT and given the possibility that the elimination of tax frontiers might increase the risk of irregularities, the Court continued its examination of the VIES (value-added tax information exchange system) () in 1995 within an ad hoc group representing certain national audit institutions. The aim of the VIES is to enable the tax authorities of the Member States to ensure that intra-Community transactions are taxed correctly.

1.67. Wherever possible, cross-checks were made with other sources of information available on trade between Member States (in particular the Intrastat system: see paragraph 1.79). This was the case for the identification of traders and the reliability of information concerning transfers.

The detection of violations of Community legislation

1.68. The Commission had made a considerable effort to identify violations via an ad hoc committee that wound up its activities in mid-1993. Since then, violations have, in practice, been detected almost solely as a result of complaints from individuals or after audits of own resources, which the Commission now carries out every two years in the Member States.

1.69. Where the Commission finds that a violation of the joint VAT system has had an effect on VAT own resources, it has the possibility of entering a reservation on the statement of VAT own resources. The Member State concerned is then invited to check and, where appropriate, amend the statement for up to the previous three years but not before. Such reservations must therefore be entered as soon as possible so as to protect the financial interests of the Union.

1.70. Although the entering of a reservation makes it possible to safeguard the financial interests of the Union, it may take several years for the amounts which could be involved to be recovered unless the Commission reaches an agreement with the Member State concerned, pursuant to Regulation No 1553/89.

1.71. The fact that, as a general rule, no arrears interest is charged on the amounts due does not encourage the Member States concerned to make them available within a reasonable time. In its previous observations on this subject (), the Court has already pointed out the inadequacy of this situation. Once an own resource loss has been detected, it must be possible to set a deadline for the recovery of the amount concerned and interest on the arrears should be charged once that deadline has expired.

The transitional system for VAT on intra-Community transfers

The exchange of information on VAT numbers and the value of transfers

1.72. Any person supplying goods or services to purchasers in other Member States has the right to ask for confirmation of the validity of the VAT identification number of any other trader. Each Member State has a database containing a register of persons to whom a VAT identification number has been issued. The other Member States can access these databases via the VIES network. In 1995, the VIES system was consulted 2,3 million times in respect of VAT identification numbers.

1.73. However, VAT identification numbers may continue to be given as valid on the VIES network for some time after the actual date of their elimination (Germany, Greece, Spain, France, Ireland, the Netherlands, Portugal and the United Kingdom). In Italy and Portugal, traders have 30 days within which to declare that they have stopped trading. There is therefore a risk that an identification number that has been entered in the quarterly summary statement of intra-Community deliveries may subsequently be invalidated, causing problems between the authorities and the taxpayers concerned.

1.74. Under current Regulations, the Member States are required to store and process the data contained in the summary statements that they receive from intra-Community traders concerning their trade with customers liable for VAT in other Member States. The total value of deliveries to the various customers, broken down by Member State and quarter, is supplied via the VIES network to the departments responsible for managing VAT in the country to which the goods or services have been supplied. The data are exchanged three months after the end of the quarter during which the deliveries took place.

1.75. In order to enable taxable transactions to be monitored and to ensure VAT revenue is not lost, traders are required to forward their summary statements within the established deadlines. Nevertheless, the Court's checks showed that, overall, at least 20% of statements were supplied late or were not forwarded at all.

1.76. The number of lines in the summary statements rejected by computer validation checks (known as 'incorrect lines`) gives an idea of the accuracy of the data in the summary statements. A line may be considered incorrect where, for example, a VAT number is not recognized or no amount is given. The errors detected may not only be the result of material errors, but may also reveal possible irregularities.

1.77. In nine States, more than 5% of the total number of incorrect lines for 1993 (608 387) had still not been rectified in June 1994. This situation has improved but is still not satisfactory. In 1994, 4,2% (532 708) of the lines were incorrect, and, in June 1995, 2,6% (327 123) had still not been rectified (). Once the lines have been accepted by the system and transmitted to the other Member States, checks are carried out to verify the accuracy of the national VAT numbers given by suppliers in the other Member States. In 1994, in eight Member States, these checks revealed inconsistencies involving 118 000 new lines, or approximately 1% of the total. Consequently, the national authorities have to devote considerable resources to the verification of data and any subsequent corrections. This may reduce the time available for VAT checks by the same amount.

1.78. The reliability of the amounts declared by traders for deliveries is difficult to measure. An examination of the breakdown of the VIES data by Member State showed significant variations that were largely unexplained.

1.79. The VIES data declared by suppliers from one country and communicated by the system to other Member States did not always correspond to the data given by the Member State in receipt of the goods. Slight differences are acceptable because of variations in exchange rates and technical delays. However, in many cases, differences of more than 10% or even as much as 40% were found, a phenomenon for which no complete explanation could be provided.

Interconnection between and limits on the utilization of sources of information

1.80. For taxation purposes, intra-Community deliveries made by taxpayers are recorded both in their VAT declarations and in the VIES system. However, trade in goods between Member States is also covered by statistics based on the monthly declarations that traders are required to make within the framework of the Intrastat system, which was introduced under Council Regulation (EEC) No 330/91 () in order to measure the progress made in terms of intra-Community trade since the single market was implemented.

1.81. Comparing the various data is a means of checking the VAT owed on the deliveries made. However, as things stand, the shortcomings noted in these sources of information limit their usefulness.

1.82. There are considerable discrepancies in the Intrastat data which have yet to be explained. Whereas the values of intra-Community deliveries and acquisitions should theoretically coincide, differences were noted of 28 000 Mio ECU in 1993 () and as much as 34 000 Mio ECU in 1994 (). A comparison based on Intrastat data between 'arrivals` (intra-Community imports) from a given Member State and 'dispatches` (exports) made by the other Member States of the Union to this Member State revealed differences of as much as 50% in 1994.

1.83. The Intrastat system was also adversely affected by the fact that the Member States took different approaches in cases where no declaration was made. Some (Germany, the Netherlands and the United Kingdom) immediately estimate cases of non-compliance or late compliance and take the data in question into consideration when publishing their statistics for the first time. Others wait until late statements are actually submitted and subsequently amend the data for the reference month. In five Member States (Greece, Spain, France, Italy and Portugal) no amendments were made in response to non-compliance with procedures. Between 4 and 5% of all transfers between the States of the Union were subject to amendments corresponding to late declarations exclusively.

1.84. It is therefore not surprising that the Member States should hold different opinions as to the reliability of Intrastat data. Some thought them satisfactory (United Kingdom, Italy and Spain) whilst others felt them to be of dubious value (Denmark). Nevertheless, the majority noted that compliance with deadlines had improved, resulting in a decline in the value of the corresponding adjustments.

1.85. Despite these limits, cross-checks between different sources of data proved effective in certain cases. In France, in 1993 and 1994, and in the Netherlands in 1993, detailed analyses based on VAT declarations and VIES data showed that 85% of the national VAT declarations gave a different amount from the figure for intra-Community transfers. Unfortunately, in most of the Member States, this analysis was carried out at individual trader level only. For this reason, there were virtually no figures for overall differences between the two sources.

1.86. The VIES system also enables the national authorities to consult data concerning individual traders or their trading relations. The number of these consultations went up from around 40 000 in 1993 to more than 4 961 000 in 1995. To illustrate the significance of this facility, the United Kingdom reported that these consultations had resulted in the recovery of 1,4 Mio ECU of additional VAT in 1994.

1.87. The VIES data can be used in conjunction with other data to highlight certain types of operation or certain trade flows for which there is a particularly high risk of irregularity. This approach was used in France, the Netherlands and Italy. In Italy, a VAT fraud estimated at 20 Mio ECU in the beef meat sector was discovered in this way by the national authorities. In the Netherlands, enquiries had been made with regard to exempted undertakings and farmers subject to the flat-rate scheme. In 8% of the cases, VAT amounts were lower than those actually due.

1.88. Improving the reliability of the data would certainly enlarge the potential for carrying out checks aimed at providing maximum safeguards for VAT revenue (and by extension, VAT own resources). In the case of Intrastat, given that this source of information contributes to the calculation of GNP, it is clear that the quality of the data bears a relation to the calculation of the GNP own resources.

Changes in verification methods

1.89. Following the implementation of the new intra-Community trade procedure and the creation of the single market, checks are no longer made at the Member States' borders. As VAT is no longer paid when goods are imported but at a later stage on the basis of taxpayers' periodic declarations, the Member States are also faced with new risks of VAT evasion (e.g. collusion between a supplier in Member State A and a purchaser in Member State B so as not to declare certain taxable transactions or the creation of phantom businesses in other Member States for the purpose of transferring to those States amounts of VAT that are due). Audit methods in the Member States need to take account, in particular, of possible tax evasion stemming from the abolition of fiscal frontiers and should make it possible to evaluate the attendant material impact. Although greater recourse to mutual assistance by the Member States has been observed, greater cooperation is still needed between Member States if the risks related to the transit procedure are to be assessed, especially in view of the largely unexplained stagnation of VAT revenue established in 1993 (see paragraphs 1.92 - 1.97).

1.90. Since the single market was introduced, Italy and the United Kingdom have observed changes affecting the nature or scope of the irregularities uncovered. Other Member States, such as the Netherlands, Spain and Portugal, reported no changes due to the single market or had observed very few. In France, VAT reminders were 20% higher in 1994 than in 1993, but the share due to intra-Community VAT could not be measured because it had not been entered separately in the accounts.

1.91. In the case of deliveries to private individuals which are not included in the VIES system, such as mail-order sales or VAT-exempt sales of new vehicles (especially boats), the actual audit possibilities available to the tax authorities are generally more limited than those applying to registered taxpayers.

VAT revenue

1.92. In 1994, VAT revenue in the 12 Member States amounted to 390 000 Mio ECU, as against 360 000 Mio ECU in 1993 (and practically the same figure in 1992). In 1994, the increase in VAT revenue in the Member States was between 2,5 and 14,5%.

1.93. This situation is in contrast with 1993, when there was virtual stagnation in total VAT revenue, and even a fall in revenue in five Member States. The rapid deceleration in the growth of VAT revenue in 1993 constituted a clear break with previous years, during which revenues had increased each year by around 25 000 Mio ECU (285 000 Mio ECU in 1989, 309 000 in 1990 and 337 000 in 1991).

1.94. In theory, the growth in VAT revenues is a function of the following:

(a) changes in the VAT rate and base;

(b) inflation;

(c) the growth in the volume of economic activity.

1.95. The data available for the 1989-94 period confirm that the halt in the growth of revenue in 1993 cannot, generally speaking, be explained by changes in these three main factors, which indicate a potential loss in VAT revenue of around 5 to 6% for 1993. This loss of revenue for all the Member States would have been of the order of 18 000 Mio ECU in 1993, without taking into account the fluctuations in the ecu rate.

1.96. It is therefore important to establish the reasons for this deficit. It is true that following the introduction of the single market delays may have occurred in the payment of VAT, as tax is no longer collected upon importation but at a later stage, when taxpayers make a declaration. However, certain Member States have taken measures to compensate for this delay in payment. Owing to a lack of appropriate data, it is not possible at present to pinpoint reasons that provide an exhaustive explanation for the deficit that was observed.

1.97. Given the size of the problem, VAT revenues from intra-Community transfers should be specifically monitored by the Commission and the Member States on the basis of harmonized statistics throughout the Community. Only on this condition will it be possible to specify the effect of the transitional regime on VAT yields.

Conclusion

1.98. The compliance of national legislation with the Community Regulations on the joint VAT system is a prerequisite for the correct and complete payment of VAT own resources. The Commission is required to verify this compliance and, in the case of violations adversely affecting own resources, establish a deadline for the payment of the amounts owed. It should also charge interest on arrears where these deadlines are not complied with.

1.99. The introduction of the transitional VAT regime for intra-Community transfers in 1993 was followed in the same year by a stagnation in net VAT revenues which cannot be explained by factors like economic growth, inflation or changes in the VAT rate or assessment base. The question is whether this phenomenon was due solely to technical delays related to the new system or to other causes. This situation should encourage the Member States and the Commission to monitor in greater detail the evolution of data on VAT, and intra-Community VAT in particular.

1.100. Despite the improvements that the Member States and the Commission have made to the VIES system, there are still shortcomings. In particular, the data on intra-Community deliveries are not sufficiently complete, accurate and up to date. In cooperation with the Commission, the Member States should clarify the reasons for the differences between intra-Community acquisitions and deliveries. Analyses of this sort could improve the efficacy of the checks carried out by the competent authorities. There were also still inadequacies in the data in the Intrastat system. Cross-checks between the data in question revealed significant errors.

1.101. To different extents, the Member States have started to adopt the VIES system as an integral part of their range of audit tools. The Commission should encourage them and help them continue along this path.

102. The audit methods employed in the Member States need to take specific account of the risks of tax evasion directly connected with the abolition of fiscal frontiers and must also make it possible to assess the material impact of any evasion.

1.103. In the event of a move to a definitive system for VAT on intra-Community transfers, with the tax being levied in the country of origin of the goods, there may be a need for a clearing mechanism between Member States in order to safeguard national VAT revenues. However, the existing information systems on intra-Community transfers do not offer all the necessary guarantees to serve as a basis for such a mechanism.

GROSS NATIONAL PRODUCT

The need to measure the quality of the statistical GNP calculation

1.104. The GNP aggregate occupies an increasingly important place in the own resources system () (see Table 1.1). This is true at several levels, i.e. for the application of a ceiling to the overall amount of own resources, the calculation of the GNP resource, the capping of the VAT assessment base and the calculation of the funding of the United Kingdom rebate (). The GNP is also used to provide a framework for certain specific Community policies, either in order to limit expenditure (EAGGF-Guarantee) or to define eligibility criteria (structural and cohesion policies). Elsewhere, in the context of monetary policy, for example, the GDP, on the basis of which the GNP is calculated, is the scale by which the breakdown of national subscriptions to the capital of the European Central Bank and contributions to the resources of the European Monetary Institute are decided ().

1.105. Directive 89/130 () required the statistical GNP to be made more comparable and more reliable.

1.106. The European Parliament, in its resolution of 25 October 1995, voiced its fears as regards the quality of the GNP. It reminded the Commission of the need to put forward measures for the improvement and harmonization of the GNP bases and carry out the relevant checks ().

1.107. Every year since the discharge for the financial year 1991, the Council has expressed its concern as to the need to increase and verify harmonization of the calculation of national GNPs. In its recommendation on the discharge to be granted by the Parliament in respect of the budgetary implementation for the financial year 1994 (), the Council once again invited the Commission to continue its efforts in the field of statistics so as to guarantee that national GNPs are both complete and comparable.

1.108. The carrying-out of the manifold tasks provided for in the various relevant legal texts (establishing, harmonizing and developing checks on GNP) often comes up against problems such as the evaluation of progress achieved, the quantification of the impact of specific factors or measures on the GNP, studying the differences between Member States, the validation of the GNP estimates and the analysis of degrees of quality (). These problems, which are faced, in particular, by the Commission and the GNP Committee (), could be adequately solved via the development of tools to enable the measurement of the quality (comparability and reliability) of the statistical GNP and its components.

1.109. The Court examined the tools available at the Commission and in the Member States and looked into the possibilities for developments in this field.

The concept of quality as applied to the statistical GNP

1.110. The concept of quality as applied to the GNPs of the Member States as a whole must be seen as a combination of two independent aspects: the mutual comparability of the GNP statistics and the individual reliability of each of them.

1.111. The comparability aspect concerns the degree of equivalence of the rules, methods and sources used in each of the national systems. The reliability of each system may be defined as the accuracy with which the level of GNP is established in relation to the rules in question.

Measuring the comparability of the GNP

1.112. The recitals of Directive No 89/130 make a distinction between conceptual and practical comparability.

1.113. Conceptual comparability is guaranteed by compliance with the definitions and relevant accounting rules laid down in the European System of Integrated Economic Accounts (ESA). Practical comparability has two aspects. On the one hand, it depends on the evaluation procedures applied, i.e. the methods, and on the other hand it relies on the data-bases available, i.e. the statistical sources. These two dimensions involve a particular aspect of comparability - the degree of coverage of GNP, or its exhaustiveness. Improvement of this degree of coverage is precisely what may be achieved by the development of methods and sources.

1.114. In 1992, after analysing the inventories () of the national systems supplied by the Member States pursuant to Article 4 of Directive 89/130, the Commission drew up a draft list of comparability criteria for the two aspects of practical comparability (methods and sources), as well as a specific list of criteria on exhaustiveness () as a particular aspect of practical comparability.

1.115. Article 7 of Directive No 89/130 empowers the GNP Committee to verify the GNP figures annually and put forward measures to increase their comparability. In this connection, the Committee delivers an annual opinion to the Commission. An analysis of these opinions showed that, although the Committee does state its position regularly, in the absence of a detailed system of comparability indicators it only expresses itself generically and in qualitative terms. It takes into consideration the circumstances in which the GNP is drawn up, states that progress has been made towards the harmonization of the GNP and expresses the view that the figures reflect the continued and optimal efforts made by the Member States to produce comparable data.

1.116. The development of a detailed system of comparability indicators would enable the GNP Committee to draw up differentiated comments in accordance with those indicators and give a more accurate account of the diversity of the national systems. This system would also be very useful for the Commission in order to give tangible shape to its stated principle, according to which 'the Commission (Eurostat) is in a good position to assess the comparability of data and evaluate the quality of the progress made ()`.

1.117. Given that, as is stated in Directive No 89/130, practical comparability depends on methods, any methods to harmonize these methods should, pursuant to Article 7 of the same Directive, be made in the context of work aimed at increasing comparability.

1.118. As far as practical comparability is concerned, absolute harmonization, such as that accepted for conceptual comparability, would seem to be difficult to achieve given all the national peculiarities. However, those possibilities for harmonization that do exist must nevertheless be utilized in order to increase the degree of comparability.

Measuring the reliability of the GNP

1.119. Independently of its comparability with other national systems, each national system has its own degree of reliability. The fact is that the statistical GNP of each Member State, as calculated in the context of that State's national accounts system, is affected by numerous uncertainties. These uncertainties result from the application of the concepts, the implementation of national systems at assessment base level, statistical methods and techniques and the degree of exhaustiveness of the field of observation.

1.120. The combination of these uncertainties determines the reliability of the system in question, that is to say, the precision with which the GNP can be calculated. Insofar as these uncertainties can be rendered in statistical terms, the ideal solution would be to be able to measure reliability via confidence intervals, within which, with a given degree of probability, the true value for the GNP would lie. This system is already used in other statistical fields administered by the Commission ().

1.121. Moreover, the objective stated by Directive No 89/130 as regards increasing the reliability, and the provisions of Article 7 of the same Directive, concerning the annual examination of GNP files by the GNP Committee, require the implementation of quantitative techniques for the measurement of the reliability. These techniques would, in particular, enable the GNP Committee to draw up its opinions on the reliability of data with reference to the degree of accuracy of the same.

1.122. Given the need to develop a quantitative approach to the measurement of reliability, the Court gathered the opinions of the experts of the national statistics offices of seven Member States (Austria, Germany, France, Finland, Italy, Sweden and the United Kingdom) with regard to the feasibility of this approach. The experts approached in the Member States were aware of the problems posed and, with one exception (), supported the idea of developing an appropriate tool to make the statistical measurement of reliability possible. The majority of them, however, had not yet carried out detailed research on this subject. Italy and the United Kingdom were able to report on studies aimed at measuring the accuracy of the national accounts.

1.123. The United Kingdom's Central Statistical Office (CSO) () had carried out its work on reliability at the behest of the Treasury. It had been instructed to establish and publish confidence intervals for the main series of national accounts and identify the contributions of the various components towards potential errors in the aggregates (). The CSO had come to the conclusion that the measurement of reliability should become an integral and regular part of the process of drawing up national accounts and that it should not remain merely a specific and occasional exercise (). According to the experts contacted in Italy and the United Kingdom and the results of pilot studies carried out in the United Kingdom, it looks as if solutions can be found.

1.124. Italy and the United Kingdom had forwarded documents concerning their respective work on the measurement of the reliability of the GNP () to the Commission. The Commission had put these documents on the agenda of the 20th meeting of the GNP Committee on 26 and 27 June 1995 (), by way of a contribution to the discussion on procedures for the assessment of the quality of GNP data, in particular via the creation of confidence intervals. The Commission had confirmed its interest in the question and suggested the creation of an ad hoc committee on the subject. The GNP Committee did not adopt this proposal ().

1.125. The measurement of the reliability of the data and the main aggregates of national accounts has been on the experts' agenda for some time. Existing scientific bases could serve as a starting point for the deliberations of the competent Community bodies on the possibilities for the development of a measurement tool.

Conclusion

1.126. Ever since its introduction, the Community GNP system has been faced by the need to increase its comparability and reliability. Comparability should be measured via a detailed system of indicators which, for certain criteria, reflect the differences between the Member States. Measuring the reliability presupposes allocation by the Member States of statistical confidence intervals to the GNP data. The Commission, together with the Member States, should study the possibility of developing appropriate tools.

1.127. The definition and introduction of a measure of the quality of the GNP aggregate would seem to be indispensable to ensure this aggregate's legitimacy in connection with its manifold functions (see paragraph 1.114 ). On several occasions, the budgetary authority has expressed this concern with regard to GNP (see paragraphs 1.116 - 1.117).

1.128. If, in the end, it should turn out to be impossible or impractical to develop a measure of the quality of GNP, the Commission and the Member States should nevertheless continue their efforts to make national statistics for the calculation of GNP increasingly more reliable, comparable and accurate.

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REPLIES OF THE COMMISSION

TRADITIONAL OWN RESOURCES

Management of irrecoverable debts (write-offs)

Introduction

1.10. The Commission is aware of the inconsistencies highlighted by the Court. The problem is largely due to the fact that, as there is no standardized model for the quarterly report, some Member States give an aggregate total for all corrections (cancellations, amendments to established entitlements and write-offs). As a result the figures in the quarterly reports cannot always be reconciled with those in the half-yearly reports. To remedy this situation, the Commission proposed that Regulation (EEC, Euratom) No 1552/89 be amended to enable it to draw up a specimen quarterly report in which cases of write-offs would be identified. This amendment was adopted by the Council on 8 July 1996. Furthermore, Article 6(4) of Regulation No 1552/89, as amended, now provides for a new kind of report which can be used to establish a link between the quarterly statement of the separate account and the recovery of amounts at stake in cases of fraud and irregularities.

1.11. On the question of reported cases of write-offs, the Commission is also aware that only some Member States apply the procedure laid down in Article 17(2) of Regulation No 1552/89. To find out more about what happens in practice, the Commission sent a letter at the end of 1995 to those Member States which had never reported write-offs, asking for an explanation. In reply, Belgium, Ireland and Luxembourg merely confirmed that there had been no cases of amounts being written off, without giving any further information.

The Commission believes that this state of affairs can be remedied only by amending the present recovery procedure (see also point 1.16 (b)). In the meantime, it will continue to monitor implementation of these arrangements in the Member States.

Management by the Commission of write-offs of which it has been notified by the Member States

1.12. The Commission has begun analysing the answers to the questionnaire it sent to Member States concerning national procedures for the recovery of own resources. In May 1996 it held a seminar to discuss its findings and obtain further information. This process should give the Commission a clearer view of existing national recovery instruments and enable it to pinpoint possible weaknesses. If necessary, the Commission will propose new legal provisions to strengthen the recovery facilities available to Member States.

Treatment of cases of suspension

1.13. Since the Court's enquiry, the Commission has accepted the German authorities' request to discount cases of write-offs in respect of entitlements established after 1 January 1989. But it has also informed the German authorities that these cases of suspension must remain entered in the separate account and has asked them to continue recovery proceedings.

1.14. The Commission did not object to the deduction from current established entitlements of amounts from the period before 1 January 1989 considered irrecoverable. By adopting this stance, the Commission hoped to avoid any discrimination, on the entry into force of Regulation (EEC, Euratom) No 1552/89, against Member States which made available to the Commission all established entitlements as compared with those which made available only the amounts they actually recovered. The Commission has also asked the German authorities to keep it informed of progress in recovering the amounts in question.

Conclusion

1.15. It is true that under the present procedure for reporting write-offs, the Commission is unable to assess the performance of individual Member States in recovering Community debts. The recent amendment of Regulation No 1552/89 may improve this situation.

1.16. (a) This problem should be resolved by the recent amendment of Regulation (EEC, Euratom) No 1552/89 (see reply to paragraph 1.10).

(b) The Commission is considering the possibility of proposing a new amendment to Regulation (EEC, Euratom) No 1552/89 to strengthen the provisions of Article 17(2) (writing-off of debts) and achieve the result recommended by the Court.

(c) Should Article 17(2) of Regulation (EEC, Euratom) No 1552/89 be amended, the Commission might then consider publishing the position in each Member State in respect of unrecovered Community debts, after a given period, in an annex to the annual balance sheet.

Inward processing procedure

Re-export and entry into home use of goods placed under the inward processing suspension procedure (IP/S)

1.20 1.22. The Commission does not share the Court's view that the cases in question constitute infringements of the applicable rules resulting in a loss of traditional own resources totalling ECU 7.2 million for the first 10 months of 1994.

However, it does feel that the very high percentages of main compensating products or goods in the unaltered state which were released for free circulation, as reported by the Court, may reflect anomalies in the operation of the customs procedure in question as compared with its intended purpose. The fact that very high percentages of products or goods released for free circulation persist over long periods points to the existence of established practices which are not being discouraged by the national authorities. As the Court observes, these practices may be of financial benefit to the national authorities in that compensatory interest does not constitute Community own resources but is booked to national budgets. The Commission will examine the problem raised by the Court and, if necessary, propose new measures to ensure that the objectives of the IP/S procedure are respected.

1.23 1.24. The switch from the inward processing repayment system (IP/R) to the suspension system (IP/S) is entirely legitimate, even though, in practice, it may lengthen the period allowed for discharge. The French authorities, in agreement with the Commission, authorized a trader to use this facility, which is provided for under Community law. Since the procedures were carried out in accordance with the relevant legislation, there can be no question of an unjustified delay giving rise to the financial consequences estimated by the Court (see also the replies to paragraphs 1.21 and 1.22).

Miscellaneous observations

1.25. After conducting an inquiry, the Member State concerned reported that the anomaly detected by the Court could be considered to be a failure to fulfil an obligation which had no significant effect on the correct operation of the inward processing procedure, as referred to in Article 204(1) of the Community Customs Code.

The Commission will make known its final views after it has checked all the relevant details. This should be done in the near future.

1.26 1.28. The Commission had already disc