EN Official Journal of the European Union C 167/1

OPINION No 4/2005

on a proposal for a Council Decision on the system of the European Communities' own resources and on a proposal for a Council Regulation on the implementing measures for the correction of budgetary imbalances in accordance with Articles 4 and 5 of the Council Decision of (…) on the system of the European Communities’ own resources

(pursuant to the second subparagraph of Article 248(4) and Article 279(2) of the EC Treaty)

(2005/C 167/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community and in particular Articles 248(4), second subparagraph, and 279(2) thereof,

Having regard to the Treaty establishing the European Atomic Energy Community and in particular Articles 160c(4) and 183 thereof,

Having regard to the Council Decision of 29 September 2000 on the system of the European Communities' own resources (1) and in particular Article 9 thereof;

Having regard to the Council Regulation of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (2),

Having regard to the Council's request, dated 22 October 2004, for the Court of Auditors' opinion on the proposals (3) for a Council decision on the system of the European Communities' own resources and for a Council Regulation on the implementing measures for the correction of budgetary imbalances in accordance with Articles 4 and 5 of the Council Decision of (…) on the system of the European Communities' own resources,

Whereas the Fontainebleau European Council of 25 and 26 June 1984 concluded (4), inter alia, that expenditure policy is ultimately the essential means of resolving the question of budgetary imbalances, however, any Member State sustaining a budgetary burden which is excessive in relation to its relative prosperity may benefit from a correction at the appropriate time,

Whereas the Berlin European Council of 24 and 25 March 1999 concluded (5), inter alia, that the Union’s own resources system should be equitable, transparent, cost-effective and simple and that it must be based on criteria which best express each Member State's ability to contribute,

HAS ADOPTED THE FOLLOWING OPINION:

I. INTRODUCTION

1. The Commission proposals are part of a two-step approach (6) for reforming the structure of the existing own resources: the first step is to replace the correction granted to the United Kingdom by a generalised mechanism to correct excessive budgetary imbalances whilst maintaining all other components of the system currently in force. The second step aims to introduce a genuinely tax-based own resource to be operational from 2014.

2. The substantive legislative proposals under examination relate to the first step. The Commission submitted to the Council two distinct legal instruments: a proposal for an overall decision on the system of own resources and a proposal for a regulation on implementing measures related to the proposed generalised correction mechanism. The former is to be adopted pursuant to Article 269 of the Treaty and would enter into force after adoption by the Member States in accordance with their respective constitutional requirements. The latter is to be adopted unanimously by the Council, pursuant to Article 279 of the Treaty.

3. No substantive legislative proposals have been made so far as regards the second step of the proposed reform. The Commission has however presented possible options (7) for a genuinely tax-based own resource and called on the Council to discuss these options.

4. The European Council of 16 and 17 December 2004 endorsed the Commission proposal to maintain the ceiling for own resources at the current level of 1,24 % of EU GNI. The European Council took note of the presentation by the Commission of the report on the operation of the own resources system as well as the proposal to introduce a generalised correction mechanism, in the light of the various positions expressed up to then. It called on the Commission and the Council to continue the examination of all issues arising in this connection, including a possible simplification of the system.

5. The Court has examined the two legal instruments proposed by the Commission, taking into account the Fontainebleau European Council conclusions in 1984, the Berlin European Council conclusions in 1999 and results of its audit work related to the current system of own resources. The Court also recalls its previous criticisms of the system which are only partly addressed in the Commission proposals.

II. THE CURRENT SYSTEM OF OWN RESOURCES AND ITS SHORTCOMINGS

6. The current own resources system consists of: (i) traditional own resources (TOR), mainly customs duties collected by Member States on behalf of the EU (10 857,2 million euro (8)); (ii) the VAT resource levied on the statistical harmonised VAT bases of the Member States (21 260,1 million euro); (iii) the GNI-based resource levied as a uniform rate in proportion to the GNI of each Member State (51 235,2 million euro); (iv) a specific mechanism for correcting the budgetary imbalance of the United Kingdom (5 184,9 million euro).

7. On several occasions the Court has criticised the shortcomings of this system, which is very complex and presents numerous problems, in particular, regarding administration, consistency and lack of transparency. The most important issues identified by the Court are summarised in the following paragraphs.

8. In 2003, the traditional own resources amounted to 10 857,2 million euro after deduction of a flat-rate amount of 25 %, which was retained by the Member States to cover collection costs. The Court has already stated in its Opinion No 8/99 (9) that collection costs actually constitute an item of expenditure and should be treated as such in the Community accounts and when calculating net balances.

9. The capping of the VAT assessment base as a percentage of GNI has reduced the significance of the VAT resource in the financing of the budget. The VAT own resource decreased from 35 192,5 million euro (40,0 %) in 2000 to 21 260,1 million euro (25,4 %) in 2003. Capping also accentuated the resource's macro-economic character via its link with the GNI. The Court reaffirms its position that a resource based on the taxable consumption of citizens can only be justified if it is directly linked to a tax base (10).

10. In addition, tax evasion, in particular ‘roundabout’ frauds (11) facilitated by the current system with taxation taking place in the country of consumption, undeclared economic activity and the varying degrees of efficiency shown by the national authorities in collecting VAT and preventing fraud might still affect the incidence of the financial burden on the Member States (12).

11. Furthermore, the results of Court audits (13) cast some doubt on the accuracy and reliability of the VAT statements produced by the Member States, which are compiled after complicated calculations demanding significant administrative resources.

12. The GNI-based resource increased from 37 580,5 million euro (42,7 %) in 2000 to 51 235,2 million euro (61,3 %) in 2003, thus providing the largest share of the own resources.

13. The Court has found (14) that there is limited direct verification by the Commission of the underlying national accounts which provide the figures presented by the Member States in the GNI questionnaires as a basis for calculating the GNI-based resource. This is due to the ambiguity of the rules laying down the obligations and powers of the Commission in this respect (15).

14. Even though the conclusions of the Fontainebleau European Council state that any Member State with a budgetary imbalance in relation to its relative prosperity may apply for a correction, the current decision on own resources only specifically grants it to one Member State. There is no mechanism enabling other Member States to benefit from such a correction, just as there is no monitoring procedure to check that the said correction is still justified (16).

15. With the exception of the issue discussed in paragraph 14, none of the shortcomings described above are addressed in the Commission proposals. The Court stresses the need to deal with these shortcomings.

III. THE PROPOSED GENERALISED CORRECTION MECHANISM

16. The Commission proposes to introduce a generalised correction mechanism, evolving from the existing United Kingdom (UK) correction, in order to address the issue of excessive budgetary imbalances. It proposes that this mechanism will be operational as from the beginning of the next financial perspective. The mechanism would be triggered if net contributions exceeded a given threshold, expressed as a percentage of each Member State's GNI. Net positions exceeding such a threshold would be eligible for a partial refund and the total amount of corrections would be capped. All Member States would participate in the financing of the global amount of such corrections in proportion to their relative prosperity.

17. Introducing a generalised correction mechanism for excessive budgetary imbalances as proposed by the Commission would be more in line with the principle laid down in the Fontainebleau European Council conclusions of 1984, namely that any Member State sustaining a budgetary burden which is excessive in relation to its relative prosperity may benefit from a correction.

18. The Court acknowledges that the proposed mechanism defines criteria which would allow an assessment to be made on an annual basis whether Member States are entitled to benefit from a correction. With regard to the financing of the cost of the corrections, it would put an end to the differential treatment of Member States under the mechanism currently in force. There would also no longer be a need for calculating a so-called ‘frozen rate’ (17), nor would there be a need for calculating the impact of successive own resources decisions and enlargements.

19. On the other hand the European Council meeting in Berlin in March 1999 concluded, inter alia, that the system of the Communities' own resources should be transparent and simple and based on criteria which best express each Member State's ability to contribute. The existence of any correction mechanism, however, compromises the simplicity and transparency of the own resources system. In particular, calculating net balances implies numerous choices that must be made (on the items to be included, reference periods and accounting methods) all of which render any correction mechanism rather cumbersome. Moreover, net budgetary balances are not good indicators for assessing the overall advantages to be gained from Community policies, as they do not take into account the multiplier effect of these policies (18).

20. The Court's specific remarks with regard to the proposed generalised correction mechanism are set out in parts V and VI of this opinion.

IV. PROSPECTIVE DEVELOPMENTS

21. The Commission proposes that the Council should entrust to it the task of submitting a proposal to modify the own resources structure by introducing a genuinely tax-based own resource, to be operational from 1 January 2014.

22. The Commission indicated possible choices for such a tax-based own resource in its report on the operation of the own resources system (19). It is not up to the Court to comment on the possible options at this stage. The Court, however, would like to emphasise that the reasons for any choice should be clearly stated and that the system selected should meet the criteria outlined by the European Council (i.e. it should be equitable, transparent, cost-effective and simple) and should offer guarantees and procedures to make it both reliable and auditable.

V. SPECIFIC REMARKS ON THE PROPOSAL FOR A COUNCIL DECISION

Article 2(7)

Text proposed by the Commission: 7. For the purposes of applying this Decision, GNI for the year is calculated at market prices as provided by the Commission in application of the ESA 95 in accordance with Regulation (EC) No 2223/96. Should modifications to the ESA 95 result in significant changes in the GNI as provided by the Commission, the Council, acting unanimously on a proposal of the Commission and after consulting the European Parliament, shall decide whether these modifications shall apply for the purposes of this Decision.

23. According to the proposal, the GNI for the year is calculated at market prices, as provided by the Commission in application of ESA 95. The proposal also stipulates, however, that modifications to the ESA 95 which result in significant changes in the GNI as provided by the Commission shall only apply for the purpose of calculating own resources if the Council decides so. The Court understands the reasons for such a clause, but points out that this procedure may lead to a situation where GNI figures used for own resources purposes do not match published national figures, thus reducing transparency.

Article 4(1)

Text proposed by the Commission: 1. Any Member State sustaining a negative budgetary imbalance in excess of a threshold equivalent to a certain percentage of its GNI shall be granted a correction. The total amount of the corrections in a given year shall not exceed a maximum available refund volume expressed in euro. The Council, in accordance with the procedure laid down in Article 279(2) of the EC Treaty, shall lay down the implementing measures for the calculation of the corrections and their financing, in particular the threshold and the maximum available refund volume. The corrections shall be established by: (a) calculating for each Member State the budgetary imbalance as the difference, in a financial year, between: — the percentage share of that Member State in the sum of the total VAT-based and GNI-based own resources payments, and — the percentage share of that Member State in total allocated expenditure; (b) multiplying the difference thus obtained by total allocated expenditure; (c) deducting from the result under (b) the value of that Member State's GNI multiplied by the threshold; (d) if the result obtained under (c) is positive, multiplying this result by a refund rate, fixed at a maximum of 0,66 and, if necessary, reduced proportionally to respect the maximum available refund volume.

24. The text should clearly state that the concept of total allocated expenditure to be used is laid down in the Council Regulation on the implementing measures for the correction of budgetary imbalances.

Article 8(2)

Text proposed by the Commission: 2. Without prejudice to the auditing of the accounts and to checks that they are lawful and regular as laid down in Article 248 of the EC Treaty and Article 160c of the Euratom Treaty, such auditing and checks being mainly concerned with the reliability and effectiveness of national systems and procedures for determining the base for own resources accruing from VAT and GNI and without prejudice to the inspection arrangements made pursuant to Article 279(1)(b) of the EC Treaty and Article 183 point (c) of the Euratom Treaty, the Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament, adopt the provisions necessary to apply this Decision and to make possible the inspection of the collection, the making available to the Commission and payment of the revenue referred to in Articles 2 and 5.

25. The Court reiterates its position (20) that Article 8(2) of the proposed Decision, insofar as it interprets the subject of the Court's checks and audits, is tantamount to amending a provision of the Treaty outside the procedure laid down for that purpose. The statement that, ‘such auditing and checks being mainly concerned with the reliability and effectiveness of national systems and procedures for determining the base of own resources accruing from VAT and GNI’, should be deleted. In any case, the Court considers that such a provision cannot have the effect of limiting its audit powers under the Treaty.

26. The Court is of the opinion that all provisions necessary to apply this Decision could be adopted pursuant to Article 279 of the EC Treaty and Article 183 of the Euratom Treaty and that there is no need for a specific procedure for adopting the provisions necessary to apply this Decision and to make possible the inspection of the collection, the making available to the Commission and payment of the revenue.

VI. SPECIFIC REMARKS ON THE PROPOSAL FOR A COUNCIL REGULATION ON THE IMPLEMENTING MEASURES FOR THE CORRECTION OF BUDGETARY IMBALANCES

Article 1(1a)

Text proposed by the Commission: 1. The calculation of the amount of the correction based on the budgetary imbalances of Member States of year t in accordance with Article 4 of Council Decision (…) shall be established by: (a) calculating for each Member State the budgetary imbalance as the difference between: — the percentage share of that Member State in the sum of the total VAT-based and GNI-based own resources payments relating to year t, and — the percentage share of that Member State in total allocated expenditure;

27. The words ‘related to year t’ should be added to the second indent in order to be consistent with the first indent.

Article 2(2)

Text proposed by the Commission: 2. The maximum available refund volume (MARV) referred to in Article 1 shall be equal to 7,5 billion euro.

28. A system with a maximum available refund volume (MARV), specified as a discretionary fixed amount of 7,5 billion euro, will not produce consistent results over time, as any GNI variation would affect the relative size of the corrections. Preservation of the ‘real value’ would require further Council agreement and negotiation. If there is a need for such a MARV, it could be expressed as a percentage of GNI.

Article 4

Text proposed by the Commission: 1. The concept of expenditure to be used in calculation of the corrections shall correspond to actual payments (execution of appropriations for payments) made in the year in question (year t) under that year’s appropriations for payments as well as payments under carryovers of non-executed appropriations for payments to the following year (from year t to year t+1). Only utilised appropriations for payments, i.e. the amount of payments actually made, shall be taken into account. 2. The allocation of expenditure across the Member States shall be governed by the following rules: In general, payments shall be allocated to the Member State in which the principal recipient resides. However, in those cases where the Commission is aware that the recipient in question acts as an intermediary, the payments shall be allocated whenever this is possible to the Member State(s) in which the final beneficiary(ies) is (are) resident, in accordance with their shares in these payments. Total allocated expenditure shall be based on total expenditure of the general budget of the European Union, excluding the following two main categories of expenditure: — expenditure on external policies, including pre-accession or enlargement-related expenditure in non-member countries as well as other expenditure benefiting recipients outside the Union, such as development cooperation expenditure, research expenditure spent outside the EU, administrative expenditure paid to recipients outside the Union, etc.; — expenditure that cannot be allocated or identified due to conceptual or other difficulties, such as expenditure on representation, on missions and on formal and other meetings as well as payments related to cross-border Community initiatives, promotion of inter-regional cooperative operations and other cross-border actions.

29. Traditional own resources constitute income under the EU budget and the collection costs should be treated as expenditure accruing to the Member States and included as allocated expenditure in the generalised correction mechanism (see also paragraph 8).

30. The references to ‘payments’, in Article 4(2) should be replaced by ‘expenditure’.

31. The definition of expenditure to be excluded from total allocated expenditure, as formulated under the first and second indent of Article 4(2), is in the form of a negative but not exhaustive list allowing for differences from one year to another in the composition of the amount of allocated expenditure. In order to ensure that the amount of allocated expenditure is calculated annually in a consistent and transparent way, the Court suggests adding to this article a provision that the Commission should present a report each year on the allocation of expenditure, also covering expenditure that cannot be allocated to a Member State.

Article 5

Text proposed by the Commission: 1. The amount of the corrections shall be budgeted in two steps: (a) the result of the first provisional calculation of the amount of the corrections for year t shall be entered in the preliminary draft budget of year t+1. The calculation shall be based on the most recent data available for both revenue and expenditure; (b) the result of the definitive calculation of the amount of the corrections for year t shall be budgeted in an amending budget of year t+3. The calculation shall be based on the data on VAT bases, GNI and allocated expenditure relating to year t as known at 31 December of year t+2, which shall, where applicable, be converted into euro according to the annual average exchange rate of the year t. In order to calculate the share of each Member State in the sum of the total VAT-based and GNI-based own resources payments the budget of year t shall be recalculated on the basis of the outturn of appropriations for payments for year t, reduced by other revenue relating to year t (not including the balance of the previous exercise or other balances or adjustments of balances relating to previous years) and the actual amount of traditional own resources made available in year t. The remaining amount shall be financed by the VATbased own resource up to the uniform rate of call of VAT and by the GNI-based resource for the residual amount necessary to balance the budget. 2. The financing of the corrections referred to in paragraph (1)(a) above shall be calculated on the basis of the latest data on Member States GNI for year t, available when the preliminary draft budget is drawn up. 3. A definitive calculation shall also be made in respect of the financing of the corrections for year t referred to in paragraph (1)(b) above. The calculation shall be based on Member States’ GNI in year t, as known at 31 December of year t+2, which shall, where applicable, be converted into euro according to the annual average exchange rate of the year t. The definitive financing data shall be compared with the payments relating to the corrections for year t already entered in the budget in year t+1. The balances per Member State shall be entered in an appropriate budgetary chapter of the amending budget referred to under paragraph (1)(b) above and converted into national currency according to the annual average exchange rate of the year t.

32. Under article 5 of the proposal, both the definitive calculation of the amount of the correction and its financing by Member States for the year t are based on data on VAT bases and GNI known at December of year t+2. The Court considers it more appropriate to use VAT and GNI data for the year t+4 as they are then final (21).

This Opinion was adopted by the Court of Auditors in Luxembourg at its meeting of 12 May 2005. For the Court of Auditors Hubert WEBER President

(1) OJ L 253, 7.10.2000, p. 42.

(2) OJ L 248, 16.9.2002, p. 1.

(3) COM(2004) 501 final of 14 July 2004.

(4) See Bulletin EC 6-1984.

(5) See Bulletin EU 3-1999.

(6) See Commission report ‘Financing the European Union, Commission report on the operation of the own resources system’, COM(2004) 505 final of 14 July 2004, Volume I, p. 13.

(7) See COM(2004) 505 final of 14 July 2004, Volume I, pp. 10 to 12.

(8) All figures for 2003. For more detailed figures see diagram V of the Annual report of the Court concerning the financial year 2003 (OJ C 293, 30.11.2004, p. XVI).

(9) See paragraphs 11 to 15 (OJ C 310, 28.10.1999, p. 1).

(10) See Special Report No 6/98, paragraph 5.5 (OJ C 241, 31.7.1998, p. 58).

(11) See Annual Report concerning the financial year 2001, paragraphs 1.50 to 1.55 (OJ C 295, 28.11.2002, p. 1).

(12) See Special Report No 6/98, paragraphs 4.1 to 4.2 (OJ C 241, 31.7.1998, p. 58).

(13) See for example the Annual Report concerning the financial year 2003, paragraph 3.61 and the Annual Report concerning the financial year 2002, paragraphs 3.44 to 3.46 (OJ C 286, 28.11.2003, p. 1).

(14) See the Annual Report concerning the financial year 2003, paragraph 3.48.

(15) See Opinion No 7/2003, paragraph 3 (OJ C 318, 30.12.2003, p. 1).

(16) See Special Report No 6/98, paragraphs 3.25 to 3.26 (OJ C 241, 31.7.1998, p. 58).

(17) The frozen rate is the amount of the VAT resource needed for the financing of the UK correction expressed as a percentage of the VAT base.

(18) See Special Report No 6/98, paragraphs 3.29 to 3.33.

(19) ‘Financing the European Union’, COM(2004) 505 final of 14 July 2004.

(20) See Opinion No 8/99, paragraph 34.

(21) Notwithstanding any reservations.