Proposal for a COUNCIL REGULATION amending Regulation (EC) No 1251/1999 establishing a support system for producers of certain arable crops, in order to include rice

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

The European rice market is in serious unbalance.

At the beginning of the 1999/2000 marketing year a total of 495 402 tonnes of paddy rice (equivalent to about 303 000 tonnes of milled rice) were stored in public intervention, which represents about 20% of internal production. Under present status quo, this quantity risks to increase at a rhythm of 150 000 to 200 000 tonnes milled equivalent per year of which only some occasional sales under food aid programs could be deducted. Financial costs are important since, due to deterioration during storage, rice risks to loose its value after 2 to 3 years.

Market prices are continuously below intervention price levels.

The unbalance is caused by a combination of increased imports and increased production as well as the limitation of subsidised exports under the GATT agreement.

A rapid solution to this problem must be found via a revision of the Common Market Organisation for rice which should enter into force as soon as possible, i.e. marketing year 2001/2002. This solution should be obtained by increasing the competitiveness of the European product as well as by improving the fluidity of the rice market. European production should also be reduced.

2. Present and Future Market situation

Historical production of rice in the Community consists of Japonica rice (round and medium grain) consumed in the producing Member States (Italy, Spain, Greece, France and Portugal).

However, consumption in Northern Member States consists mainly of Indica rice (long grain) imported from the US, ACP/OCT countries, Thailand, India and Pakistan.

From 1988 to 1993, in order to reconvert from surplus Japonica to Indica, the Community encouraged the production of Indica varieties by means of a direct payment to producers. After that period, even without a direct payment, Indica production increased as a result of demand from Northern Member States (from 27 000 ha in 1988/89 to 120 000 ha in 1999/2000), covering about 55% of the consumption of this type of rice in the Community.

Table 1: EU rice balance sheet 1994/95-1999/2000

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Production has increased since 1996/97 due to the increase of the area sown to rice as well as good yields subsequent to the end of the drought in Spain and the good general climate conditions. For 1998/99, some decrease of rice production can be noted probably caused by depressed market prices (see paragraph 3).

Imports have increased since 1994/95 as a consequence of the implementation of the Agreement of the Uruguay Round (especially Basmati) and the implementation of preferential regimes (TRQ's, ACP).

Total exports have stabilised since 1996/97 since food aid operations have partly replaced commercial exports.

Consumption has increased since 1995/96 mainly as a consequence of the accession of new Member States.

Since 1996/97, the EU has started to accumulate intervention stocks due to a combination of increased imports and increased production. Over the last three years, a total of 818 000 tonnes of paddy rice have been bought into intervention. This is on average 273 000 tonnes per year of paddy or 164 000 of fully milled rice.

Table 2: Intervention purchases of rice in the EU

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Provisional figures for 1999/2000 indicate a quantity offered for intervention of around 130 000 tonnes of milled rice equivalent. As already indicated, rice in storage is sensitive to deterioration and special costly conditions have to be assured to avoid as much as possible such deterioration.

Some quantities could be used as food aid for third countries (North Korea and Russia) as well as for the most deprived persons in the EU, but overall public stocks have increased to 303 000 tonnes in milled equivalent, or 20% of yearly production.

Future possibilities for subsidised exports will be further limited due to the GATT limit of 133 400 tonnes per year.

If status quo is maintained, one can expect an accumulation of intervention stocks at a rate of 250 000 to 350 000 tonnes of paddy per year (or 150 000 to 210 000 tonnes of milled rice per year). Each 100 000 t of paddy rice bought into intervention represents an immediate budgetary cost of 10 Mio EUR (depreciation and entry costs) and a subsequent yearly budgetary cost of 4 Mio EUR (storage and financial costs).

This means that the situation becomes unsustainable from an economical and budgetary point of view.

3. Evolution of producer prices (paddy rice)

In 1995/96, the EU production was still reduced as a consequence of the drought in Spain. During that year, average internal prices were higher than intervention prices.

In 1996/97, due to an increase in production and imports, internal average prices came down to levels well below the intervention price.

During the marketing years 1997/98 and 1998/99, internal prices were also lower than the intervention price for both Japonica and Indica rice. They were particularly low in Greece for Indica rice.

Table 3: Internal average prices as percentage of the intervention price

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One can conclude that, over the last 3 years, prices at the most representative markets have been well below intervention price levels (intervention itself is open for 4 months as from 1 April).

4. The import regime

4.1 The fixed tariff

During the Uruguay Round negotiations, it was agreed to convert variable levies into fixed tariffs and to reduce them by a total of 36% until 2000. Such was also the case for rice and table 4 shows the agreed tariffs for paddy, husked and milled rice.

Table 4: Import tariffs for rice as fixed in GATT schedule

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4.2 The Ceiling System

However, the EU agreed to insert in its GATT schedule a special headnote 7 for rice, resulting in a ceiling price for imported husked rice equal to:

- for Japonica rice: 188% of the intervention price for paddy,

- for Indica rice: 180% of the intervention price for paddy,

irrespective of the price/quality of the rice concerned.

In practice, this means a lower duty for higher priced rice while, under a normal "ad valorem" system, this is just the reverse.

Since Basmati rice prices (aromatic Indica rice from India and Pakistan) were on average 250 EUR/t higher than the world market reference prices to be used for calculating the duty, a special abatement of an equivalent amount had to be granted to this rice [1]. As a consequence, Basmati imports increased from about 40 000 tonnes in 1994/95 to about 100 000 tonnes in 1998/99 entering at low or "0" duty.

[1] In 1995/1996, this abatement was only 50 EUR/t for Pakistani Basmati.

Due to this ceiling system, between July 1995 and February 2000, the applied import duty for husked Indica rice came down from around 390 EUR/t to around 200 EUR/t. This is 89 EUR/t below the agreed fixed tariff for 1999/00.

4.3 The Cumulative Recovery System (CRS)

The United States requested twice (November 1995 and February 1997) the establishment of a WTO dispute settlement panel on the Community's import system for rice and cereals as they considered the Community representative price system inconsistent with the GATT. According to them, the headnote had to be applied on a consignment by consignment basis. To avoid a panel, the Community introduced a Cumulative Recovery System (CRS) for husked rice for a trial period from 1 July 1997 to 31 December 1998 in order to calculate import duties on the basis of prices declared consignment by consignment.

A consequence of the application of the CRS was that, during 1997/98, average import duties for common husked rice decreased to around 200 EUR/t, thus further reducing the Community external protection.

4.4 The present import duty calculation

In December 1998, after consultations between the Commission and the USA, it was decided not to extend the CRS as it proved to be administrative cumbersome and a source of trade distortions. A new regime has been put in place based on the former representative prices for husked Indica rice increased by 8%, which brings the duty for this type of rice at present to around 200 EUR/t. (Basmati abatement is maintained at the same level of maximum 250 EUR/t).

4.5 The preferential imports

Besides imports under the ceiling system, the EU is importing considerable amounts of rice under preferential conditions of which the most important one is the quota of 160 000 tonnes of husked rice from ACP/OCT (35% of normal duty for ACP countries and 0 duty for OCTs).

In addition, tariff rate quota agreed on the basis of GATT Article XXIV.6 (accession of new Member States) had to be opened for

- 63 000 tonnes/year of milled rice at 0 duty

and

- 20 000 tonnes/year of husked rice at a duty of 88 EUR/t.

Those imports constitute about 40% of total imports and the average duty paid is about 15% of the tariff fixed under the GATT schedules.

While imports under the ceiling system have no quantitative limit, the above preferential conditions and TRQ's are restricted to certain quantities.

5. Reform proposal

After careful examination of all aspects, including GATT compatibility, the Commission has come to the conclusion that integration of the rice sector into the arable crop system combined with the abolition of the intervention price is the best possible scenario to solve present problems.

5.1 Integration of rice into the arable crop system

Full integration of rice into the arable crop system offers major advantages in terms of simplification and in terms of achieving market balance by enabling farmers to choose freely where possible between rice and other arable products.

In order to integrate rice different steps have to be taken:

- Member States' national base areas for arable crops need to be expanded taking into account the areas under rice production during the same reference years as were used in the case of the arable crops, i.e. 1989, 1990 and 1991,

- it is proposed to increase the present area payment for rice from the present 52.65 EUR/t to 63 EUR/t, which is the same area aid as the one foreseen for cereals from 2001/2002. The 63 EUR/t is to be multiplied by the regional yield to constitute the aid per hectare,

- Member States will also need to adapt their regionalisation plans to integrate rice,

- rice producing Member States will have the possibility to apply in their regionalisation plan a yield for rice which is different than the one for cereals. If this yield is higher than the one for cereals, a separate base area would have to be defined,

- in order to allow this integration without changing the possibility for Member States to maintain the status quo for the other arable crops, global national yields will need to be adapted to incorporate the existing rice areas.

Full integration of rice into the arable crop system also means application of set-aside. At the present rate of 10%, this would mean a reduction of production of around 150 000 tonnes of paddy (or 90 000 tonnes milled equivalent), which constitutes more than 50% of the average intake in intervention over the last 3 years.

5.2 Abolition of the intervention price

Intervention should constitute in its ideal form a real safety net for surplus production. However, one has to admit that, in practice, it often constitutes an obstacle for market fluidity as well as an obstacle for orientation of production towards real market demand.

During the 1995 reform for rice, it was already decided to diminish the role of intervention by reducing the intervention period from 7 to 4 months (April to July).

It is now proposed to fully abolish intervention.

The integration of rice into the arable crop system will allow farmers to better react to market signals as regards demand. Market balance will also improve due to the application of set-aside. As explained in paragraph 5.1, farmers will receive increased area payments, which will compensate them for market price fluctuations in the absence of intervention.

A legal base is proposed to allow the Commission to open private storage in order to overcome market disturbances in the absence of intervention.

In case serious market disturbances continue to occur subsequent to the abolition of the intervention mechanism, a special legal base is created to allow the Commission to take additional appropriate measures.

Regarding imports, as indicated in paragraph 4.2, the headnote for rice was added to the application of the general system of fixed tariffs (variable levies converted into fixed tariffs and gradually reduced by 36%). If the headnote becomes inapplicable in the absence of an intervention price, the fixed tariff should in principle be applied to all rice imports now entering the Community under the ceiling system. In this case, Community preference would increase since present applied duties under the headnote would increase from around 200 EUR/t for husked rice to the fixed tariff of 264 EUR/t and abatements for Basmati (maximum 250 EUR/t) would no longer apply.

Following this scenario, the quantities imported under preferential conditions (around 200 000 tonnes or 40% of present imports) would continue to be imported since they enter at "0" or low duty levels.

Other qualities such as US parboiled, Thai fragrant and Basmati which have obtained important market shares (presently around 275 000 tonnes) would most probably continue to do so because of their special type and the particular consumer preference. Therefore even in the case of application of the full tariff, it is not expected that overall import quantities would diminish. Removal of the headnote would mean in practice the removal of an instrument, which is economically difficult to justify since it leads to discrimination between different qualities as well as distortion of trade. Returning to fixed tariffs will greatly simplify the system making it more transparent for all operators and therefore will create a more stable international trading environment.

The return to fixed tariffs will lead to the application of the tariff rates bound under the schedule and will render headnote 7 ineffective. Since this will have an impact on our trade with the supplying countries, the Commission is ready to find a solution in negotiations with them, which takes account of our international obligations. At the appropriate time, the Commission intends to make a recommendation to the Council to this effect, which is an accordance with WTO procedures and will take the interest of developing countries into consideration.

It is proposed to maintain the legal base to subsidise consignments to the French overseas department of Réunion in the basic regulation for rice. This legal base will be taken over by a horizontal regulation to be proposed by the Commission.

As regards the rice-growing area in French Guyana, a provision has to be inserted in the same horizontal regulation applying from 1 July 2001, which defines its specific position in terms of non-application of set-aside and support limited to a maximum area.

6. Budget costs

In case of full integration of rice in the arable crop sector budget expenditure for the payments per hectare will increase by about 27 Mio EUR per year.

However, the abolition of the intervention system will lead to savings that will more than neutralise the additional expenditure. The moment existing public stocks have been eliminated, savings will be in the order of 38 Mio EUR per year.

7. Final observations

In order to implement the integration of the rice sector into the arable crop system, Council Regulation (EC) n° 1251/1999 establishing a support system for producers of certain arable crops, needs to be amended. Provision has to be made to adapt national base areas as well as average yields to incorporate rice.

Since the Commission recently proposed to amend Regulation (EC) n° 1251/1999 also in the context of the reform of the support system for flax and hemp, this regulation will need to be consolidated after adoption by the Council of both amendments.

As explained above, it is proposed to remove the intervention mechanism from the present basic regulation for rice (Regulation (EC) No 3072/95).

Given the importance of the above amendments and the necessity to harmonise the regulations of different Common market organisations, it is proposed to replace the present basic regulation for rice by a new one.

Since this proposal has the potential to restore the balance at the internal rice market, it will contribute to safeguard the income of rice farmers in the longer term - which is a key objective of this proposal - and permit the continuation of rice production in the European Community.

The proposed measures have the potential to restore and maintain the competitiveness of EU rice and should therefore be beneficial to the many small and medium sized agricultural enterprises active in this sector.

The proposed measures also respect the environment and the multi-functionality of agriculture since their objective is to ensure the continuation of rice growing in areas where a careful water-management is important for the maintenance of specific environmental characteristics. The Commission is convinced of the importance of rice being grown in specific traditional zones and requests the Member States to submit a special report by 31 December 2003 on the impact of the measures proposed as well as any national measures taken in this respect.

In this context it is important to note that Council Regulation (EC) n° 1259/1999, establishing common rules for direct support schemes under the common agricultural policy, also applies on rice and especially its Article 3 on the protection of the environment. Moreover, the present rural development regulation (Regulation (EC) No 1257/1999, chapter VI) allows Member States to take rice land more permanently out of production (at least 5 years), for instance in order to create natural reserves for birds.

The proposed measures contribute greatly to budget discipline since the expensive accumulation of intervention stocks cannot continue and will be stopped.

In order to allow farmers to be informed sufficiently in advance and to allow Member States to take the necessary administrative measures, it is important that the Council decides on this proposal as soon as possible.

2000/0152 (CNS)

Proposal for a COUNCIL REGULATION amending Regulation (EC) No 1251/1999 establishing a support system for producers of certain arable crops, in order to include rice

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Articles 36 and 37 thereof,

Having regard to the proposal from the Commission [16],

[16] OJ C , ..., p.

Having regard to the opinion of the European Parliament [17],

[17] OJ C , ..., p.

Having regard to the opinion of the Economic and Social Committee [18],

[18] OJ C , ..., p.

Having regard to the opinion of the Committee of the Regions [19],

[19] OJ C , ..., p.

Whereas:

(1) The common agricultural policy aims to attain the objectives referred to in Article 33 of the Treaty, taking account of the market situation.

(2) The European rice market is in serious unbalance; the volume of rice stored in public intervention is very large, equivalent to about one fifth of Community output, and increasing significantly each year. The imbalance is caused by increases in both domestic output and imports as well as by the restrictions on exports with refunds in accordance with the general agreement on agriculture.

(3) If the price support system provided for in Council Regulation (EC) No 3072/95 of 22 December 1995 on the common organisation of the market in rice [20] were maintained, the difficulty of finding outlets for intervention stocks of rice would cause those stocks to increase steadily, with a considerable impact on budget expenditure.

[20] OJ L 329, 30.12.1995, p. 18.

(4) This problem must be solved by revising the common market organisation for rice, in such a way as to take control of output, improve the equilibrium and fluidity of the market and enhance the competitiveness of Community agriculture, while pursuing the other aims of Article 33 of the Treaty, including maintaining suitable income support for producers. This amendment is achieved by means of Regulation (EC) No [...]/2000 [21].

[21] OJ L , ..., p.

(5) After careful consideration of all aspects of the situation, it appears that the most suitable solution is to integrate rice into the support arrangements for the producers of certain arable crops, governed by Council Regulation (EC) No 1251/1999 [22], amended by Regulation (EC) No 2704/1999 [23], and by Regulation (EC) No [...]2000 to include fibre flax and hemp, while discontinuing the intervention price arrangements.

[22] OJ L 160, 26.6.1999, p. 1.

[23] OJ L 327, 21.12.1999, p. 12.

(6) As rice has a different yield from other cereals, the Member States should be given the possibility of using a specific yield for rice.

(7) In some Member States, the effect of including rice in the support scheme for certain arable crop producers is to change average yields; consequently, the data on average yields in the Regulation should be adapted.

(8) In view of the discontinuation of intervention prices, the single base amount defined for all arable crops should be applied to rice from the first marketing year.

(9) The measures required for the implementation hereof will be adopted under Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission [24],

[24] OJ L 184, 17.7.1999, p. 23.

HAS ADOPTED THIS REGULATION:

Article 1

Regulation (EC) No 1251/1999 is amended as follows:

1. The second subparagraph of Article 3(3) is replaced by the following:

"The irrigated base area shall be equal to the average area irrigated from 1989 to 1991 with a view to harvesting arable crops including the increases made pursuant to Article 3(1), fourth subparagraph, last sentence of Regulation (EEC) No 1765/92. Areas to take into consideration for rice in the framework of this separate area shall be those provided for in Article 6(4) of Regulation (EC) No 3072/95.

The irrigated base area in Portugal shall be progressively increased by 60 000 hectares, for those areas where it has been established that investment in irrigation began after 1 August 1992. This increase may be added partially or totally to the irrigated maize base area as referred to in Article 3(2)."

2. In Article 3, the following paragraph 3a is added:

"3a. In their regionalisation plans, Member States may apply a specific yield figure for rice, for each production region concerned. These specific yields shall be set at such a level that their weighted average amounts to 6.04 for Italy, 6.35 for Spain, 7.48 for Greece, 6.05 for Portugal and 5.86 for France. In this case, a base area as referred to in Article 2(2) must be established separately for rice."

3. In Article 3(6) the following subparagraph is added:

"Any revision of the regionalisation plans to incorporate data concerning rice shall be presented by the Member States to the Commission at the latest on 1 August 2000."

4. The first subparagraph of Article 3(7) is replaced by the following:

"Should a Member State, pursuant to paragraph 1, choose to establish production regions the demarcation of which does not correspond to that of regional base areas, it shall send the Commission a summary statement of payment applications and the yields pertaining to these. If it emerges from this information that, in a Member State, the average yield resulting from the regionalisation plan applied in 1993 or, in the case of Austria, Finland and Sweden, the average yield resulting from the plan applied in 1995 or, in the case of Italy, Spain, Greece, Portugal and France, the yield fixed respectively at 4.00 tonnes per hectare, 2.95 tonnes per hectare, 3.48 tonnes per hectare, 3.00 tonnes per hectare and 6.02 tonnes per hectare, is exceeded, all payments to be made in that Member State for the following marketing year shall be reduced in proportion to the overrun which has been recorded. However, this provision shall not apply where the quantity for which applications were made, expressed in tonnes of cereals, does not exceed that resulting from the product of the total base areas of the Member State by the aforementioned average yield."

5. In Article 4, paragraph 2 is replaced by the following:

"2. The calculation mentioned in paragraph 1 shall be made using the average cereals yield for all arable crops. Where a Member State chooses to apply a specific yield as provided for in Article 3(3a), that yield shall be used for rice, and the average cereals yield shall be used for arable crops other than rice. Where maize is treated separately, the "maize" yield shall be used for maize, and the "cereals other than maize" yield shall be used for cereals, oilseeds, rice, linseed and flax and hemp grown for fibre."

6. The following words are added to the first subparagraph of Article 4(3):

"for rice:

- EUR 63.00/t from the 2001/02 marketing year onwards."

7. In Article 6(2) the following subparagraph is added:

"By 31 December 2003, the producer Member States shall send the Commission a report on the environmental situation of rice production with special reference to the development in traditional zones and the effect of any national measures taken to safeguard the environmental interest of rice-growing areas set aside."

8. Article 9 is amended as follows:

(a) the introductory sentence is replaced by the following:

"Detailed rules for the application of this Chapter shall be adopted in accordance with the procedure laid down in Article 9a(2), and in particular:"

(b) in the first subparagraph, the following indent is inserted after the fifth indent:

"- those relating to rice, and where applicable to the fixing of the specific base area taking account of the areas provided for in Article 6(4) of Regulation (EC) No 3072/95;"

(c) in the first indent of the second subparagraph, point (ii) is replaced by the following:

(ii) certified seed in the case of durum wheat, rice and flax and hemp grown for fibre,"

9. The following Article 9a is inserted:

"Article 9a

1. The Commission shall be assisted by the Management Committee for Cereals set up under Article 23 of Regulation (EEC) No 1766/92.

2. Where reference is made to this paragraph, Articles 4 and 7 of Decision 1999/468/EC shall apply, in compliance with Article 8 thereof.

3. The period referred to in Article 4(3) of Decision 1999/468/EC shall be set at one month."

10. In the last subparagraph of Article 10(3) and in Article 12, references to Article 23 of Regulation (EEC) No 1766/92 are replaced by references to Article 9a(2).

11. In Annex I, the following point VI is added:

CN code // Description

VI. RICE

1006 10 //

Rice

Article 2

This Regulation shall enter into force on the seventh day following its publication in the Official Journal of the European Communities.

It shall apply from the 2001/02 marketing year.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels,

For the Council

The President

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ANNEX TO THE FINANCIAL STATEMENT

1. Expenditure

The budgetary impact of the proposal on the EAGGF Guarantee expenditure is assessed in relation to the assumptions used for the rice sector in the preliminary draft budget for 2001 (status quo scenario):

- the aids per hectare are paid for a total eligible area of 408 034 ha, within a maximum base area for the Union of 434 123 ha,

- under the existing Regulations, purchases into public intervention are forecast at 333 000 tonnes of paddy (200 000 tonnes milled rice equivalent) with sales of 157 000 tonnes.

As a result of the abolition of the intervention system, the purchase of 200 000 tonnes of milled rice equivalent will no longer take place, which could tend to have a downward effect on market prices. This could lead to an improvement of the competitiveness of Community rice and result in an increased uptake on the internal market as well as increased possibilities for exports to third countries without refund. Under this scenario, the following consequences are assumed:

* increased sales of Community rice on internal market of 40 000 tonnes, of which 15 000 tonnes corresponds to an expansion of total internal consumption as a result of improved market fluidity and 25 000 tonnes displaces an equivalent quantity of imported rice;

* an increase in community exports without refund of 15 000 tonnes;

* a decrease in the rates of export refunds and the aid for the supply of rice to Réunion of up to 60 EUR/tonne milled equivalent as a result of improved market competitiveness, comparable to the average increase in the rates of area aid.

The budgetary consequences according to measure are shown in Annex I.

2. Own resources

Without prejudice to the results of consultations with interested countries.

The current level of community imports in milled rice equivalent (and excluding broken rice) is estimated at 525 000 tonnes (about 710 000 tonnes in terms of product weight).

With the abolition of the intervention price, the present system of import duties related to a ceiling price could be replaced by the full tariffs set out in the WTO schedules as from 1.7.2000. In this case, and taking account of the existence of concessionaire arrangements for certain categories of rice imported from the ACP countries and the overseas territories as well as the minimum access quotas under the WTO, it is estimated that the application of the full tariffs would involve a reduction in Community imports as from 2001/02 of 25 000 tonnes to 500 000 tonnes. The assumption is made that the overall reduction of 25 000 tonnes would be concentrated on those categories and origins subject to the most pronounced increase in rates of duty.

On these assumptions, the impact of the proposal on own resources is shown in Annex III

ANNEX I

Calculation of the budgetary impact of the proposed amendment to the common market organisation for rice

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ANNEX II

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ANNEX III

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1. Forecast imports and rates of duty

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2. Impact by financial year

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Note

It is assumed that duties are accounted for as own resources two months after the month of importation.