EXPLANATORY MEMORANDUM

1. CONTEXT OF THE PROPOSAL

The Commission proposal for the Multiannual Financial Framework (MFF) for 2014-2020 (the MFF proposal)[1] sets the budgetary framework and main orientations for the Common Agricultural Policy (CAP). On this basis, the Commission presents a set of regulations laying down the legislative framework for the CAP in the period 2014-2020, together with an impact assessment of alternative scenarios for the evolution of the policy.

The current reform proposals are based on the Communication on the CAP towards 2020[2] that outlined broad policy options in order to respond to the future challenges for agriculture and rural areas and to meet the objectives set for the CAP, namely 1) viable food production; 2) sustainable management of natural resources and climate action; and 3) balanced territorial development. The reform orientations in the Communication have since been broadly supported both in the inter-institutional debate[3] and in the stakeholder consultation that took place in the framework of the impact assessment.

A common theme that has emerged throughout this process is the need to promote resource efficiency with a view to smart, sustainable and inclusive growth for EU agriculture and rural areas in line with the Europe 2020 strategy, keeping the structure of the CAP around two pillars that use complementary instruments in pursuit of the same objectives. Pillar I covers direct payments and market measures providing a basic annual income support to EU farmers and support in case of specific market disturbances, while Pillar II covers rural development where Member States draw up and co-finance multiannual programmes under a common framework.[4]

Through successive reforms the CAP has increased market orientation for agriculture while providing income support to producers, improved the integration of environmental requirements and reinforced support for rural development as an integrated policy for the development of rural areas across the EU. However, the same reform process has raised demands for a better distribution of support among and within Member States, as well as calls for a better targeting of measures aiming at addressing environmental challenges and better addressing increased market volatility.

In the past, reforms mainly responded to endogenous challenges, from huge surpluses to food safety crises; they have served the EU well both on the domestic and the international front. However, most of today's challenges are driven by factors that are external to agriculture and would thus require a broader policy response.

The pressure on agricultural income is expected to continue as farmers are facing more risks, a slowdown in productivity and a margin squeeze due to rising input prices; there is therefore a need to maintain income support and to reinforce instruments to better manage risks and respond to crisis situations. A strong agriculture is vital for the EU food industry and global food security.

At the same time, agriculture and rural areas are being called upon to step up their efforts to meet the ambitious climate and energy targets and biodiversity strategy that are part of the Europe 2020 agenda. Farmers, who are together with foresters the main land managers, will need to be supported in adopting and maintaining farming systems and practices that are particularly favourable to environmental and climate objectives because market prices do not reflect the provision of such public goods. It will also be essential to best harness the diverse potential of rural areas and thus contribute to inclusive growth and cohesion.

The future CAP will not, therefore, be a policy that caters only for a small, albeit essential, part of the EU economy, but also a policy of strategic importance for food security, the environment and territorial balance. Therein lies the EU added value of a truly common policy that makes the most efficient use of limited budgetary resources in maintaining a sustainable agriculture throughout the EU, addressing important cross-border issues such as climate change and reinforcing solidarity among Member States, while also allowing flexibility in implementation to cater for local needs.

The framework set out in the MFF proposal foresees that the CAP should maintain its two-pillar structure with the budget for each pillar maintained in nominal terms at its 2013 level and with a clear focus on delivering results on the key EU priorities. Direct payments should promote sustainable production by assigning 30 % of their budgetary envelope to mandatory measures that are beneficial to climate and the environment. Payment levels should progressively converge and payments to large beneficiaries be subject to progressive capping. Rural development should be included in a Common Strategic Framework with other EU shared management funds with a reinforced outcome-orientated approach and subject to clearer, improved ex-ante conditionalities. Finally, on market measures the financing of the CAP should be reinforced with two instruments outside the MFF: 1) an emergency reserve to react to crisis situations; and 2) the extension of the scope of the European Globalization Adjustment Fund.

On this basis, the main elements of the legislative framework for the CAP during the period 2014-2020 are set out in the following regulations:

- Proposal for a Regulation of the European Parliament and of the Council establishing rules for direct payments to farmers under support schemes within the framework of the common agricultural policy ('the direct payments regulation');

- Proposal for a Regulation of the European Parliament and of the Council establishing a common organisation of the markets in agricultural products (Single CMO Regulation) ('the Single CMO regulation');

- Proposal for a Regulation of the European Parliament and of the Council on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) ('the rural development regulation');

- Proposal for a Regulation of the European Parliament and of the Council on the financing, management and monitoring of the common agricultural policy ('the horizontal regulation');

- Proposal for a Council regulation determining measures on fixing certain aids and refunds related to the common organisation of the markets in agricultural products;

- Proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EC) No 73/2009 as regards the application of direct payments to farmers in respect of the year 2013;

- Proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1234/2007 as regards the regime of the single payment scheme and support to vine-growers.

The rural development regulation builds on the proposal presented by the Commission on 6 October 2011 that sets out common rules for all funds operating under a Common Strategic Framework[5]. A regulation will follow on the scheme for most deprived persons, for which funding is now placed under a different heading of the MFF.

In addition, new rules on the publication of information on beneficiaries taking account of the objections expressed by the Court of Justice of the European Union are also under preparation with a view to finding the most appropriate way to reconcile beneficiaries' right to protection of personal data with the principle of transparency.

2. RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENT

ON THE BASIS OF THE EVALUATION OF THE CURRENT POLICY FRAMEWORK AND AN ANALYSIS OF FUTURE CHALLENGES AND NEEDS, THE IMPACT ASSESSMENT ASSESSES AND COMPARES THE IMPACT OF THREE ALTERNATIVE SCENARIOS. THIS IS THE RESULT OF A LONG PROCESS STARTED IN APRIL 2010 AND STEERED BY AN INTER-SERVICE GROUP THAT BROUGHT TOGETHER EXTENSIVE QUANTITATIVE AND QUALITATIVE ANALYSIS, INCLUDING SETTING A BASELINE IN THE FORM OF MEDIUM-TERM PROJECTIONS FOR AGRICULTURAL MARKETS AND INCOME UP TO 2020 AND MODELLING THE IMPACT OF THE DIFFERENT POLICY SCENARIOS ON THE ECONOMICS OF THE SECTOR.

The three scenarios elaborated in the impact assessment are: 1) an adjustment scenario that continues with the current policy framework while addressing its most important shortcomings, such as the distribution of direct payments; 2) an integration scenario that entails major policy changes in the form of enhanced targeting and greening of direct payments and reinforced strategic targeting for rural development policy in better coordination with other EU policies, as well as extending the legal base for a broader scope of producer cooperation; and 3) a refocus scenario that reorients the policy exclusively towards the environment with a progressive phasing out of direct payments, assuming that productive capacity can be maintained without support and that the socio-economic needs of rural areas can be served by other policies.

Against the background of the economic crisis and the pressure on public finances, to which the EU has responded with the Europe 2020 strategy and the MFF proposal, all three scenarios attach different weight to each of the three policy objectives of the future CAP which aims at a more competitive and sustainable agriculture in vibrant rural areas. With a view to a better alignment with the Europe 2020 strategy, notably in terms of resource efficiency, it will be increasingly essential to improve agricultural productivity through research, knowledge transfer and promoting cooperation and innovation (including through the European Innovation Partnership on agricultural productivity and sustainability). Whereas EU agricultural policy does not any more operate within a trade distorting policy environment, additional pressure on the sector is expected from further liberalization, notably in the framework of the DDA or the FTA with Mercosur.

The three policy scenarios were drawn up taking into account the preferences expressed in the consultation which was conducted in the context of the impact assessment. Interested parties were invited to submit contributions between 23.11.2010 and 25.1.2011 and an advisory committee was organised on 12.1.2011. The main points are summarized below:[6]

- There is broad agreement among stakeholders on the need for a strong CAP based on a two-pillar-structure in order to address the challenges of food security, sustainable management of natural resources and territorial development.

- Most respondents find that the CAP should play a role in stabilizing markets and prices.

- Stakeholders have diverse opinions concerning the targeting of support (especially redistribution of direct aid and capping payments).

- There is agreement that both pillars can play an important role in stepping up climate action and increasing environmental performance for the benefit of EU society. Whereas many farmers believe that this already takes place today, the wider public argues that Pillar I payments can be more efficiently used.

- The respondents want all parts of the EU, including less favoured areas, to be part of future growth and development.

- The integration of the CAP with other policies, such as environmental, health, trade, development, was emphasised by many respondents.

- Innovation, development of competitive businesses and provision of public goods to EU citizens are seen as ways to align the CAP with the Europe 2020 strategy.

The impact assessment thus compared the three alternative policy scenarios:

The refocus scenario would accelerate structural adjustment in the agricultural sector, shifting production to the most cost efficient areas and profitable sectors. While significantly increasing funding for the environment, it would also expose the sector to greater risks due to limited scope for market intervention. Furthermore, it would come at a significant social and environmental cost as the less competitive areas would face a considerable income loss and environmental degradation, since the policy would lose the leverage of direct payments coupled with the cross compliance requirements.

At the other end of the spectrum, the adjustment scenario would best allow for policy continuity with limited but tangible improvements both in agricultural competitiveness and environmental performance. There are however serious doubts as to whether this scenario could adequately address the important climate and environmental challenges of the future, which also underpin the long-term sustainability of agriculture.

The integration scenario breaks new ground with enhanced targeting and greening of direct payments. The analysis shows that greening is possible at a reasonable cost to farmers although some administrative burden cannot be avoided. Similarly, a new impetus in rural development is possible provided that the new possibilities are efficiently used by Member States and regions and that the common strategic framework with the other EU funds does not remove synergies with Pillar I or weaken rural development's distinctive strengths. If the right balance is struck, this scenario would best address the long term sustainability of agriculture and rural areas.

On this basis the impact assessment concludes that the integration scenario is the most balanced in progressively aligning the CAP with the EU's strategic objectives and this balance is also found in the implementation of the different elements in the legislative proposals. It will also be essential to develop an evaluation framework to measure the performance of the CAP with a common set of indicators linked to policy objectives.

Simplification has been an important consideration throughout the process and should be enhanced in a variety of ways, for instance in the streamlining of cross compliance and market instruments, or the design of the small farmers scheme. In addition, the greening of direct payments should be designed in such a way as to minimize administrative burden including the costs of controls.

3. LEGAL ELEMENTS OF THE PROPOSAL

It is proposed to maintain the current structure of the CAP in two pillars with annual mandatory measures of general application in Pillar I complemented by voluntary measures better tailored to national and regional specificities under a multi-annual programming approach in Pillar II. However, the new design of direct payments seeks to better exploit synergies with Pillar II, which is in turn placed under a Common Strategic Framework to better coordinate with other EU shared management funds.

On this basis, the current structure of four basic legal instruments is also maintained, albeit with the scope of the financing regulation enlarged to bring together common provisions into what is now called the horizontal regulation.

The proposals comply with the principle of subsidiarity. The CAP is a truly common policy: it is an area of shared competence between the EU and the Member States that is being handled at EU level with a view to maintaining a sustainable and diverse agriculture throughout the EU, addressing important cross-border issues such as climate change and reinforcing solidarity among Member States. In the light of the importance of future challenges for food security, the environment and territorial balance, the CAP remains a policy of strategic importance to ensure the most effective response to the policy challenges and the most efficient use of budgetary resources. In addition, it is proposed to maintain the current structure of instruments in two pillars where Member States have more leeway to tailor solutions to their local specificities and also co-finance Pillar II. The new European Innovation Partnership and risk management toolkit are also placed within Pillar II. At the same time the policy will be better aligned with the Europe 2020 strategy (including a common framework with other EU funds) and a number of improvements and simplification elements introduced. Finally, the analysis carried out in the framework of the impact assessment clearly shows the cost of no action in terms of negative economic, environmental and social consequences.

In addition to financing provisions, the horizontal regulation brings together relevant rules for all instruments, such as provisions on cross compliance, checks and penalties. As a result, the regulation now lays down rules on financing, the farm advisory system, management and control systems, cross compliance and clearance of accounts.

The aim is to adjust financing rules on the basis of experience to date, to streamline and enhance cross compliance and to strengthen the farm advisory system.

In relation to cross compliance in particular, the current rules were reviewed with a view to simplification, strengthening the climate change dimension within GAEC and ensuring consistency with the provisions of greening and of relevant environmental measures offered under rural development.

Finally, the regulation provides the basis for a common monitoring and evaluation framework to measure the performance of the CAP during the next period.

This regulation includes various simplification elements. First of all, it regroups all cross-compliance rules in one single legislative act, thereby improving their readability.

Furthermore, it foresees reducing the number of paying agencies and reinforcing the role of the coordinating body. This will render the system more transparent and less burdensome for both national administrations and the Commission services. There will be fewer accreditations and declarations of assurance required at Member State level and the number of Commission audits can be reduced.

The rules on management and controls will be aligned, as far as possible, for the two pillars of the CAP so as to bring legal clarity and harmonised procedures. Moreover, the regulation foresees empowering the Commission to allow for a reduction of the number of on-the-spot checks for Member States with properly functioning control systems and low error rates. This could reduce the administrative burdens for both farmers and national administrations.

4. BUDGETARY IMPLICATION

The MFF proposal provides that a significant part of the EU budget should continue to be dedicated to agriculture, which is a common policy of strategic importance. Thus, in current prices, it is proposed that the CAP should focus on its core activities with EUR 317.2 billion allocated to Pillar I and EUR 101.2 billion to Pillar II over the 2014-2020 period.

The Pillar I and Pillar II funding is complemented by additional funding of EUR 17.1 billion consisting of EUR 5.1 billion for research and innovation, EUR 2.5 billion for food safety and EUR 2.8 billion for food support for the most deprived persons in other headings of the MFF, as well as of EUR 3.9 billion in a new reserve for crises in the agricultural sector and up to EUR 2.8 billion in the European Globalization Adjustment Fund outside the MFF, thus bringing the total budget to EUR 435.6 billion over the 2014-2020 period.

As regards distribution of support among Member States, it is proposed that all Member States with direct payments below 90% of the EU average will see one third of this gap closed. The national ceilings in the direct payments regulation are calculated on this basis.

The distribution of rural development support is based on objective criteria linked to the policy objectives taking into account the current distribution. As is the case today, less developed regions should continue to benefit from higher co-financing rates, which will also apply to certain measures such as knowledge transfer, producer groups, cooperation and Leader.

Some flexibility for transfers between pillars is introduced (up to 5% of direct payments): from Pillar I to Pillar II to allow Member States to reinforce their rural development policy, and from Pillar II to Pillar I for those Member States where the level of direct payments remains below 90% of the EU average.

Details on the financial impact of the CAP reform proposals are set out in the financial statement accompanying the proposals.

2011/0288 (COD)

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on the financing, management and monitoring of the common agricultural policy

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 43(2) thereof,

Having regard to the proposal from the European Commission[7],

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Economic and Social Committee[8],

Having consulted the European Data Protection Supervisor[9],

Acting in accordance with the ordinary legislative procedure,

Whereas:

1. The Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on "The CAP towards 2020: Meeting the food, natural resources and territorial challenges of the future"[10] set out potential challenges, objectives and orientations for the Common Agricultural Policy (CAP) after 2013. In the light of the debate on that Communication, the CAP should be reformed with effect from 1 January 2014. That reform should cover all the main instruments of the CAP, including Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy[11] as amended by Regulation of the European Parliament and Council [COM(2010)…( Lisbon alignement )][12]. Experience drawn from the implementation of that Regulation shows that certain elements of the financing and monitoring mechanism need to be adjusted. In view of the scope of the reform, it is appropriate to repeal Regulation (EC) No 1290/2005 and to replace it with a new text. The reform should also, as far as possible, harmonise, streamline and simplify provisions.

2. Since the objectives of this Regulation cannot be achieved sufficiently by Member States given the links between it and the other instruments of the CAP, the limits on the financial resources of the Member States in an enlarged Union, and can therefore be better achieved at Union level through the multiannual guarantee of Union finance and by concentrating on its priorities, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5(3) of the Treaty on European Union. In accordance with the principle of proportionality as set out in Article 5(4) of that Treaty, this Regulation does not go beyond what is necessary in order to achieve that objective.

3. In order to supplement or amend certain non-essential elements of this Regulation, the power to adopt delegated acts in accordance with Article 290 of the Treaty should be delegated to the Commission in respect of the accreditation of the paying agencies and coordinating bodies, the content of the Farm Advisory System, the measures to be financed by Union budget under public intervention and the valuation of the operations in connection with public intervention, the reductions and suspension of the reimbursements to the Member States, the compensation between expenditure and revenues under the Funds, the recovery of debts, the penalties applied to beneficiaries in case of non-compliance with the eligibility conditions, in respect of rules on securities, on the functioning of the integrated administration and control system, of the measures excluded from the scrutiny of transactions, the penalties applied under cross compliance, the rules on maintenance of permanent grassland, the rules on the operative event and the exchange rate to be used by the Member States not using the euro and in respect of the content of the common evaluation framework of the measures adopted under the CAP. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level. The Commission, when preparing and drawing-up delegated acts, should ensure a simultaneous, timely and appropriate transmission of relevant documents to the European Parliament and Council.

4. The CAP consists of a series of measures, some of which relate to rural development. It is important that financing be provided for those measures in order to contribute to the achievement of the objectives of the CAP. Since the measures have certain elements in common but do also differ in a number of respects, their financing should be combined in the same set of provisions which allows for different treatment where necessary. Regulation (EC) No 1290/2005 created two European agricultural funds, namely the European Agricultural Guarantee Fund (hereinafter ‘EAGF’), and the European Agricultural Fund for Rural Development (hereinafter ‘EAFRD’). Those two Funds should be maintained.

5. Regulation (EU) No [FR]/xxx of the European Parliament and of the Council of […] on the financial rules applicable to the annual budget of the Union[13] and the provisions adopted pursuant to it should apply to the measures set out in this Regulation. In particular the Regulation lays down provisions related to the shared management with Member States based on the principles of sound financial management, transparency and non-discrimination, as well as provisions on the function of accredited bodies, the budgetary principles, provisions which should be respected in the framework of this Regulation.

6. The Union budget should finance CAP expenditure, including that on rural development, through both Funds either directly or in the context of shared management with the Member States. The types of measures that can be financed using those Funds should be specified.

7. Provision should be made for the accreditation of paying agencies by Member States, for the establishment of procedures for obtaining the requisite management declarations of assurance, and the certification of management and monitoring systems, as well as the certification of annual accounts by independent bodies. Moreover, in order to ensure the transparency of national checks, in particular as regards authorisation, validation and payment procedures, to reduce the administrative and audit burden for the Commission services as well as for the Member States where accreditation of each individual paying agency is required, the number of authorities and bodies to which those responsibilities are delegated should be restricted taking account of the constitutional arrangements of each Member State.

8. Where a Member State accredits more than one paying agency, it is important that it designates a single coordinating body to ensure consistency in the management of the funds, to provide liaison between the Commission and the various accredited paying agencies and to ensure that the information requested by the Commission concerning the operations of several paying agencies is made rapidly available. The coordinating body should also be responsible for ensuring that remedial action is taken and that the Commission is kept informed of the follow-up and it should ensure homogeneous application of common rules and standards.

9. Only paying agencies accredited by the Member States offer reasonable assurance that the necessary checks have been carried out before granting Union aid to beneficiaries. It should therefore be explicitly laid down that only expenditure effected by accredited paying agencies can be reimbursed from the Union budget.

10. In order to help beneficiaries to become more aware of the relationship between agricultural practices and management of farms on the one hand, and standards relating to the environment, climate change, good agricultural condition of land, food safety, public health, animal health, plant health and animal welfare on the other, it is necessary that Member States establish a comprehensive farm advisory system offering advice to beneficiaries. That farm advisory system should in any way not affect the obligation and responsibility of beneficiaries to respect those standards. Also a clear separation between advice and checks should be ensured by the Member States.

11. The farm advisory system should cover at least the requirements and standards forming the scope of cross compliance. That system should also cover the requirements to be respected in relation to the agricultural practices beneficial for the climate and the environment for direct payments, as well as the maintenance of the agricultural area under Regulation (EU) No DP/xxx of the European Parliament and of the Council of xxx establishing rules for direct payment to farmers under support schemes within the framework of the common agricultural policy[14]. That system should finally cover certain elements related to climate change mitigation and adaptation, biodiversity, protection of water, animal and plant disease notification and innovation as well as the sustainable development of the economical activity of the small farms.

12. Entry into the farm advisory system should be on a voluntary basis for beneficiaries. All beneficiaries, even if not receiving support under the CAP, should be allowed to participate in the system. However priority criteria may be set by the Member States. Due to the nature of the system, it is appropriate for the information obtained in the course of the advisory activity to be treated as confidential, except in case of serious infringements of Union or national law. In order to ensure the efficiency of the system, advisors should be suitably qualified and regularly trained.

13. The financial resources required to cover the expenditure effected by the accredited paying agencies in respect of the EAGF, are to be made available to the Member States by the Commission in the form of reimbursements against the booking of the expenditure effected by those agencies. Until such reimbursements, in the form of monthly payments, have been paid, financial resources are to be mobilised by the Member States in accordance with the needs of their accredited paying agencies. The personnel costs and the administrative costs of the Member States and the beneficiaries involved in the execution of the CAP should be borne by themselves.

14. The use of the agro-meteorological system and the acquisition and improvement of satellite images should provide the Commission with the means to manage the agricultural markets and to facilitate the monitoring of agricultural expenditure.

15. In the context of respecting budget discipline, it is necessary to define the annual ceiling for the expenditure financed by the EAGF by taking into account the maximum amounts laid down for that Fund under the multiannual financial framework provided for in the Council Regulation (EU) No xxx/xxx of […] laying down the multiannual financial framework for the years 2014-2020[15] [ MFF] .

16. Budget discipline also requires that the annual ceiling for expenditure financed by the EAGF to be respected under all circumstances and at all stages of the budget procedure and the execution of the budget. This requires that the national ceiling for the direct payments per Member State set out in Regulation (EU) No xxx/xxx[DP] be regarded as a financial ceiling for such direct payments for the Member State concerned and that the reimbursement of those payments remain within this financial ceiling. Furthermore, budget discipline requires that all acts proposed by the Commission or adopted by the legislator or by the Commission under the CAP and financed by the EAGF comply with the annual ceiling for the expenditure financed by that Fund.

17. With a view to ensuring that the amounts for the financing of the CAP comply with the annual ceilings, the financial mechanism referred to in Council Regulation (EC) No 73/2009 of 19 January 2009 establishing common rules for direct support schemes for farmers under the common agricultural policy and establishing certain support schemes for farmers, amending Regulations (EC) No 1290/2005, (EC) No 247/2006, (EC) No 378/2007 and repealing Regulation (EC) No 1782/2003[16] whereby the level of direct support is adjusted, should be maintained. In the same context, it is necessary to authorise the Commission to set those adjustments where the Council do not fix them before 30 June of the calendar year in respect of which they apply.

18. The measures taken to determine the financial contribution from the EAGF and the EAFRD in respect of the calculation of financial ceilings do not affect the powers of the budgetary authority designated by the Treaty. Those measures should therefore be based on the reference amounts fixed in accordance with the Interinstitutional Agreement of […] between the European Parliament, the Council and the Commission on cooperation in budgetary matters and on sound financial management[17] and Regulation (EU) No xxx/xxx [ MFF] .

19. Budget discipline also demands a continuous examination of the medium-term budget situation. The Commission, when submitting the draft budget for a given year, should therefore present its forecasts and analyses to the European Parliament and the Council and propose, if necessary, appropriate measures to the legislator. Furthermore, the Commission should make full use of its management powers at all times to ensure compliance with the annual ceiling and, if necessary, propose appropriate measures to the European Parliament and to the Council or to the Council to redress the budget situation. If, at the end of a budget year, the annual ceiling cannot be complied with as a result of the reimbursements requested by the Member States, the Commission should be able to take measures allowing provisional distribution of the available budget among the Member States in proportion to their requests for reimbursement not yet paid, as well as compliance with the ceiling fixed for the year concerned. Payments for that year should be charged to the following budget year and the total amount of Union financing per Member State should be definitively established, as should compensation between Member States in order to comply with the established amount.

20. When implementing the budget, the Commission should operate a monthly early-warning and monitoring system for agricultural expenditure, so that, if there is a risk of the annual ceiling being exceeded, the Commission may at the earliest opportunity take the appropriate measures under the management powers at its disposal and propose other measures if those measures appear to be insufficient. A periodic report by the Commission to the European Parliament and the Council should compare the evolution of the expenditure effected in relation to the profiles so far and give an assessment of the foreseeable implementation for the remainder of the budget year.

21. The exchange rate used by the Commission in drawing up the budget documents should, while making allowances for the time lag between drafting and submission reflect the most recent information available.

22. Regulation (EU) No CR/xxx of the European Parliament and of the Council of […] laying down common provisions common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund covered by the Common Strategic Framework and laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1083/2006[18] provides rules applying to the financial support from the Funds covered by that Regulation, including the EAFRD. Those provisions also include certain rules on the eligibility of expenditure, on financial management as well as the management and control systems. As regards the financial management of the EAFRD, for sake of legal clarity and coherence between the agricultural Funds, reference should be made to the relevant provisions on the budget commitments, payment deadlines and decommitment of Regulation (EU) No CR/xxx.

23. The rural development programmes are financed from the Union budget on the basis of commitments in annual instalments. Member States should be able to draw on the Union funds provided for as soon as they begin the programmes. A suitably restricted prefinancing system ensuring a steady flow of funds so that payments to beneficiaries under the programmes are made at the appropriate time is therefore needed.

24. Prefinancing apart, a distinction should be drawn between payments by the Commission to the accredited paying agencies. Interim payments and payment of balances, and rules on their payment should be set. The automatic decommitment rule should help speed up execution of programmes and contribute to sound financial management.

25. Union aid should be paid to beneficiaries in good time so that they may use it efficiently. A failure by the Member States to comply with the payment deadlines laid down in Union legislation could create serious difficulties for the beneficiaries and could jeopardise the Union's yearly budgeting. Therefore, expenditure made without respecting deadlines for payments should be excluded from Union financing. In order to respect the principle of proportionality, the Commission should be able to provide for exceptions to this general rule. This principle, laid down in Regulation (EC) No 1290/2005 should be maintained and apply to both the EAGF and the EAFRD. If Member States pay late, they should add interests on the principal amount at their own cost to compensate the beneficiaries. Such a provision could create an incentive to Member States to better respect payment deadlines, and could give more assurance to beneficiaries to be paid in time, or at least to be compensated in case of late payment.

26. Regulation (EC) No 1290/2005 provides for reductions and suspensions of monthly or interim payments for the EAGF and the EAFRD. Despite the rather broad wording of those provisions, it is noticed that in practice those provisions are used essentially to reduce payments for non-respect of payment deadlines, ceilings and similar "accounting issues" which can readily be detected in the declarations of expenditure. Those provisions also allow reductions and suspensions in case of serious and persistent deficiencies in national control systems, but including rather restrictive substantive conditions for doing so and providing for a special, two-step procedure to be followed. The budgetary authority has repeatedly asked the Commission to suspend payments to non-compliant Member States. Against this background, it is necessary to clarify the system provided for in Regulation (EC) No 1290/2005 and to merge the rules on reductions and suspensions for both the EAGF and the EAFRD into one single Article. The system of reductions for "accounting issues" should be maintained with a clearer wording in line with the existing administrative practice. The possibility for reducing or suspending payments in case of significant and persistent deficiencies in national control systems should be extended by including negligence in the recovery of irregular payments, while maintaining the two-step procedure for such reductions or suspensions.

27. Sectoral agricultural legislation requires Member States to send information on the numbers of checks carried out and their outcome within specified deadlines. Those control statistics are used to determine the level of error at Member State level and, more generally, for the purposes of checking the management of the EAGF and the EAFRD. They are an important source for the Commission to satisfy itself as to the correct management of funds and are an essential element for the annual declaration of assurance. Given the vital nature of this statistical information and in order to ensure that Member States respect their obligation to send it in time, it is necessary to provide a deterrent to late provision of the data required in a manner proportionate to the extent of the data deficit. Therefore, provisions should be put in place whereby the Commission can suspend part of the monthly or interim payments for which the relevant statistical information has not been sent in time.

28. In order to allow reuse of EAGF and EAFRD funds, rules are needed on the assignment of specific sums. The list contained in Regulation (EC) No 1290/2005 should be completed with the sums relating to late payments and to the clearance of accounts as regards expenditure under the EAGF. Also Council Regulation (EEC) No 352/78 of 20 February 1978 on the crediting of securities, deposits and guarantees furnished under the common agricultural policy and subsequently forfeited[19] laid down rules on the destinations of the sums resulting from forfeited securities. Those provisions should be harmonised and merged with the existing provisions on assigned revenue. Regulation (EEC) No 352/78 should therefore be repealed.

29. Council Regulation (EC) No 814/2000 of 17 April 2000 on information measures relating to the common agricultural policy[20] and its implementing rules define the information measures relating to the CAP which may be financed under point (c) of Article 5 of Regulation (EC) No 1290/2005. Regulation (EC) No 814/2000 contains a list of those measures and their objectives and fixes the rules of their financing and the implementation of the corresponding projects. Since the adoption of that Regulation, rules have been adopted by Regulation (EU) No xxx/xxx[FR] as regards grants and procurement. Those rules should apply also to the information measures under the CAP. For reasons of simplification and coherence, Regulation (EC) No 814/2000 should be repealed while maintaining the specific provisions relating to the objectives and types of measures to be financed. Those measures should also take into account the need to ensure more efficiency in communication to the public at large and stronger synergies between the communication activities undertaken at the initiative of the Commission and to ensure that the Union's political priorities are communicated effectively. Therefore they should also cover information measures relevant to CAP in the framework of the corporate communication as referred to in the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Budget for Europe 2020 - Part II: Policy fiches[21].

30. The financing of measures and operations under the CAP will in part involve shared management. To ensure that Union funds are soundly managed, the Commission should perform checks on the management of the Funds by the Member State authorities responsible for making payments. It is appropriate to define the nature of the checks to be made by the Commission, to specify the terms of its responsibilities for implementing the budget and to clarify the Member States' cooperation obligations.

31. In order to allow the Commission to fulfil its obligation to check the existence and proper functioning of management and inspection systems for Union expenditure in the Member States, provision should be made, irrespective of the inspection carried out by Member States themselves, for checks by persons delegated by the Commission who should be able to request assistance from the Member States in their work.

32. Information technology needs to be used as fully as possible for producing the information to be sent to the Commission. When carrying out checks, the Commission should have full and immediate access to expenditure information recorded both in paper form and in electronic files.

33. In order to establish the financial relationship between the accredited paying agencies and the Union budget, the Commission should clear the accounts of these paying agencies annually. The clearance of accounts decision should cover the completeness, accuracy and veracity of the accounts but not the conformity of the expenditure with Union legislation.

34. The Commission, which is responsible for the proper application of Union law under Article 17 of the Treaty on European Union, should decide whether the expenditure incurred by the Member States complies with Union legislation. Member States should be given the right to justify their decisions to make payments and should have recourse to conciliation where there is no common agreement between them and the Commission. In order to give Member States legal and financial assurances as to expenditure effected in the past, a maximum period should be set for the Commission to decide which financial consequences should follow from non-compliance. The conformity clearance procedure should be , as regards EAFRD, in line with the provisions on the financial corrections by the Commission as laid down in Part 2 of Regulation (EU) No CR/xxx .

35. As regards the EAGF, sums recovered should be paid back to that Fund where the expenditure is not in conformity with Union legislation and no entitlement existed. Provision should be made for a system of financial responsibility for irregularities in the absence of total recovery. In this respect a procedure should be established permitting the Commission to safeguard the interests of the Union budget by deciding on the charging to the Member State concerned of the sums lost as a result of irregularities and not recovered within reasonable deadlines. The rules should apply to all sums not yet recovered by the time of the entry into force of this Regulation. In certain cases of negligence on the part of the Member State, it is also justified to charge the full sum to the Member State concerned. Same rules should apply to the EAFRD, keeping however the specificity that sums recovered or cancelled following irregularities should remain available to the approved rural development programmes of the Member State concerned as those sums have been allocated to that Member State. Provisions on the reporting obligation for Member States should be set also.

36. The recovery procedures used by the Member States may have the effect of delaying recovery for a number of years, with no guarantee that the outcome will actually be successful. The cost of implementing those procedures may also be out of proportion to the amounts which are or may be collected. Consequently, Member States should be permitted to halt recovery procedures in certain cases.

37. In order to protect the financial interests of the Union budget, measures should be taken by Member States to satisfy themselves that transactions financed by the EAGF and the EAFRD are actually carried out and are executed correctly. Member States should also prevent, detect and deal effectively with any irregularities or non-compliance with obligations committed by beneficiaries. To this end, Council Regulation (EC, Euratom) No 2988/95 of 18 December 1995 on the protection of the European Communities financial interests[22] should apply.

38. Provisions relating to general principles on checks, withdrawals, reductions or exclusions from payments and to the imposition of penalties are contained in various sectoral agricultural regulations. Those rules should be gathered in the same legal framework at a horizontal level. They should cover the obligations of the Member States as regards administrative and on-the-spot checks, the rules on the recovery, reduction and exclusions of aid. Rules on checks of obligations not necessarily linked to the payment of an aid should be laid down as well.

39. Various provisions of the sectoral agricultural legislation require that a security be lodged to ensure the payment of a sum due if an obligation is not met. To all those provisions a single horizontal rule should apply so as to strengthen the framework for securities.

40. Member State should operate an integrated administration and control system for certain payments provided for in Regulation (EU) No xxx/xxx [DP] and in Regulation (EU) No RD/xxx of the European Parliament and of the Council of Xxx on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)[23]. In order to improve the effectiveness and monitoring of Union support, Member States should be authorised to make use of that integrated system also for other Union support schemes.

41. The main elements of that integrated system and, in particular, the provisions concerning a computerised database, an identification system for agricultural parcels, aid applications or payment claims and a system for the identification and recording of payment entitlements should be maintained.

42. Payments provided for in Union support schemes covered by the integrated system should be made by the competent national authorities to beneficiaries in full, subject to any reductions provided for in this Regulation, and within prescribed periods. In order to render the management of direct payments more flexible, Member States should be allowed to pay payments covered by the integrated system in up to two instalments per year.

43. Scrutiny of the commercial documents of undertakings receiving or making payments can be a very effective means of surveillance of transactions forming part of the system of financing by the EAGF. The provisions on the scrutiny of the commercial documents are laid down in Council Regulation (EC) No 485/2008 of 26 May 2008 on scrutiny by Member States of transactions forming part of the system of financing by the European Agricultural Guarantee Fund[24]. That scrutiny supplements other checks already carried out by the Member States. Furthermore, national provisions relating to scrutiny which are more extensive than those provided for in that Regulation are not affected by it.

44. Under Regulation (EC) No 485/2008, Member States are to take the measures necessary to ensure effective protection of the financial interests of the Union budget, and particularly in order to check the genuineness and compliance of operations financed by the EAGF. In the interests of clarity and rationality, the relevant provisions should be integrated into the same act. Regulation (EC) No 485/2008 should therefore be repealed.

45. The documents used as a basis for such scrutiny should be determined in such a way as to enable a full scrutiny to be carried out. The undertakings to be scrutinised should be selected on the basis of the nature of the transactions carried out on their responsibility and the breakdown per sector of the undertakings receiving or making payments according to their financial importance in the system of financing by the EAGF.

46. The powers of the officials responsible for scrutiny and the obligations on undertakings to make commercial documents available to such officials for a specified period and to supply such information as may be requested by them should be defined. Provision should be made allowing commercial documents to be seized in certain cases.

47. Having regard to the international structure of agricultural trade and in the interest of the functioning of the internal market, it is necessary to organise cooperation among the Member States. It is also necessary to set up a centralised documentation system at Union level concerning undertakings receiving or making payments established in third countries.

48. While it is the responsibility of the Member States to adopt their scrutiny programmes, it is necessary that those programmes be communicated to the Commission so that it can assume its supervisory and coordinating role, in order to ensure that the programmes are adopted on the basis of appropriate criteria and to guarantee that the scrutiny is concentrated on sectors or undertakings where the risk of fraud is high.

49. It is essential that each Member State has a special department responsible for monitoring the scrutiny of commercial documents provided for in this Regulation or for coordinating that scrutiny. Those special departments should be organised independently of the departments carrying out scrutiny prior to payment. Information collected during that scrutiny should be protected by professional secrecy.

50. Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001[25], which was replaced by Regulation (EC) No 73/2009, established the principle that the full payment to beneficiaries of some supports under the CAP should be linked to compliance with rules relating to land management, agricultural production and agricultural activity. That principle was subsequently reflected in Council Regulation (EC) No 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)[26] and Council Regulation (EC) No 1234/2007 of 22 October 2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation)[27]. Under this so-called 'cross compliance' system Member States are to impose penalties in the form of reduction or exclusion of support received under the CAP in whole or in part.

51. The cross compliance system incorporates in the CAP basic standards for the environment, climate change, good agricultural and environmental condition of land, public health, animal health, plant health and animal welfare. This link aims at contributing to the development of a sustainable agriculture through a better awareness of beneficiaries of the need to respect those basic standards. It aims also at contributing to make the CAP more compatible with the expectation of the society through a better consistency of that policy with the environment, public health, animal health, plant health and animal welfare policies.

52. The cross compliance system forms an integral part of the CAP and should therefore be maintained. However, its scope, which consists so far in separate lists of statutory management requirements and standards of good agricultural and environmental condition of land should be streamlined so that its consistency is ensured and made more visible. For this purpose the requirements and standards should be organised in a single list and grouped by areas and issues. Experience has also shown that a number of the requirements within the scope of cross compliance are not sufficiently relevant to farming activity or the area of the holding or concern national authorities rather than beneficiaries. It is therefore appropriate to adjust this scope in this respect. Provision should furthermore be made for the maintenance of permanent grassland in 2014 and 2015.

53. Statutory management requirements need to be fully implemented by Member States in order to become operational at farm level and ensure the necessary equal treatment between farmers.

54. As regards Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy[28] the provisions will only be operational under cross compliance when all Member States will have fully implemented them in particular with clear obligations for farmers. According to the Directive the requirements at farm level will be applied at the latest by 1 January 2013.

55. As regards Directive 2009/128/EC of the European Parliament and of the Council of 21 October 2009 establishing a framework for Community action to achieve the sustainable use of pesticides[29] the provisions will only be operational under cross compliance when all Member States will have fully implemented them in particular with clear obligations for farmers. According to the Directive the requirements at farm level will be progressively applied following a time schedule and in particular the general principles of integrated pest management will be applied at the latest by 1 January 2014.

56. According to Article 22 of Directive 2000/60/EC, Council Directive 80/68/EEC of 17 December 1979 on the protection of groundwater against pollution caused by certain dangerous substances[30] shall be repealed on 23 December 2013. In order to maintain the rules under cross compliance related to protection of groundwater, it is appropriate, while awaiting the inclusion of Directive 2000/60/EC in cross compliance, to adjust the scope of cross-compliance and to define a standard of good agricultural and environnemental condition encompassing the requirements of Articles 4 and 5 of the Directive 80/68/EEC.

57. The cross compliance system implies certain administrative constraints for both beneficiaries and national administrations since record keeping must be ensured, checks must be carried out and penalties have to be applied where necessary. Those penalties should be proportionate, effective and dissuasive. Such penalties should be without prejudice to other penalties laid down under other provisions of Union or national law. For the sake of consistency, it is appropriate to merge the relevant Union provisions into one single legal instrument. For farmers participating in the small farmers scheme referred to in Title V of Regulation (EU) No xxx/xxx[DP], the efforts to be made under the cross compliance system may be considered as exceeding the benefit of keeping those farmers under that system. For reasons of simplification, those farmers should therefore be exempted from cross compliance and in particular from its control system and from the risk of cross compliance penalties. However, that exemption should be without prejudice to the obligation to respect the applicable provisions of the sectoral legislation and to the possibility to be checked and to be imposed penalties under that legislation.

58. Regulation (EC) No 1782/2003 established a framework of standards of good agricultural and environmental condition of the land within which Member States are to adopt national standards taking account of the specific characteristics of the areas concerned, including soil and climatic conditions and existing farming systems (land use, crop rotation, farming practices) and farm structures. Those standards of good agricultural and environmental condition of the land aim at contributing to prevent soil erosion, maintain soil organic matter and soil structure, ensure a minimum level of maintenance, avoid the deterioration of habitats and protect and manage water. The wider scope of the cross compliance system as laid down in this Regulation should therefore include a framework within which Member States should adopt national standards of good agricultural and environmental condition. The Union framework should also include rules to better address water, soil, carbon stock, biodiversity and landscape issues as well as minimum level of maintenance of the land.

59. Beneficiaries should know clearly what they have to comply with in relation to the rules on cross compliance. For that purpose, all requirements and standards forming part of those rules should be communicated by Member States in an exhaustive, understandable and explanatory way, including, where possible, by electronic means.

60. An effective implementation of cross compliance requires verification at beneficiaries' level that obligations are respected. Where a Member State decides to make use of the option not to apply a reduction or exclusion where the amount concerned is less than EUR 100, the competent control authority should, for a sample of beneficiaries in the following year, verify that the findings of the non-compliance concerned have been remedied.

61. To ensure harmonious cooperation between the Commission and the Member States regarding the financing of CAP expenditure and, more particularly, to allow the Commission to monitor the financial management by the Member States and clear the accounts of the accredited paying agencies, certain information has to be communicated by the Member States or to be kept available to the Commission.

62. For the purposes of compiling the data to be sent to the Commission, and to allow the Commission to have full immediate access to expenditure data in both paper and electronic form, suitable rules on the presentation and transmission of data, including rules on time limits, need to be laid down.

63. As personal data or business secrets might be involved in the application of the national control systems and the conformity clearance, the Member States and the Commission should guarantee the confidentiality of the information received in that context.

64. In the interests of sound financial management of the Union budget and impartiality of treatment at both Member State and beneficiary level, rules on the use of the euro should be laid down.

65. The rate of exchange of the euro into national currency may vary in the course of the period during which an operation is carried out. Therefore the rate applicable to the amounts concerned should be determined taking into account the event through which the economic objective of the operation is achieved. The rate of exchange applied should be that of the date on which this event occurs. It is necessary to specify this operative event or to waive its application, observing certain criteria and in particular the rapidity with which currency movements are passed on. Those rules are laid down in Council Regulation (EC) No 2799/98 of 15 December 1998 establishing agrimonetary arrangements for the euro[31] and they complete similar provisions of Regulation (EC) No 1290/2005. In the interests of clarity and rationality the relevant provisions should be integrated into the same act. Regulation (EC) No 2799/98 should therefore be repealed.

66. Special rules should be laid down for dealing with exceptional monetary situations arising either within the Union or on the world market and requiring immediate action to ensure that the arrangements established under the CAP operate effectively.

67. Member States not having adopted the euro should have the option of making payments for expenditure resulting from the CAP legislation in euro rather than in national currency. Specific rules are needed to ensure that this option does not lead to any unjustified advantage for parties making or receiving payment.

68. Each measure under the CAP should be subject to monitoring and evaluation in order to improve its quality and demonstrate its achievements. In this context a list of indicators should be determined and the impact of the CAP policy assessed by the Commission in relation to policy objectives. The Commission should set up a framework for a common monitoring and evaluation ensuring among others that relevant data, including information from Member States is available on a timely manner. In so doing it should take into account the data needs and synergies between potential data sources. Moreover, the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Budget for Europe 2020 - Part II stated that the climate related expenditure in the overall Union budget should increase to at least 20%, with contribution from different policies. The Commission should therefore be able to assess the impact of the Union's support in the framework of the CAP to climate objectives.

69. Union legislation concerning the protection of individuals with regard to the processing of personal data and on the free movement of such data, in particular Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data[32] and Regulation (EC) No 45/2001 of the European Parliament and of the Council of 18 December 2000 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data[33] are applicable.

70. In its judgment in Joined Cases C-92/09 and 93/09[34] the Court of Justice of the European Union declared the relevant provisions in Regulation (EC) No 1290/2005 concerning the obligation of Member States to publish information on natural persons benefiting from the European agricultural funds invalid. Since it is in the interest of natural persons that their personal data are protected, and with a view to reconciling the different objectives underlying the obligation to publish information on the beneficiaries of funds, as provided for in Commission Regulation (EC) No 259/2008 laying down detailed rules for the application of Council Regulation (EC) No 1290/2005 as regards the publication of information on the beneficiaries of funds deriving from the European Agricultural Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD)[35], that Regulation was amended in order to lay down explicitly that this obligation does not apply to natural persons. The adoption by the European Parliament and the Council of new rules taking account of the objections expressed by the Court should be preceded by in depth analysis and assessment in order to find the most appropriate way to reconcile the right to protection of personal data of the beneficiaries with the need for transparency. Pending that analysis and assessment, the current provisions on the publication of information on beneficiaries of the European agricultural funds should be maintained.

71. In order to ensure uniform conditions for the implementation of this Regulation, implementing powers should be conferred on the Commission. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council of 16 February 2011 laying down the rules and general principles concerning mechanisms for control by Member States of the Commission's exercise of implementing powers[36].

72. The advisory procedure should be used for the adoption of certain implementing acts. With regard to the implementing acts involving the calculations of amounts by the Commission the advisory procedure enables the Commission to fully assume its responsibility of managing the budget and aims at increased efficiency, predictability and rapidity, taking into account the time limits and the budgetary procedures. With regard to the implementing acts within the framework of the payments made to the Member States and the operation of the clearance of accounts procedure, the advisory procedure enables the Commission to fully assume its responsibility of managing the budget and verifying the annual accounts of the national paying agencies with a view to accepting such accounts or, in the case of expenditure not effected in compliance with Union rules, to excluding such expenditure from Union financing. In other cases, the examination procedure should be used for the adoption of implementing acts.

73. The Commission should further be empowered to carry out certain administrative or management tasks, in particular concerning the setting of the net balance available for EAGF expenditure. To those empowerments Regulation (EU) No 182/2011 should not apply.

74. The transition from the provisions of the Regulations repealed by this Regulation to those in this Regulation could give rise to practical and specific difficulties. In order to deal with those possible difficulties, provision should be made for the Commission to adopt the necessary and duly justified measures.

75. As the programming period for the rural development programmes financed on the basis of this Regulation runs from 1 January 2014, this Regulation should be applicable as from that date. However, certain provisions related in particular to the financial management of the funds should apply as from an earlier date corresponding to the beginning of the financial year,

HAVE ADOPTED THIS REGULATION:

TABLE OF CONTENTS

EXPLANATORY MEMORANDUM 2

1. CONTEXT OF THE PROPOSAL 2

2. RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENT 4

3. LEGAL ELEMENTS OF THE PROPOSAL 6

4. BUDGETARY IMPLICATION 7

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the financing, management and monitoring of the common agricultural policy 9

TITLE I SCOPE AND DEFINITIONS 27

TITLE II GENERAL PROVISIONS ON AGRICULTURAL FUNDS 28

Chapter I Agricultural Funds 28

Chapter II Paying agencies and other bodies 30

TITLE III FARM ADVISORY SYSTEM 33

TITLE IV FINANCIAL MANAGEMENT OF THE FUNDS 35

Chapter I EAGF 35

Section 1 Financing of Expenditure 35

Section 2 Budget discipline 38

Chapter II EAFRD 41

Section 1 General provisions for EAFRD 41

Section 2 Financing of rural development programmes 41

Section 3 Financial Contribution to rural development programmes 42

Section 4 Financing of the Prize for innovative, local cooperation 45

Chapter III Common Provisions 46

Chapter IV Clearance of accounts 52

Section I General provisions 52

Section II Clearance 54

Section III Irregularities 56

TITLE V CONTROL SYSTEMS AND PENALTIES 58

Chapter I General rules 58

Chapter II Integrated Administration and Control System 63

Chapter III Scrutiny of transactions 69

Chapter IV Other provisions on checks 74

TITLE VI CROSS COMPLIANCE 77

Chapter I Scope 77

Chapter II Control system and penalties in relation to cross compliance 79

TITLE VII COMMON PROVISIONS 83

Chapter I Communication 83

CHAPTER II Use of the euro 85

CHAPTER III Report and evaluation 87

TITLE VIII FINAL PROVISIONS 89

ANNEX I 91

ANNEX II 94

ANNEX III 97

LEGISLATIVE FINANCIAL STATEMENT 102

TITLE I SCOPE AND DEFINITIONS

Article 1 Scope

This Regulation lays down the rules on:

(a) the financing of expenditure under the common agricultural policy, including expenditure on rural development;

(b) the farm advisory system;

(c) the management and control systems to be put in place by the Member States;

(d) the cross-compliance system;

(e) clearance of accounts.

Article 2 Terms used in this Regulation

1. The definitions of "farmer", "agricultural activity", "agricultural area", "holding" laid down in Article 4 of Regulation (EU) xxx/xxx[DP] shall apply for the purposes of this Regulation, save as otherwise provided for in this Regulation.

The terms "direct payments" referred to in Article 1 of Regulation (EU) xxx/xxx[DP] shall apply for the purposes of this Regulation.

2. Force majeure and exceptional circumstances as used in this Regulation in relation to Regulation (EU) xxx/xxx[DP], Regulation (EU) xxx/xxx[sCMO] and Regulation (EU) xxx/xxx[RD] may in particular be recognised in cases such as:

(a) the death of the beneficiary;

(b) long-term professional incapacity of beneficiary;

(c) a severe natural disaster gravely affecting the holding;

(d) the accidental destruction of livestock buildings on the holding;

(e) an epizootic affecting part or all of the beneficiary's livestock;

(f) expropriation of a large part of the holding if that could not have been anticipated on the day of lodging the application.

TITLE II GENERAL PROVISIONS ON AGRICULTURAL FUNDS

Chapter I Agricultural Funds

Article 3 Funds financing agricultural expenditure

1. In order to achieve the objectives of the common agricultural policy defined by the Treaty, the financing of the various measures falling under it, including rural development shall be made by:

(a) the European Agricultural Guarantee Fund, hereinafter referred to as the ‘EAGF’;

(b) the European Agricultural Fund for Rural Development, hereinafter referred to as the ‘EAFRD’.

2. The EAGF and the EAFRD shall come under the general budget of the European Union.

Article 4 EAGF expenditure

1. The EAGF shall be implemented in shared management between the Member States and the Union and shall finance the following expenditure, which shall be effected in accordance with Union legislation:

(a) measures regulating or supporting agricultural markets;

(b) direct payments to farmers under the common agricultural policy;

(c) the Union's financial contribution to information and promotion measures for agricultural products on the internal market of the Union and in third countries, undertaken by Member States on the basis of programmes other than those referred to in Article 5 and selected by the Commission;

(d) the Union’s financial contribution to the Union School Fruit Scheme and to the measures in relation to animal diseases and loss of consumer confidence referred to in Articles 21 and 155 of Regulation (EU) No xxx/xxx [sCMO] respectively.

2. The EAGF shall finance the following expenditure in a direct manner and in accordance with Union legislation:

(a) promotion of agricultural products, undertaken either directly by the Commission or via international organisations;

(b) measures, undertaken in accordance with Union legislation, to ensure the conservation, characterisation, collection and utilisation of genetic resources in agriculture;

(c) establishment and maintenance of agricultural accounting information systems;

(d) agricultural survey systems, including surveys on the structure of agricultural holdings.

Article 5 EAFRD expenditure

The EAFRD shall be implemented in shared management between the Member States and the Union and shall finance the Union's financial contribution to rural development programmes implemented in accordance with the Union legislation on support for rural development, as well as the expenditure related to the Prize for innovative, local cooperation referred to in Chapter IV of Title III of Regulation (EU) No RD/xxx..

Article 6 Other expenditure, including technical assistance

The EAGF and the EAFRD may each respectively finance on a direct manner, on the initiative of the Commission and/or on its behalf, the preparatory, monitoring, administrative and technical support, as well as evaluation, audit and inspection measures required to implement the common agricultural policy. Those measures shall include in particular:

76. measures required for the analysis, management, monitoring, information exchange and implementation of the common agricultural policy, as well as measures relating to the implementation of control systems and technical and administrative assistance;

77. the acquisition by the Commission of the satellite images required for the checks in accordance with Article 21;

78. the measures taken by the Commission via remote-sensing applications used for the monitoring of agricultural resources in accordance with Article 22;

79. measures required to maintain and develop methods and technical means for information, interconnection, monitoring and control of the financial management of the funds used to finance the common agricultural policy;

80. provision of information on the common agricultural policy in accordance with Article 47;

81. studies on the common agricultural policy and evaluation of measures financed by the EAGF and the EAFRD, including improvement of evaluation methods and exchange of information on practices;

82. where relevant, executive agencies set up in accordance with Council Regulation (EC) No 58/2003[37], acting in connection with the common agricultural policy;

83. measures relating to dissemination of information, raising awareness, promoting cooperation and exchanging experience at Union level, undertaken in the context of rural development, including networking of the parties concerned;

84. measures required for the development, registration and protection of logos within the framework of the Union quality policies and for the protection of intellectual property rights linked to it, as well as the necessary information technology (IT) developments.

Chapter II Paying agencies and other bodies

Article 7 Accreditation and withdrawal of accreditation of paying agencies and coordinating bodies

1. Paying agencies shall be dedicated departments or bodies of the Member States responsible for the management and control of expenditure referred to in Article 4(1) and Article 5.

With the exception of payment, the execution of those tasks may be delegated.

2. Member States shall accredit as paying agencies departments or bodies which fulfil the accreditation criteria to be laid down by the Commission pursuant to Article 8(a).

Each Member State shall, taking into account its constitutional provisions, restrict the number of its accredited paying agencies to one per Member State or one per region, where applicable. However, where paying agencies are established at regional level, Member States shall, in addition, accredit a paying agency at national level for aid schemes which, by their nature, have to be managed at national level.

3. By [1 February] of the year following the financial year concerned, the person in charge of the accredited paying agency shall draw up:

(a) the annual accounts for the expenditure made in the execution of the tasks entrusted to their accredited paying agencies, accompanied by the requisite information for their clearance in accordance with Article 53;

(b) a management declaration of assurance as to the completeness, accuracy and veracity of the accounts, the proper functioning of the internal control systems as well as to the legality and regularity of the underlying transactions and the respect of the principle of sound financial management;

(c) a summary of the results of all available audits and checks carried out, including an analysis of systematic or recurrent weaknesses as well as corrective actions taken or planned.

4. Where more than one paying agency is accredited, the Member State shall designate a body, hereinafter referred to as the "coordinating body", to which it assigns the following tasks:

(a) to collect the information to be made available to the Commission and to send that information to the Commission;

(b) to establish a synthesis report providing an overview at national level of all management declarations of assurance referred to in point (b) of paragraph 3 and the audit opinions thereon referred to in Article 9;

(c) to ensure that remedial action is taken as regards any deficiencies of a common nature and that the Commission is kept informed of the follow-up;

(d) to promote and ensure harmonised application of the Union rules.

The coordinating body shall be subject to specific accreditation by the Member States as regards the processing of the financial information referred to in point (a) of the first subparagraph.

5. Where an accredited paying agency does not meet or no longer meets one or more of the accreditation criteria referred to in paragraph 2, the Member State shall withdraw its accreditation unless the paying agency makes the necessary changes within a period to be determined according to the severity of the problem.

6. The paying agencies shall manage and ensure control of the operations linked to public intervention for which they are responsible and they shall retain overall responsibility in that field.

Article 8 Commission powers

1. To ensure the sound operation of the system provided for in Article 7, the Commission shall be empowered to adopt delegated acts in accordance with Article 111 concerning:

(a) minimum conditions for the accreditation of paying agencies with regard to the internal environment, control activities, information and communication, and monitoring, as well as rules on the procedure for issuing and withdrawing accreditation;

(b) rules relating to supervision and the procedure for reviewing accreditation of paying agencies;

(c) minimum conditions for the accreditation of coordination bodies as well as rules on the procedure for issuing and withdrawing accreditation.

2 The Commission shall lay down, by means of implementing acts, rules on:

(a) the obligations of the paying agencies as regards public intervention, as well as on the content of their management and control responsibilities.

(b) the functioning of the coordinating body and the notification of information to the Commission as referred to in Article 7(4).

The implementing acts provided for in the first subparagraph shall be adopted in accordance with the examination procedure referred to in Article 112(3).

Article 9 Certification bodies

1. The certification body shall be a public or private audit body designated by the Member State which shall provide an opinion on the management declaration of assurance covering the completeness, accuracy and veracity of the annual accounts of the paying agency, the proper functioning of its internal control system, the legality and regularity of the underlying transactions, as well as the respect of the principle of sound financial management.

It shall be operationally independent from both the paying agency concerned and the authority which has accredited that agency.

2. The Commission shall, by means of implementing acts, lay down rules concerning the status of the certification bodies, the specific tasks, including the checks, which they have to carry out as well as the certificates and the reports, together with the documents accompanying them, to be drawn up by those bodies. Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 112(3).

Article 10 Admissibility of payments made by the paying agencies

The expenditure referred to in Article 4(1) and in Article 5 may be covered by Union financing only if it has been effected by accredited paying agencies.

Article 1 1 Payment in full to beneficiaries

Save explicitly provided otherwise in the Union legislation, payments relating to the financing provided for in this Regulation shall be disbursed in full to the beneficiaries.

TITLE III FARM ADVISORY SYSTEM

Article 12 Principle and scope

1. Member States shall establish a system of advising beneficiaries on land and farm management (hereinafter referred to as the ‘farm advisory system’) operated by one or more designated bodies. The designated bodies may be public or private.

2. The farm advisory system shall cover at least:

(a) the statutory management requirements and the standards for good agricultural and environmental condition of land as laid down in Chapter I of Title VI;

(b) the agricultural practices beneficial for the climate and the environment as laid down in Chapter 2 of Title III of Regulation (EU) No xxx/xxx [DP] and the maintenance of the agricultural area as referred to in Article 4(1)(c) of Regulation (EU) No xxx/xxx [DP];

(c) the requirements or actions related to climate change mitigation and adaptation, biodiversity, protection of water, animal and plant disease notification and innovation at minimum as laid down in Annex I to this Regulation;

(d) the sustainable development of the economical activity of the small farms as defined by the Member States and at least of the farms participating in the small farmers scheme referred to in Title V of Regulation (EU) No xxx/xxx[DP].

3. The farm advisory system may also cover in particular:

(a) the sustainable development of the economical activity of holdings other than those referred to in paragraph (2)(d);

(b) the minimum requirements established by national legislation, as referred to in Article 29(3) and 30(2) of Regulation (EU) No xxx/xxx [RD]

Article 13 Specific requirements relating to the farm advisory system

1. Member States shall ensure that the advisors within the farm advisory system are suitably qualified and regularly trained.

2. Member States shall ensure the separation between advice and control. In this respect and without prejudice to national legislation concerning public access to documents, Member States shall ensure that the designated bodies referred to in Article 12 do not disclose personal or individual information and data they obtain in their advisory activity to persons other than the beneficiary managing the holding concerned, with the exception of any irregularity or infringement found during their activity which is covered by an obligation laid down in Union or national law to inform a public authority, in particular in the case of criminal offences.

3. The competent national authority shall provide the beneficiary, where appropriate by the use of electronic means, with the appropriate list of designated bodies.

Article 14 Access to the farm advisory system

Beneficiaries, whether or not they receive support under the common agricultural policy, including rural development, may use the farm advisory system on a voluntary basis.

However Member States may determine, in accordance with objective criteria, the categories of beneficiaries that have priority access to the farm advisory system. Member States shall nevertheless ensure that priority is given to farmers whose access to an advisory service other than the farm advisory system is most limited.

The farm advisory system shall ensure that beneficiaries have access to advice reflecting the specific situation of their holding.

Article 15 Commission powers

1. In order to guarantee the proper functioning of the farm advisory system, the Commission shall be empowered to adopt delegated acts in accordance with Article 111 concerning provisions aiming at rendering that system fully operational. Those provisions may relate, amongst others, to the accessibility criteria for farmers.

2. The Commission may, by means of implementing acts, adopt rules for the uniform implementation of the farm advisory system. Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 112(3).

TITLE I V FINANCIAL MANAGEMENT OF THE FUNDS

Chapter I EAGF

SECTION 1 FINANCING OF EXPENDITURE

ARTICLE 16 Budget ceiling

1. The annual ceiling for EAGF expenditure shall be constituted by the maximum amounts set for it under Regulation (EU) No xxx/xxx [MFF] .

2. In the event that the Union legislation provides for sums to be reduced from the amount referred to in paragraph 1 , the Commission shall, by means of implementing acts, set the net balance available for EAGF expenditure on the basis of the data referred to in that legislation.

Article 17 Monthly payments

1. The appropriations necessary to finance the expenditure referred to in Article 4(1) shall be made available to Member States by the Commission in the form of monthly payments, on the basis of the expenditure effected by the accredited paying agencies during a reference period.

2. Until transfer of the monthly payments by the Commission, the resources required to undertake expenditure shall be mobilised by the Member States according to the needs of their accredited paying agencies.

Article 18 Procedure for monthly payments

1. Monthly payments shall be made by the Commission, without prejudice to the implementing acts referred to in Articles 53 and 54, for expenditure effected by accredited paying agencies during the reference month.

2. Monthly payments shall be made to each Member State at the latest on the third working day of the second month following that in which the expenditure is effected.

Expenditure effected by Member States between 1 and 15 October shall count as being made in the month of October. Expenditure effected between 16 and 31 October shall count as being made in the month of November.

3. The Commission shall, by means of implementing acts, determine the monthly payments which it makes, on the basis of a declaration of expenditure from the Member States and the information supplied in accordance with Article 102(1), taking account reductions or suspensions applied under Article 43 or any other corrections. Those implementing acts shall be adopted in accordance with the advisory procedure referred to in Article 112(2).

4. The Commission may, by means of implementing acts, decide to make supplementary payments or deductions. In such cases, the Committee referred to in Article 112(1) shall be informed at its next meeting.

Article 19 Administrative and personnel costs

Expenditure relating to administrative and personnel costs incurred by Member States and by beneficiaries of aid from the EAGF shall not be borne by the Fund.

Article 20 Public intervention expenditure

1. Where, within the framework of the common organisation of the markets, a sum per unit is not determined in respect of a public intervention, the EAGF shall finance the measure concerned on the basis of standard amounts uniform throughout the Union, in particular for funds originating in the Member States used for buying-in products, for material operations arising from storage and, where appropriate, for processing of intervention products.

2. In order to ensure the funding by the EAGF of the public intervention expenditure the Commission shall be empowered to adopt delegated act in accordance with Article 111 concerning:

(a) the type of measures eligible for Union financing and the reimbursement conditions;

(b) the eligibility conditions and calculation methods on the basis of the information actually observed by the paying agencies or on the basis of flat-rates determined by the Commission, or on the basis of flat-rate or non-flat-rate amounts provided for by the sectoral agricultural legislation.

3. The amounts referred to in the paragraph 1 shall be set by the Commission by means of implementing acts. Those implementing acts shall be adopted in accordance with the advisory procedure referred to in Article 112(2).

Article 21 Acquisition of satellite images

The list of the satellite images required for checks shall be agreed by the Commission and the Member States in accordance with the specification prepared by each Member State.

The Commission shall supply those satellite images free of charge to the control bodies or to suppliers of services authorised by those bodies to represent them.

The Commission shall remain the owner of the images and shall recover them on completion of the work. It may also provide that work is carried out on enhancing techniques and working methods in connection with the inspection of agricultural areas by remote sensing.

Article 22 Monitoring of agricultural resources

The measures financed pursuant to point (c) of Article 6 shall aim to give the Commission the means to manage Union agricultural markets in a global context, to ensure agri-economic monitoring of agricultural land and of the condition of crops so as to enable estimates to be made, in particular as regards yields and agricultural production, to share the access to such estimates in an international context, such as initiatives coordinated by United Nations organisations or other international agencies, to contribute to transparency of world markets, and to ensure technological follow-up of the agri-meteorological system.

The measures financed pursuant to point (c) of Article 6 concern the collection or purchase of data needed to implement and monitor the common agricultural policy, including satellite data and meteorological data, the creation of a spatial data infrastructure and a website, the carrying out of specific studies on climatic conditions and the updating of agri-meteorological and econometric models. Where necessary, those measures shall be carried out in collaboration with national laboratories and bodies.

Article 23 Implementing powers

The Commission may, by means of implementing acts, adopt rules relating to the financing pursuant to points (b) and (c) of Article 6, the procedure under which the measures referred to in Articles 21 and 22 shall be carried out in order to meet the objectives assigned, the framework governing the acquisition, enhancing and utilisation of satellite images and meteorological data, and the applicable deadlines. Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 112(3).

SECTION 2 BUDGET DISCIPLINE

ARTICLE 24 Compliance with the ceiling

1. Throughout the budget procedure and the implementation of the budget, appropriations relating to EAGF expenditure shall not exceed the amount referred to in Article 16.

All legislative instruments proposed by the Commission and adopted by the European Parliament and the Council, the Council or the Commission and having an influence on the EAGF budget shall comply with the amount referred to in Article 16.

2. Where Union legislation provides for a financial ceiling in euro for agricultural expenditure in respect of a Member State, such expenditure shall be reimbursed subject to that limit set in euro, with any necessary adjustments being made if Article 43 applies.

3. National ceilings for direct payments referred to in Article 7 of Regulation (EU) No xxx/xxx[DP], corrected by the adjustments laid down in Article 25 of this Regulation, shall be deemed to be financial ceilings in euro.

Article 25 Financial discipline

1. With a view to ensuring that the annual ceilings set out in the Regulation (EU) No xxx/xxx [ MFF] for the financing of the market related expenditure and direct payments are respected, an adjustment rate of the direct payments shall be determined when the forecasts for the financing of the measures financed under that subceiling for a given financial year indicate that the applicable annual ceilings will be exceeded.

2. The Council, acting on a proposal from the Commission presented no later than 31 March of the calendar year in respect of which the adjustment referred to in paragraph 1 applies, shall determine the adjustment no later than 30 June of the same calendar year.

3. If by 30 June in any year the adjustment rate has not been set, the Commission shall set it by means of an implementing act and shall inform the Council immediately. Such implementing act shall be adopted in accordance with the advisory procedure referred to in Article 112(2).

4. Until 1 December, on a proposal by the Commission, on the basis of new information in its possession, the Council may adapt the adjustment rate for direct payments set in accordance with paragraphs 2 or 3.

5. The Commission may by means of implementing act adopt the terms and conditions applicable to appropriations carried over in accordance with Article [149(3)] of Regulation (EU) No FR/xxx in order to finance the expenditure referred to in Article 4(1)(b) of this Regulation. Those implementing acts shall be adopted in accordance with the advisory procedure referred to in Article 112(2).

6. Before applying this Article, account shall first be taken of the amount authorised by the budget authority for the Reserve for crises in the agricultural sector referred to in point 14 of the Interinstitutional Agreement between the European Parliament, the Council and the Commission on cooperation in budgetary matters and on sound financial management.

Article 26 Budget discipline procedure

1. The Commission shall present to the European Parliament and to the Council, at the same time as the draft budget for financial year N, its forecasts for financial years N - 1, N and N + 1.

2. If, on drawing up the draft budget for financial year N, there appears to be a risk that the amount referred to in Article 16 for financial year N will be exceeded, the Commission shall propose to the European Parliament and the Council or to the Council the measures necessary to ensure compliance with that amount.

3. At any time, if the Commission considers that there is a risk of the amount referred to in Article 16 being exceeded and that it cannot take adequate measures to remedy the situation under its powers, it shall propose other measures to ensure compliance with that amount. These measures shall be adopted by the Council on the basis of Article 43(3) of the Treaty or by the European Parliament and the Council on the basis of Article 43(2) of the Treaty.

4. If, at the end of financial year N, reimbursement requests from the Member States exceed or are likely to exceed the amount referred to in Article 16, the Commission shall:

(a) consider the requests presented by Member States pro rata and within the limit of the available budget, and shall, by means of implementing acts, set provisionally the amount of the payments for the month concerned;

(b) determine, for all Member States, at the latest by 28 February of the following year, their situation with regard to Union financing for the previous financial year;

(c) set, by means of implementing act the total amount of Union financing broken down by Member State, on the basis of a single rate of Union financing, within the limit of the budget which was available for the monthly payments;

(d) effect, at the latest when the monthly payments are made for March of year N+1, any compensations to be carried out with respect to Member States.

The implementing acts provided for in points (a) and (c) of the first subparagraph shall be adopted in accordance with the advisory procedure referred to in Article 112(2).

Article 27 Early-warning system

In order to ensure that the budget ceiling referred to in Article 16 will not be exceeded, the Commission shall implement a monthly early-warning and monitoring system in respect of EAGF expenditure.

Before the beginning of each financial year, the Commission shall determine for that purpose monthly expenditure profiles based, where appropriate, on average monthly expenditure during the previous three years.

The Commission shall present periodically to the European Parliament and to the Council a report examining the development of expenditure effected in relation to the profiles and containing an assessment of the foreseeable implementation for the current financial year.

Article 28 Reference exchange rates

1. When adopting the draft budget, or a letter of amendment to the draft budget which concerns agricultural expenditure, the Commission shall use for EAGF budget estimates the average euro/US dollar exchange rate recorded on the market during the latest quarter ending at least 20 days before adoption of the budget document by the Commission.

2. When adopting a draft amending and supplementary budget or a letter of amendment thereto, in so far as those documents concern appropriations relating to the measures referred to in Article 4(1)(a), the Commission shall use:

(a) firstly, the average euro/US dollar exchange rate actually recorded on the market from 1 August of the previous financial year until the end of the latest quarter ending at least 20 days before adoption of the budget document by the Commission and at the latest on 31 July of the current financial year, and

(b) secondly, as a forecast for the remainder of the financial year, the average exchange rate actually recorded during the latest quarter ending at least 20 days before adoption of the budget document by the Commission.

Chapter II EAFRD

SECTION 1 GENERAL PROVISIONS FOR EAFRD

ARTICLE 2 9 No double funding

Without prejudice to the eligibility for support under Article 30(2) of Regulation (EU) No RD/xxx, expenditure financed under the EAFRD shall not be subject of any other financing under the EU budget.

Article 30 Provisions applying to all payments

1. In accordance with Article 67(1) of Regulation (EU) No CR/xxx payments by the Commission of the EAFRD contribution as referred to in Article 5 shall not exceed the budget commitments.

They shall be assigned to the earliest open budget commitment.

2. Article [81] of Regulation (EU) No FR/xxx shall apply.

SECTION 2 FINANCING OF RURAL DEVELOPMENT PRO