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Brussels, 22.12.2010

COM(2010) 815 final

2010/0395 (COD)

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on the financial rules applicable to the annual budget of the Union

EXPLANATORY MEMORANDUM

CONTEXT OF THE PROPOSAL

The present proposal takes into account recent legislative and political developments regarding the Financial Regulation (hereinafter FR[1]).

1. For the sake of legal clarity and in order to facilitate the negotiations of the European Parliament and the Council (hereinafter "the legislative authority"), it merges and replaces two earlier Commission proposals on the revision of the FR in a single text and under a standard legislative format (no recast). These two earlier proposals concerned on the one hand, the triennial revision of the Financial Regulation (COM(2010)260 final), which notably addressed the genuine necessity of revisiting budget delivery mechanisms in the current economic context and in view of the future policy challenges; and, on the other hand, the revision of the FR to align it with the Lisbon Treaty (COM(2010)71 final), including the obligations of Member States concerning internal control and audit and their resulting responsibilities in shared management. Therefore, these two earlier proposals (COM(2010)260 final) and (COM(2010)71 final) are withdrawn.

2. Additionally, it also incorporates the changes to the FR due to the adoption of the Regulation No 1081/2010 regarding the creation of the European External Action Service (hereinafter the 'EEAS')[2].

1.1. PROCEDURE

Since the entry into force of the Lisbon Treaty, the FR is to be revised in accordance with the ordinary legislative procedure foreseen in Article 322 TFEU. In order to allow the legislative authority to have a global view of the proposed modifications, the Implementing Rules of the Financial Regulation (hereinafter IR[3]) are presented, in a Commission Staff working document, together with the FR in a single package. The Implementing Rules, which contain more detailed provisions complementing the FR, will be adopted under the delegated powers of the Commission according to Article 290 TFEU.

The present proposal does not contain any change of substance compared to the two earlier proposals mentioned in point 1 above. As a consequence, the working document of the Commission services concerning the Implementing Rules to the FR (SEC(2010)), which has been put forward by the Commission together with the triennial revision, remains entirely valid.

1.2. CALENDAR

It should be recalled that the present revision of the FR occurs while preparation for the post-2013 programmes is also under way. It should therefore be considered in this wider context. For this reason, it is important that all the actors concerned in the legislative process, in particular the European Parliament and the Council, maintain an ambitious timetable for the present revision and on the need to ensure coherence between the financial rules enshrined in the FR and on the content of sector-specific legal bases. For this to be effective, they should aim at an agreement on the package (Financial Regulation and Implementing Rules) so that it could enter into application on 1.1.2012, which is a very ambitious timetable given the inherent constraints of the ordinary legislative procedure.

OBJECTIVE OF THE PROPOSAL

Budget is one of the key instruments to deliver EU policies. In 2011 more than EUR 126 billion is planned for allocation to EU policies benefitting the Union and its citizens. In the current economic context it is even more important that the delivery mechanisms of the budget operate in the most efficient way and facilitate the implementation of EU policies, while securing sound treatment of European taxpayers' money. In particular, it is important that these mechanisms are simple and transparent (especially to final recipients of EU funds), provide the possibility for leverage of non-EU budget resources and at the same time strengthen the Commission's accountability for implementation of the budget as set in Article 317 TFEU

The FR contains all the principles and rules which govern the implementation of the budget. It has a horizontal character, being applicable to all areas of expenditure and all revenue.

2.1. Basis for undertaking the present revision

The FR should only contain the fundamental principles (FR, Title II) and the basic rules of budgetary and financial management, leaving the details to be specified in the IR and soft law such as internal guidelines. These principles must be respected in all legislative acts[4] and by all institutions; they should be kept stable and derogations to them limited to a strict minimum.

In terms of content, the key elements of the financial reforms should be preserved, in particular: the role of financial actors, the importance of the financing decision adopted by the College for operational expenditure, the integration of controls with operational services, the internal audit function, activity-based budgeting, and modernisation of accounting principles and basic rules applicable to grants. Procurement rules should be preserved in line with the procurement Directives.

Moreover, it should be borne in mind that not all problems encountered with the application of the rules require modifications of the FR. In the vast majority of cases, the difficulties raised during the public consultation do not find their source in the Financial Regulation or could be solved by interpretation of the rules. Difficulties also stem from sector-based regulations, whose level of detail and complexity increase significantly the risk of error or misinterpretation.

In terms of method, any modification of substance has been assessed against the following benchmarks:

- reduce the administrative burden for beneficiaries, contractors and implementing partners;

- facilitate, whenever possible, the leveraging of budget appropriations;

- facilitate the Commission’s obligation under Article 317 of the Treaty to implement the budget and accomplish the policy objectives by improving delivery instruments and simplifying the rules and procedures;

- ensure sound financial management and protect the financial interests of the Union against fraud and other illegal activities[5].

2.2. NEED FOR A REFORM

Reform is necessary with a view to adapting the financial rules to the new requirements of budget implementation (co-financing with other donors, specific financial instruments, PPPs) or where the basic principles create disproportionate workload (interests on pre-financing) or may unduly impede efficiency (prohibition of budget implementation through private sector bodies). The award of small grants and contracts also needs to be facilitated.

Furthermore, the new procedure applicable to the IR, as set out in the Lisbon Treaty, should lead to a new articulation between the FR and the IR, imposing a complete review of the whole set of financial rules. In this regard, some IR provisions which currently define exceptions or derogations to FR provisions should be introduced in the FR itself, while the IR should be limited to technical details and implementing modalities[6].

In this context, the Commission has based its proposal on the following objectives:

- to introduce more flexibility in the application of budgetary principles, which should better suit operational needs and alleviate unnecessary administrative burden for recipients of Union funds;

- to streamline relations with implementing partners to which the Commission entrusts the management of programmes or part of programming actions (projects), in particular taking account of the nature of the implementing partner (Member States, agencies, EIB, public and private operators, etc.) and the financial risks entailed (proportionality);

- to shift the regime of grants from a real-cost based management (inputs) towards a performance-based scheme (outputs), in order to better target policy objectives and achieve significant simplification of procedural and documentary requirements for the benefit of beneficiaries, and facilitate the use of lump sums;

- to ensure sound financial management while leaving significant room for manoeuvre for Authorising Officers so that they can adapt the means to their operational constraints and the financial risks they are faced with;

- to modernise the system of risk management and control measures so as to make them more proportional to the probability of errors and to the cost involved.

2.3. ALIGNMENT WITH THE LISBON TREATY

For the first time in decades, the Lisbon Treaty (Treaty on the Functioning of the European Union - TFEU), which entered into force on December 1, 2009, foresees important changes concerning budgetary and financial issues. These changes should be translated in the Financial Regulation and concern in particular:

- the introduction of the multiannual financial framework in the Treaty, and its link to annual budgetary procedure: in this regard, as a consequence of the introduction of the multiannual financial framework in the TFEU, some provisions of the Interinstitutional Agreement (IIA) on budgetary discipline and sound financial management should be introduced in the Financial Regulation;

- the new annual budgetary procedure and the abolition of the distinction between compulsory and non-compulsory expenditure, which have an impact on the provisions relating to transfers and the provisional twelfths;

- the new provisions introduced in Article 317 TFEU concerning the control and audit obligations of the Member States in the implementation of the budget, together with Point 44 of the Interinstitutional Agreement (IIA) on budgetary discipline and sound financial management (See point 4.3.1. for more details).

The present proposal also allows for the streamlining of the Financial Regulation in line with the Lisbon Treaty, through both technical adaptations and the deletion of obsolete provisions.

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES

The proposal builds on the results of the public consultation of 19 October 2009[7], which resulted in 235 contributions of all type of stakeholders implementing or receiving Union funds such as citizens, public and private operators or regional and national administrations. In particular, its aims at addressing the major concern expressed in this public consultation, i.e. the excessive administrative burden imposed on recipients of Union funds.

The Commission has furthermore built on the experience of its operational services, which have been involved in a wide internal consultation, and lessons learned from previous revisions.

DETAILED CONTENT OF THE PROPOSAL

The present revision has three main objectives.

4.1. SIMPLIFICATION

In order to simplify grant procedures and to shift towards a more result-oriented approach, the Commission proposes to facilitate the use of lump sums and other instruments allowing the Commission to reasonably assess and fix ex ante the amount necessary for achieving a project. In future, grant would, to a larger extent, be paid on the basis of such an ex ante assessment, upon evidence that the project is achieved.

Furthermore, the Commission proposes to revise rules requiring interest on pre-financing. The current FR imposes disproportionate administrative burden on grant beneficiaries when obliging them to open a separate bank account so as to able to reimburse interest on generated on the funds received. In practise, the amounts concerned are often very low. The Commission proposes to reverse the current approach: as a principle, interest on pre-financing would not be due to the Union unless, the grant agreement, for reasons of proportionality (ex: very large sums involved) and sound financial management, foresees that interest has to be invested in the project or recovered.

Regarding procurement rules the provisions related to bank guarantees to be provided by the contractor and the procedures for the award of small contracts are modified so as to achieve simplification.

4.2. Obtain more results with limited resources (leveraging)

The Commission sees the need to increase the leverage of Union funds against the background of two political developments: the Political Guidelines that Commission President Barroso adopted in 2009 for his second mandate, which proposed to maximise investment and devise innovative financial instruments, and the budgetary constraints both at national and Union levels, which will impact the negotiations on the future Multiannual financial framework (post 2013).

A number of instruments are proposed to leverage Union funds, including:

- The pooling of funds in external relations: together with the revised rules on external assigned revenue, the creation of EU Trust funds will allow pooling of funds from multiple sources (Member States, Union Budget, third countries);

- Synergy with EIB own funds: the proposal seeks to foster a systematic use of mixed Instruments (EU funds/EIB funds for risk capital, guarantee funds, long terms loans), which take into account the 'privileged partner' status of the EIB under the EU Treaty, and its contribution to the reinforcement of the internal market;

- Synergy with private funds and public-private partnerships (PPPs) : the Commission proposes to facilitate the creation of PPPs, either via a simple delegation of the Commission to a private entity that has successfully passed an ex ante check (capacity to manage public funds in accordance with standards of sound financial management), or via a basic act entrusting a EU public body with the implementation of a PPP, within a "light" framework regulation;

- Leveraging effect of prizes in the R&D sector : learning from successful experience abroad, the Commission proposes to clarify rules for the award prizes which could, in the future, be more extensively used to induce private R&D investments into R&D.

4.3. Increase accountability: responsibilities of implementing partners and 'Tolerable risk of error'

4.3.1. Reshaping the various methods of implementation

The proposal seeks to simplify the different methods of implementation (centralised direct/indirect, shared, decentralised and joint management), to render the rules applicable to the different methods more coherent and to strengthen the accountability of the implementing partners so as to support the Commission in discharging its responsibility under the Treaty.

The Commission proposes a set of common principles that shall apply in all cases of indirect managed, i.e. whenever the Commission entrusts third parties with the implementation of the Union budget. These principles (which may be complemented by sector specific-rules) are:

- Ex ante verification of the capacity to manage EU funds, taking due account of the specific risks of the actions concerned (flexibility and proportionality);

- Management, control and audit obligations (sound financial management);

- A single chain of accountability, established notably through the annual management declarations of assurance to be signed by the Commission implementing partners and a regular clearance of the accounts.

Member States are the most important partner of the Commission and have a crucial role to play in the implementation of the budget (Article 317(5) TFEU). The current FR and the Commission proposal take this into account by providing for specific rules, reflecting the common principles mentioned.

The proposal for shared management builds on what already exists and has proved to function well in the area of shared management. On the basis of Article 317 TFEU, requiring the FR to lay down the control and audit obligations of the Member States in the implementation of the budget and the resulting responsibilities, the proposal defines the key functions which management and control systems under shared management have to perform. The Member States have considerable flexibility in arranging their existing administrative structures around these functions.

4.3.2. Introducing the concept of Tolerable Risk of Error (TRE)

Until now the benchmark for measuring how the Commission has managed risk has been the standard 2% materiality level applied by the Court of Auditors across the whole budget, irrespective of the risks and the cost of controls entailed in each policy area. In order to allow a more adequate yardstick for measuring the Commission's management of risk, the Commission proposes that a TRE is decided by the Council and the European Parliament for each policy area following a Commission proposal assessing the cost and benefits of controls.

A TRE defined for each policy area would therefore be a useful tool at the disposal of the Commission, to be used ex-ante, in order to adjust the way it manages programmes taking into account the risks involved. It does not interfere with control arrangements or corrective measures which are applied where errors are detected. Furthermore, the TRE would not entail differentiated levels of tolerable error between Member States but would be applicable to a policy area at Union level.

2010/0395 (COD)

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on the financial rules applicable to the annual budget of the Union

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 322 thereof, in conjunction with the Treaty establishing the European Atomic Energy Community, and in particular Article 106a thereof,

Having regard to the proposal from the European Commission[8],

Having regard to the opinion of the Court of Auditors[9],

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

Acting in accordance with the ordinary legislative procedure,

Whereas:

3. Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities[10] has been substantially amended several times. Since further amendments are to be made, including changes to take account of amendments introduced by the Treaty of Lisbon, the Regulation (EC, Euratom) No 1605/2002 should be replaced by this Regulation, in the interests of clarity.

4. Regulation (EC, Euratom) No 1605/2002 laid down the budgetary principles and financial rules to be respected in all legislative acts and by all institutions. The fundamental principles, the concept and the structure of that Regulation and the basic rules of budgetary and financial management need to be maintained. Derogations to those fundamental principles should be reviewed and simplified as far as possible, taking into account their continuing relevance, their added-value for the annual budget of the Union (hereinafter the 'budget'), and the burden they impose on stakeholders. It is necessary to maintain and strengthen the key elements of the financial reform: the role of the financial actors, the integration of controls in operational services, the internal auditors, the Activity Based Budgeting, the modernisation of accounting principles and rules and the basic principles for grants.

5. Due to the specific nature and tasks of the European Central Bank, notably its independence as regards the management of its finances, it should be excluded from the scope of this Regulation.

6. In the light of practical experience, rules should be included in this Regulation in order to follow evolving requirements of budget implementation such as co-financing with other donors, to increase the efficiency of external aid and to facilitate the use of specific financial instruments like those concluded with the European Investment Bank or implementation through public and private partnerships.

7. Regulation (EC, Euratom) No 1605/2002 was confined to stating the broad principles and basic rules governing the whole budgetary sector covered by the Treaties, while the implementing provisions were laid down in Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities[11] in order to produce a better hierarchy of rules and make Regulation (EC, Euratom) No 1605/2002 easier to read. Under the Treaty on the Functioning of the European Union (hereinafter the 'TFEU') the Commission may receive delegation to adopt acts of general application to supplement or amendment certain non-essential elements of legislative acts. As a consequence, some provisions laid down in Regulation (EC, Euratom) No 2342/2002, should be incorporated into this Regulation. The detailed rules for the application of this Regulation adopted by the Commission should be confined to technical details and implementing modalities.

8. Police and judicial cooperation in criminal matters became an integral part of other Union policies and internal actions. The specific financial provisions applicable to that policy are thus no longer justified and should therefore not be included in this Regulation.

9. Under the multiannual financial framework for 2007-2013, established by Interinstitutional Agreement of 17 May 2006 between the European Parliament, the Council and the Commission on budgetary discipline and sound financial management[12], the Guarantee Fund for external actions is no longer subject to a special regime. Payments to that Fund from the budget are now entered in a dedicated budget line. The relevant specific financial provisions are no longer necessary and should therefore not be included in this Regulation.

10. The rules governing interest generated by pre-financing should be simplified as they generate excessive administrative burden on both recipients of Union funds and Commission services and create misunderstandings between the Commission services and operators and partners. For reasons of simplification, in particular in respect of grant beneficiaries, and in line with the principle of sound financial management, there should no longer be an obligation to generate interest on pre-financing and to recover such interest. [However, it should be possible to include such obligation in a delegation agreement in order to allow the re-use of interests generated by pre-financing for the programmes managed by some delegates, or its recovery.

11. Carry over rules for assigned revenue should take into account the distinction between external and internal assigned revenue. In order to respect the purpose assigned by the donor, external assigned revenues should be carried over automatically and used until all the operations relating to the programme or action to which it is assigned have been carried out. Where the external assigned revenue is received during the last year of the programme or action, it should also be possible to use it in the first year of the succeeding programme or action. It should be possible to carry over the internal assigned revenue for one year only, unless specified otherwise in the basic act applicable or in duly justified circumstances.

12. As regards provisional twelfths, the rules should be clarified for the situation where the European Parliament decides to reduce the amount of the additional expenditure in excess of the provisional twelfths adopted by Council in accordance with Article 315 of the TFEU.

13. The Treaty requires that the multiannual financial framework be laid down in the form of a regulation. It is therefore necessary to incorporate certain provisions from the multiannual financial framework for 2007-2013 into this Regulation. In particular, in order to ensure budgetary discipline, it is necessary to establish a link between the multiannual financial framework and the annual budgetary procedure. It is also necessary to include provisions on commitment of the European Parliament and of the Council to respect the allocations of commitment appropriations laid down in the basic acts for structural operations, rural development and the European Fisheries Fund.

14. The derogation concerning assigned revenue should be modified to take into account the specificities of, on the one hand, internal assigned revenue - arising from appropriations authorised by the budgetary authority, and, on the other hand, external assigned revenue - collected from and assigned by various donors to a specific programme or action. Furthermore, external donors should be allowed to co-finance external actions, in particular humanitarian actions, even in cases where the basic act does not expressly provide for such co-financing. To facilitate the management of real estate stock, the list of internal assigned revenue should include revenue from the sale of buildings or assimilated operations.

15. As regards the presentation of assigned revenues in the draft budget, more transparency should be introduced by providing that amounts of assigned revenue are to be included in the draft budget for the amounts which are certain at the date of its establishment.

16. As regards the principle of specification, a distinction is no longer made between compulsory and non-compulsory expenditure. Provisions concerning transfers should therefore be adapted accordingly.

17. The rules governing transfers of appropriations should also be simplified and clarified on certain points because they have proved cumbersome or unclear in practice. It is necessary to ensure better budget implementation, especially in relation to payments appropriations, assigned revenues and administrative appropriations which are common to several titles. To this purpose, the typology of transfers should be simplified and more flexibility should be allowed in the adoption procedure of some transfers. In particular, the possibility for the Commission to decide on transfers of unused budgetary appropriations in cases of international humanitarian disasters and crisis has proved to be relevant and efficient. That possibility should therefore be extended to similar events occurring after 1st December. In those cases, for reasons of transparency, the Commission should inform immediately the budgetary authority of its decision. The Commission should also decide autonomously, within certain limits, on transfers from the emergency aid reserve.

18. Concerning provisions on proportionality, the notion of tolerable risk of error should be introduced as part of the risk assessment made by the Authorising Officer. The institutions should be able to move away from the general 2% materiality threshold used by the Court of Auditors to conclude on the legality and regularity of the underlying transactions. Tolerable risk levels constitute more appropriate basis for the Discharge Authority to judge the quality of the management of risk by the Commission. The European Parliament and the Council should therefore determine the level of tolerable risk of error per policy area, taking into account the costs and benefits of controls.

19. For the purposes of Article 316 of the TFEU, it should be provided that the European Council and the Council share the same section in the budget.

20. The amended annual budgetary procedure under the TFEU should be reflected in this Regulation.

21. With regard to the establishment of the budget, it is important to clearly define the structure and the presentation of the draft budget drawn up by the Commission. The content of the general introduction preceding the draft budget should be described more precisely. It is also necessary to include a provision on financial programming for the years to come as well as on a possibility for a Commission to submit any working paper to support budget requests.

22. As regards the specific features of the Common Foreign and Security Policy, the forms basic acts can take under the TFEU and under Title V and VI of the Treaty on European Union should be updated. In addition, the adoption procedure of preparatory measures in the area of external action should be adapted to the provisions of the TFEU.

23. As regards methods of implementation, which govern in particular the conditions of externalisation of implementing powers to third parties, the rules have become too complex over the years and should be simplified. At the same time, the initial objective of externalisation, to ensure that whatever the method of implementation, expenditure should be implemented with a level of control and transparency equivalent to that expected from the Commission services, should be maintained. Therefore, a clear distinction should be made between situations where the budget is implemented directly, by the Commission or its executive agencies and situations where the budget is implemented indirectly through third parties. This should allow establishment of a common regime for indirect management with the possibility to adapt it in accordance with sector-specific rules, in particular where the budget is implemented indirectly by Member States under shared management. Such common regime should include in particular the basic principles to be respected by the Commission where it decides to implement the budget indirectly and the basic principles to be respected by entrusted parties. The Commission should be able to apply Union rules and procedures or to accept the application of the rules and procedures of the entrusted entity, provided the latter guarantees an equivalent protection of the financial interests of the Union.

24. Rules on ex ante assessment of entities, other than Member States which are not subject to ex-ante assessment, should be adapted to ensure that all entrusted entities and persons provide a level of protection of the financial interests of the Union equivalent to that required under this Regulation. As part of the supervision tasks of the Commission, it is necessary to provide for a set of control and audit obligations, including clearance of accounts procedures for all budget management types.

25. In order to take account of operational needs and to facilitate implementation by potential beneficiaries or implementing partners, requirements should remain proportionate to the specific risks of the action and its overall control environment. The nature of the tasks and the measures carried out by the Commission as part of the supervision and support of the implementation of the action should be taken into account when assessing the capacity of the third party or entity to comply with such requirements. Furthermore, this Regulation should accommodate new financial instruments such as financial instruments and Public Private Partnerships in order to improve budget and policy delivery.

26. The experience with Public Private Partnerships (PPPs) institutionalised as Union bodies under Article 185 of Regulation (EC, Euratom) No 1605/2002 demonstrates that further alternatives should be added in order to increase the choice of instruments to include bodies whose rules are more flexible and accessible to the private partners than those applicable to the Union institutions. Such alternatives should operate under indirect management. An alternative should be a body established by a basic act and endowed with financial rules which should take into account the principles necessary to ensure sound financial management of Union funds. These principles should be adopted in a delegated regulation and should be based on those with which third entities entrusted with budget implementation tasks have to comply. Another alternative should be the implementation of PPPs by bodies governed by private law of a Member State.

27. Basic control and audit obligations of Member States where they implement the budget indirectly in shared management, which currently exist only in sector-specific Regulations, should be, for the purposes of Article 317 of the TFEU, introduced in this Regulation. Therefore it is necessary to include provisions, setting out a coherent framework for all policy areas concerned, on a harmonised administrative structure at national level, common management and control obligations for those structures, annual management declaration of assurance with independent audit opinion thereon and an annual declaration by Member States by which they assume the responsibility for the management of Union funds they are entrusted with, financial clearance, suspension and correction mechanisms operated by the Commission. Detailed provisions should remain in sector-specific Regulations.

28. With regard to the duties of the authorising officer by delegation, some provisions should be clarified, in particular concerning the internal control procedures that he puts into place ex ante and ex post and his reporting duties. In this respect, the content of his annual activity report should be updated in line with practice which consists in including the required financial and management information to support his declaration of assurance on the performance of his duties.

29. The responsibilities of the Accounting Officer of the Commission should be clarified, in particular it should be specified that he is the only person who is entitled to define the accounting rules and harmonised charts of accounts, while Accounting Officers of all other institutions define accounting procedures applicable in their institutions.

30. In order to facilitate the implementation of certain programmes or actions entrusted to financial institutions, the possibility to open fiduciary accounts should be introduced in this Regulation. Such bank accounts should be opened in the name or on behalf of the Commission in the books of a financial institution. They should be managed by that financial institution under the responsibility of the authorising officer and it should be possible to open them in other currencies than euro.

31. Concerning revenue operations, it is necessary to streamline the rules on estimates of receivable amounts in order to take into account budgetary needs. Registration should be required when expectation of revenue has a certain degree of probability and can be translated into figures with a reasonable degree of approximation. Simplification should be achieved by introducing some specific provisions on procedures of adjustment or cancellation of an estimate of amount receivable.

32. The rules on recovery should both be clarified and strengthened. In particular, clarification is needed in order to specify that the cancellation of an established amount receivable does not imply a waiver of a Union's established entitlement. Moreover, in order to reinforce the safeguarding of the financial interests of the Union, Union funds claimed for reimbursement should be treated by Member States not less favourably than claims of public companies on their territory.

33. Taking into account Commission Communication on the management of fines temporarily collected[13] , fines, penalties and sanctions and any income generated by them should be recorded as budget revenue in the year following the exhaustion of all remedies against the decisions imposing them. As an exception to this rule, a portion limited to 2% of the total amounts of fines or penalties to be entered in the budget should be withheld to supply the Fund created by that Communication.

34. As regards payments and in line with the principle of sound financial management, clarification of the various types of payments should be provided. Moreover, pre-financing payments should be cleared regularly by the responsible authorising officer in accordance with the accounting rules defined by the Accounting Officer of the Commission. To this effect, appropriate provisions should be included in contracts, grant decisions, grant agreements as well as in delegation agreements with third parties.

35. Institutions should be allowed to give their prior agreement in order to officially accept the transmission of documents by electronic procedure. Moreover, in accordance with Commission decisions on electronic and digitised documents, financial provisions on verifications applicable to commitments should be updated and recognise explicitly the legal value of electronic order forms and invoices for the registration of legal commitments.

36. The rules for exclusion should be improved in order to strengthen the protection of financial interests of the Union. The reference to money laundering should be added, as provided for in the Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts[14]. Moreover, situations of exclusion concerning candidates or tenderers convicted by a judgment having the force of res judicata for an offence concerning their professional conduct, or for fraud, corruption, involvement in a criminal organisation, money laundering or similar criminal infringements detrimental to the financial interests of the Union, should be extended to persons having powers of representation, decision making or control over these candidates and tenderers. However, for reasons of proportionality, exclusion should not apply to candidates and tenderers who can demonstrate that they have taken adequate measures against the concerned persons having powers of representation. Finally, in order to ensure the continuity of service of the institution, derogation from the obligation of exclusion based on the grounds of bankruptcy or analogous situations, grave professional misconduct and non compliance with social obligations should be introduced in case of negotiated procedures where, for technical or artistic reasons or for reasons connected with the protection of exclusive rights, the contract can be awarded only to a particular economic operator.

37. Although the European Central Bank (ECB) and the European Investment Bank (EIB) have their own specific status within the Union framework, the use of their own resources is of financial interest to the Union. Therefore, they should have access to the information contained in the central exclusion database, which was created to protect the financial interests of the Union, and should take it into account under their responsibility for the award of contracts under their procurement rules. The ECB and the EIB should also communicate to the Commission information on tenderers which are subject to a definitive judgment for fraud or similar criminal infringements detrimental to the financial interests of the Union.

38. Concerning administrative and financial penalties, a sound legal basis for the publication of decisions applying such penalties should be introduced, in line with data protection requirements. Such publication should remain facultative for reasons of data protection and legal security.

39. For reasons of legal clarity and simplification, the framework for the award and monitoring of Union grants should be revised, in particular the specific provisions for implementing the principles of transparency, equal treatment, co-financing, non-profit, degressive award for operating grants, prohibition of retrospective awards and control.

40. For the purpose of the framework for the award and monitoring of Union grants, and in the light of practical experience, the lump sums regime should be clarified (lump sums, standard scale of unit costs and flat rates) and clearly distinguished from any ex-post verification of real costs. Control measures should be adjusted to this new approach with the possibility to request operational audits and to extend findings to non audited projects of same beneficiary where recurrent errors have been detected in similar projects. Finally, the possibility for a beneficiary to redistribute its grant by way of subsidies to third parties should be extended under certain conditions in order to facilitate the correct implementation of programmes dedicated to numerous physical persons who can only be reached through two levels of dispatch. This redistribution should be authorised as long as appropriate guarantees are presented by the first rank beneficiary and adequate clauses to limit the margin of appreciation for the choice of sub-beneficiaries and the amount of the award are introduced in the grant agreement.

41. As a new type of financial support, prizes should be regulated separately from the grant regime with specific rules not containing any reference to predictable costs. Prizes should be part of the annual work programme and, above a certain threshold, should be awarded by a beneficiary or by a contractor after their award conditions and criteria have been approved by the Commission.

42. Financial instruments are increasingly valuable to multiply the effect of Union funds when those funds are pooled with others funds or include a leverage effect. Since such financial instruments cannot be assimilated to services or grants, a new type of financial support should be established.

43. As regards the rules on accounting and the accounts, the presentation of accounts should be simplified by providing that Union's accounts comprise only the consolidated financial statements and the aggregated budgetary accounts. It should also be clarified that the consolidation process only concerns the institutions financed by the budget, in order to take into account the specific independent status of the ECB.

44. In order to clearly separate the duties and responsibilities of the Commission's Accounting officer from those of the accounting officers of institutions or bodies whose accounts are consolidated, it should be provided that the report on budgetary and financial management of the financial year has to be prepared by each institution or body and then sent to the budgetary authority and the Court of Auditors by 31 March of the following financial year.

45. It is necessary to update the Union rules and principles on accounting in order to ensure their coherence with the International Public Sector Accounting Standard rules.

46. The provisions concerning provisional and final accounts should be updated, in particular in order to provide for the reporting information that should accompany the accounts sent to the Commission's Accounting officer for the purpose of consolidation. Reference should also be made to the representation letter accompanying the transmission, by the institutions and bodies financed by the budget, to the Court of Auditors of their final accounts, as well as to the representation letter accompanying the transmission of the Union's final consolidated accounts. Finally, an earlier deadline should be set out for the Court of Auditors to make its observations on the provisional accounts of institutions other than the Commission and bodies financed by the budget in order to allow them to draw up their final accounts taking into account the remarks by the Court of Auditors remarks.

47. As regards the information which is to be submitted by the Commission in the context of discharge, the Commission should notably submit to the European Parliament and to the Council an evaluation report on the Union's finances based on the results achieved, in accordance with Article 318 of the TFEU. Adequate provisions should therefore be introduced in this Regulation for such report in relation to other existing reporting requirements.

48. As regards the specific provisions of this Regulation concerning the structural funds, cohesion funds, European fisheries fund, the European Agricultural Fund for Rural Development and funds in the area of Freedom, Security and Justice managed under shared management , the provision for repayment of payments on account and making appropriations available again contained in the Commission declaration annexed to Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds[15] should be retained. Moreover, by way of derogation from the rule of carry over, it should be allowed to carry over commitment appropriations available at the end of the financial year, arising from repayments of payment on account, until the closure of the programme, and to use those commitment appropriations when other commitment appropriations are no longer available.

49. Furthermore, clarification is needed for the participation of the Joint Research Centre (JRC) in procurement and grant procedures when it carries out activities financed in whole or in part by the budget outside the budget lines usually dedicated to the JRC in the research funds. When participating in grant and public procurement procedures as a third party, the JRC should be exempted from the application of the provisions concerning exclusion criteria, administrative and financial penalties, economic and financial capacity and the lodging of guarantees. Moreover, it is necessary to take into account the technical-scientific services provided by the JRC to other institutions or Commission services through internal administrative arrangements, which fall outside public procurement rules. Finally, in order to carry out these tasks effectively, that revenue stemming from the activities linked to those tasks should exceptionally be considered external assigned revenue.

50. As regards the specific provisions relating to the implementation of external actions, it is necessary to adapt them to the changes proposed for the methods of implementation.

51. In order to strengthen the international role of the Union in external actions and development and to increase its visibility and efficiency, the Commission should be authorised to create and manage European trust funds for emergency, post-emergency or thematic actions. Although not integrated in the budget, those trust funds should be managed in accordance with this Regulation to the extent necessary for the security and transparency of the use of Union funds. For that purpose, the Commission should chair the governing board established for each trust fund to ensure the representation of donors and to decide for the use of the funds. Moreover, the accounting officer of each trust fund should be the accounting officer of the Commission.

52. As regards entities entrusted under indirect management to implement external actions, the period for the conclusion of contracts and grants by these entities should be limited to three years following the signature of the delegation agreement with the Commission, unless specific exceptional and external circumstances prevail. However, that deadline should not apply to multiannual programmes implemented under the structural funds procedures. Detailed rules for de-commitment of appropriations in the case of those multiannual programmes should be laid down in sector-specific rules.

53. With regard to specific rules on procurement applicable to external actions, it is necessary to allow third country nationals to participate in tender procedures, in the case of implementation of a programme without a basic act and where duly justified exceptional circumstances prevail.

54. As regards specific provisions for administrative appropriations, institutions should be allowed to develop a long term real estate policy and profit from lower interest rates thanks to the favourable credit rating of the Union on the financial market. To this end, they should be authorised to raise loans outside the budget to acquire real estate assets. This would provide the possibility to address the complexity of the current system, while saving costs and introducing more transparency.

55. As regards framework research programmes, in the light of practical experience, the scope of the special selection procedure of natural persons as experts should be clarified as their assistance is required in the evaluation of project proposals, grant applications, projects and tenders and for providing expert opinion and advice.

56. The Commission should be empowered to adopt delegated acts in accordance with Article 290 of the Treaty in order to establish detailed rules for the application of this Regulation, a framework financial regulation for the bodies set up under the TFEU and the Euratom Treaty and a model financial regulation for Public-Private Partnerships in order to lay down the necessary principles to ensure sound financial management.

57. The revision of this Regulation should be made only when necessary. Too frequent revisions generate disproportionate cost of adjusting administrative structures and procedures to the new rules. Furthermore, time may be too short to allow for valid conclusion to be drawn from the application of the rules in force.

58. In order to ensure continuity in the implementation of the current programmes, the provisions concerning control and audit obligations of Member States when they implement the budget indirectly under shared management should apply only to the next generation of sector-specific regulations,

HAVE ADOPTED THIS REGULATION:

PART ONE COMMON PROVISIONS

TITLE I SUBJECT MATTER AND SCOPE

Article 1 Subject matter

This Regulation lays down the rules for the establishment and the implementation of the annual budget of the Union, (hereinafter the 'budget') and the presentation and auditing of the accounts.

Article 2 Scope

Any provision concerning the implementation of the revenue and expenditure of the budget, contained in another legislative act, must comply with the budgetary principles set out in Title II.

This Regulation shall apply to the European Parliament, the European Council and the Council, the European Commission, the Court of Justice of the European Union and the European Court of Auditors, the European Economic and Social Committee, the Committee of the Regions, the European Ombudsman, the European Data Protection Supervisor and the European External Action Service (hereinafter referred to as 'institution(s)').

This Regulation shall not apply to the European Central Bank.

This Regulation shall apply to the implementation of administrative expenditure relating to the appropriations provided in the budget for the Euratom Supply Agency.

TITLE II BUDGETARY PRINCIPLES

Article 3 Budgetary principles

The budget shall be established and implemented in compliance with the principles of unity, budgetary accuracy, annuality, equilibrium, unit of account, universality, specification, sound financial management which requires effective and efficient internal control, and transparency as set out in this Regulation.

CHAPTER 1 PRINCIPLES OF UNITY AND OF BUDGET ACCURACY

Article 4 Definition of the budget

1. The budget is the instrument which, for each financial year, forecasts and authorises all revenue and expenditure considered necessary for the Union and the European Atomic Energy Community.

2. The revenue and expenditure of the Union shall comprise:

(a) the revenue and expenditure of the Union, including administrative expenditure occasioned for the institutions by the provisions of the Treaty on European Union relating to the common foreign and security policy, and the operational expenditure occasioned by implementation of those provisions where this is charged to the budget;

(b) the expenditure and revenue of the European Atomic Energy Community.

Article 5 Rules governing the principles of unity and budgetary accuracy

1. Subject to Article 80, no revenue shall be collected and no expenditure effected unless booked to a line in the budget.

2. No expenditure may be committed or authorised in excess of the authorised appropriations.

3. An appropriation may not be entered in the budget if it is not for an item of expenditure considered necessary.

4. Interest yielded by the funds which are the property of the Union shall not be due to the Union save otherwise provided for in the agreements concluded with the entrusted entities listed in points (ii) to (viii) of Article 55(1)(b), and in grant decisions or agreements concluded with beneficiaries. In those cases, such interest shall be re-used for the corresponding programme or recovered.

CHAPTER 2 PRINCIPLE OF ANNUALITY

Article 6 Definition

The appropriations entered in the budget shall be authorised for one financial year which shall run from 1 January to 31 December.

Article 7 Type of appropriations

1. The budget shall contain differentiated appropriations, which shall consist of commitment appropriations and payment appropriations, and non-differentiated appropriations.

2. Commitment appropriations shall cover the total cost of the legal commitments entered into during the current financial year, subject to Article 83(2) and Article 180(2).

3. Payment appropriations shall cover payments made to honour the legal commitments entered into in the current financial year and/or earlier financial years.

4. Paragraphs 1 and 2 shall be without prejudice to the special provisions of Titles I, IV and VI of Part Two. They shall not prevent appropriations being committed globally nor budgetary commitments being made in annual instalments.

Article 8 Accounting rules for the revenue and appropriations

1. The revenue of a financial year shall be entered in the accounts for the financial year on the basis of the amounts collected during the financial year. However, the own resources for the month of January of the next financial year may be paid in advance pursuant to the Council Regulation (EC, Euratom) No 1150/2000[16] .

2. The entries in respect of value added tax own resources, the additional resource based on gross national income and any financial contributions may be adjusted in accordance with the Regulation referred to in paragraph 1.

3. The appropriations authorised for a given financial year may be used solely to cover expenditure committed and paid in that financial year and to cover amounts due against commitments from earlier financial years.

4. Commitments shall be entered in the accounts on the basis of the legal commitments entered into up to 31 December, subject to the global commitments referred to in Article 83(2) and the agreements referred to in Article 180(2) and concluded with third countries, which shall be entered in the accounts on the basis of the budget commitments up to 31 December.

5. Payments shall be entered in the accounts for a financial year on the basis of the payments effected by the accounting officer by 31 December of that year at the latest.

6. By way of derogation from paragraphs 3, 4 and 5, the expenditure of the European Agricultural Guarantee Fund shall be entered in the accounts for a financial year in accordance with the rules laid down in Title I of Part Two.

Article 9 Cancellation and carry over of appropriations

1. Appropriations which have not been used at the end of the financial year for which they were entered shall be cancelled.

However, they may be carried over to the following financial year only, by a decision taken by the institution concerned by 15 February at the latest, in accordance with paragraphs 2 and 3 or be carried over automatically in accordance with paragraph 4.

2. Differentiated commitment appropriations and non-differentiated appropriations not yet committed at the close of the financial year may be carried over in respect of:

(a) amounts corresponding to commitment appropriations for which most of the preparatory stages of the commitment procedure have been completed by 31 December. These amounts may then be committed up to 31 March of the following year;

(b) amounts which are necessary when the legislative authority has adopted a basic act in the final quarter of the financial year and the Commission has been unable to commit the appropriations provided for this purpose by 31 December.

3. Payment appropriations may be carried over in respect of amounts needed to cover existing commitments or commitments linked to commitment appropriations carried over, when the appropriations provided for the relevant lines in the budget for the following financial year do not cover requirements. The institution concerned shall first use the appropriations authorised for the current financial year and shall not use the appropriations carried over until the former are exhausted.

4. Non-differentiated appropriations corresponding to obligations duly contracted at the close of the financial year shall be carried over automatically to the following financial year only.

5. The institution concerned shall inform the European Parliament and the Council (hereinafter the 'budgetary authority’) by 15 March at the latest of the carry-over decision it has taken and shall state, for each budget line, how the criteria in paragraphs 2 and 3 have been applied to each carry-over.

6. Without prejudice to Article 10, appropriations placed in reserve and appropriations for staff expenditure may not be carried over.

Article 10 Carry over rules for assigned revenue

Revenue not used and appropriations available at 31 December arising from the assigned revenue referred to in Article 18 shall be carried over as follows:

(a) external assigned revenue shall be carried over automatically and must be fully used until all the operations relating to the programme or action to which they are assigned have been carried out; external assigned revenue received during the last year of the programme or action may be used in the first year of the succeeding programme or action;

(b) internal assigned revenue shall be carried over for one year only, unless specified otherwise in the basic act applicable, or in duly justified exceptional circumstances; the corresponding appropriations available must be used first.

Article 11 Decommitment of appropriations

Without prejudice to Articles 170 and 174, where amounts are decommitted as a result of total or partial non-implementation of the actions for which they were earmarked, in any financial year after that in which the appropriations were entered in the budget, the appropriations concerned shall be cancelled.

Article 12 Commitment of appropriations

The appropriations entered in the budget may be committed with effect from 1 January, once the budget has been finally adopted, save as otherwise provided in Title I and Title VI of Part Two.

Article 13 Rules applicable in case of late adoption of the budget

1. If the budget has not been definitively adopted at the beginning of the financial year, the first paragraph of Article 315 of the Treaty on the Functioning of the European Union (hereinafter the 'TFEU') shall apply to commitment and payment of expenditure which it has been possible to book to a specific chapter in the budget as part of implementation of the last budget duly adopted.

2. Commitments may be made per chapter to a maximum of one quarter of the total allotted appropriations in the relevant chapter of the previous financial year plus one twelfth for each month which has elapsed.

Payments may be made monthly per chapter to a maximum of one twelfth of the allotted appropriations in the relevant chapter of the preceding financial year.

The limit of the appropriations provided for in the draft budget in preparation may not be exceeded.

3. If the continuity of action by the Union and management needs so require, the Council, acting by a qualified majority on a proposal of the Commission, may authorise two or more provisional twelfths both for commitments and for payments over and above those automatically made available pursuant to paragraphs 1 and 2. It shall forward the decision on authorisation without delay to the European Parliament.

The decision shall enter into force thirty days following its adoption unless the European Parliament, acting by a majority of its Members, decides to reduce that expenditure within those thirty days.

If the European Parliament decides to reduce that expenditure, the Council shall review the decision on authorisation taking into account the amount approved by the European Parliament.

The additional twelfths shall be authorised in full and shall not be divisible.

CHAPTER 3 PRINCIPLE OF EQUILIBRIUM

Article 14 Definition and scope

1. Budget revenue and payment appropriations must be in balance.

2. Within the framework of the budget, the Union and the European Atomic Energy Community, as well as the bodies set up by the Union as referred to in Article 200, may not raise loans.

Article 15 Balance from financial year

1. The balance from each financial year shall be entered in the budget for the following financial year as revenue in the case of a surplus or as a payment appropriation in the case of a deficit.

2. The estimates of such revenue or payment appropriations shall be entered in the budget during the budgetary procedure and in a letter of amendment presented pursuant to Article 35. They shall be drawn up in accordance with the Council Regulation implementing the Decision on the system of the Union's own resources.

3. After the presentation of the accounts for each financial year, any discrepancy with the estimates shall be entered in the budget for the following financial year through an amending budget devoted solely to that discrepancy. In such a case, the draft amending budget must be submitted by the Commission within 15 days following the submission of the provisional accounts.

CHAPTER 4 PRINCIPLE OF UNIT OF ACCOUNT

Article 16 Use of euro

The multiannual financial framework and the budget shall be drawn up and implemented in euro and the accounts shall be presented in euro. However, for the cash-flow purposes referred to in Article 65, the accounting officer and, in the case of imprest accounts, the imprest administrators, and, for the needs of the administrative management of the Commission and the European External Action Service (hereinafter referred to as 'EEAS'), the authorising officer responsible shall be authorised to carry out operations in national currencies as laid down in the delegated Regulation referred to in Article 199.

CHAPTER 5 PRINCIPLE OF UNIVERSALITY

Article 17 Definition and scope

Total revenue shall cover total payment appropriations, subject to Article 18. All revenue and expenditure shall be entered in full without any adjustment against each other, subject to Article 20.

Article 18 Assigned revenue

1. External assigned revenue and internal assigned revenue shall be used to finance specific items of expenditure.

2. The following shall constitute external assigned revenue:

(a) financial contributions from Member States to certain research programmes pursuant to the Council Regulation implementing the Decision on the system of the Union's own resources;

(b) financial contributions from Member States, third countries, including in both cases their public and parastatal agencies, legal entities or natural persons, to certain external aid projects or programmes financed by the Union and managed by the Commission on their behalf ;

(c) interest on deposits and the fines provided for in the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure;

(d) revenue earmarked for a specific purpose, such as income from foundations, subsidies, gifts and bequests, including the earmarked revenue specific to each institution;

(e) contributions to Union activities from third countries or various bodies;

(f) assigned revenue referred to in Article 173(2) and Article 175(2).

3. The following shall constitute internal assigned revenue:

(a) revenue from third parties in respect of goods, services or work supplied at their request;

(b) proceeds from the sale of vehicles, equipment, installations, materials, and scientific and technical apparatus which are being replaced or scrapped when the book value is fully depreciated;

(c) revenue arising from the repayment of amounts wrongly paid;

(d) proceeds from the supply of goods, services and works for other departments, institutions or bodies, including refunds by other institutions or bodies of mission allowances paid on their behalf;

(e) insurance payments received;

(f) revenue from the sale, letting or any other contract concerning rights connected with real estate;

(g) revenue from the sale of publications and films, including those on an electronic medium.

4. The basic act applicable may also assign the revenue for which it provides to specific items of expenditure. Unless specified otherwise in the basic act applicable, such revenue shall constitute internal assigned revenue.

5. The budget shall include lines to accommodate external assigned revenue and internal assigned revenue and wherever possible shall indicate the amount.

Assigned revenue may be included in the draft budget only for the amounts which are certain at the date of the establishment of the draft budget.

Article 19 Donations

1. The Commission may accept any donation made to the Union, such as foundations, subsidies, gifts and bequests.

2. Acceptance of donations of a value of EUR 50000 or more which involve a financial charge, including follow-up costs, exceeding 10 % of the value of the donation made, shall be subject to the authorisation of the European Parliament and of the Council, both of which shall act on the matter within two months of the date of receipt of the request from the Commission. If no objection has been made within that period, the Commission shall take a final decision in respect of acceptance.

Article 20 Rules on deductions and exchange rates adjustments

1. The delegated Regulation referred to in Article 199 may specify the cases where certain revenue may be deducted from requests for payment, which shall then be passed for payment of the net amount.

2. The cost of products or services provided to the Union incorporating taxes refunded by third countries on the basis of the relevant agreements shall be charged to the budget for the tax inclusive amount. Subsequent reimbursement of taxes shall be treated as assigned revenue in accordance with Article 18(2).

3. Adjustments may be made in respect of exchange differences occurring in the implementation of the budget. The final gain or loss shall be included in the balance for the year.

CHAPTER 6 PRINCIPLE OF SPECIFICATION

Article 21 General provisions

1. Appropriations shall be earmarked for specific purposes by title and chapter; the chapters shall be further subdivided into articles and items.

2. The Commission may, within its own section of the budget, transfer appropriations autonomously as detailed in Article 23 or shall request the budgetary authority's approval for the transfer of appropriations in the cases detailed in Article 24.

3. Appropriations may be transferred only to budget lines for which the budget has authorised appropriations or carries a token entry " pro memoria ".

4. Appropriations corresponding to assigned revenue may be transferred only if such revenue is used for the purpose to which it is assigned.

Article 22 Transfers by institutions other than the Commission

1. Any institution other than the Commission may, within its own section of the budget, transfer appropriations:

(a) from one title to another up to a maximum of 10 % of the appropriations for the year shown on the line from which the transfer is made;

(b) from one chapter to another and from one article to another without limit.

2. Three weeks before making the transfers referred to in paragraph 1, the institutions shall inform the budgetary authority of their intentions. In the event of duly substantiated reasons being raised within this period by either branch of the budgetary authority, the procedure laid down in Article 24 shall apply.

3. Any institution other than the Commission may propose to the budgetary authority, within its own section of the budget, transfers from one title to another exceeding the limit of 10 % of the appropriations for the financial year on the line from which the transfer is to be made. Those transfers shall be subject to the procedure laid down in Article 24.

4. Any institution other than the Commission may, within its own section of the budget, make transfers within articles without informing the budgetary authority beforehand.

Article 23 Internal transfers by the Commission

1. The Commission may, within its own section of the budget, autonomously:

(a) transfer commitment appropriations within each chapter;

(b) transfer payment appropriations within each title;

(c) as regards expenditure on staff and administration which is common to several titles, transfer appropriations from one title to another ;

(d) as regards operational expenditure, transfer appropriations between chapters within the same title, up to a maximum total of 10 % of the appropriations for the year shown on the line from which the transfer is made.

2. The Commission may, within its own section of the budget, decide on the following transfer appropriations from one title to another, provided it informs immediately the budgetary authority of its decision:

(a) transfer appropriations from the "provisions" title referred to in Article 43, where the only condition to lift the reserve lies in the adoption of a basic act in accordance with the ordinary legislative procedure foreseen in Article 294 TFEU;

(b) in duly substantiated exceptional cases of international humanitarian disasters and crises, occurring after 1 December of the budgetary year, the Commission may transfer unused budgetary appropriations for the current budgetary year still available in the budget titles falling under heading 4 of the multiannual financial framework to the budget titles concerning the crisis management aid and humanitarian aid operations.

Article 24 Transfers by the Commission submitted to the budgetary authority

1. The Commission shall submit its proposal of transfers simultaneously to the European Parliament and the Council.

2. The budgetary authority shall take decisions on transfers of appropriations as provided for in paragraphs 3 to 6, save as otherwise provided in Title I of Part Two.

3. Save in urgent circumstances, the Council, by a qualified majority, and the European Parliament, shall deliberate upon the Commission proposal within six weeks of the date on which the two institutions received the proposal for each transfer submitted to them.

4. The transfer proposal shall be approved, if within the six-week period in any of the following cases:

(a) European Parliament and the Council approve it;

(b) either the European Parliament or the Council approves it and the other institution refrains from acting;

(c) European Parliament and the Council refrain from acting or have not taken a decision contrary to the Commission proposal.

5. The six-week period referred to under point 4 shall be reduced to three weeks, unless either the European Parliament or the Council requests otherwise, in any of the following cases:

(a) the transfer represents less than 10% of the appropriations of the line from which the transfer is made and does not exceed EUR 5 million;

(b) the transfer concerns only payment appropriations and the overall amount of the transfer does not exceed EUR 100 million.

6. If either the European Parliament or the Council has amended the transfer while the other institution has approved it or refrains from acting, or if European Parliament and the Council have amended the transfer, the smaller amount approved either by the European Parliament or the Council shall be deemed approved, unless the Commission withdraws its proposal.

Article 25 Transfer subject to special provisions

1. Transfers within the titles of the budget devoted to the European Agricultural Guarantee Fund, the Structural Funds, the Cohesion Fund, the European Fisheries Fund, the European Agricultural Fund for Rural Development and Research shall be the subject of special provisions under Titles I, II and III of Part Two.

2. Decisions on transfers to allow the use of the emergency aid reserve shall be taken by the budgetary authority on a proposal from the Commission, or by the Commission for a maximum of 10% of the appropriations for the year shown on the line from which the transfer is made.

The procedure provided for in Article 24(3) and (4) shall apply. If the Commission proposal is not agreed to by the European Parliament and the Council and there is a failure to arrive at a common position on the use of this reserve, the European Parliament and the Council shall refrain from acting on the Commission's proposal of transfers.

CHAPTER 7 PRINCIPLE OF SOUND FINANCIAL MANAGEMENT

Article 26 Principles of economy, efficiency and effectiveness

1. Budget appropriations shall be used in accordance with the principle of sound financial management, namely in accordance with the principles of economy, efficiency and effectiveness.

2. The principle of economy requires that the resources used by the institution for the pursuit of its activities shall be made available in due time, in appropriate quantity and quality and at the best price.

The principle of efficiency is concerned with the best relationship between resources employed and results achieved.

The principle of effectiveness is concerned with attaining the specific objectives set and achieving the intended results.

3. Specific, measurable, achievable, relevant and timed objectives shall be set for all sectors of activity covered by the budget. Achievement of those objectives shall be monitored by performance indicators for each activity and information shall be provided by the spending authorities to the budgetary authority. Such information shall be provided annually and at the latest in the documents accompanying the draft budget.

4. In order to improve decision-making, institutions shall undertake both ex ante and ex post evaluations in line with guidance provided by the Commission. Such evaluations shall be applied to all programmes and activities which entail significant spending and evaluation results disseminated to spending, legislative and budgetary authorities.

Article 2 7 Compulsory financial statement

1. Any proposal or initiative submitted to the legislative authority by the Commission, the High Representative of the Union for Foreign Affairs and Security Policy (hereinafter the 'High Representative') or by a Member State, which may have an impact on the budget, including changes in the number of posts, must be accompanied by a financial statement and by the evaluation provided for in Article 26(4).

Any amendment to a proposal or initiative submitted to the legislative authority which may have appreciable implications for the budget, including changes in the number of posts, must be accompanied by a financial statement prepared by the institution proposing the amendment.

2. In order to reduce the risk of fraud and irregularities, the financial statement referred to in paragraph 1 shall provide information on the internal control system set up, an assessment of the risk involved, as well as existing and planned fraud prevention and protection measures.

Article 28 Internal control of budget implementation

1. The budget shall be implemented in compliance with effective and efficient internal control as appropriate in each management mode, and in accordance with the relevant sector-specific regulations.

2. For the purposes of the implementation of the budget, internal control is defined as a process applicable at all levels of the management and designed to provide reasonable assurance of achieving the following objectives:

(a) effectiveness, efficiency and economy of operations;

(b) reliability of reporting;

(c) safeguarding of assets and information;

(d) prevention, detection and correction of fraud and irregularities;

(e) adequate management of the risks relating to the legality and regularity of the underlying transactions, taking into account the multiannual character of programmes as well as the nature of the payments concerned.

Article 29 Tolerable risk of error

The Legislative authority shall, in accordance with the procedure laid down in Article 322 of the TFEU, decide on a level of tolerable risk of error at an appropriate aggregation of the budget. That decision shall be taken into account during the annual discharge procedure, in accordance with Article 157(2).

The level of tolerable risk of error shall be based on an analysis of the costs and benefits of controls. Member States and entities and persons referred to in point (b) Article 55(1) shall on request report to the Commission on the costs of controls borne by them as well as the number and size of activities financed by the budget.

The level of tolerable risk of error shall be closely monitored and shall be reviewed in case of major changes in the control environment.

CHAPTER 8 PRINCIPLE OF TRANSPARENCY

Article 30 Publication of accounts, budgets and reports

1. The budget shall be established and implemented and the accounts presented in compliance with the principle of transparency.

2. The President of the European Parliament shall have the budget and amending budgets, as finally adopted, published in the Official Journal of the European Union .

The budget shall be published within three months following the date on which the budget is declared finally adopted.

The consolidated annual accounts and the report on budgetary and financial management drawn up by each institution shall be published in the Official Journal of the European Union .

Article 31 Publication of Union funds recipients and other information

1. Information on borrowing-and-lending operations contracted by the Union for third parties shall appear in an Annex to the budget.

2. The Commission shall make available, in an appropriate manner, information on the recipients of funds deriving from the budget held by it when the budget is implemented on a centralised basis and directly by its departments or by Union Delegations in accordance with the second paragraph of Article 53, and information on the recipients of funds as provided by the entities to which budget implementation tasks are delegated under other modes of management.

3.This information shall be made available with due observance of the requirements of confidentiality, in particular the protection of personal data as laid down in Directive 95/46/EC of the European Parliament and of the Council[17] and Regulation (EC) No 45/2001 of the European Parliament and of the Council[18] , and of the requirements of security, taking into account the specificities of each management mode referred to in Article 53 and where applicable in conformity with the relevant sector-specific rules.

TITLE III ESTABLISHMENT AND STRUCTURE OF THE BUDGET

CHAPTER 1 ESTABLISHMENT OF THE BUDGET

Article 3 2 Estimates of revenue and expenditure

The European Parliament, the European Council and the Council, the Court of Justice of the European Union, the Court of Auditors, the Economic and Social Committee, the Committee of the Regions, the Ombudsman, the European Data-Protection Supervisor and the EEAS shall draw up an estimate of their revenue and expenditure, which they shall send to the Commission before 1 July each year.

The EEAS shall draw up an estimate of its revenue and expenditure, which it shall send to the Commission before 1 July each year. The High Representative shall hold consultations with the Members of the Commission responsible for development policy, neighbourhood policy and international cooperation, humanitarian aid and crisis response, regarding their respective responsibilities.

These estimates shall also be sent by these institutions to the budgetary authority for information by no later than 1 July each year. The Commission shall draw up its own estimates, which it shall also send to the budgetary authority by the same date.

In preparing its own estimates the Commission shall use the information referred to in Article 33.

Article 3 3 Estimated budget of the bodies referred to in Article 200

Each body referred to in Article 200 shall, in accordance with the instrument establishing it, send to the Commission and the budgetary authority by 31 March each year an estimate of its revenue and expenditure, including the establishment plan, and its draft work programme.

Article 3 4 Draft budget

1. The Commission shall submit a proposal containing the draft budget to the European Parliament and the Council, at the latest, by 1 September of the year preceding that in which the budget is to be implemented.

The draft budget shall contain a summary general statement of the expenditure and revenue of the Union and consolidate the estimates referred to in Article 32.

The draft budget shall follow the structure and presentation set out in Articles 41 to 46.

Each of the sections of the draft budget shall be preceded by an introduction drawn up by the institution concerned.

The Commission shall draw up the general introduction to the draft budget. The general introduction shall comprise financial tables covering the main data by titles and justifications for the changes in the appropriations from one financial year to the next by categories of expenditure of the multi-annual financial framework.

2. Where relevant, the Commission shall attach to the draft budget a financial programming for the following years.

The financial programming shall be updated after the adoption of the budget, to incorporate the results of the budgetary procedure and any other relevant decisions.

3. The Commission shall also attach to the draft budget any working paper it considers useful to support its budget requests.

4. In accordance with Article 8(5) of Decision 2010/427/EU of 26 July 2010 establishing the organisation and functioning of the European External Action Service[19] and in order to ensure the budgetary transparency in the area of external action of the Union, the Commission shall transmit to the budgetary authority, together with the draft budget, a working document presenting, in a comprehensive way:

(a) all administrative and operational expenditure related to the external actions of the Union, including Common Foreign and Security Policy (CFSP) and Common Security and Defence Policy tasks, and financed from the budget;

(b) the EEAS' overall administrative expenditure for the previous year, broken down into expenditure by delegation and expenditure for the EEAS' central administration; together with the operational expenditure, broken down by geographic area (regions, countries), thematic areas, Union Delegation and mission.

The working document shall also:

(a) show the number of posts for each grade in each category and the number of permanent and temporary posts, including contractual and local staff authorised within the limits of the budget appropriations in each Union Delegation, as well as in the central administration of the EEAS;

(b) show any increase or reduction of posts by grade and category in the central administration of the EEAS, and in all Union Delegations based on the preceding year;

(c) show the number of posts authorised for the financial year, the number of posts authorised for the preceding year, as well as the number of posts occupied by diplomats seconded from the Member States, Council and Commission staff;

(d) provide a detailed picture of all staff in place in the Union delegations at the time of presenting the draft budget, including a breakdown by geographic area, individual country and mission, distinguishing establishment plan posts, contract agents, local agents and seconded national experts and appropriations requested in the draft budget for such other types of personnel with corresponding estimates of the equivalent full-time staff that may be employed within the limits of the appropriations requested.

Article 3 5 Letter of amendment to the draft budget

Until the Conciliation Committee referred to in Article 314 of the TFEU is convened, the Commission may, on its own initiative or if requested by the other institutions, each in respect of its own section, present simultaneously to the European Parliament and the Council letters of amendment to the draft budget on the basis of new information which was not available at the time the draft was established, including a letter of amendment updating expenditure estimates for agriculture.

Article 3 6 Approval of the outcome of the Conciliation Committee

Once the Conciliation Committee has agreed on a joint text, the European Parliament and the Council shall endeavour to approve the outcome of the Conciliation Committee as soon as possible in accordance with Article 314(6) of the TFEU, in accordance with their respective internal rules of procedure.

Article 37 Adoption of the budget

1. The President of the European Parliament shall declare the budget finally adopted in accordance with the procedure provided for in Article 314(9) of the TFEU and Article 177(7) of the Treaty establishing the European Atomic Energy Community (hereinafter the 'Euratom Treaty').

2. Once the budget has been declared finally adopted, each Member State shall, from 1 January of the following financial year or from the date of the declaration of final adoption of the budget if that is after 1 January, be bound to make over to the Union the payments due as specified in the Council Regulation implementing the Decision on the system of the Union's own resources.

Article 3 8 Draft amending budgets

1. If there are unavoidable, exceptional or unforeseen circumstances, the Commission may present draft amending budgets.

Requests for amending budgets, in the same circumstances as referred to in the preceding paragraph, from institutions other than the Commission shall be sent to the Commission.

Before presenting a draft amending budget, the Commission and the other institutions shall examine the scope for reallocation of the relevant appropriations, taking into account any expected under-implementation of appropriations.

2. The Commission shall, save in exceptional circumstances, submit any draft amending budget simultaneously to the European Parliament and the Council by 1 September each year at the latest. It may attach an opinion to the requests for amending budgets from the other institutions.

3. The European Parliament and the Council shall discuss them with due account for their urgency.

Article 39 Early transmission of estimates and draft budgets

The Commission and the budgetary authority may agree to bring forward certain dates for the transmission of the estimates, and for the adoption and transmission of the draft budget. This arrangement may not, however, have the effect of shortening or prolonging the periods allowed for consideration of these texts under Article 314 of the TFEU and Article 177 of the Euratom Treaty.

CHAPTER 2 STRUCTURE AND PRESENTATION OF THE BUDGET

Article 40 Structure of the budget

The budget shall consist of the following:

(a) a general statement of revenue and expenditure;

(b) separate sections subdivided into statements of revenue and expenditure for each institution.

The European Council and the Council shall share the same section of the budget.

Article 41 Classification of the budget

1. Commission revenue and the revenue and expenditure of the other institutions shall be classified by the budgetary authority according to their type or the use to which they are assigned under titles, chapters, articles and items.

2. The statement of expenditure for the Commission section shall be set out on the basis of a nomenclature adopted by the budgetary authority and classified according to purpose.

A title shall correspond to a policy area and a chapter shall, as a rule, correspond to an activity.

Each title may include operational appropriations and administrative appropriations.

The administrative appropriations for a title shall be grouped in a single chapter.

Article 42 Prohibition of negative revenue

The budget may not contain negative revenue.

The own resources paid under the Council Decision on the system of the Union's own resources shall be net amounts and shall be shown as such in the summary statement of revenue in the budget.

Article 43 Provisions

1. Each section of the budget may include a ‘provisions’ title. Appropriations shall be entered in this title in the following two circumstances:

(a) where no basic act exists for the action concerned when the budget is established;

(b) where there are serious grounds for doubting the adequacy of the appropriations or the possibility of implementing, under conditions consonant with sound financial management, the appropriations entered on the lines concerned.

The appropriations in this title may be used only after transfer in accordance with the procedure laid down in point (d) of Article 23(1), where the adoption of the basic act is subject to the procedure laid down in Article 294 of the TFEU, and that of Article 24, for all other cases.

2. In the event of serious implementation difficulties, the Commission may propose, in the course of a financial year, that appropriations be transferred to the ‘provisions’ title. The budgetary authority shall take a decision on these transfers as provided in Article 24.

Article 44 Negative reserve

The Commission section of the budget may include a ‘negative reserve’ limited to a maximum amount of EUR 200 million. This reserve, which shall be entered in a separate title, may comprise both commitment appropriations and payment appropriations.

This reserve must be drawn upon before the end of the financial year by means of transfer in accordance with the procedure laid down in Articles 21 and 23.

Article 45 Reserve for emergency aid

1. The Commission section of the budget shall include a reserve for emergency aid for third countries.

2. The reserve referred to in paragraph 1 shall be drawn upon before the end of the financial year by means of transfer in accordance with the procedure laid down in Articles 24 and 25.

Article 46 Presentation of the budget

1. The budget shall show:

(a) in the general statement of revenue and expenditure:

(i) the estimated revenue of the Union for the financial year concerned;

(ii) the estimated revenue for the preceding financial year and the revenue for year n - 2;

(iii) the commitment and payment appropriations for the financial year concerned;

(iv) the commitment and payment appropriations for the preceding financial year;

(v) the expenditure committed and the expenditure paid in year n – 2;

(vi) appropriate remarks on each subdivision, as set out in Article 41(1);

(b) in each section of the budget, the revenue and expenditure shall be shown in the same structure as in point (a);

(c) as regards staff:

(i) for each section of the budget, an establishment plan setting the number of posts for each grade in each category and in each service and the number of permanent and temporary posts authorised within the limits of the budget appropriations;

(ii) an establishment plan for staff paid from the research and technological development appropriations for direct action and an establishment plan for staff paid from the same appropriations for indirect action; the establishment plans shall be classified by category and grade and shall distinguish between permanent and temporary posts, authorised within the limits of the budget appropriations;

(iii) as regards scientific and technical staff, the classification may be based on groups of grades, in accordance with the conditions laid down in each budget; the establishment plan must specify the number of highly qualified technical or scientific personnel who are accorded special advantages under the specific provisions of the Staff Regulations;

(iv) an establishment plan setting the number of posts by grade and by category for each body referred to in Article 200 which receives a grant charged to the budget. The establishment plans shall show next to the number of posts authorised for the financial year the number authorised for the preceding year;

(d) as regards borrowing-and-lending operations:

(i) in the general statement of revenue, the budget lines corresponding to the relevant operations and intended to record any reimbursements received from beneficiaries who initially defaulted, leading to activation of the performance guarantee. These lines shall carry a token entry " pro memoria " and be accompanied by appropriate remarks;

(ii) in the Commission section:

- the budget lines containing the Union's performance guarantees in respect of the operations concerned. These lines shall carry a token entry " pro memoria ", so long as no effective charge which has to be covered by definitive resources has arisen;

- remarks giving the reference to the basic act and the volume of the operations envisaged, the duration and the financial guarantee given by the Union in respect of these operations;

(iii) in a document annexed to the Commission section, as an indication:

- ongoing capital operations and debt management;

- the capital operations and debt management for the financial year concerned;

(e) the total amount of CFSP expenditure shall be entered into one budget chapter, entitled CFSP, with specific budgetary articles. Those articles shall cover CFSP expenditure and shall contain specific budget lines identifying at least the single major missions.

2. In addition to the documents referred to in paragraph 1 the budgetary authority may attach any other relevant documents to the budget.

Article 47 Rules on the Establishment Plan for staff

1. The establishment plan described in point (c) of Article 46(1) shall constitute an absolute limit for each institution or body; no appointment may be made in excess of the limit set.

However, save in the case of grades AD 16, AD 15 and AD 14, each institution or body may modify establishment plans by up to 10 % of posts authorised, subject to two conditions:

(a) that the volume of staff appropriations corresponding to a full financial year is not affected, and

(b) that the limit of the total number of posts authorised by each establishment plan is not exceeded.

Three weeks before making the modifications referred to in the second subparagraph, the institutions shall inform the budgetary authority of their intentions. In the event of duly justified reasons being raised within this period by either branch of the budgetary authority, the institutions shall refrain from making the modifications and the normal procedure shall apply.

2. By way of derogation from the first subparagraph of paragraph 1, the effects of part-time work authorised by the appointing authority in accordance with the Staff Regulations may be offset by other appointments.

CHAPTER 3 BUDGETARY DISCIPLINE

Article 48 Compliance of the budget with the multiannual financial framework

The budget shall comply with the multiannual financial framework.

Article 49 Compliance of Union acts with the budget and the multiannual financial framework

Where by implementation of an act of the Union the appropriations available in the budget or the allocations available in the multiannual financial framework would be exceeded, such act may be implemented in financial terms only after the budget has been amended and, if necessary, the financial framework has been appropriately revised.

TITLE IV IMPLEMENTATION OF THE BUDGET

CHAPTER 1 GENERAL PROVISIONS

Article 50 Budget implementation according to sound financial management

1. The Commission shall implement the revenue and expenditure of the budget in accordance with this Regulation, on its own responsibility and within the limits of the appropriations authorised.

2. The Member States shall cooperate with the Commission so that the appropriations are used in accordance with the principle of sound financial management.

Article 51 Basic act and exceptions

1. A basic act shall first be adopted before the appropriations entered in the budget for any action by the Union may be used.

A basic act is a legal act which provides a legal basis for the action and for the implementation of the corresponding expenditure entered in the budget.

2. In application of the TFEU and the Euratom Treaty, a basic act is an act adopted by the legislative authority and may take the form of a regulation, a directive or a decision within the meaning of Article 288 of the TFEU.

3. In application of Title V of the Treaty on European Union, a basic act may take one of the forms specified in Articles 26(2), 28(1), 29, 31(2), 33 and 37 of the Treaty on European Union.

4. Recommendations and opinions do not constitute basic acts within the meaning of this Article, nor do resolutions, conclusions, declarations or other acts which have no legal effects.

5. By way of derogation from paragraphs 1, 2 and 3, the following may be implemented without a basic act provided the actions which they are intended to finance fall within the powers of the Union:

(a) appropriations for pilot projects of an experimental nature designed to test the feasibility of an action and its usefulness. The relevant commitment appropriations may be entered in the budget for not more than two successive financial years;

(b) appropriations for preparatory actions in the field of application of the TFEU and the Euratom Treaty, designed to prepare proposals with a view to the adoption of future actions. The preparatory actions are to follow a coherent approach and may take various forms. The relevant commitment appropriations may be entered in the budget for not more than three successive financial years. The legislative procedure must be concluded before the end of the third financial year. In the course of the legislative procedure, the commitment of appropriations must correspond to the particular features of the preparatory action as regards the activities envisaged, the aims pursued and the persons benefited. Consequently, the means implemented cannot correspond in volume to those envisaged for financing the definitive action itself.

When the draft budget is presented, the Commission shall submit a report to the budgetary authority on the actions referred to in point (a) and the first paragraph of this point which shall also contain an assessment of results and the follow-up envisaged;

(c) appropriations for preparatory measures in the field of Title V of the Treaty on European Union. These measures shall be limited to a short period of time and shall be designed to establish the conditions for Union action in fulfilment of the objectives of the CFSP and for the adoption of the necessary legal instruments.

For the purpose of Union crisis management operations, preparatory measures are designed inter alia to assess the operational requirements, to provide for a rapid initial deployment of resources, or to establish the conditions on the ground for the launching of the operation.

Preparatory measures shall be agreed by the Council, on a proposal by the High Representative of the Union for Foreign Affairs and Security Policy.

In order to ensure the rapid implementation of preparatory measures, the High Representative shall inform the Commission as early as possible on the Council's intention to launch a preparatory measure and in particular of the estimated resources required for this purpose. In conformity with this Regulation, the Commission shall take all the necessary measures to ensure a rapid disbursement of the funds.

(d) appropriations for one-off actions, or even actions for an indefinite duration, carried out by the Commission by virtue of tasks resulting from its prerogatives at institutional level pursuant to the TFEU and the Euratom Treaty other than its right of legislativ