Special Report No 6/98 concerning the Court's assessment of the system of resources based on VAT and GNP together with the Commission's replies (submitted pursuant to the second subparagraph of Article 188c(4) of the EC Treaty)
Date: 1998-05-14
Institutions: European Court of Auditors
Subjects: GNP contribution, Member States' contribution, VAT resource, financing of the EU budget, report

C  241/58

EN

Official  Journal  of  the  European  Communities

31.7.98

SPECIAL  REPORT  No  6/98

concerning the Court’s assessment of the system of resources based on VAT and GNP together
with  the  Commission’s  replies

(submitted  pursuant  to  the  second  subparagraph  of  Article  188c(4)  of  the  EC  Treaty)

(98/C  241/02)

CONTENTS

Paragraph
reference

Page

1.  INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1 — 1.3

2.  FINANCING  THE  COMMUNITY  BUDGET . . . . . . . . . . . . . . . . . . . . . . . . .

2.1 — 2.12

The  background  to  the  system  for  financing  the  Community . . . . . . . . . . . . .

2.1 — 2.5

The  main  characteristics  of  the  VAT  and  GNP  resources . . . . . . . . . . . . . . . .

2.6 — 2.12

The  VAT  resource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.8 — 2.9

The  GNP  resource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.10

Determining  and  monitoring  the  VAT  and  GNP  assessment  bases . . . . . .

2.11 — 2.12

3.  THE  LIMITATION  AND  DISTORTIONS  OF  THE  CURRENT  SYSTEM .

3.1 — 3.60

Virtual  own  resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.3 — 3.7

The  contributory  capacity  of  the  Member  States . . . . . . . . . . . . . . . . . . . . . . .

3.8 — 3.9

The  system’s  corrective  factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.10 — 3.33

The  capping  of  the  VAT  assessment  base . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.10 — 3.16

Towards  a  twofold  GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.17 — 3.22

Correcting  budgetary  imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.23 — 3.33

No  generalised  application  of  the  system . . . . . . . . . . . . . . . . . . . . . . . . .

3.25 — 3.26

A  possible  extension  to  other  countries . . . . . . . . . . . . . . . . . . . . . . . . . .

3.27 — 3.28

An  inadequate  definition  of  the  notion  of  a  budgetary  imbalance . . . . .

3.29

The  possibility  of  using  expenditure  to  restore  the  balance . . . . . . . . . .

3.30 — 3.33

The  importance  of  statistics  in  the  calculation  of  the  VAT  and  GNP
resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.34 — 3.42

The  need  for  a  measure  of  data  quality . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.40 — 3.42

A  complex  and  inefficient  management  system . . . . . . . . . . . . . . . . . . . . . . . .

3.43 — 3.52

Estimating  the  assessment  bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.44 — 3.45

Rectification  of  the  bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.46 — 3.52

An  imprecise  legal  framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.53 — 3.60

Adaptation  of  the  regulations  on  the  VAT  resource . . . . . . . . . . . . . . . . . .

3.54 — 3.55

Data  to  be  used  for  the  calculation  of  the  Weighted  Average  Rate . . . . . .

3.56 — 3.57

The  entry  of  own  resources  in  the  accounts . . . . . . . . . . . . . . . . . . . . . . . . .

3.58 — 3.60

59

59

59

60

60

60

60

61

61

61

62

62

63

64

64

64

64

61

65

66

66

66

66

67

67

68

68

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Paragraph
reference

Page

4.  THE  VULNERABILITY  OF  THE  VAT  AND  GNP  RESOURCES . . . . . . . .

4.1 — 4.26

Effects  of  losses  of  tax  income  on  the  VAT  and  GNP  resources . . . . . . . . . .

4.1 — 4.7

The  inherent  risks  of  the  VAT  system . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.4 — 4.7

Ways  of  assessing  losses  of  VAT  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.8 — 4.19

Assessment  work  by  the  Commission  and  the  Member  States . . . . . . . . . .

4.13 — 4.15

Assessment  work  by  the  Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.16 — 4.19

Theoretical  VAT  and  the  exhaustiveness  of  the  GNP . . . . . . . . . . . . . . . . . . .

4.20 — 4.26

5.  CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.1 — 5.11

A  question  that  must  be  addressed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.1 — 5.4

Ambiguities  that  must  be  cleared  up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.5 — 5.6

A  choice  that  must  be  made:  a  consistent  and  transparent  system . . . . . . . . .

5.7 — 5.9

A  stable  system  that  can  be  audited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.10 — 5.11

Annex  I 

The  financing  of  the  European  Union  in  1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annex  II 

The  development  of  the  VAT  and  GNP  own  resources  (1992-1998) . . . . . . . . . . . . . . .

Annex  III  The  VAT  and  GNP  resources  in  relation  to  national  tax  revenue,  population  and  GNP
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1992-1995)

Annex  IV  The  main  stages  in  the  development  of  the  system  of  own  resources. . . . . . . . . . . . . . . .

68

68

68

69

70

70

70

71

71

72

72

72

73

74

75

76

The  Commission’s  replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77

1.  INTRODUCTION

report  examines 

the  development, 

the
1.1. This 
workings  and  the  limitations  of  the  Community  budget’s
two  main  sources  of  funds,  to  wit  the  VAT  and  GNP
resources,  which  account  for  approximately  80 %  of  the
Community’s  revenue  i. e.  61 000  Mio  ECU  in  1997 (1).
The  reader  is  reminded  that  the  entire  system  of  own
resources  has  been  examined  once  before,  in  1993 (2).
Subsequent  Annual  Reports  have  also  made  observations
on the traditional own resources, in addition to those set
out  in  the  1993  report.

data  used  for  the  calculation  of  the  Weighted  Average
Rate (a fundamental element of the assessment base) and
the  various  adjustments  and  compensations.  Regarding
the  GNP  resource,  the  Court’s  previous  comments
looked, in particular, at the methods and procedures used
for making forecasts, the quality of the national accounts
and  the  need  for  measuring  instruments.

1.3. Given the scale of the phenomenon, this report also
looks  at  the  consequences  for  the  VAT  and  GNP
resources  of  the  loss  of  tax  income.

1.2. Various  Court  Annual  Reports  have  also  looked  at
several aspects of the VAT and GNP resources. In respect
of the VAT resource, these aspects included, in particular,
the  disparity  between  Member  States  in  respect  of  the

(1)  Data on budgetary implementation are given in Annexes Nos

I  and  II.

(2)  Opinion No 8/93 of the Court of Auditors on an assessment
of  the  system  of  own  resources  introduced  in  1988  in  the
light  of  the  conclusions  of  the  Edinburgh  European  Council
(document  not  published  in  the  Official  Journal).  This
Opinion  was  drawn  up  at  the  request  of  the  European
Parliament.

2.  FINANCING  THE  COMMUNITY  BUDGET

The  background 
Community

to 

the  system 

for 

financing 

the

2.1. The  Treaty  of  Paris  of  18  April  1951 (3),  which  set
up  the  European  Coal  and  Steel  Community  (ECSC),

(3)  The  main  stages  in  the  development  of  the  system  of
financing  the  Communities  are  given  in  Annex  No  IV.

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provided  that  the  latter  would  be  financed  from  levies
based  on  coal  and  steel  production.

tax revenue. Tables Nos II and III compare the VAT and
GNP  resources  in  terms  of  population  and  GNP.

In  addition  to  these  levies,  which  might  rightly  be
2.2.
defined  as  the  first  Community  tax,  there  was  also
interest received on own funds, investments, reserves and
other  revenue.

The  VAT  resource

2.3.
In  1957,  with  the  creation  of  the  European
Economic  Community  and  the  European  Atomic  Energy
Community,  the  Treaties  had  provided  for  national
contributions,  with  the  option  of  replacing  these  with
own  resources.  These  contributions  were  established  as
percentages  of  budgetary  expenditure,  the  costs  being
shared  out  among  the  Member  States  according  to
various  cost-sharing  formulae,  depending  on  whether  the
financed  was  administrative  or
expenditure  being 
operational  (at  the  time,  primarily  expenditure  on
research  and  the  Social  Fund).

2.4. This system remained practically unaltered until the
adoption  of  the  Council  Decision  of  21  April  1970 (4),
concerning  the  replacement  of  the  Member  States’
financial  contributions  with  Community  own  resources.

2.5. The  aim  of  this  Decision  was  for  the  Community
budget  to  be  funded  entirely  from  own  resources,  i. e.
agricultural levies, contributions based on the production
of  sugar  and  isoglucose  and  customs  duties  levied  at  the
Community’s external borders, as well as a percentage of
the  base  of  the  VAT  collected  by  the  Member  States.  In
1988,  in  order  to  reduce  the  relative  share  of  the  VAT
resource and, at the same time, increase revenue, a fourth
resource,  based  on  GNP,  was  created.  Broadly  speaking,
this  system  is  still  in  force.

The  main  characteristics  of 
resources

the  VAT  and  GNP

2.6. The present system is governed by Council Decision
No  94/728/EC,  Euratom  of  31  October  1994 (5).  The
budget  is  partly  financed  by  resources  that  are  paid  over
by taxpayers (agricultural levies, sugar levies and customs
duties).

2.7. The VAT and GNP resources constitute transfers of
revenue  from  the  Member  States  to  the  budget  of  the
European Union. In Annex  No  III, the data in Table No
I show that the VAT and GNP resources represent, from
one  Member  State  to  another,  a  variable  percentage  of

(4)  Council  Decision  No  70/243/ECSC,  EEC,  Euratom  of  21

April  1970  (OJ  L  94,  28.4.1970,  p.  19).

(5)  OJ  L  293,  12.11.1994,  p.  9.

2.8. The  assessment  base  for  the  VAT  resource  is
calculated  on  the  basis  of  net  revenue  collected  for  this
purpose  by  the  Member  States  during  a  given  year.  This
income  is  divided  by  a  rate,  known  as  the  Weighted
Average  Rate,  which,  for  each  Member  State,  represents
the weighted average of the various rates applicable to all
transactions  subject 
to  non-deductible  VAT.  Final
household  consumption  constitutes  the  lion’s  share  of
these  transactions,  which  are  taken  from  the  national
statistical  accounts.

2.9. Because  of  the  different  ways  that  the  common
VAT  system  is  applied  in  the  various  Member  States,  in
particular  in  order  to  take  into  account  the  various
exemptions  and  exceptions,  adjustments  are  carried  out
so  as  to  standardise  the  final  VAT  resource  base,  as
required  by  the  Regulation.

The  GNP  resource

2.10. The  GNP  resource  represents  a  percentage  of
Gross  National  Product  at  market  prices,  established  in
accordance  with  Council  Directive  No  89/130/EEC,
Euratom  of  13  February  1989 (6).  The  function  of  this
resource  is  to  balance  the  Community  budget:  it  is  only
called  up  in  order  to  make  up  the  difference  between
planned  expenditure  and  the  other  resources  available
(agricultural  levies,  sugar  and  isoglucose  levies,  customs
duties,  VAT  resources  and  other  revenue).

Determining  and  monitoring 
assessment  bases

the  VAT  and  GNP

2.11. These  two  resources  rely  on  data  that  are  drawn
up  and  forwarded  by  the  Member  States,  initially  on  the
basis  of  an  estimate  and  then  on  the  basis  of  the  actual
figures 
subsequent
adjustments (7)).  The  relevant  provisions (8)  state  that  the
Member  States  and  the  Commission  are  responsible  for

(subject,  however, 

to  possible 

(6)  OJ  L  49,  21.2.1989,  p.  26.
(7)  For financial year n, the estimated data are established at the
start  of  the  year  n-1.  The  actual  data  are  forwarded  in  the
second  half  of  the  year  n+1.

(8)  For the VAT resource: Council Regulation No 1553/89 of 29
May 1989 (OJ L 155, 7.6.1989, p.9). For the GNP resource:
Council  Directive  No  89/130/EEC,  Euratom  of  13  February
1089  (OJ  L  49,  21.2.1989,  p.  26).

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determining complete and uniform tax bases for assessing
the  VAT  and  GNP  resources.

2.12. The  data  concerning  these  bases  are  inspected  by
the  Commission,  which  is  required  to  ensure  uniform
compliance  by  all  the  Member  States  with  the  relevant
provisions  on  the  calculation  of  tax  bases.

3.  THE  LIMITATIONS  AND  DISTORTIONS  OF  THE

CURRENT  SYSTEM

declarations, was subsequently abandoned (11) as a result,
in particular, of the differing ways the VAT legislation is
applied  in  the  Member  States.  The  practical  procedures
for calculating this resource (12) confirm the fact that it is
a  national  contribution (13).  This  resource  derives  from  a
tax that is not borne by taxpayers; instead it represents a
debt  on  the  part  of  the  Member  States.

3.5. Contrary to the Commission’s 1988 statement, even
though  the  VAT  resource  is  based  on  the  first  tax  to  be
harmonised at a European level, it may be doubted that it
has  had 
‘an  undoubted  political  and  psychological
impact’ (14).  In  fact,  its  link  to  fiscal  reality  is  very
tenuous, in particular because the calculation of the VAT
resource  involves  considerable  use  of  statistical  sources.

3.1. By virtue, in particular, of the provisions of Articles
199  and  201  of  the  EC  treaty,  the  budget  must  be
balanced.  It  must  in  fact  be  wholly  financed  with  the
resources  provided  for  this  purpose.  The  only  existing
limitation  is  a  ceiling  of  1,27 %  of  GNP  for  all  the
resources (9).

3.6. Moreover,  the  progressive  capping  of  the  VAT
assessment base as a percentage of GNP with effect from
1988  has  on  the  one  hand  helped  to  reduce  the
significance  of  the  VAT  resource  in  the  financing  of  the
budget  and,  on  the  other  hand,  it  has  accentuated  the
resource’s macro-economic character via its link with the
GNP.

3.2. Whilst,  in  consequence,  the  necessary  resources  are
guaranteed,  on  the  other  hand,  the  design  and  the
practical  running  of  the  system  are  subject  to  a  number
of  constraints,  which  are  discussed  below.

Virtual  own  resources

3.3. According  to  the  Commission  ‘the  methods  used  to
finance  the  Community  budget  illustrate  the  political
development  of  the  Community.  Thus,  in  the  beginning,
the  Community  was  financed  by  financial  contributions
from  the  Member  States  based  on  fixed  percentages
(Article  200  of  the  EC  Treaty)’ (10).  This  system  was  to
be  replaced  by  own  resources  (Article  201  of  the  EC
Treaty).  These  own  resources  therefore  took  the  form  of
taxes  that  were  levied  directly  on  natural  and  legal
persons  within  the  Community.  They  were  independent
of  the  decisions  of  the  Member  States  and  there  was  an
automatic link between the Community and its source of
revenue, 
to
Community  taxation.

i. e.  all  economic 

transactions 

liable 

3.4. The original plan of making the VAT resource a tax
based directly on consumption, or, at least, on taxpayers’

(9)  Under  Article  3  of  Council  Decision  94/728/EC  Euratom  of

31  October  1994  (OJ  L  293,  12.2.1994,  p.  9).

(10) ‘Outlook  for  the  financing  of  the  Community  budget’,  green
paper  of  23  November  1978,  EC  Bulletin,  supplement  8/78,
paragraph 18.

3.7. Though  the  GNP  resource  is  certainly  not  fiscal  in
nature,  the  situation  is  not  very  different  for  the  VAT
resource.  This  is  so  despite  the  fact  that  ‘the  system  of
VAT  resources  was  designed  to  provide  a  source  of
Community  financing  that  ensures  a  direct  link  between
the  Community
the  European 
budget’ (15).

taxpayers 

and 

The  contributory  capacity  of  the  Member  States

3.8. The  Decision  on  own  resources  states  that  the
system  of  own  resources  must  ‘take  into  account  the
contributory  capacity  of  the  Member  States’,  which  is

(11) The Commission had proposed that 1 % of the base actually
subject  to  VAT  should  be  paid  over  to  the  Community.  See
COM  (87)  101  final  of  28  February  1987,  p.  30.

(12) These procedures were first laid down by Council Regulation
(EEC,  Euratom,  ECSC)  No  2892/77  of  19  December  1997
(OJ  L  336,  27.12.1977,  p.  8)  and  subsequent  amendments
and  then  confirmed  by  Council  Regulation  (EEC,  Euratom)
No 1553/89 of 29 May 1989 (OJ L 155, 7.6.1989, p. 9) and
subsequent  amendments.  The  first  Regulation  gave  a  free
choice between the current method and a method, which was
theoretically  equivalent,  based  on  the  returns  of  taxpayers.
Two Member States initially opted for the latter method but
subsequently  joined  the  other  Member  States,  which  were
applying  the  revenue-based  method.

(13) On this point, see COM(87) 101 final of 28 February 1987,
p.  5;  COM(88)  99  final  of  9  March  1988,  pages  26-27  and
COM(92)  81  final  of  10  March  1992,  p.  23.

(14) COM(88)  99  final  of  9  March  1988,  p.  27.
(15) COM(88)  99  final  of  9  March  1988,  p.  26.

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indicated by the Gross National Product at market prices
(GNP).  The  GNP,  a  derivative  of  the  Gross  Domestic
Product  at  market  prices  (GDP),  was  chosen  as  an
indicator  of  contributory  capacity  because  it  is  supposed
to measure the prosperity of a country and not, as is the
case  with  GDP,  its  productive  capacity.

3.9. However,  under  the  Agreement  on  the  European
Economic  Area (16),  these  countries’  contributions  to
Community  projects  are  determined  according  to  their
GDP.  The  Commission  also  uses  GDP  to  assess  a
Member  State’s  ‘ability  to  pay’  in  connection  with  the
obligations provided for in Article 171 of the Treaty (17).
It  must  therefore  be  asked  whether  the  notion  of
contributory  capacity  is  being  treated  consistently,  even
though  the  contexts  are  different.

The  system’s  corrective  factors

The  capping  of  the  VAT  assessment  base

3.10. Whereas the call-up rate for the VAT resource had
just  been  increased  from  1 %  to  1,4 %  in  1985  to  make
up  for  the  shortfall  in  resources,  in  1988  it  was  decided
to  reduce  the  VAT  resource’s  contribution  to  the  budget
and create a complementary resource based on the GNP.
The  intention  was  to  take  the  contributory  capacity  of
the Member States more accurately into account, and this
was subsequently confirmed by the protocol on economic
and  social  cohesion  annexed  to  the  Treaty  on  European
Union  and  the  current  Decision  on  own  resources.

3.11. The  Commission  had  in  fact  pointed  out (18)  that,
by  its  very  nature  as  a  consumption  tax,  the  VAT
resource  produced  a  regressive  effect,  whereby  the  least
prosperous Member States (with their relatively high level
of  consumption  and 
to
contribute more than their share of the Community GNP
would  warrant.  This  meant  that  the  VAT  resource
constituted  a  factor  of  imbalance  in  the  Member  States’
financing  of  the  budget,  in  particular  from  the  point  of
view  of  ‘equity’ (19).

low  savings  rate) 

tended 

3.12. The  share  of  the  VAT  resource  in  financing  the
Community  budget  has  gradually  been  reduced  since

(16) Article  82  of  the  Treaty,  signed  in  Oporto,  on  2  May

1992.

1988.  As  from  1999,  the  call-up  rate  for  the  VAT
resource is to be limited to 1 % and the VAT base taken
into  consideration  may  not  exceed  50 %  of  GNP (20).

3.13.
In  the  Commission’s  opinion,  the  VAT  resource
does  not  represent  the  contributory  capacity  of  the
Member  States  and  it  even  considers  it  to  be  inequitable
—  even  after  correction  by  capping.  However,  this
resource  has  not  been  abolished  and  replaced  by  an
increase  in  the  GNP  resource,  although  this  would  have
been  possible  when  the  GNP  resource  was  created  in
1988.

3.14. Furthermore,  even  with  the  establishment  of  a
capping ceiling at 50 % of GNP as from 1999, the bases
of  certain  Member  States  will  not  be  capped.  Moreover,
as  the  Court  observed  in  its  Opinion  No  8/93,  it  is  not
necessarily  the  least  prosperous  Member  States  that
benefit  from  this  capping,  even  though  the  re-balancing
of  the  resources  was  intended  to  benefit  them.

3.15. The  capping  of  the  VAT  resource  introduced  an
element  of  distortion  into  the  system.  Some  Member
States  (four  in  1998)  contribute  to  the  budget  purely  in
accordance  with  their  contributory  capacity  (GNP),  as  a
result  of  the  capping  of  their  VAT  bases,  while  others
contribute  on  the  twofold  basis  of  their  contributory
capacity  and  taxable  consumption  (VAT).  However,  as
the  Court  has  already  noted (21),  the  call-up  rate  for  the
VAT  resource  is  based  on  the  principle  that  it  should
apply  in  the  same  way  to  everybody.  Moreover,  a
reduction in the share of the budget financed by the VAT
resource  could  have  been  achieved  without  calling  into
question  the  generalised  application  of  this  principle,
simply  by  reducing  the  call-up  rate.

3.16. The VAT resource poses a problem of consistency.
If  it  is  to  be  considered  a  contribution  by  the  Member
States,  it  should  logically  have  been  abolished  in  1988
and replaced by the GNP resource. If, on the other hand,
it  is  meant  to  be  a  tax  on  the  final  consumption  of
European  citizens,  capping  it  in  accordance  with  GNP
may  reasonably  be  questioned.  Indeed,  in  the  latter  case,
it  should  be  considered  a  genuine  own  resource,  and
capping  it  would  therefore  not  be  justified  because  that
would  nullify  its  primary  function.

(17) Method  of  calculation  of  the  penalty  provided  for  in  Article

171  of  the  EC  Treaty  (OJ  C  63,  28.2.1997,  p.  2).

(18) COM(92)  81  final  of  10  March  1992,  pp.  4,  23  and  40.
(19) Commission  study  on  ‘Budgetary  contributions,  expenditure
of  the  European  Union,  budgetary  balances  and  the  relative
prosperity  of  the  Member  States’,  9  October  1997,  pages
2-3.

(20) See Council Decision No 94/728/EC, Euratom of 31 October
1994 (OJ L 293, 12.11.1994, p. 9). These limits will remain
applicable  until  the  current  decision  on  own  resources  is
amended.

(21) Annual  Report  of  the  Court  of  Auditors  concerning  the
(OJ  C  330,

financial  year  1991,  paragraph  1.104 
15.12.1992).

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Towards  a  twofold  GNP

3.17. One might expect that macro-economic aggregates
would  always  be  used  in  their  most  complete  form.
Improvements  in  the  calculation  of  GNP,  both  from  the
point  of  view  of  the  field  covered  and  from  that  of  the
concepts  used (22),  are  to  be  introduced  in  1999  via  the
new  version  of  the  European  System  of  Integrated
Economic Accounts (the 1995 ESA). However, in spite of
the  Commission’s  opposition,  the  legislation  expressly
prevent this new ESA from being used for the calculation
of  the  GNP  resource  as  long  as  the  current  Decision  on
own  resources  is  in  force (23).  Consequently,  the  GNP
taken  into  account  in  this  context  will  still  be  based  on
the  1979  ESA  (second  edition).  This  decision  also  affects
the  determination  of  the  VAT  resource,  inasmuch  as  the
calculation of the weighted average rate, a key feature of
the  base  (see  paragraph  2.8),  requires  the  breakdown  of
taxable  transactions  using  national  accounts.  Here  too
the  1979  version  of  the  ESA  will  continue  to  apply.

3.18. One  may  therefore  wonder  about  the  reasons  for
this  exclusion,  especially  when,  at  the  same  time,
discussions within the Council suggest that it is ‘probable
that  the  new  system  will  bring  about  an  increase  in  the
Community’s  GNP  and  changes  in  the  relationships
between  the  GNPs  of  the  Member  States’ (24).  Amongst
the  nine  Member  States  which  supplied  estimates  during
the  preparatory  work  for  the  1995  ESA,  the  difference
compared  with  the  present  GNP  (1979  ESA)  was
between  - 9,7 %  and  + 5 %,  depending  on  the  country.
According  to  the  Commission,  the  new  ESA  was  meant
to  make  for  the  greater  comparability  required  for  the
management  of  the  economic  and  monetary  union  and
the  utilisation  of  aggregates  from  the  national  accounts
in
for  Community  administrative  calculations  and, 
particular,  budgetary  calculations (25).

3.19. When  the  GNP  is  being  calculated  according  to
the  1995  ESA,  a  particular  problem  is  that  of  the
subdivision of Financial Intermediation Services (FISIMs).
The  rules  adopted  by  the  Council  stated  that,  for  the
purposes  of  the  GNP  resource,  the  utilisation  of  FISIMs
would  not  be  automatic  but  would  be  dealt  with  in  a
subsequent  specific  Council  Decision  to  be  adopted

(22) For  details  of  the  amendments  introduced  by  the  1995  ESA,
see  Commission  Decision  No  97/178/EC,  Euratom  of  10
February  1997  (OJ  L  75,  15.3.1997,  p.  44).

(23) The  1995  version  of  the  ESA,  introduced  by  Council
Regulation (EC) No 2223/96 of 25 June 1996, Article 8 (OJ
L  310,  30.11.1996,  p.  1).

(24) Council  Document  No  7057/95  of  15  May  1995,  p.  2.
(25) COM(93)  454  final  of  22  October  1993,  p.  41.

unanimously (26).  Nevertheless,  in  the  Council’s  view (27),
the subdivision of the FISIMs should bring about a major
improvement  in  ESA  methodology  and  a  more  accurate
comparison  of  GDP  levels (28)  within  the  European
Union.

3.20. This  development  is  contrary  to  the  objectives
behind  the  GNP  resource,  namely  the  creation  of  a
resource  based  on  reliable  and  exhaustive  data  that  are
comparable  from  both  the  conceptual  and  practical
points  of  view.  It  offends  against  the  principle  of  the
impartiality  of  Community  statistics (29),  which  implies
that  they  should  be  produced  in  an  objective  and
independent  way.  The  GNP  resource  is  therefore  in
danger  of  becoming  a  purely  financial  contribution,
ending up as a formula for budgetary cost-sharing among
the Member States. If it is not based on the most refined
calculation  of  the  GNP  (the  1995  version  of  the  ESA),
this  GNP  resource  will 
the
measurement of the contributory capacity of the Member
intends (30)  to
States.  The  Commission  nevertheless 
accompany  in  future  any  proposal  aimed  at  modifying
the  statistical  definition  of  the  GNP  used  for  the
calculation  of  own  resources  with  an  estimate 
in
percentage  terms  of  the  difference  between  the  GNP
according to the 1995 ESA and the GNP according to the
1979  ESA  taken  into  account  for  the  own  resources.

introduce  a  bias 

in 

result,  and 

in  connection  with 

3.21. As  a 
the
considerations  under  3.9.  above,  the  existence  of  two
GNPs  (relating  to  the  1979  and  1995  ESAs  respectively)
poses  the  problem  of  deciding  which  aggregate  is  to  be
used  in  other  Community  fields,  such  as,  for  example,
decisions  on  which  areas  are  to  be  eligible  for  structural
measures.

3.22. Furthermore,  calculating  the  GNP  twice  does  not
make  for  any  qualitative  improvements  in  the  national
accounts. On the contrary, it represents an inefficient use
of  available  resources  and  is  contrary  to  the  general
principles  of  Community  statistics.

(26) Article  8  of  Council  Regulation  (EC)  No  448/98  of  16

February  1998  (OJ  L  58,  27.2.1998).

(27) Third  recital  of  Council  Regulation  (EC)  No  448/98  of  16

February  1998.

(28) As  stated  under  paragraph  3.8,  the  GNP  is  derived  from  the

GDP.

(29) See  Article  10  of  Council  Regulation  (EC)  No  322/97  of  17

February  1997  (OJ  L  52,  22.2.1997,  p.  1).

(30) Commission  declaration  in  the  minutes  of  the  Council
meeting  on  the  occasion  of  the  adoption  of  the  regulation
concerning  the  distribution  of  indirectly  measured  financial
intermediation services in the context of the European system
of  national  and  regional  accounts  (SEC).  Council  document
No  5450  of  21  January  1998.

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Correcting  budgetary  imbalances

A  possible  extension  to  other  countries

imbalances, 

3.23. Whilst  considering  expenditure  policy  to  be  the
main  tool  for  the  eventual  solution  of  the  problem  of
budgetary 
the  Fontainebleau  European
Council of 25 and 26 June 1984 nonetheless decided that
any  Member  State  that  was  bearing  excessive  budgetary
costs  in  relation  to  its  relative  prosperity  could  benefit
from  a  correction (31).

‘budgetary 

3.24. The  correction  of 
imbalances’,  as
defined  by  the  Fontainebleau  European  Council,  consists
of  reducing  the  negative  budget  balance  of  the  Member
State  in  question  by  two  thirds.  For  a  given  financial
is  calculated  by  multiplying  the
year,  this  balance 
difference  between  the  Member  State’s  percentage  share
of  VAT-GNP  contributions  and  its  percentage  share  of
‘allocated’  expenditure  by 
‘allocated
expenditure’ (32).  This  correction  is  financed  by  the  other
Member  States.

total 

the 

for 

No  generalised  application  of  the  system

3.25. Even  though  the  conclusions  of  the  European
Council  of  Fontainebleau  state  that  any  Member  State
with  a  budgetary  imbalance  in  relation  to  its  relative
prosperity  may  apply  for  a  correction,  the  current
Decision  on  own  resources  only  specifically  grants  it  to
one  Member  State.

3.26. There  is  therefore  no  generalised  system  enabling
other  Member  States  to  benefit  from  such  a  correction,
just  as  there  is  no  monitoring  procedure  to  examine  that
the  said  correction  is  still  justified.  A  solution  to  this
problem  would  be  to  amend  the  Decision  on  own
resources.  However,  under  Article  201  of  the  EC  Treaty,
any  amendments 
to
unanimous  approval  by  the  Member  States  and  national
ratification  procedures.

this  Decision  are  subject 

to 

(31) According  to  the  Commission,  the  aim  of  the  notion  of
‘relative  prosperity’  is  to  determine  the  situation  of  the
citizens  of  a  country  or  a  region  in  comparison  with  the
average  for  the  European  Union.  See  the  Commission  study
on  ‘Budgetary  contributions,  budgetary  balances  and  the
relative prosperity of the Member States’, 9 October 1997, p.
9-10.

(32) The  notion  of  ‘allocated  expenditure’  is  specified  in  the
procedure  for  calculating  the  correction  in  favour  of  the
United Kingdom (see, in particular, COM (85) 36 final of 21
February 1985, SEC 926 of 21 June 1988 and document No
XIX/66/94).  Essentially,  it  corresponds  to  all  budgetary
expenditure except that in favour of non-Member States and
certain  minor  budget  headings.

for 

the  criteria  currently  applied 

3.27. Without  prejudice  to  any  comments  that  could  be
made  as  regards  the  relative  prosperity  of  the  Member
States, 
revenue
correction  would  enable  six  other  Member  States  to
qualify.  This  would  have  resulted,  on  the  basis  of  the
latest  definitive  figures  available  (for  the  financial  year
1996),  in  an  increase  of  between  2 900  Mio  ECU  (one
Member  State)  and  12 400  Mio  ECU  (seven  Member
States)  in  the  total  amount  spent  on  the  correction  (i. e.
22 %  of  the  VAT  and  GNP  resources  for  the  financial
year  in  question).

3.28. Moreover, given that the beneficiary States do not
contribute  towards  financing  it,  this  correction  would
actually largely be financed by Member States whose per
capita GNP is lower than the Community average, which
is the reason why these Member States are eligible for the
Structural  Funds 
less  prosperous
in  favour  of  the 
countries.

An  inadequate  definition  of  the  notion  of  a  budgetary
imbalance

rightly 

the  Commission  has 

stated (33),
3.29. As 
budgetary  balances  provide  misleading  interpretations  or
inaccurate  assessments  of  the  advantages  to  be  gained
from the European Union’s expenditure policies. The fact
is  that  budgetary  flows  shown  in  the  accounts  cannot  be
used  to  identify  the  multiplier  effect  of  these  Community
policies.  Because  of  the  integration  of  the  Member  State
economies  within  the  single  market,  establishing  a  strict
link  between  the  destination  of  Community  payments
and  the  benefits  accruing  to  the  Member  States  is
becoming  increasingly  open  to  question.

The  possibility  of  using  expenditure  to  restore  the
balance

3.30. The  present  method  for  calculating  the  correction
of  a  budgetary  imbalance  neglects  these  considerations.
The establishment of a ceiling for the rebate at two thirds
of  the  negative  balance,  whatever  its  size,  is  arbitrary.
the  objective  of  reducing  a  budgetary
Moreover, 
imbalance  by  calculations  of  this  sort  could  have  been
achieved  by  the  ‘expenditure’  side  of  the  budget  —  for
example by means of a flat-rate sum or by readjusting the
balance among the measures financed by the Community,
as  the  Fontainebleau  European  Council  recommended.

3.31. The  choices  made  by  the  budgetary  authority
when  it  adopts  the  budget  have  different  direct  or

(33) Commission study: ‘Budgetary contributions, the expenditure
of  the  Union,  budget  balances  and  the  relative  prosperity  of
the  Member  States’,  9  October  1997,  pp.  7-8.

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In 

economic 

concerned. 

indirect  effects  in  the  Member  States  according  to  the
individual 
this
sectors 
connection,  the  Court  carried  out  a  simulation  on  the
basis of the general principles and notions currently used
for  project  assessment  and  cost-benefit  analyses (34).  The
statistical data from the input-output tables and the trade
flows  between  the  Member  States  were  used  to  identify
the  effects  on  the  output  of  the  economic  sectors  of  the
countries  concerned (35).  These  data  made  it  possible  to
quantify  the  links  between  the  various  productive  sectors
and,  in  particular,  the  relations  between  the  productive
structures  of  one  country  and 
those  of  others
(Community  or  otherwise).

3.32. The  aim  of  this  exercise  was  to  assess  the
economic output flows generated both within and among
the  Member  States  by  a  given  hypothetical  piece  of
expenditure  in  their  favour  in  the  sectors  of  agriculture
(50 %  of  the  hypothetical  expenditure),  infrastructure
(40 %  of  the  expenditure)  and  services  (10 %  of  the
expenditure).  The  result  was  that  the  additional  output
generated by expenditure granted to a given country was
not  limited  to  the  country  in  question,  but  could  extend
to  other  countries  (including  non-Member  States)  as  a
result  of  imports/exports  of  goods  and  services.  Effects
could  also  be  identified  in  economic  sectors  which  were
not  direct  beneficiaries  of  Community  payments.

3.33. The  multiplier  effect  in  terms  of  output  generated
by  the  expenditure  was,  overall,  about  twice  as  high  as
the  expenditure  itself.  However,  probably  because  of
differences  in  the  productive  structures  of  the  various
countries  of  the  Union,  this  effect  may  vary  considerably
from  one  Member  State  to  another.  In  relation  to
expenditure,  the  multiplier  effect  is  between  +  48 %  and
+ 111 %. This does seem to confirm that, in this context,
the  sectors  where  the  Community  intervenes  do  indeed
determine  the  benefits  that  a  country  obtains  from  its
membership  of  the  Union.  It  therefore  follows  that  it  is
the  effects  of  budgetary  policy  choices,  rather  than  mere
financial  flows,  that  provide  the  most  appropriate
information  as  to  any  imbalances.

(34) See, 

for  example:  UNIDO  —  Guidelines 

for  project
evaluation  —  Vienna,  1972;  W.  Leontief  —  Input-Output
economics  —  Oxford  University  Press,  1996,  NY;  H.B.
Chenery  —  Interindustry  economics  —  J.  Willey  &  sons,
1959,  NY;  Chervel-Le  Gall  —  Manuel  d’e´valuation
e´conomique  des  projets,  la  me´thode  des  effets  —  Ministe`re
de  la  Coope´ration,  Paris,  1976;  Costa  —  Interdipendenze
industriali  e  programmazione  regionale  —  Franco  Angeli,
Milano  1978.

(35) These  data  refer  to  1991,  the  last  year  available.

The  importance  of  statistics  in  the  calculation  of  the
VAT  and  GNP  resources

3.34. Macro-economic  data,  deriving  from  national
accounts  statistics,  on  which  the  GNP  resource  is  based,
also  play  a  major  role  in  the  determination  of  the  VAT
resource.

3.35. For  the  VAT  resource,  calculating  the  Weighted
Average  Rate  (WAR)  requires  statistical  data  so  that  the
weighting of the VAT rates applied to the various taxable
transactions  can  be  established.  These  data,  which
correspond to the net values of the transactions that have
been  carried  out,  are  broken  down  by  VAT  rate  on  the
basis  of  statistical  data  from  the  national  accounts  (ESA)
or  other  sources.  Nevertheless,  compiling  the  necessary
data  requires  practical  efforts  so  as  to  reconcile  the
statistics  on  taxable  transactions.

3.36. For  harmonisation  purposes,  corrections  or
compensations  need  to  be  made  when  calculating  the
VAT  assessment  base.  It  is  not  always  possible  to
determine  these  adjustments,  which  in  1995  represented
percentages  varying,  according  to  the  State,  between
0,09 %  and  - 5,66 %  of  their  base,  on  the  basis  of
adequate  tax  data (36).  Where  these  are  lacking,  national
accounts  data  or  suitable  other  sources  are  used.

3.37. By  its  very  nature,  the  GNP  is  a  statistical
aggregate  drawn  up  in  the  context  of  the  national
accounts  to  measure  the  result  of  the  overall  activity  of
an  economy  over  a  given  period.  It  covers  all  the
economic  transactions  of  all  the  parties  concerned,
whether  commercial  or  non  commercial.  It  enables
presentation  from  three  viewpoints (37)  —  ‘production’,
‘expenditure’  and  ‘revenue’  —  thus  allowing  a  detailed
macro-economic  analysis,  in  particular  for  purposes  of
temporal  and  geographical  comparisons.

3.38. This  aggregate  is  drawn  up  by  the  statistical
in  accordance  with
services  of  the  Member  States 
national systems, principles and methods. The creation of
the  European  System  of  Integrated  Economic  Accounts
(ESA) introduced a uniform framework of definitions for
the  Member  States.  Directive  No  89/130/EEC,  Euratom
the
established  procedures 
conceptual,  technical  and  organisational  points  of  view.

for  harmonisation 

from 

(36) See  the  Court’s  Statement  of  Assurance  concerning  the
financial  year  1995,  Table  3.2  (OJ  C  395,  31.12.1996,  p.
37).

(37) For  the  details  in  the  presentation  of  the  GNP  according  to
the  three  viewpoints  and  their  respective  components,  see
Directive  89/130/EEC,  Euratom.

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3.39.
It  is  the  Commission’s  responsibility  to  ensure  the
consistent  and  uniform  application  of  the  rules  for
national accounts, because high quality statistical data are
needed  not  only  for  the  GNP  resource  but  also  for  the
the
completion  of 
coordination  of  national  economic  policies  and  the
formulation,  application,  monitoring  and  evaluation  of
the  policies  provided  for  in  the  Treaty.

internal  market  and 

the 

for 

The  need  for  a  measure  of  data  quality

inevitably, 

3.40. Statistical  data  are  drawn  up  by  the  Member
their  own  statistical  systems.  This,
States,  under 
leads  to  a  certain  degree  of
practically 
heterogeneity.  However, 
statistics  must  be
harmonised  and  their  quality  measured  if  they  are  to
enjoy  the  degree  of  confidence  and  legitimacy  that  is
required  for  them  to  be  used.

these 

3.41. There  are  two  aspects  to  the  notion  of  quality  as
applied  to  statistical  data:  the  comparability  of  statistical
data between Member States and the specific reliability of
each  national  system.  The  comparability  aspect  regards
the level of equivalence of the specific standards, methods
and  sources  of  each  national  system.  The  reliability  of
each  system  is  defined  as  the  precision  with  which
statistical  data  are  drawn  up  in  accordance  with  the
applicable standards (38).

the 

stresses 

increasing 

importance  of 

3.42. For  the  GNP,  Directive  No  89/130/EEC,  Euratom
details  the  various  dimensions  of  the  quality  of  the  GNP
its
and 
comparability  and  reliability.  In  this  context,  the  Court
would  remind  the  reader  of  its  previous  comments (39)
recommending  that,  alongside  its  efforts  to  ensure  the
harmonisation  and  improvement  of  statistical  systems,
for
should  develop 
the  Commission 
measuring the quality of the GNP. The aim of this would
be  to  accompany  the  statistical  data  of  a  given  Member
State  with  an  indication  of  their  intrinsic  reliability  and
their quality in relation to those of other Member States.
The  Commission  has  taken  the  initiative  of  launching
two  pilot  studies  to  examine  the  feasibility  of  developing
a  measure  of  the  reliability  of  the  GNP.

instruments 

(38) The  notion  of  reliability  is  defined  in  this  way  in  Council
Regulation (EC) No 322/97 of 17 February 1997 concerning
Community statistics (OJ L 52, 22.2.1997, p. 1): ‘Reliability
is the fact that Community statistics should reflect, as closely
as  possible,  the  reality  that  they  are  meant  to  represent’
(Article  10).

(39) Annual  Report  of  the  Court  of  Auditors  concerning  the
financial  year  1995,  paragraphs  1.104-1.128  (OJ  C  340,
12.11.1996).

A  complex  and  inefficient  management  system

3.43. Although  it  is  a  system  of  financial  contributions
by  the  Member  States,  the  VAT  and  GNP  resources
system  is  not  a  simplified  system.  Paradoxically,  it
contains  all  the  constituent  components  of  a  traditional
this
budgetary  system  based  on 
connection,  there  are  a  number  of  comments  to  be  made
on  the  procedures  for  the  estimation  and  rectification  of
the  assessment  base.

tax  revenue. 

In 

Estimating  the  assessment  bases

3.44. During  the 
implementation  of  the  budgetary
procedure,  the  Commission  establishes  estimates  of  the
VAT  and  GNP  bases. 
Independently  of  exchange
variations  between  national  currencies  and  the  ECU,
differences,  sometimes  significant  differences,  have  been
noted  compared  with  the  actual  bases.  During  the
1989-1995  period,  for  the  VAT  resource,  the  maximum
divergences  between  estimated  and  actual  bases  were
between  - 5 %  and  + 9 %  for  the  Member  States  as  a
whole.  For  the  GNP  resource,  this  same  divergence  was
between  - 6 %  and  + 3 %.  As  overall  resources  available
for financial year n, as determined at the beginning of the
year  n-1  on  the  basis  of  an  estimate  of  the  Community’s
GNP,  are  not  rectified  during  year  n,  the  quality  of  the
estimates  is  particularly  important.

It 

the 

system  of 

the  current 

is  questionable  whether 

forecasting
3.45.
procedure, which involves administrative costs, should be
preserved  under 
financial
contributions.  Some  thought  could  be  given  to  replacing
it  with  the  use  of  definitive  (even  old)  data,  with  results
that would be at least as close to reality as those achieved
via  the  estimates.  The  data  used  could  then  be  based  on
mean  values  in  order  to  avoid  cyclical  and  short-term
effects,  and  on  a  sufficient  number  of  financial  years.
This  principle  had  already  been  applied  to  the  system  of
own  resources  until  1987,  when  not  all  the  Member
States  had  set  up  their  VAT  systems (40).

Rectifications  of  the  bases

3.46. The  VAT  and  GNP  assessment  bases  are  rectified
in  two  ways:  on  the  one  hand  corrections  are  made  on

(40) Under  the  Decision  of  21  April  1970  and  Article  13  of
Council  Regulation  No  2891/77  of  19  December  1977,  the
financial contribution of any Member State not applying the
VAT system was based on its GNP’s share in the sum of the
GNPs of the Member States, with reference to the first three
years  of  a  period  of  five  years  preceding  the  budget  year  in
question.

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the  basis  of  the  real  assessment  bases  at  the  end  of  the
year  following  the  financial  year 
in  question  (see
paragraph 3.47). On the other hand, multiple corrections
are  carried  out  following  audits  by  the  Commission.

enables,  where  necessary, 

3.47. Where  the  Commission  judges  an  aspect  of  the
calculation  of  the  base  to  be  incorrect,  it  lodges  a
the
reservation,  which 
necessary  adjustments  to  be  made  for  the  current
financial  year  as  well  as  for  the  previous  accounting
periods.  In  addition,  Member  States  are  also  entitled  to
lodge reservations. At the end of the financial year 1997,
there  were  117  reservations  for  the  VAT  resource  and
120  for  the  GNP  resource,  the  majority  of  which
concerned  the  exhaustiveness  of  the  GNP.

3.48. These  reservations  usually  stem  from  problems
relating  to  the  statistical  data  used  for  the  calculation  of
the  bases,  or  even  from  cases  of  infringement  of  the
legislation,  in  particular  in  respect  of  the  application  of
the  Sixth  Directive,  on  the  Common  VAT  Regime (41).

laborious  because 

3.49. The  Court  has  already  noted,  on 
several
occasions, (42)  that  the  resolution  of  outstanding  cases  is
particularly 
it  sometimes  requires
additional  work.  It  takes  several  years,  during  which
discussions  are  held  with  the  Member  States.  This  is
shown  by  the  fact  that,  although  the  Commission
declared,  in  1991,  that  it  would  lift  the  reservations  two
years  after  its  checks,  six  years  later  it  declared  this
commitment  to  have  been  unrealistic (43).

3.50.
In  the  notification  of  reservations  for  the  VAT
resource, no account is taken of the fact that, for certain
Member  States  whose  assessment  base  has  been  reduced
by capping, reservations that might increase the base will
for  this  reason  have  no  effect.  Except  where  work
undertaken  in  this  connection  is  likely  to  bring  about
improvements  in  other  fields  (statistics,  tax  legislation),
the  point  of  these  procedures  is  not  clear.

(41) The  Council’s  Sixth  Directive  No  77/388/EEC  of  17  May
1977  (OJ  L  145,  13.6.1977  and  subsequent  amendments.
(42) See:  the  Annual  Report  of  the  Court  of  Auditors  concerning
the  financial  year  1988,  paragraphs  4.16-4.31  (OJ  C  312,
12.12.1988);  Annual  Report  of  the  Court  of  Auditors
concerning  the  financial  year  1989,  paragraphs  1.74-1.80
(OJ  C  313,  12.12.1990);  Annual  Report  of  the  Court  of
Auditors  concerning  the  financial  year  1991,  paragraphs
1.99-1.102  (OJ  C  330,  15.12.1992);  Annual  Report  of  the
Court  of  Auditors  concerning  the  financial  year  1995,
paragraphs  1.69-1.71;  Annual  Report  of  the  Court  of
Auditors  concerning  the  financial  year  1996,  paragraphs
1.137-1.147  (OJ  C  348,  18.11.1997).

(43) The  Annual  Report  of  the  Court  of  Auditors  concerning  the
financial  year  1996,  paragraph  1.139  and  the  Commission’s
reply  thereto.

3.51. When  an  agreement  is  found  as  to  the  corrections
that  need  to  be  made,  this  modifies  the  Member  States’
respective  contributions  to  the  Community  budget  for
several  financial  years  previously.  In  1997,  corrections
were  made  as  far  back  as  the  financial  year  1982.  These
corrections  are  generally  not  subject  to  interest  on
arrears,  which,  however,  should  be  charged  given  the
delays  that  occur  in  the  resolution  of  outstanding  cases.

3.52. However,  corrections  of  the  assessment  base  in
connection  with  budgetary  imbalances  are  only  taken
into  account  up  to  the  financial  year  n+4,  that  is  to  say
when 
definitively.
Consequently, the latter cannot be affected by corrections
beyond  this  time  limit.

correction 

adopted 

the 

is 

An  imprecise  legal  framework

3.53. The legal framework governing the VAT and GNP
resources 
is  not  precise.  Some  examples  are  given
below.

Adaptation  of  the  regulations  on  the  VAT  resource

3.54. Following  the  introduction  of  the  transitional
regime  for  VAT  on  intra-Community  trade  on  1  January
1993,  the  Commission  considered  it  necessary  to  add
provisions  to  Regulation  No  1553/89 (44)  to  adapt  it  to
the  changes  in  the  VAT  system.  At  the  same  time,  the
Commission  also  wished  to  act  in  response  to  certain
comments by the Court and the European Parliament (45).
A technical annex was also planned so as to formalise in
legal  terms  certain  practices  to  be  followed  so  that  the
VAT  assessment  base  could  be  determined  in  a  uniform
manner.

3.55. According  to  the  Commission,  the  provisions
proposed  for  adoption  by  the  Council  would  have
involved modifications of the national bases and hence of
the  VAT  resource  itself (46).  It  withdrew  this  draft
Regulation  in  1996  after  it  had  found  that  the  Council
was  not  in  a  position  to  adopt  it.

(44) Council Regulation No 1553/89 of 29 May 1989 (OJ L 155,

7.6.1989,  p.  9).

(45) The  Annual  Report  of  the  Court  of  Auditors  concerning  the
financial year 1990, paragraph 2.32 (OJ C 324, 13.12.1991).
Decision  of  the  European  Parliament  of  18  November  1992
concerning  the  discharge  for  the  financial  year  1990,
paragraph  19  (OJ  L  19,  28.1.1993,  p.  26).

(46) See  COM(92)  580  final  of  18  December  1992,  p.  12.

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Data  to  be  used  for  the  calculation  of  the  Weighted
Average  Rate

3.56. Article 4 of Regulation No 1553/89 states that the
national  accounts  to  be  used  for  the  calculation  of  the
Weighted  Average  Rate  are  those  for  the  year  n-2.
However,  exceptions  are  possible,  whereas,  as  the  Court
pointed out in its Opinion No 6/93 (47), the existence of a
European System of Integrated Economic Accounts (ESA)
presupposes  the  availability,  in  all  the  Member  States,  of
national  accounts  based  on  the  same  reference  years  at
the  right  time  for  the  transmission  of  the  VAT  resource
statement.

3.57. This  same  provision  allows  the  use  of  data  from
outside  the  ESA  on  condition  that  they  are  from  a
‘suitable source’. Until this concept is defined inequalities
in  the  determination  of  the  Member  States’  bases  will
continue  to  be  possible.

The  entry  of  own  resources  in  the  accounts

3.58. The  applicable  provisions (48)  state  that  the  own
resources  are  to  be  paid  into  an  account  opened  in  the
name  of  the  Commission  in  each  of  the  Member  States.
The  Member  States  are  required  to  send  a  statement  to
the  Commission  after  each  transaction,  within  seven
working  days.  Practice  concerning  the  transmission  of
these  statements  (once  a  day,  or  even  after  months  have
elapsed),  as  well  as  the  indication  of  the  payment  date
(value  date  and/or  date  of  entry  in  accounts)  varies
considerably  from  one  Member  State  to  another.  The
result 
is  not  permanently
informed,  in  a  direct  and  independent  manner,  of  the
actual  situation  regarding  its  assets.  This  is  contrary  to
the  notion  of  an  own  resource  and  can  cause  cash
management  difficulties  or  even  payment  difficulties.

is  that  the  Commission 

3.59. Budgetary  imbalances  are  corrected  by  a  detailed
calculation  procedure  worked  out  by  the  Commission.
First  of  all,  the  latter  makes  a  calculation  that  takes  into
account  the  principles  adopted  before  the  1988  Decision
on own resources, when there was no GNP resource and
the  VAT  resource  was  not  capped.  This  calculation  is
then  adjusted  to  take  account  of  the  current  Decision  on
own  resources.  In  practice,  this  means  two  calculations.
As  the  Court  observed  in  its  Annual  Report  on  the
financial  year  1991 (49),  it  would  be  simpler  and  more
transparent  to  use  one  calculation  method  only.

(47) OJ  C  227,  23.8.1993,  p.  2,  paragraph  6.
(48) Council Regulation No 1552/89 of 29 May 1989, Articles 9

and  12  (OJ  L  155,  7.6.1989,  p.  1).

(49) The  Annual  Report  of  the  Court  of  Auditors  concerning  the
financial  year  1991  (OJ  C  330,  15.12.1992,  paragraphs
109-110).

3.60. Separating  the  calculation  of  the  VAT  resource
from  that  of  financing  the  correction  would  make  it
possible  to  avoid  subsequent  complications.  The  amount
of  the  correction  and  the  financing  of  it  result  in  a
substitution  effect  between  the  VAT  and  GNP  resources,
which  modifies  the  respective  shares  of  the  Member
States  and  must  be  taken  into  account  for  both  the
estimated  and  definitive  calculations.

4.  THE  VULNERABILITY  OF  THE  VAT  AND  GNP

RESOURCES

Effects  of  losses  of  tax  revenue  on  the  VAT  and  GNP
resources

4.1. The  Community’s  ability  to  meet  its  expenditure
obligations  does  not  depend  on  the  degree  of  efficiency
shown  by  the  national  authorities  in  collecting  VAT  and
preventing  fraud.  Under  the  terms  of  the  Decision  on
own  resources,  the  GNP  resource  may  in  fact  be  used  to
compensate  for  a  budgetary  imbalance  in  the  event  that
other  resources  are  inadequate.

4.2. However,  as  the  Commission  has  pointed  out (50),
these  differences  in  degree  of  efficiency  are  not  without
effects  on  the  Community’s  finances.  Tax  evasion  and
underground  economic  activities  may  affect  both  VAT
income  and  the  calculation  of  the  GNP  unless  suitable
adjustments are made. Consequently, this could affect not
only the financial breakdown among Member States, but
also the maximum ceiling of budgetary resources which is
established  as  a  percentage  of  GNP.

4.3. The  components  of  the  VAT  assessment  base  are
also  at  the  base  of  taxpayers’  declarations  for  direct
taxation  and  social  security  contribution  purposes.  The
amounts  at  stake  in  these  cases,  moreover,  are  much
higher  than  for  VAT (51)  alone,  which  may  therefore
constitute 
fraud.  As  a
consequence,  a  simultaneous  VAT  fraud  results  from  the
need for the taxpayer’s accounts to be consistent and the
VAT  fraud  is  therefore  no  more  than  a  component  of  a
more  general  loss  of  tax  revenue.

the  main  reason 

the 

for 

The  inherent  risks  of  the  VAT  system

4.4. Under  the  VAT  system,  taxpayers  in  principle  have
an  interest  in  insisting  on  invoices  so  as  to  be  able  to

(50) SEC  (92)  280  final  of  24  February  1992,  p.  5  (a).
(51) For  example,  in  one  Member  State,  it  was  calculated  that
VAT  represented  around  a  quarter  of  the  amounts  paid  in
taxes  by  taxpayers.

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deduct  the  VAT.  This  is  why  the  Commission  has  stated
that  VAT  is  an  ‘inherently  self-policing’  tax (52).

4.5.
In  actual  fact,  a  taxpayer  who  wants  to  reduce  the
tax  base  to  be  declared  (which,  as  shown  under  4.3
above,  is  linked  to  that  used  for  other  taxes  and  social
charges) has various ways of ‘justifying’ the plausibility of
his  accounts  in  the  event  of  an  audit.

In particular, the mechanism of deducting the input
4.6.
tax  may  induce  taxpayers  to  declare  undue  production
costs,  backed,  for  example,  by  presenting  formally
irreproachable  documents  which,  however,  do  not
correspond  to  any  economic  reality  or  to  any  actual
transactions.  This  concerns,  in  particular,  false  invoices.
Such  undue  costs  are  difficult  to  detect  because  of  the
need  for  detailed  cross-checks  between  a  number  of
taxpayers.

compliance  with 

4.7.
In  view  of  the  financial  stakes  involved,  presumed
conflicting interests between taxpayers are not enough to
guarantee 
legislation.
Compliance  is  more  the  product  of  other  factors  (public
spiritedness,  efficient  checks,  clear  simple  legislation,  tax
levels) than the supposed self-regulating machinery of the
VAT  system.

tax 

the 

Ways  of  assessing  losses  of  VAT  income

In the case of VAT, the national accounts enable an
4.8.
assessment  of  the  size  of  potential  losses  of  revenue  by
comparing  the  tax  base  as  calculated  from  the  national
accounts  with  that  declared  to  the  tax  authorities  by
registered  taxpayers.  Where  this  latter  factor  is  not

(52) Of  frauds  where  the  aim  is  not  to  pay  VAT  on  sales,  the
Commission  has  said  ‘in  such  cases,  the  normal  VAT
mechanism  of  staged  payment  limits  the  gains  to  the
fraudulent  trader  to  the  amount  of  VAT  due  on  his  value
added and, as he does not declare his supplies, he will not be
able  to  reclaim  the  VAT  on  his  purchases.  Moreover,  if  his
customers  require  invoices  and  subsequently  use  them  as  a
basis  for  deduction,  the  control  administration  has  the
opportunity  to  become  aware  of  his  existence.  In  these
respects,  the  VAT  system  can  be  said  to  be  inherently
self-policing.’  See  detailed  technical  description  of  the
Commission  programme,  ‘A  common  VAT  system’,  Annex
B,  p.40.

available, it is possible to carry out an indirect assessment
by  calculating  the  tax  base  implicitly  declared  on  the
basis  of  revenue  collected.  This  procedure 
involves
calculating the divergence between VAT revenue collected
and  what  may  be  called  the  ‘theoretical  VAT’.

4.9. Despite  the  different  approaches  adopted  by  the
Member  States,  the  ‘only  reliable  rule  in  this  case  is
perhaps  that  theoretical  VAT  is  higher  than  actual  VAT
revenue.  This  is  the  only  means  of  guaranteeing  that  the
national accounts have at least included a certain number
of  transactions  that  have  been  hidden  from  the  tax
authorities’ (53).

4.10. Theoretical  VAT  may  be  defined  as  ‘the  VAT
which would be produced if all units liable to pay the tax
actually  paid 
the  relevant
legislation’ (54).

in  accordance  with 

it 

in 

4.11. The  discrepancy  between 
revenue 
actually
itself,
collected  and  theoretical  VAT  does  not, 
constitute  the  amount  of  tax  revenue  lost.  In  actual  fact
neither  of  the  two  factors  being  compared  is  completely
homogeneous.  In  particular,  the  figure  for  revenue
is  affected  by  bankruptcies,  cancelled  or
collected 
deferred  debts,  the  non-correspondence  between  revenue
paid  in  and  the  financial  year  concerned.  These  factors
are  not  entirely  taken  into  account  by  the  national
accounts  upon  which  the  calculation  of  theoretical  VAT
is  based.

or 

4.12. On the other hand, the theoretical VAT is directly
affected  by  the  exhaustiveness  of  the  national  accounts
and  by  their  capacity  to  reflect  taxable  transactions
which do not figure for various reasons (failure to update
statistical  records,  shortcomings  in  statistical  surveys,  the
existence of unregistered workers, cases where turnover is
understated 
the
undeclared). 
Commission  noted  in  1994 (55)  that  ‘economic  activity
carried  out  contrary  to  fiscal  and  social  legislation  is
currently  not  taken  into  account  in  the  Member  States’
estimates  in  a  uniform  manner’.  It  admits  that  the
underground  economy  does  raise  a  not  inconsiderable
problem  concerning  the  fiscal  systems  at  present  in
use (56),  and  that  problem  seems  to  have  increased  in
recent  decades (57).

Furthermore, 

(53) Doc.  Eurostat/B1/CPNB/093,  p.  7.  See  also  Doc.

XIX/114/81,  para.  14,  p.  8.
(54) Doc.  Eurostat/B1/CPNB/093,  p.2.
(55) Commission  Decision  94/168/EC,  Euratom  of  22  February

1994,  fourth  recital,  OJ  L  77,  19.3.1994,  p.  51.
(56) COM(97)  559  final  of  13  November  1997,  p.  18.
(57) See  COM(98)  219  final  of  7  April  1998,  p.  5.

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Assessment  work  by  the  Commission  and  the  Member
States

4.13.
In  connection  with  its  responsibilities  as  regards
the  collection  of  the  VAT  resource,  the  Commission  has
carried out work in this field, starting in 1981. This work
was  gradually  extended  to  include  the  effects  of  VAT
fraud  on  the  calculation  of  the  GNP.

4.14. Several  Member  States  used  the  calculation  of
theoretical  VAT  to  assess  fraud  and  carry  out  the
necessary  adjustments  with  regard  to  the  calculation  of
the  GNP.  Estimating  total  fraud,  in  particular  that  for
fraud  ‘without  the  complicity’  of  the  purchaser (58),  is
part  of  the  work  of  the  GNP  Committee (59).

4.15. The  figures  given  by  the  Member  States,  in
particular  in  connection  with  the  work  of  the  GNP
Committee,  differ  considerably,  depending  on 
the
methods  used  and  the  degree  of  exhaustiveness  of  the
national  accounts.  Nevertheless,  this  confirms,  at  a
factual level, that divergences between collected VAT and
theoretical  VAT  can  mainly  be  explained  by  fraud.  Such
divergences  provide  a  minimal  assessment  of 
the
phenomenon  (see  paragraph  4.12).

Assessment  work  by  the  Court

in  1989, 

4.16. Basing itself on the methods used, in particular, by
the  Court
the  Commission  departments 
replicated  this  exercise  for  nine  Member  States  for  the
period  running  from  1991  to  1993.  The  Court’s
calculation  was  based,  in  particular,  on  data  taken  from
the national accounts drawn up by the Member States for
the establishment of the VAT assessment base (60). It was
forwarded  to  the  Commission  and  the  Member  States
concerned.

(58) According  to  the  definition  of  the  GNP  committee,  fraud
‘without  complicity’  occurs  when  the  buyer  pays  the  seller
the  price  of  a  transaction  inclusive  of  VAT,  but  the  seller
does  not  subsequently  declare  the  transaction  and  pay  the
relevant  tax.  In  contrast,  in  fraud  ‘with  complicity’  the
transaction takes place exclusive of VAT. These two types of
fraud  make  up  all  VAT  fraud.

(59) This Committee, consisting of representatives of the Member
States,  is  responsible  for  assisting  the  Commission  in  the
verification  of  the  calculation  of  the  GNP.  It  was  set  up
under Council Directive 89/130/EC, Euratom of 13 February
1989  concerning  the  harmonisation  of  the  establishment  of
the  GNP  at  market  prices  (OJ  L  49,  21.2.1989,  p.  26).
(60) In  particular,  this  concerns  data  regarding  the  establishment

4.17. For  the  period  in  question,  this  calculation  shows
that  there  was  a  considerable  difference  between  VAT
collected  and  theoretical  VAT (61).  On  a  weighted  basis,
the  overall  difference  was  more  than  1 %  of  the  total
GNP of the countries in question. It accounted for almost
21 %  of  the  total  of  revenue  collected  by  these  Member
States,  or  an  annual  average  of  approximately  70 000
Mio  ECU,  an  amount  which  is  almost  equal  to  the
present  total  for  the  Community  budget.

4.18. As  stated  under  4.12  above,  this  difference  must
be  considered  minimal,  since  it  reflects  the  greater  or
lesser  exhaustiveness  of  the  national  accounts  during  the
period  in  question.  The  Court  notes  that,  in  connection
with  the  calculation  of  the  GNP (62),  Member  States  are
required  to  check  the  exhaustiveness  of  their  national
accounts  so  as  to  give  adequate  attention  to  economic
transactions  relating  to  the  underground  economy.  On
the basis of this operation, which is to be completed by 1
October 1998 (63), it should be possible to obtain a figure
that  is  more  representative  of  economic  reality.

4.19.
If  the  results  of  the  Court’s  calculation  are
compared with those of a similar calculation made by the
Commission in 1989 for the 1980-1984 period, it will be
noted,  for  the  countries  covered  by  the  two  enquiries  at
the  time,  that  the  overall  difference  as  a  percentage  of
revenue  collected  had  increased  by  more  than  60 %  in
ten  years.  This  is  an  indication  that  VAT  fraud  is  on  the
increase.

Theoretical  VAT  and  the  exhaustiveness  of  the  GNP

4.20.
In  order  to  provide  the  Member  States  with  a
uniform  framework  of  reference  for  the  treatment  of
theoretical  VAT  revenue  in  their  national  accounts,  the
Commission plans to ask the Member States to carry out
the  necessary  work  on  the  treatment  of  theoretical  VAT
revenue  simultaneously  with  the  conclusion  of  the
exercise  on  the  exhaustiveness  of  the  GNP.  Nevertheless,
at  a  distance  of  a  few  months  from  the  expected
conclusion  date,  no  decision  has  been  taken.  The  draft
decision  calls  for  some  comments.

(61) The  Court  compared  theoretical  VAT  with  both  the  net
revenue  given  in  the  statement  of  VAT  resources  and  with
‘VAT charged on products’ (R 21 in the nomenclature of the
European  System  of  Integrated  Economic  Accounts).  The
difference  observed  remained  substantially  the  same.

(62) Commission  Decision  97/619/EC,  Euratom  of  3  September

1997  (OJ  L  252,  16.9.1997,  p.  33).

(63) The  deadline  is  10  October  1999  for  Austria,  Finland  and

of  the  Weighted  Average  Rate.

Sweden.

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4.21. A  method  is  proposed,  but  the  Member  States  are
free  to  continue  to  apply  others  on  condition  that  they
achieve  comparable  results.  It  will  therefore  be  up  to  the
Commission  to  ensure  the  validity  of  the  sources  and
methods  used  as  well  the  comparability  of  the  results
obtained.

4.22. The  need  to  ensure  that  the  data  are  completely
comparable  also  applies  to  those  Member  States  which
are able to show that an equivalent calculation is already
implicitly  included  in  their  national  accounts,  which  will
entitle  them  to  be  exempted  from  the  exercise  required
under  the  terms  of  Article  4  of  the  draft  Decision.
Furthermore, in this connection, it should be remembered
that Commission Directive No 89/130/EEC, Euratom and
Commission  Decision  No  94/168/EC,  Euratom  of  22
February  1994 (64)  already 
that  adjustments
ensuring the exhaustiveness of the GNP should be backed
by  appropriate  calculations.  The  Commission  should
already  be  in  a  position  to  check  these  calculations.

state 

4.23. The  draft  Commission  Decision  requires  the
Member  States  to  make  a  distinction  between  fraud
‘without  complicity’  (of  the  purchaser)  and  fraud  ‘with
complicity’ (65). The latter is defined as being perpetrated
by  economically  active  units  that  are  not  listed  in  the
statistical  records  and  carry  out  transactions  without
collecting  and  paying  over  VAT.

4.24. However,  in  the  real  economic  world,  it  does  not
seem to be possible to distinguish between types of fraud
in  such  a  clear-cut  fashion.  In  particular,  it  is  difficult  to
establish  whether  the  price  paid  for  a  transaction
corresponds to a market price with or without VAT. It is
possible for the purchaser not to make a profit where the
price  paid  to  the  seller  is  actually  equivalent  to  the  price
inclusive  of  VAT.  This  depends,  in  particular,  on  the
and  demand.
equilibrium  price  between 
Consequently,  distinguishing  between  fraud 
‘without
(purchaser) complicity’ and fraud ‘with complicity’ raises
difficulties  which  neither  the  Member  States  nor  the
Commission  can  evade.

supply 

to 

involved 

this  draft  Decision,  registered
4.25. According 
taxpayers  would  not  be 
‘with
complicity’.  However,  as  discussions  within  the  GNP
Committee  have  shown,  this  is  questionable.  In  actual
fact,  registered  and  unregistered  taxpayers  alike  may,
with  the  agreement  of  the  purchaser,  carry  out  sales
exclusive of VAT even though they are intended for final
consumption. They may also connive to increase their tax

fraud 

in 

deduction 
intermediate  costs,  where  necessary  via  false  invoices.

rights  unduly  by  over-assessing 

their

4.26. The  question  also  arises  as  to  how  the  national
fraud
accounts  can  adequately 
perpetrated  by  registered 
the
Commission  Decision  and  the  debates  within  the  GNP
Committee  provide  only  partial  answers.

take 
taxpayers.  However, 

into  account 

5.  CONCLUSIONS

A  question  that  must  be  addressed

5.1. Although  it  has  made  it  possible  to  continue
financing  the  budget  under  acceptable  conditions,  the
VAT  and  GNP  resource  system  is  characterized  by
problems  of  consistency  and  transparency,  as  well  as
operational  shortcomings,  which  should  be  addressed  as
soon  as  possible.  This  discussion  is  all  the  more  urgent
from  the  viewpoint  of  the  enlargement  of  the  European
Union.

5.2. The  structure  and  operation  of  the  current  system,
which is just as detailed as a traditional budgetary system
based  on  tax  revenue,  therefore  seem  disproportionate  in
relation  to  the  nature  of  the  VAT  and  GNP  resources.  A
system  of  financial  contributions  does  not  call  for  the
innumerable  complications  of  the  current  system.

5.3. The  presence  of  a  form  of  revenue  correction
constitutes another anomaly of the system. Its conceptual
basis, consisting in identifying the benefit that a Member
State  gains  from  its  membership  of  the  Union  by
calculating  the  difference  between  the  money  it  pays  in
and  that  which  it  receives,  is  questionable.  As  the
any
Fontainebleau  European  Council 
imbalances should be corrected via expenditure policy. In
actual fact, the time when political budgetary choices are
made, when the Council and the Parliament are involved
in  their  roles  as  budgetary  authorities,  is  the  right
moment  to  direct  the  effects  of  Community  funding,
including geographically.

suggested, 

5.4. Furthermore,  tax  evasion,  which  is  growing  in  an
alarming  fashion,  and  which  must  be  fought  first  and
foremost  by  the  Member  States,  directly  affects  the
establishment of the VAT and GNP assessment bases and
may also affect the calculation of the GNP and therefore
also  the  GNP  resource  itself.

Ambiguities  that  must  be  cleared  up

(64) OJ  L  77,  19.3.1994,  p.  51.
(65) The  definition  is  given  in  note  No  58  above.

5.5. Situations  like  that  of  the  VAT  resource,  which
started  out  as  a  tax  but,  in  reality,  has  taken  on  the
nature  of  a  financial  contribution,  should  be  avoided.  A

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resource  based  on  the  taxable  consumption  of  citizens
only  has  a  raison  d’ëtre  if  it  is  based  directly  on  a  tax
base  declared  by  the  taxpayers.  It  should  also  take  into
account  the  various  factors  making  for  losses  of  tax
resources  and  endow  the  Union  with  suitable  corrective
instruments.

capacity 

5.6. With regard to the GNP, the fact of not linking the
GNP  resource  to  the  most  up-to-date  form  of  the  GNP
(the  1995  version  of  the  ESA),  as  recent  developments
show,  would  make  it  impossible  for  it  to  mirror  the
contributory 
States.
of 
Furthermore,  the  need  to  guarantee  equivalent  sources,
methods and calculation procedures in the Member States
means  that  the  GNP  must  be  evaluated  in  the  light  of
instruments  for  measuring  the  quality  of  the  national
accounts. Such instruments ought to ensure that the GNP
enjoys  the  legitimacy  that  the  various  uses  to  which  it  is
put  within  the  European  Union  require.

the  Member 

A choice that must be made: a consistent and transparent
system

5.7. The  history  of  the  financing  of  the  European
Communities  is  sufficiently  long  to  provide  specific
examples  and  practical  experience  with  regard  to  the
system  that  needs  to  be  developed  for  the  future.

5.8. This  debate  must  provide  a  clear  definition  of  the
nature  of  the  resources  that  should  be  allocated  to  the
Community budget. It is not up to the Court to point out
the possible choices. The implications of these choices are
not  neutral,  for  either  the  Member  States  or  the
Commission.  The  Court  feels,  however,  that  the  precepts
behind any system of financing must be clearly stated and
there  must  be  consistency  between  the  nature  of  the
resources  selected  and  the  methods  used  for  collecting
and  auditing  them.

5.9. Any new system should be simple, practical, related
to  the  Member  States’  ability  to  pay  and  transparent.  It
should  also  be  in  accordance  with  the  nature  of  the
resources  chosen.

A  stable  system  that  can  be  audited

5.10. The  system  to  be  selected  must  be  able  to
guarantee  the  funds  needed  for  financing  Community
policies  in  the  long  term.  In  particular,  repeated  changes
in  the  legal  framework  should  be  avoided.  In  the  recent
past,  the  framework  of  the  Decision  on  own  resources
was  changed  three  times  in  ten  years.

5.11. Lastly,  the  system  must  offer  guarantees  and
procedures  to  make  it  both  reliable  and  auditable.  What
is  at  stake  is  the  confidence  in  it  of  those  who  are  called
upon  to  finance  it,  and  the  possibility  of  accounting  to
the  taxpayers  for  its  functioning  and  its  compliance  with
the  objectives  upon  which  it  is  based.

This  report  was  adopted  by  the  Court  of  Auditors  in  Luxembourg  at  the  Court  meeting
of  13  and  14  May  1998.

For  the  Court  of  Auditors

Bernhard  FRIEDMANN

President

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ANNEX I

The financing of the European Union in 1997

I. Total revenue by type (1)

Misc.
1 %

TOR
19 %

GNP
35 %

II. Own resources by MS and by type (1)

25 000

25000

20 000

20000

15 000

15000

10 000

10000

5 000

5000

0

0

VAT
45 %

Mio ECU

Revenue

VAT
GNP
TOR (2)
Sub-total own resources
Misc.

TOTAL

Mio ECU

34 230,12
26 890,60
14 172,27
75 292,98
870,64

76 163,62

MS

Mio ECU

%

B
DK
D
GR
E
F
IRL
I
L
NL
A
P
FIN
S
UK

2 971,41
1 505,77
21 217,28
1 178,40
5 367,62
13 185,88
686,96
8 667,11
170,69
4 837,65
2 110,36
1 077,79
1 061,90
2 326,05
8 928,11

3,95
2,00
28,18
1,57
7,13
17,51
0,91
11,51
0,23
6,43
2,80
1,43
1,41
3,09
11,86

B DK D GR E

F IRL

I

L NL A

P FIN S UK

TOTAL

75 292,98

100,00

(1) The amounts shown correspond to recoveries carried out during the financial year 1997.

Source: 1997 revenue and expenditure account, Volume I, part 1.

(2) These are agricultural duties established by the institutions of the European Communities on trade with non-Member States
in the context of the Common Agricultural Policy, plus levies and other entitlements provided for in connection with the com-
mon organisation of the markets in the sugar sector and duties under the common customs tariff and other entitlements esta-
blished on trade with non-Member States (Article 2(1)(a) and (b) of Decision 94/728/EC, Euratom).

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ANNEX II

The development of the VAT and GNP own resources (1992-1998)

I. Development of amounts by type of resource (1)

(Mio ECU)

45 000

45000

40 000

40000

35 000

35000

30 000

30000

25 000

25000

20 000

20000

15 000

15000

10 000

10000

5 000

5000

0

0

1992 

1993 

1994 

1995 

1996 

BTW -m iddelen

1997 
VAT resource
GNP resource
Traditionele eigen m iddelen (2)
‘Traditional own resources’ (2)

1998

BN P-m iddelen

II.  Development of respective shares 

(in %)

100%

100 %

90%

90 %

80%

80 %

70%

70 %

60%

60 %

50%

50 %

40%

40 %

30%

30 %

20%

20 %

10 %

10%

0%

0 %

1992 

1993 

1994 

1995 

1996 

1997 

1998

,
(1) For the financial years 1992 to 1997, the amounts shown correspond to recoveries carried out during the respective years
(source: revenue and expenditure accounts). For the financial year 1998, the amounts shown correspond to budgetary esti-
mates from the 1998 general budget.

(2) These are agricultural duties established by the institutions of the European Communities on trade with non-Member States
in the context of the Common Agricultural Policy, plus levies and other entitlements provided for in connection with the com-
mon organisation of the markets in the sugar sector and duties under the common customs tariff and other entitlements esta-
blished on trade with non-Member States (Article 2 (1)( a) and (b) of Decision 94/728/EC, Euratom).

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ANNEX III

The VAT and GNP resources in relation to national tax revenue, population and GNP
(1992–1995)

I. VAT/GNP resources / national tax revenue       

in %

4,50

4,50

4,00

4,00

3,50

3,50

3,00

3,00

2,50

2,50

2,00

2,00

1,50

1,50

1,00

1,00

0,50

0,50

0,00

0,00

B

B

D K

DK

D

D

G R

GR

E

E

F

F

IR L

IRL

I

I

L

L

N L

NL

P

P

U K

UK

B elastingontvangsten zonder sociale bijdragen

II. VAT/GNP resources / inhabitant

in ECU

B elastingontvangsten m et sociale bijdragen

Tax revenue without social security contributions
B
Tax revenue with social security contributions
B

1400

1 400

1200

1 200

1000

1 000

800

800

600

600

400

400

200

200

0

0

B

B

D K

D

G R

E

F

IR L

I

DK

D

GR

E

F

IRL

I

L

L

N L

NL

P

P

U K

UK

III. VAT/GNP resources / GNP   

in %

1,20

1,20

1,00

1,00

0,80

0,80

0,60

0,60

0,40

0,40

0,20

0,20

0,00

0

B

B

D K

DK

D

D

G R

GR

E

E

F

F

IR L

IRL

I

I

L

L

N L

NL

P

P

U K

UK

NB:
1. For  the  first  table,  the  calculation  for  Greece  was  only  made  over  three  budgetary  years  (1992-1994)  as
against four for the other Member States (1992-1995); the 1995 data for tax revenue  are not available.
2. The figures for national tax revenue are from Eurostat Newcronos database. These are indirect taxes (taxes
related to output and imports — code 9980), direct taxes (on income and assets — code 9100, capital tax —
code 9200), and social security contributions  (code 9300).
3. The dates on the VAT-GNP resources come from the revenue and expenditure account drawn up by the Com-
mission.
4. For the population, the figures used are those from the ‘Basic statistics of the European Union’, 33rd edi-
tion/1996, page 123.
5. The  figures  for  GNP  were  taken  from  the  1996  GNP  questionnaire,  Eurostat/B1/CPNB/190/A/Rev.1  of
24 October 1996.
6. The exchange rates for the ECU are contained in Eurostat's publication ‘National ESA accounts-aggregates’,
1970-1995, page 101.

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ANNEX  IV

The  main  stages  in  the  development  of  the  system  of  own  resources

1951:

1957:

1970:

1985:

1988:

1994:

Article  49  of  the  ECSC  Treaty  provided  that  the  High  Authority  (the  Commission)  was  entitled
to  procure  the  funds  necessary  to  carry  out  its  task  by  setting  levies  on  the  production  of  coal
and  steel.

Article  201  of  the  EEC  Treaty  envisaged  replacing  the  financial  contributions  made  by  the
Member  States  by  own  resources.

Council  Decision  No  243/70  ECSC/EEC/Euratom  of  21  April  1970  (OJ  L  94,  28.4.1970)
concerning the replacement of the Member States’ financial contributions with the Communities’
own  resources.  This  decision  stated  that  the  Community  budget,  without  prejudice  to  other
income,  was  to  be  financed  completely  from  own  resources  as  from  1  January  1975.

This  decision  defined  the  own  resources  as  follows:

—  levies,  premiums,  additional  or  compensatory  amounts,  amounts  or  additional  components
and other duties established or to be established by the Community institutions on trade with
non-member  countries,  within  the  framework  of  the  common  agricultural  policy,  as  well  as
contributions  and  other  entitlements  provided  for  under  the  common  organisation  of  the
market  in  sugar;

—  duties under the Common Customs Tariff and other duties established or to be established by

the  Community  institutions  on  trade  with  the  non-member  countries;

—  resources from Value-Added Tax obtained by the application of a rate which may not exceed
1%  of  the  base,  calculated  in  a  uniform  way  for  the  Member  States,  in  accordance  with
Community  procedures.

Council  Decision  No  85/257/EEC/Euratom  of  7  March  1985  concerning  the  system  of  the
European Communities’ own resources (OJ L 128, 14.5.1985, p. 15). This Decision increased the
call-up  rate  for  the  VAT  resource  from  1 %  to  1,4 %  and  formalised  the  principle  of  the
correction  of  budgetary  imbalances.

Council  Decision  No  88/376/EEC/Euratom  of  24  June  1988  (OJ  L  185,  15.7.1988,
p.  24)  concerning  the  system  of  the  European  Communities’  own  resources.  This  Decision
introduced  the  notion  of  the  capping  of  the  VAT  base  in  terms  of  a  percentage  (55 %)  of  GNP
and  created  a  new  resource  based  on  the  GNP.  This  resource  became  a  means  of  balancing  the
Community  budget.

Council  Decision  No  94/728/EEC/Euratom  of  31  October  1994  (OJ  L  293,  12.11.1994,  p.  9)
concerning  the  system  of  the  European  Communities’  own  resources.  This  Decision  broadened
the application of the capping of the VAT base in terms of a percentage of GNP (50 % in 1999)
and  reduced  the  call-up  rate  for  this  resource  (1 %  in  1999).

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THE  COMMISSION’S  REPLIES

A.  GENERAL  COMMENTS

The  Commission  agrees  with  the  Court’s  emphasis  on  certain  aspects  of  the  present  own
resources  system,  in  particular  on  the  VAT  resource  and  the  mechanism  to  correct  budgetary
imbalances.

Concerning the former, the Commission sees the contradiction in the interpretation of VAT and
the capping rules introduced in recent years. If the VAT contribution were to be considered as a
tax  on  individuals,  then  the  capping  of  the  VAT  base  is  not  appropriate.  However,  capping  of
the  VAT  base  would  be  logical  if  VAT  contributions  are  seen  as  effectively  national
contributions.  The  Commission  also  sees  the  correction  mechanism  in  favour  of  the  United
Kingdom  as  an  anomaly.

The  Commission  takes  note  of  the  Court’s  views  and  comments  on  the  operation  of  the  own
resources system. These views are important contributions to the emerging debate on the future
character  of  the  financing  system  and  in  the  exploration  of  alternative  possibilities.  The
Commission  would  also  take  the  opportunity  to  stress  that  the  present  system  has  worked
generally  well.  The  system’s  weaknesses  which  have  been  singled  out  by  the  Court  are  largely
the  result  of  inevitable  political  compromises.

B.  SPECIFIC  COMMENTS

2.  FINANCING  THE  COMMUNITY  BUDGET

The  VAT  resource

In various paragraphs the Court expresses the concern that the VAT resource relies substantially
on  statistical  methods  with  the  result  that  it  has  little  in  common  with  fiscal  reality.  Although
correct, this is a partial view that emphasises only one aspect of the process. One could clearly
argue  the  opposite,  that  the  VAT  resource  is  based  principally  on  fiscal  data  since  they
constitute the base on which statistical methods are applied in order to arrive at the harmonised
base.  Statistical  data  play  a  role,  admittedly  very  important,  in  the  calculation  of  the  weighted
average rate. In this case, however, what is important is the relationship between the categories
that  are  submitted  to  different  rates  and  not  the  absolute  level  of  VAT  receipts.

Determining  and  monitoring  the  VAT  and  GNP  assessment  bases

2.11. The  data  for  the  VAT  and  the  GNP  bases  are  used  in  the  budget  to  determine
provisionally  the  contributions  of  the  Member  States.  The  responsibility  for  establishing  these
data rests with the Commission. The Commission does so following an exchange of views with,
and after soliciting the advice of, the Member States. The formal forum where these exchanges
take  place  is  the  Advisory  Committee  on  Own  Resources  (ACOR).

3.  THE  LIMITATIONS  AND  DISTORTIONS  OF  THE  CURRENT  SYSTEM

The  contributory  capacity  of  the  Member  States

3.9. The  use  of  GNP  (gross  national  product)  and  GDP  (gross  domestic  product)  in  the
different  circumstances  reflects  primarily  data  availability  rather  than  inconsistency.  The  use  of

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GDP in the case of the EEA was partly a reflection of the unavailability of GNP data for some
small and very open economies such as Liechtenstein. Moreover, in order to be consistent with
the  Stability  Pact,  the  use  of  GDP  in  Article  171  of  the  Treaty  was  preferred.  Fundamentally,
however, the use of GNP or GDP would play a lesser role in most cases except for Ireland and
Luxembourg  where  net  factor  income  from  abroad  is  substantial.

The  capping  of  the  VAT  assessment  base

3.10.-3.16. The  Commission  shares  the  concerns  of  the  Court  in  relation  to  the  inconsistency
implicit in the capping of the VAT base. Although the VAT resource is generally considered to
perform poorly when judged by the criterion of equity in gross budget contributions, it has not,
nevertheless,  been  considered  appropriate  to  replace  it  but  only  to  limit  its  undesirable  aspects
through  capping  and  through  a  reduction  in  the  VAT  call-uprate.

Towards  a  twofold  GNP

3.17.-3.22. The  Court’s  commentary  on  the  ‘double  GNP’  is  entirely  to  the  point.  The
Commission regrets this situation and has expressed its dissatisfaction on several occasions. It is
essential  that  the  best  available  data  are  used  in  the  determination  of  all  EU  activities  and
especially  in  the  sensitive  area  of  budget  contributions.

The  importance  of  statistics  in  the  calculation  of  the  VAT  and  GNP  resources

3.36. As the figures quoted by the Court indicate, the adjustments made to eliminate the effect
of differences in the VAT systems of the Member States are minor compared to the global base.
Moreover,  the  Council  has  already  adopted  Commission  proposals  in  this  area,  and  the
Commission  will  propose  in  the  future  measures  which  will  contribute  to  reducing  further  the
differences  between  the  national  VAT  regimes.

The  need  for  a  measure  of  data  quality

3.40.-3.42. The  Commission  considers  that  the  examinations  undertaken  regularly  by  its
services  concerning  the  application  of  the  rules  governing  national  accounts  estimates  ensure  a
correct  and  satisfactory  application  of  the  GNP  Directive.  However,  the  Commission  also
recognises  that  research  on  the  evaluation  of  the  quality  of  macroeconomic  aggregates  is  not
entirely  satisfactory,  and  partly  in  response  to  this  it  has  launched  a  research  project  on  an
analysis  and  evaluation  of  the  quality  of  national  accounts  aggregates.  Two  studies  have  been
commissioned by Eurostat in this area, one conducted by the National Statistical Office of Italy
(ISTAT)  and  one  by  the  UK  Office  of  National  Statistics  (ONS).  The  results  of  the  former  will
be  discussed  by  the  GNP  Committee  in  June  1998;  the  results  of  the  latter  will  be  available  in
1999.

Estimating  the  assessment  bases

3.44. The  relatively  large  forecasting  errors  mentioned  by  the  Court  refer  to  a  particularly
unstable  economic  period  covering  the  peak  of  the  high  growth  cycle  of  the  second  half  of  the
1980s, the recession of 1993 and the recovery of 1995. The Commission believes that forecasts
of  budgetary  variables  constitute  a  better  method  of  determining  the  provisional  contributions
of the Member States than relying simply on past averages and that the greater accuracy justifies

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the extra efforts required. From 1998 the Commission has introduced in the first Supplementary
and  Amending  Budget  (SAB)  for  the  year  a  review  of  forecasts  involving  the  use  of  the  most
recent  data;  the  new  procedure  will  undoubtedly  improve  the  accuracy  of  the  forecasts  of  the
provisional  contributions.

Rectification  of  the  bases

3.50. The  Commission  is  examining  the  possibility  of  introducing  an  alternative  system  of
controls  that  could  minimise,  or  eliminate  completely,  unnecessary  work.  In  this  system,  for
example,  there  could  be  no  ‘reserves’  if  estimates  for  the  VAT  base  relative  to  GNP  are  well
above  the  capping  threshold.

Adaptation  of  the  regulations  on  the  VAT  resource

3.54.-3.55. The  Commission  had  to  withdraw  this  proposal  as  the  Member  States  had
expressed  their  opposition  to  these  changes  to  Regulation  No  1553/89.  The  changes  were
proposed  in  order  to  give  legal  form  to  the  methods  of  calculation  already  applied  in
practice.

Data  to  be  used  for  the  calculation  of  the  Weighted  Average  Rate

3.56. Article  4  of  Regulation  No  1553/89  allows  data  from  years  ‘n-3’,  ‘n-4’  or  ‘n-5’  to  be
used, by way of exception to the general rule, on condition that the national accounts for these
years  conform  with  the  ESA.  This  exception  is  justified  if  there  are  particular  problems  or  if
data for year ‘n-2’ are not available when the statements of the VAT assessment bases must be
sent to the Commission. This must be done before 31 July of the following year while the GNP
data  do  not  have  to  be  communicated  until  October.  Recently,  one  exception  of  this  type  was
made  for  Germany  because  of  statistical  problems  related  to  German  reunification.  The  only
exception  being  applied  at  present  concerns  Portugal.  For  the  reasons  which  the  Court  gave  in
paragraph  3.50  (capping),  this  exception  has  no  effect  on  the  determination  of  the  VAT
resource  that  Portugal  has  to  pay.

3.57. Since the ESA data are sometimes insufficient or not sufficiently detailed to allow certain
components  of  the  weighted  average  rate  (WAR)  to  be  correctly  calculated,  some  other
appropriate source must be used, such as sectoral or trade statistics. Such data vary according to
the  country  and  it  is  not  possible  to  give  a  precise  definition;  clearly,  if  it  is  necessary  to  use
these data, it will be possible to calculate the WAR correctly and therefore avoid differences in
the  fixing  of  the  VAT  assessment  bases  of  the  Member  States.

The  entry  of  own  resources  in  the  accounts

3.58. The  Commission  is  aware  of  the  existing  differences  in  practices  in  this  area  and  has
already  approached  the  Member  States  to  request  more  uniform  information  in  a  standardised
form.

4.  THE  VULNERABILITY  OF  THE  VAT  AND  GNP  RESOURCES

Effects  of  losses  of  tax  income  on  the  VAT  and  GNP  own  resources

4.2. The  Commission  agrees  with  the  emphasis  the  Court  is  placing  on  the  vulnerability  of
VAT to fraud and its implications for measuring the national, harmonised, VAT base. However,

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it is important to stress that unrecorded economic activity has asymmetric implications for VAT
receipts  and  for  GNP  statistics.  In  the  case  of  VAT  fraud,  the  under-recording  results  in  a
corresponding  reduction  in  VAT  receipts  and,  therefore,  in  the  national  VAT  base  and,  ceteris
paribus,  the  national  contributions  from  this  resource.  On  the  other  hand,  national  statistical
services  adjust  the  national  accounts  aggregates  for  the  under-recording  of  economic  activity
and,  to  the  extent  that  they  are  successful  in  doing  so,  GNP  figures  are  not  affected  by  the
existence  of  an  unofficial  economy.

The  inherent  risks  of  the  VAT  system

4.4.-4.5. The Commission agrees that the possibility of fraud clearly exists in the case of VAT
taxation,  although  compared  with  other  taxes  the  system  of  VAT  taxation  has  an  important
element  of  self-policing.

Ways  of  assessing  losses  of  VAT  income

4.12. Following  the  remarks  of  the  Court  in  its  annual  report  concerning  the  financial  year
1995, the Commission has taken steps to monitor more closely the evolution in Member States’
VAT  revenue.  The  results  of  the  bilateral  discussions  that  subsequently  took  place  with  all  the
Member States were discussed at the meeting of Deputy Directors-General for Indirect Taxation
on  24  March  1998.  On  this  occasion,  the  Member  States  concurred  with  the  operational
procedure  proposed  by  the  Commission  concerning  the  automatic  transmission  to  the
Commission  of  information  about  VAT  receipts  and  about  the  reasons  explaining  their
evolution.

Theoretical  VAT  and  the  exhaustiveness  of  the  GNP

4.23.-4.26. The  draft  Commission  Decision  on  the  treatment  of  VAT  fraud  in  national
accounts  demands  that  effectively  the  Member  States  make  the  distinction  between  complicity
and non-complicity of the buyer. The Commission assumes that fraud with complicity concerns
only those establishments which are not registered. This hypothesis would appear acceptable. It
is  possible  that  registered  establishments  in  certain  circumstances  will  engage  in  VAT  fraud
‘with complicity’, in which case the evaluation of VAT fraud ‘without complicity’ in the sense of
the  draft  Decision  will  diminish.  VAT  fraud  ‘with  complicity’  based  on  false  receipts  would
produce  the  same  effect.  Consequently,  the  proposed  method  of  calculation  would  correspond
to  a  maximal  estimation.

It  is  also  essential  to  stress  that  the  increase  in  theoretical  VAT  following  the  work  on  the
underground  economy  will  translate  in  general  into  an  equivalent  increase  in  fraud  ‘with
complicity’.  As  a  result,  this  type  of  calculations  would  have  no  effect  on  estimates  of  VAT
fraud  ‘without  complicity’.