Opinion No 4/2005 on a proposal for a Council Decision on the system of the European Communities' own resources and on a proposal for a Council Regulation on the implementing measures for the correction of budgetary imbalances in accordance with Articles 4 and 5 of the Council Decision of (…) on the system of the European Communities’ own resources
Date: 2005-05-12
Institutions: European Court of Auditors
Subjects: Community budget, Member States' contribution, budget policy, budgetary equilibrium, financing of the EU budget, own resources

7.7.2005

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I

(Information)

COURT OF AUDITORS

OPINION No 4/2005

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

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

(2005/C 167/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

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

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

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

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

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

HAS ADOPTED THE FOLLOWING OPINION:

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

I. INTRODUCTION

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

(1) OJ L 253, 7.10.2000, p. 42.
(2) OJ L 248, 16.9.2002, p. 1.
(3) COM(2004) 501 final of 14 July 2004.

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

(4) See Bulletin EC 6-1984.
(5) See Bulletin EU 3-1999.
(6) See Commission report ‘Financing the European Union, Commission
report on the operation of the own resources system’, COM(2004)
505 final of 14 July 2004, Volume I, p. 13.

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

3.
No substantive legislative proposals have been made so far
as regards the second step of the proposed reform. The Commis-
sion has however presented possible options (1) for a genuinely
tax-based own resource and called on the Council to discuss these
options.

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

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

II. THE CURRENT SYSTEM OF OWN RESOURCES AND ITS

SHORTCOMINGS

6.

(i)

The current own resources system consists of:

traditional own resources (TOR), mainly customs duties col-
lected by Member States on behalf of the EU (10 857,2 mil-
lion euro (2));

(ii)

the VAT resource levied on the statistical harmonised VAT
bases of the Member States (21 260,1 million euro);

(iii) the GNI-based resource levied as a uniform rate in propor-
tion to the GNI of each Member State (51 235,2 million
euro);

(iv) a specific mechanism for correcting the budgetary imbalance

of the United Kingdom (5 184,9 million euro).

(1) See COM(2004) 505 final of 14 July 2004, Volume I, pp. 10 to 12.
(2) All figures for 2003. For more detailed figures see diagram V of the
Annual report of the Court concerning the financial year 2003
(OJ C 293, 30.11.2004, p. XVI).

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

In 2003, the traditional own resources amounted to
8.
10 857,2 million euro after deduction of a flat-rate amount of
25 %, which was retained by the Member States to cover collec-
tion costs. The Court has already stated in its Opinion No 8/99 (3)
that collection costs actually constitute an item of expenditure
and should be treated as such in the Community accounts and
when calculating net balances.

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

In addition,

tax evasion,

in particular ‘roundabout’
10.
frauds (5) facilitated by the current system with taxation taking
place in the country of consumption, undeclared economic activ-
ity and the varying degrees of efficiency shown by the national
authorities in collecting VAT and preventing fraud might still
affect the incidence of the financial burden on the Member
States (6).

11.
Furthermore, the results of Court audits (7) cast some
doubt on the accuracy and reliability of the VAT statements pro-
duced by the Member States, which are compiled after compli-
cated calculations demanding significant administrative resources.

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

(3) See paragraphs 11 to 15 (OJ C 310, 28.10.1999, p. 1).
(4) See Special Report No 6/98, paragraph 5.5 (OJ C 241, 31.7.1998,

p. 58).

(5) See Annual Report concerning the financial year 2001, para-

graphs 1.50 to 1.55 (OJ C 295, 28.11.2002, p. 1).

(6) See Special Report No 6/98, paragraphs 4.1 to 4.2 (OJ C 241,

31.7.1998, p. 58).

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

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The Court has found (1) that there is limited direct veri-
13.
fication by the Commission of the underlying national accounts
which provide the figures presented by the Member States in the
GNI questionnaires as a basis for calculating the GNI-based
resource. This is due to the ambiguity of the rules laying down the
obligations and powers of the Commission in this respect (2).

14.
Even though the conclusions of the Fontainebleau Euro-
pean Council state that any Member State with a budgetary
imbalance in relation to its relative prosperity may apply for a
correction, the current decision on own resources only specifi-
cally grants it to one Member State. There is no mechanism
enabling other Member States to benefit from such a correction,
just as there is no monitoring procedure to check that the said
correction is still justified (3).

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

The Court acknowledges that the proposed mechanism
18.
defines criteria which would allow an assessment to be made on
an annual basis whether Member States are entitled to benefit
from a correction. With regard to the financing of the cost of the
corrections, it would put an end to the differential treatment of
Member States under the mechanism currently in force. There
would also no longer be a need for calculating a so-called ‘frozen
rate’ (4), nor would there be a need for calculating the impact of
successive own resources decisions and enlargements.

19.
On the other hand the European Council meeting in Ber-
lin in March 1999 concluded, inter alia, that the system of the
Communities’ own resources should be transparent and simple
and based on criteria which best express each Member State’s abil-
ity to contribute. The existence of any correction mechanism,
however, compromises the simplicity and transparency of the
own resources system. In particular, calculating net balances
implies numerous choices that must be made (on the items to be
included, reference periods and accounting methods) all of which
render any correction mechanism rather cumbersome. Moreover,
net budgetary balances are not good indicators for assessing the
overall advantages to be gained from Community policies, as they
do not take into account the multiplier effect of these policies (5).

III. THE PROPOSED GENERALISED CORRECTION MECHANISM

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

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

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

IV. PROSPECTIVE DEVELOPMENTS

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

22.
The Commission indicated possible choices for such a
tax-based own resource in its report on the operation of the own
resources system (6). It is not up to the Court to comment on the
possible options at this stage. The Court, however, would like to
emphasise that the reasons for any choice should be clearly stated
and that the system selected should meet the criteria outlined by
the European Council (i.e. it should be equitable, transparent,
cost-effective and simple) and should offer guarantees and proce-
dures to make it both reliable and auditable.

(1) See the Annual Report concerning the financial year 2003, para-

graph 3.48.

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

(2) See Opinion No 7/2003, paragraph 3 (OJ C 318, 30.12.2003, p. 1).
(3) See Special Report No 6/98, paragraphs 3.25 to 3.26 (OJ C 241,

(5) See Special Report No 6/98, paragraphs 3.29 to 3.33.
(6) ‘Financing the European Union’, COM(2004) 505 final of 14 July

31.7.1998, p. 58).

2004.

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V. SPECIFIC REMARKS ON THE PROPOSAL FOR A COUNCIL

DECISION

Article 2(7)

Text proposed by the Commission:
7.
For the purposes of applying this Decision, GNI for the
year is calculated at market prices as provided by the
Commission in application of the ESA 95 in accordance with
Regulation (EC) No 2223/96.

Should modifications to the ESA 95 result in significant
changes in the GNI as provided by the Commission, the
the
Council,
Commission and after consulting the European Parliament,
shall decide whether these modifications shall apply for the
purposes of this Decision.

acting unanimously on a proposal of

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

Article 4(1)

Text proposed by the Commission:
1.
Any Member State sustaining a negative budgetary
imbalance in excess of a threshold equivalent to a certain
percentage of its GNI shall be granted a correction. The total
amount of the corrections in a given year shall not exceed a
maximum available refund volume expressed in euro. The
Council, in accordance with the procedure laid down in
Article 279(2) of
lay down the
implementing measures for the calculation of the corrections
and their financing,
in particular the threshold and the
maximum available refund volume.

the EC Treaty, shall

The corrections shall be established by:
(a)

calculating for each Member State the budgetary imbal-
ance as the difference, in a financial year, between:

— the percentage share of that Member State in the
sum of the total VAT-based and GNI-based own
resources payments, and

— the percentage share of that Member State in total

allocated expenditure;

(b) multiplying the difference thus obtained by total allo-

cated expenditure;

(c) deducting from the result under (b) the value of that

Member State’s GNI multiplied by the threshold;

(d)

if the result obtained under (c) is positive, multiplying this
result by a refund rate, fixed at a maximum of 0,66 and,
if necessary, reduced proportionally to respect the maxi-
mum available refund volume.

The text should clearly state that the concept of total allo-
24.
cated expenditure to be used is laid down in the Council Regula-
tion on the implementing measures for the correction of budget-
ary imbalances.

Article 8(2)

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

The Court reiterates its position (1) that Article 8(2) of the
25.
proposed Decision, insofar as it interprets the subject of the
Court’s checks and audits, is tantamount to amending a provision
of the Treaty outside the procedure laid down for that purpose.
The statement that, ‘such auditing and checks being mainly con-
cerned with the reliability and effectiveness of national systems
and procedures for determining the base of own resources accru-
ing from VAT and GNI’, should be deleted. In any case, the Court
considers that such a provision cannot have the effect of limiting
its audit powers under the Treaty.

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

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

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

Article 1(1a)

Text proposed by the Commission:
1.
The calculation of the amount of the correction based
on the budgetary imbalances of Member States of year t in
accordance with Article 4 of Council Decision (…) shall be
established by:
(a)

calculating for each Member State the budgetary imbal-
ance as the difference between:

— the percentage share of that Member State in the
sum of the total VAT-based and GNI-based own
resources payments relating to year t, and

— the percentage share of that Member State in total

allocated expenditure;

The words ‘related to year t’ should be added to the sec-

27.
ond indent in order to be consistent with the first indent.

The allocation of expenditure across the Member States

2.
shall be governed by the following rules:

In general, payments shall be allocated to the Member State in
which the principal recipient resides. However, in those cases
where the Commission is aware that the recipient in question
acts as an intermediary, the payments shall be allocated
whenever this is possible to the Member State(s) in which the
final beneficiary(ies) is (are) resident, in accordance with their
shares in these payments.

Total allocated expenditure shall be based on total expenditure
of the general budget of the European Union, excluding the
following two main categories of expenditure:
— expenditure on external policies, including pre-accession or
enlargement-related expenditure in non-member coun-
tries as well as other expenditure benefiting recipients
outside the Union, such as development cooperation
expenditure, research expenditure spent outside the EU,
administrative expenditure paid to recipients outside the
Union, etc.;

— expenditure that cannot be allocated or identified due to con-
ceptual or other difficulties, such as expenditure on rep-
resentation, on missions and on formal and other meet-
related to cross-border
ings as well as payments
Community initiatives, promotion of
inter-regional
cooperative operations and other cross-border actions.

Article 2(2)

Text proposed by the Commission:
2.
referred to in Article 1 shall be equal to 7,5 billion euro.

The maximum available refund volume (MARV)

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

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

Article 4

The references to ‘payments’, in Article 4(2) should be

30.
replaced by ‘expenditure’.

Text proposed by the Commission:
The concept of expenditure to be used in calculation of
1.
the corrections
shall correspond to actual payments
(execution of appropriations for payments) made in the year
in question (year t) under that year’s appropriations for
payments as well as payments under carryovers of
non-executed appropriations for payments to the following
year (from year t to year t+1). Only utilised appropriations for
payments, i.e. the amount of payments actually made, shall be
taken into account.

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

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Article 5

The amount of the corrections shall be budgeted in two

Text proposed by the Commission:
1.
steps:
(a)

the result of the first provisional calculation of the
amount of the corrections for year t shall be entered in
the preliminary draft budget of year t+1. The calculation
shall be based on the most recent data available for both
revenue and expenditure;

Under article 5 of the proposal, both the definitive cal-
32.
culation of the amount of the correction and its financing by
Member States for the year t are based on data on VAT bases and
GNI known at December of year t+2. The Court considers it more
appropriate to use VAT and GNI data for the year t+4 as they are
then final (1).

(b)

the result of the definitive calculation of the amount of
the corrections for year t shall be budgeted in an amend-
ing budget of year t+3. The calculation shall be based on
the data on VAT bases, GNI and allocated expenditure
relating to year t as known at 31 December of year t+2,
which shall, where applicable, be converted into euro
according to the annual average exchange rate of the
year t.

In order to calculate the share of each Member State in the
sum of the total VAT-based and GNI-based own resources
payments the budget of year t shall be recalculated on the
basis of the outturn of appropriations for payments for year
t, reduced by other revenue relating to year t (not including
the balance of the previous exercise or other balances or
adjustments of balances relating to previous years) and the
actual amount of traditional own resources made available in
year t. The remaining amount shall be financed by the VAT-
based own resource up to the uniform rate of call of VAT and
by the GNI-based resource for the residual amount necessary
to balance the budget.

The financing of the corrections referred to in para-
2.
graph (1)(a) above shall be calculated on the basis of the latest
data on Member States GNI for year t, available when the pre-
liminary draft budget is drawn up.

A definitive calculation shall also be made in respect of
3.
the financing of the corrections for year t referred to in para-
graph (1)(b) above. The calculation shall be based on Member
States’ GNI in year t, as known at 31 December of year t+2,
which shall, where applicable, be converted into euro accord-
ing to the annual average exchange rate of the year t. The
definitive financing data shall be compared with the payments
relating to the corrections for year t already entered in the
budget in year t+1. The balances per Member State shall be
entered in an appropriate budgetary chapter of the amending
budget referred to under paragraph (1)(b) above and con-
verted into national currency according to the annual average
exchange rate of the year t.

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

For the Court of Auditors
Hubert WEBER
President

(1) Notwithstanding any reservations.