Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1905/2006 establishing a financing instrument for development cooperation and Regulation (EC) No 1889/2006 on establishing a financing instrument for the promotion of democracy and human rights worldwide
Date: 2009-04-21
Institutions: European Commission
Subjects: EU aid, EU financial instrument, cooperation policy, democratisation, human rights

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.4.2009 
COM(2009) 194 final 

2009/0060 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Regulation (EC) No 1905/2006 establishing a financing instrument for 
development cooperation and Regulation (EC) No 1889/2006 on establishing a financing 
instrument for the promotion of democracy and human rights worldwide 

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EXPLANATORY MEMORANDUM 

The various Community financial instruments for external cooperation contain inconsistencies 
regarding  the  eligibility  for  Community  financing  of  costs  related  to  taxes,  duties  and  other 
charges.  

The Development Cooperation Instrument (DCI) and the European Instrument for Democracy 
and Human Rights (EIDHR) are the only ones not to provide for an exception to the principle 
of  the  non-eligibility  of  such  costs  for  funding.  The  other  instruments  lay  down  that 
Community support may not be used to finance these costs in principle. They therefore allow 
for  flexibility  on  a  case-by-case  basis  and  the  authorising  officer  responsible  may,  where 
appropriate, decide to accept their being financed in the interests of proper implementation of 
programmes and projects. 

Such  flexibility  is  essential  for  certain  recurring  situations  where  deadlock  occurs  because 
exemption  mechanisms  are  absent  or  impractical  (owing,  for  example,  to  the  extreme 
complexity of procedures in the beneficiary country). In these situations, the rigid formulation 
of the DCI and EIDHR instruments may make the action financed by external aid extremely 
difficult,  particularly  in  the  context  of  EIDHR  projects.  Note  also  that  with  the  current 
wording  the  prohibition  on  financing  for  the  payment  of  taxes  concerns  only  those  paid  "in 
beneficiary  countries",  which  adds  difficulty  of  interpretation  to  the  problem  of  eligibility 
(especially  in  the  case  of  regional  projects).  Another  example  is  the  levying  of  local  taxes 
(equivalent to VAT) which cannot be recovered because of a lack of machinery for relief and 
then have to be borne by the contractor because of the strict prohibition on covering taxes.  

By  way  of  example,  difficulties  as  regards  eligibility  arise  in,  but  are  not  limited  to,  the 
following cases:  

•  Local  purchases  of  low  value  and/or  reimbursables  where  the  beneficiary  country's 

machinery for VAT exemption is sometimes difficult to apply or non-existent. 

•  Financing  of  value-added  taxes  by  a  Community  grant,  provided  that  such  taxes  are  not 
refundable and that the basic act does not exclude it, is provided for in the implementing 
rules of the Financial Regulation (Article 172a(2)(c)). Any grant awarded under centralised 
management  does  not  require  the  prior  consent  of  the  country  where  the  project  is 
implemented. If the law of that country does not provide for any exemption machinery, the 
grant  beneficiary  has  to  bear  the  value-added  tax  or  equivalent  local  tax  and  cannot  be 
reimbursed from EC funds. 

•  In the case of EIDHR projects, given the particular circumstances in which they are carried 
out, some countries are reluctant to grant exemptions for projects they do not support. In 
the absence of tax-exemption agreements for Community-financed projects, these taxes are 
paid  by  the  beneficiary  organisations.  This  may  act  as  an  impediment  to  the 
implementation of projects that are highly politically sensitive. 

Finally,  note  that  even  though  full  funding  of  an  external  action  may  be  considered  under 
certain  circumstances,  this  is  not  always  enough  to  make  it  possible  to  cover  taxes,  which 
remain  ineligible  costs.  In  any  case,  full  funding  applies  only  to  the  eligible  costs  of  the 
action.  

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In view of the above and of the evolving nature of tax rules in the beneficiary countries, it is 
essential  to  preserve  sufficient  flexibility  to  enable  authorising  officers  to  determine,  on  a 
case-by-case  basis,  whether  there  is  need  to  accept  the  eligibility  of  taxes  for  Community 
financing  under  the  EIDHR  and  DCI,  as  they  may  do  for  other  instruments  of  EC  external 
assistance, where such taxes are lawful.  

Therefore it is proposed to align the relevant provisions of both these instruments on the other 
instruments.  

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2009/0060 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Regulation (EC) No 1905/2006 establishing a financing instrument for 
development cooperation and Regulation (EC) No 1889/2006 on establishing a financing 
instrument for the promotion of democracy and human rights worldwide 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 179(1) and the first paragraph of Article 181 thereof, 

Having regard to the proposal from the Commission, 

Acting in accordance with the procedure laid down in Article 251 of the Treaty1, 

Whereas: 

(1) 

A  new  framework  for  planning  and  delivering  assistance  was  established  in  2006  in 
order to make the Community’s external assistance more effective and transparent. It 
contains  Council  Regulation  (EC)  No 1085/2006  of  17 July  2006  establishing  an 
Instrument  for  Pre-Accession  Assistance2,  Regulation  (EC)  No 1638/2006  of  the 
European  Parliament  and  of  the  Council  of  24 October  2006  laying  down  general 
provisions  establishing  a  European  Neighbourhood  and  Partnership  Instrument3, 
Council Regulation (EC) No 1934/2006 of 21 December 2006 establishing a financing 
instrument  for  cooperation  with  industrialised  and  other  high-income  countries  and 
territories4,  Regulation  (EC)  No 1717/2006  of  the  European  Parliament  and  of  the 
Council  of  15 November  2006  establishing  an  Instrument  for  Stability5,  Council 
Regulation  (Euratom)  No 300/2007  of  19 February  2007  establishing  an  Instrument 
for  Nuclear  Safety  Cooperation6,  Regulation  (EC)  No 1889/2006  of  the  European 
Parliament  and  of  the  Council  of  20 December  2006  establishing  a  financing 
instrument  for  the  promotion  of  democracy  and  human  rights  worldwide7,  and 
Regulation  (EC)  No 1905/2006  of  the  European  Parliament  and  of  the  Council  of 
18 December 2006 establishing a financing instrument for development cooperation8. 

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Opinion  of  the  European  Parliament  of  XX  (not  yet  published  in  the  Official  Journal),  Council 
Common  Position  of  XX  (not  yet  published  in  the  Official  Journal)  and  Common  Position  of  the 
European Parliament of XX (not yet published in the Official Journal). 
OJ L 210, 31.7.2006, p. 82. 
OJ L 310, 9.11.2006, p. 1. 
OJ L 405, 30.12.2006, p. 37. 
OJ L 327, 15.11.2006, p.1. 
OJ L 81, 22.3.2007, p. 1. 
OJ L 386, 29.12.2006, p. 1. 
OJ L 378, 27.12.2006, p. 41. 

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(2) 

In implementing these Regulations inconsistencies have emerged regarding exceptions 
to  the  principle  of  non-eligibility  for  Community  financing  of  costs  related  to  taxes, 
duties and other charges. It is therefore proposed to amend the relevant provisions of 
Regulations (EC)  Nos 1905/2006 and 1889/2006 in order to align  them on  the  other 
instruments. 

(3) 

This Regulation does not go beyond what is necessary in order to achieve the objective 
pursued, in accordance with the third paragraph of Article 5 of the Treaty, 

HAVE ADOPTED THIS REGULATION: 

Article 1 

Article 25(2) of Regulation (EC) No 1905/2006 is replaced by the following: 

"2.  Community  assistance  shall  not  in  principle  be  used  for  paying  taxes,  duties  or 
charges in beneficiary countries." 

Article 2 

Article 13(6) of Regulation (EC) No 1889/2006 is replaced by the following: 

"6.  Community  assistance  shall  not  in  principle  be  used  for  paying  taxes,  duties  or 
charges in beneficiary countries." 

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

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

Done at Brussels, 21.4.2009 

For the European Parliament 
The President 

For the Council 
The President 

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