COMMISSION STAFF WORKING PAPER FINANCING THE EU BUDGET:REPORT ON THE OPERATION OF THE OWN RESOURCES SYSTEM
Date: 2011-06-29
Institutions: European Commission
Subjects: VAT, air transport, corporation tax, own resources, tax collection, tax reform, tradeable emission permit

EUROPEAN COMMISSION 

Brussels, 27.10.2011 
SEC(2011) 876 final/2 

Corrigendum : annule et remplace le document SEC(2011) 876 final 
Concerne uniquement la version EN - page 12 et page 21 

COMMISSION STAFF WORKING PAPER 

FINANCING THE EU BUDGET: 
REPORT ON THE OPERATION OF THE OWN RESOURCES SYSTEM 

Accompanying the document 

Proposal for a Council Decision 

on the system of own resources of the European Union 

{COM(2011) 510 final} 

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EXECUTIVE SUMMARY 

In  accordance  with  the  conclusions  of  the  European  Council  of  15-16  December  2005,  the 
Commission  presented  "a  full,  wide-ranging  review  covering  all  aspects  of  EU  spending, 
including the Common Agricultural Policy, and of resources, including the United Kingdom 
rebate"1 in the EU Budget Review2.  

The  Budget  Review  highlighted  that  the  current  financing  system  is  perceived  as  both 
opaque  and  complex,  as  lacking  in  fairness  –  notably  with  regard  to  corrections  –  and  as 
relying excessively on resources which are perceived as expenditure to be minimized by the 
Member  States.  With  the  exception  of  customs  duties  stemming  from  the  customs  union, 
existing resources do not display a clear link to EU policies.  

Hence it noted that introducing a new phase in the evolution of EU financing could provide 
gains in three closely linked dimensions – the simplification of Member States' contributions, 
the introduction of one or several new own resources and the progressive phasing-out of all 
correction  mechanisms.  As  these  changes  are  phased  in,  the  essential  elements  of  the  EU 
financing  system  should  be  retained:  a  stable  and  sufficient  financing  of  the  EU  budget, 
respect for budgetary discipline and a mechanism to ensure a balanced budget.  

It  also  underlined  that  a  reform  of  the  way  the  EU  budget  is  financed  "is  not  an  argument 
about the size of the budget – it is a debate about the right mix of resources. The progressive 
introduction of a new resource would open the door for other resources to be reduced, phased 
out or dropped". 

This own resources report presents an in-depth and systematic technical analysis of the issues 
and possible options for reform of the EU financing system identified in the Budget Review. 
This  analysis  underpins  the  concrete  proposals  made  by  the  Commission  in  the  draft  own 
resources Decision and its accompanying implementing regulations3. 

The proposals developed here aim to bring the financing mechanisms closer to those designed 
by the founders of the Union, which encompassed in particular the principle that "the budget 
shall be financed wholly from own resources", such as customs duties collected on the basis 
of the common custom tariff. The current dominance of own resources perceived as national 
contributions  does  not  reflect  the  special  character  of  the  EU  which  is  not  a  simple  club  of 
different members that are paying their membership fees.  

At the same time the proposals aim to establish a link between the revenues of the EU-budget 
and commonly agreed EU policy objectives. It should also be stressed that proposals for new 
own resource have no impact on national sovereignty.  

1  See  Declaration  3  to  the Interinstitutional  Agreement  between  the  European  Parliament,  the  Council  and  the 
Commission on budgetary discipline and sound financial management, 2006/C 139/01, 14.6.2006.  
2 See COM(2010)700 of 19.10.2010. 
3 See COM(2011) 511 final of 29.6.2011. 

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The report is organised in three parts.  

Part I presents the main features and an assessment of the current financing system. It 
includes an analysis of the evolution of own resources and correction mechanisms over time, 
and a qualitative assessment of the system.  

The  financing  system  has  evolved  considerably  over  time,  from  a  system  of  contributions 
from  the  Member  States  to  a  system  of  own  resources,  primarily  based  on  traditional  own 
resources at the start, then increasingly on a VAT-based own resource and, more recently, on 
a GNI-based own resource. Today, the bulk of EU financing relies on the GNI-based and the 
VAT-based own resources, which are statistical aggregates and display no link to EU policies. 
Both own resources are widely perceived as national contributions.  

In  parallel  to  the  evolutions  in  the  composition  of  own  resources,  an  increasing  number  of 
correction mechanisms have been developed, based on principles set out at the Fontainebleau 
European Summit in June 1984 according to which "any member State sustaining a budgetary 
burden which is excessive in relation to its relative prosperity may benefit from a correction 
at the appropriate time". Mechanisms of corrections, and numerous exceptions, can be found 
both  on  the  expenditure  and  the  revenue  sides  of  the  budget.  The  most  important  of  these 
mechanisms is the UK correction, and the "rebates on the rebate" to the benefit of Germany, 
the Netherlands, Austria and Sweden. In addition, reductions of the GNI-based contributions 
have  been  granted  to  the  Netherlands  and  Sweden  for  the  period  2007-2013.  These  two 
countries,  as  well  as  Germany  and  Austria  also  benefit  from  temporary  reductions  for  the 
same  period  on  the  call  rates  on  the  VAT-based  own  resource.  These  mechanisms  are  very 
complex and lack transparency. They lead to a widespread perception that the EU financing is 
unfair. 

An assessment of the system highlights that the current financing system allows a sufficient 
and  stable  financing  of  the  EU.  The  GNI-based  own  resource  plays  the  central  role  in 
allowing a balanced budget but this could be achieved with a much smaller (indeed residual) 
resource  and  with  a  fundamentally  different  mix  of  resources.  A  genuine  advantage  of  the 
current  system  relates  to  the  limited  administrative  costs.  The  GNI-based  and  VAT-based 
contributions  also  create  a  direct  link  between  the  national  budgets  and  the  EU  budget  thus 
potentially contributing to financial discipline at the EU level. However, this link would still 
be effective if these resources constituted a much smaller share of the EU budget. 

The  current  financing  system  performs  poorly  with  regard  to  all  other  relevant  criteria.  It 
contributes  to  an  increasing  focus  Member  States  place  on  a  narrow  'accounting'  approach 
with the main objective of maximising financial returns from the EU budget. This has led to 
tensions  between  them  and  has  distorted  the  public  debate  about  the  value  of  EU  spending 
and, in some quarters, about the benefits of EU membership itself. 

The Treaty on the Functioning of the European Union (TFEU) introduces important changes, 
not  only  for  EU  budgetary  procedure,  but  also  the  way  the  EU  budget  is  financed.  Article 
311(3) TFEU opens the door to reducing the number of existing resources and to creating new 
ones.  The  new  Article  311(4)  TFEU  introduces  the  possibility  of  defining  specific 
implementing  measures  related  to  the  own  resources  system  in  an  implementing  regulation 
within  the  limits  set  out  by  the  own  resources  Decision.  This  new  framework  creates  an 
opportunity to make the own resources system sufficiently flexible within the framework and 
limits set out by the own resource Decision.  

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The recent financial crisis creates a new context which needs to be taken into account when 
designing  the  future  architecture  of  the  EU  budget.  The  EU  financing  system  could  play  a 
significant  role  in  the  Union-wide  budgetary  consolidation  efforts.  With  the  progressive 
introduction of new resources the need for Member States transfers to the EU budget would 
diminish and Member States would have an additional degree of freedom in managing scarce 
national resources.  

It is therefore reasonable to envisage well-grounded alternatives to the existing system. Those 
are examined in the rest of the report. 

Part II analyses the simplification of Member States' contributions and the introduction 
of new own resources. The analysis is underpinned by assessment criteria defined in the EU 
Budget  Review  and  which  allow  a  consistent  and  politically  sound  examination  of  reform 
options. 

Eliminating  the  VAT-based  own  resource  in  parallel  to  the  introduction  of  one  or  several 
genuine own resources would simplify the existing Member States contributions. The VAT-
based  contribution  is  complex,  requires  an  important  administrative  work  necessary  to 
harmonize  the  calculation  basis,  and  offers  little  or  no  added  value  compared  to  the  GNI-
based  own  resource.  Furthermore,  due  to  the  statistical  nature  of  the  basis,  the  resource  is 
fully independent of- and does not support VAT policies at EU or Member States level. This 
is why most Member States and EU institutions called for its elimination in the context of the 
Budget  Review  consultation.  Considering  the  administrative  complexities  related  to  the 
current  system  and  the  low  call  rates  currently  in  place,  a  step-by-step  phasing-out  would 
seem less effective than the complete elimination on a given date. 

The  analysis  of  the  various  potential  candidates  identified  in  the  EU  Budget  Review  as 
potential  new  own  resources  gave  rise  to  a  substantial  technical  work  (see  Annex  to  this 
report). It highlighted the following key elements: 

  Financial  sector  taxation  would  constitute  new  revenue  stream,  therefore  potentially 
reducing  the  existing  contributions  from  Member  States,  giving  an  extra  room  for 
manoeuvre  to  national  governments  and  contributing  to  general  budgetary  consolidation 
efforts.  Although  various  forms  of  financial  sector  taxation  can  be  observed  in  Member 
States, action at EU level could prove more effective and efficient, and it could play a role 
in reducing the existing fragmentation of the Internal market. A financial transaction tax 
that could be collected at EU level would also reduce the juste retour problems observed 
in the current financing system. An EU initiative in this area would constitute a first step 
towards the application of a FTT at global level. On the other hand, a financial activities 
tax would seem less suitable as an own resource as it would rely exclusively on national 
administrations for its collection and management. The debate on VAT policy following 
the VAT green paper later this year will be a most appropriate opportunity to discuss FAT 
as a compensation scheme for VAT exemption on financial services.  

  Aviation sector taxation would share many of the advantages identified for the financial 
transaction  tax.  It  would  constitute  a  new  revenue  stream,  lend  itself  to  autonomous 
collection  at  EU  level  and  constitute  an  effective  response  to  the  emerging  tax-induced 
internal market fragmentation in this area. However, to the extent that the aviation sector 

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will be affected by the Emission Trading System from 2012, introducing an aviation tax at 
EU level may not be appropriate at this stage. 

  Resources  based  on  emission  auctioning  in  the  context  of  the  EU  Emission  Trading 
System (ETS) or a tax based on energy based on the revised Energy Taxation Directive 
would display strong links to emerging and rapidly evolving climate and energy priorities. 
They could be underpinned by a strong regulatory framework. Although these resources 
would stem from an existing system, with a revenue stream entering into national systems, 
autonomous  revenue  collection  at  the  EU  level  could  be  envisaged  in  the  medium-  to 
long-term.  Nevertheless,  given  the  initial  need  of  stability  for  the  finely  balanced  new 
system of auctioning starting in 2013, no link to the EU own resources system is proposed 
for the time being. 

  The development of a new VAT resource creating a genuine link between national VAT 
and the EU budget would be feasible. While revenue collection would rely exclusively on 
Member  States  administrations,  such  a  system  could  provide  significant  and  stable 
receipts  to  the  EU  with  limited  administrative  costs  for  national  administrations.  This 
resource would not create a new VAT system parallel to the national ones, nor would it 
impose new charges on businesses or citizens. The introduction of a new VAT resource 
could  form  part  of  a  broader  reform  initiated  by  the  Commission's  Green  Paper  on  the 
future  of  VAT.  Broadening  the  tax  base,  reducing  the  scope  for  fraud,  improving  the 
administration of the tax and reducing compliance costs in the context of a broad reform 
of  VAT,  could  deliver  important  results  and  generate  new  revenue  streams  for  the 
Member States. A fraction of the gains derived from this initiative could be attributed to 
the  EU  level,  and  these  could  be  further  increased  as  the  VAT  system  improved  its 
performance.  

  The  examination  of  the  EU  Corporate  Income  Tax  (EUCIT)  generated  a  host  of 
conceptual  and  practical  issues  and  was  considered  as  unsuitable  as  a  potential  own 
resource for the foreseeable future. 

Overall, based on this analysis, it appears feasible to introduce several new own resources at 
EU level beyond 2013. The introduction of new own resources could play a role in budgetary 
consolidation processes and lead to a new impetus in the European construction by facilitating 
reforms of the Internal market. It would be difficult to assess the combined impact of several 
resources on one specific Member State or on one specific economic sector. 

Part III examines issues related to correction mechanisms and their simplification. The 
limitations of the current mechanisms are presented, together with alternative options.  

A  number  of  the  correction  mechanisms,  introduced  in  the  current  own  resources  Decision, 
will  automatically  end  in  2013.  However,  the  rebate  granted  to  the  United  Kingdom  (UK 
correction)  –  and  the  related  rebates  on  this  rebate  granted  to  Germany,  The  Netherlands, 
Austria and Sweden – has no expiration date. 

At  the  time  of  its  introduction  the  UK  correction  offered  a  response  to  what  was  clearly  an 
inequitable  situation  whereby  one  of  the  poorest  Member  States  was  one  of  the  largest 
contributors to the EU budget.  

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However, the underlying factors contributing to this particular situation have clearly evolved 
since  the  rebate  was  agreed  in  1984  and  the  budgetary  burden  of  the  UK  in  relation  to  its 
relative prosperity is now more in line with that of other net contributors.  

The UK correction and its financing arrangements ("rebates on the rebate") are fraught with 
complexity. The economic disincentive inherent to the mechanism potentially discourages the 
UK from spending EU money on its own territory. Finally a technical consideration: with the 
elimination  of  the  current  VAT-based  own  resource,  essential  data  for  calculating  the  UK 
correction will no longer be available.  

The budgetary burden of the UK and its relative prosperity must be carefully assessed against 
the situation of other Member States on the basis of horizontal criteria and any proposal for 
the introduction or the continuation of corrections post-2013 must be rooted in an equitable 
approach across Member States. 

The  analysis  demonstrates  that  transforming  the  current  mechanism  into  a  lump  sum  gross 
reduction on the GNI-based own resources payments would offer clear advantages compared 
to any alternative formula, including a generalised correction mechanism as was proposed by 
the  Commission  in  2004.  A  system  of  lump  sums  would  be  transparent  and  easy  to 
understand, thus making it more open to public and parliamentary scrutiny; it would be fair, 
by  treating  large  contributors  to  the  EU  budget  in  line  with  their  economic  prosperity,  and 
ensuring a balanced financing of the corrections; its ex ante nature would ensure that Member 
States are not influenced by corrections when making spending decisions. Lump sums would 
be  foreseen  for  the  duration  of  one  financial  framework,  thus  ensuring  the  link  between 
expenditure and revenue provided for in the Fontainebleau agreement. 

Overall,  the  analysis  shows  that  the  simplification  of  the  current  contributions  through  the 
elimination of the VAT-based own resource, the parallel introduction of new own resources 
linked  to  EU  policies,  and  the  transformation  of  the  existing  correction  maze,  are  strongly 
related and reinforce each other to achieve a major reform of the financing of the EU budget. 

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PART 1: AN OVERVIEW OF THE EU FINANCING SYSTEM 

Part  1  presents  first  key  facts  about  the  own  resources  (section  1)  and  the  correction 
mechanisms  (section  2),  including  key  legal  and  quantitative  aspects  of  the  EU  financing 
system. A qualitative assessment of the system is presented in section 3, based on budgetary, 
EU integration, efficiency and equity criteria.  

1. 

Key facts about own resources 

1.1. 

Legal framework 

Article 311 of the Treaty on the Functioning of the European Union defines the key principles 
regarding EU financing.  

  First, "without prejudice to other revenue, the budget shall be financed wholly from own 
resources". The revenue of the general budget of the European Union can be divided into 
the own resources and other revenue. 

  Second, the provisions relating to the system of own resources are set out in a decision - 
the  own  resources  decision  -  adopted  unanimously  by  the  Council  after  consulting  the 
European  Parliament,  in  accordance  with  a  special  legislative  procedure.  In  that  context 
the  Council  "may  establish  new  categories  of  own  resources  or  abolish  an  existing 
category".  That  decision  "shall  not  enter  into  force  until  it  is  approved  by  the  Member 
States  in  accordance  with  their  respective  constitutional  requirements".  This  procedure 
preserves national sovereignty in tax matters. 

  Third, the Treaty provides that the Council, acting by means of regulations in accordance 
with  a  special  legislative  procedure,  and  after  obtaining  the  consent  of  the  European 
Parliament, may lay down implementing measures for the Union's own resources system 
"in so far as this is provided for in the [own resources] decision". 

In addition, Article 322§2 lays down provisions on the methods and procedures whereby the 
budget revenue provided under the arrangements relating to the Union's own resources "shall 
be made available" to the Commission. 

1.2. 

Evolution over time 

Just  like  the  expenditure  side  of  the  budget,  the  structure  of  the  financing  side  has  evolved 
considerably over time. Six own resources decisions, of varying durations, have been adopted 
since  19704.  New  own  resources  have  been  introduced  and  other  revenue  streams  have 
disappeared or been reduced according to evolving circumstances.  

As can been seen in graph 1, in the early years of the European Communities the financing 
system  relied  on  ad  hoc  national  contributions.  These  were  progressively  replaced  by  own 
resources  defined  in  the  own  resources  decisions  and  disappeared  completely  in  1982. 
Traditional own resources (customs duties and sugar levies) emerged in 1968 and constituted 
the  largest  part  of  the  financing  until  the  early  1990s.  Their  share  declined  markedly  in 
subsequent years. The VAT-based own resource constituted a new income stream from 1979, 

4 Council Decisions EEC, Euratom No 70/243 of 21.4.1970, No 85/257 of 7.5.1985, No 88/376 of 24.6.1988, No 
94/728 of 31.10.1994, No 2000/597 of 29.9.2000, No 2007/436 of 23.6.2007. 

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reaching a peak in the mid-1980s. Lastly, the GNI-based own resource was introduced in 1988 
and  now  represents  three-quarters  of  the  budget  revenue5.  Other  revenue  represents  only  a 
very minor part of total financing6. 

Graph 1 – Structure of EU financing 1958-2011 

EU budget revenue
1958-2011
(in % of EU GNI)

1,20%

1,00%

Other revenue & surplus

0,80%

GNI-based own resource

VAT-based own resource

Traditional own resources (custom duties &
sugar levies)
Financial contributions

0,60%

0,40%

0,20%

0,00%

1958

1963

1968

1973

1978

1983

1988

1993

2003

2008

2011

Source: DG Budget, European Commission  

The  graph  also  illustrates  that  EU  budget  revenues  expressed  as  a  percentage  of  GNI  have 
also  fluctuated  substantially.  A  peak  was  reached  in  the  mid-1990s.  Following  a  declining 
trend, recent years have witnessed a new increase, which reflects the impact of the crisis on 
EU GNI rather than a change in policy orientation for the EU budget.  

In  accordance  with  Article  310  of  the  Treaty,  total  EU  revenue  has  to  be  equal  to  total 
expenditure and is required to stay within agreed legal limits, currently set at 1.29% of the EU 
GNI  for  appropriations  for  commitments  and  1.23%  of  EU  GNI  for  appropriations  for 
payments. These ceilings are laid down in the own resources Decision and can therefore only 
be  modified  by  unanimity  and  after  ratification  of  the  Member  States.  The  actual  level  of 
expenditure/revenue is significantly below the current own resources ceiling. 

5  Gross  National  Income  (GNI)  is  used  as  a  reference  for  this  resource  since  2002.  Over  1988-2001  Gross 
National Product (GNP) was used instead. 
6 See European Commission, European Union Public Finance, 4th Edition, OPOCE, Luxembourg, 2008, chapter 
12. 

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Table 1: EU budget revenue 1970-2010 (% GNI) 

1970 

EU-6 

--- 

--- 

0,78 

0,78 

--- 

0,78 

--- 

0,00 

0,78 

1979 

1988 

1995 

2004 

2010 

EU-9 

EU-12 

EU-15 

EU-25 

EU-27 

0,38 

--- 

--- 

0,38 

0,39 

0,77 

0,00 

0,01 

0,78 

0,59 

0,10 

--- 

0,68 

0,28 

0,96 

0,01 

0,01 

0,99 

0,58 

0,21 

--- 

0,80 

0,22 

1,01 

0,10 

0,01 

1,12 

0,13 

0,65 

--- 

0,78 

0,12 

0,90 

0,05 

0,03 

0,98 

0,10 

0,75 

--- 

0,85 

0,13 

0,97 

0,02 

0,05 

1,05 

VAT-based own resource (1) 

GNP/GNI-based own resource (2) 

Other payments from/to Member States (3) 

Total national contributions (4)=(1)+(2)+(3) 

Traditional own resources (5) 

Total own resources (6)=(4)+(5) 

Surplus from previous year (7) 

Other revenue (8) 

TOTAL REVENUE (9)=(6)+(7)+(8) 

1.3. 

Situation today 

There  are  now  three  main  categories  of  own  resource:  traditional  own  resources,  the  VAT-
based  resource  and  the  GNI-based  resource.  These  are  supplemented  by  various  correction 
mechanisms7: 

  The  first  own  resource  ("traditional  own  resource"  or  TOR)  mainly  consists  of  customs 
duties  and  some  resources  of  agricultural  origin  (sugar  levies).  Since  2001,  a  25 %  flat-
rate  deduction  is  retained  at  source  by  the  Member  States  by  way  of  collection  costs. 
Before  that,  the  percentage  retained  was  10%.  TOR  represents  14.1 %  of  the  total  EU 
revenues in the 2011 budget8 (see Table 2). 

  The  second  resource  results  from  the  application  of  a  uniform  rate  to  Member  States’ 
value added tax (VAT) bases. The uniform rate is set at 0.30%. However, this percentage 
has been reduced for 4 Member States (Austria, Germany, the Netherlands and Sweden) 
for the period 2007-2013 only. Where a Member State's VAT base is greater than 50 % of 
its  GNI  the  uniform  rate  is  applied  to  a  base  equivalent  to  50%  of  GNI  (capping).  Six 
Member States (Ireland, Cyprus, Luxembourg, Malta, Portugal and Slovenia) are expected 
to have their VAT base capped in 2011. The VAT-based own resource represents 11.2 % 
of revenue in the budget 2011. 

  The third resource, the "additional" resource, results from the application of a uniform rate 
to  Member  States’  GNI  bases;  calculated  in such  a  way  as  to  cover  the  balance  of  total 
expenditure not covered by the other resources. Gross annual reductions in GNI payments 
are  granted  to  Sweden  and  the  Netherlands  for  2007-2013  only.  The  GNI-based  own 
resource represents 70.0% of revenue in the budget 2011. 

7  The  EU  financing  system  has  been  modified  with  the  entry  into  force  on  1.3.2009  of  the  Own  Resources 
Decision 2007 (2007/436/EC, Euratom - OJ L 163 of 23.6.2007). 
8 Amending budget 4/2011. 

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Table 2: breakdown by type of revenue 

Type of revenue 

Budget 1988 

Budget 2000 

AB 4/2011 

EUR 
billion 

Share  
% 

EUR 
billion 

Share  
% 

EUR 
billion 

Share  
% 

Customs duties 
and sugar levies 
VAT own resource 
GNI own resource 
Other revenue (incl. 
surplus) 

Total 

11.9 

24.9 
4.2 
0.9 

41.8 

29 

60 
10 
1 

100 

15.3 

35.2 
37.6 
4.8 

92.7 

17 

38 
41 
5.1 

17.9 

14.1 
88.6 
5.9 

100 

126.5 

14.1 

11.2 
70.0 
4.7 

100 

Source: EU budget Financial Report & Amending Budget 4/2011 

A summary of financing of the general budget by class of own resource and by Member State 
for the amending budget 4/2011 can be found in Annex 1. 

2. 

Key facts about the correction mechanisms 

2.1. 

Legal context 

Unlike  own  resources,  correction  mechanisms  are  not  provided  for  in  the  Treaty  but  result 
from  political  agreements.  They  were  first  introduced  in  the  1980s  to  solve,  it  was  hoped, 
problems related to budgetary imbalances.  

The 1984 Fontainebleau European Council conclusions set out the core principles behind the 
existing system of corrections. First, "expenditure policy is ultimately the essential means of 
resolving  the  question  of  budgetary  imbalances".  Second,  "any  member  State  sustaining  a 
budgetary burden which is excessive in relation to its relative prosperity may benefit from a 
correction at the appropriate time".  

2.2. 

Evolution over time and the situation today 

Since  the  1984  Fontainebleau  agreement  several  permanent  or  temporary  correction 
mechanisms  have  been  introduced.  The  most  important  correction  mechanisms  are  on  the 
revenue side. They are a collection of diverse measures resulting from a series of successive 
negotiations.  An  own  initiative  resolution  of  the  European  Parliament  ("the  Lamassoure 
resolution") identified 41 exceptions introduced by the European Council in December 2005 
on the expenditure and revenue sides of the budget9.  

On the expenditure side, numerous ad hoc payments have been granted to individual Member 
States  or  regions  over  the  years  (see  Annex  2).  In  practice,  Member  States  benefiting  from 
redistributive  packages,  such  as  cohesion  policy  aiding  poorer  regions,  see  their  benefit 
reduced  through  increased  contributions  to  the  budget  to  finance  the  corrections  on  the 
revenue  side.  Some  of  the  corrections  on  the  expenditure  side  in  turn  increase  the  UK 
correction.  

However, the most important correction mechanisms are to be found on the revenue side:  

9 See European Parliament resolution of 29 March 2007 on the future of the European Union's own resources 
(2006/2205(INI)) - P6_TA-PROV(2007)0098. 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
•  The  UK  correction  agreed  by  the  1984  Fontainebleau  European  Council  and  its 
financing.  Although  the  mechanism  has  been  modified  in  successive  own  resource 
decisions  its  basic  principle  remains  unchanged,  namely  to  reimburse  the  UK  with 
66% of the difference between what it pays to the EU budget (except TOR) and what 
it  receives  from  the  budget10.  The  financing  of  the  UK  correction  has  also  been 
modified  over  time,  extending  and  reinforcing  what  are  commonly  known  as  "the 
rebates  on  the  rebate"  to  the  traditionally  most  important  net  contributors  to  the  EU 
budget11. The December 2005 European Council decided to adjust the UK correction 
so that non-agricultural expenditure in the 12 Member States that acceded to the Union 
in 2004 and 2007  is no longer included in its calculation base12.  

The  amount  to  be  entered  in  the  2012  budget  for  the  ‘correction  of  budgetary 
imbalances in favour of the United Kingdom’ (UK correction) is EUR 3.8 billion. The 
calculation is shown in table 4 below. 

Germany, the Netherlands, Austria and Sweden benefit from a reduction in their share 
in the financing the UK correction. 

Table 4: calculation of the UK correction for the year 2011 (EUR million) 

(1) 
(2) 
(3) 
(4) 

(5) 

(5a) 

(5b) 

(6) 

(7) 

(8) 

(9) 

UK share of total uncapped VAT base 
UK share of enlargement-adjusted total allocated expenditure 
= (1) - (2) 
Total allocated expenditure 

Enlargement-related expenditure = (5a) + (5b) 

Pre-accession expenditure 

Expenditure related to Art 4(1)(g) 

Enlargement-adjusted total allocated expenditure = (4) - (5) 

UK correction original amount = (3) x (6) x 0.66 

UK advantage  

Core UK correction = (7) - (8) 

(10) 

Traditional Own Resources (TOR) windfall gains  

(11)  UK correction = (9) - (10) 

Source: Draft Budget 2012 

15.0054%
7.6164%
7.3890%
114,982.0

29,243.0

3,047.7

26,195.2

85,739.0

4,181.2

319.4

3,861.7

61.3

3,800.4

•  Germany,  the  Netherlands,  Austria  and  Sweden  benefit  from  a  reduction  in  the  call 
rates  for  the  VAT-based  own  resource.  While  Member  States  normally  contribute 
0.3% of their VAT assessment base to the EU budget, the rate of call is reduced for 
Austria  (0.225%),  Germany  (0.15%),  the  Netherlands  (0.10%)  and  Sweden  (0.10%) 
for the period 2007-2013. 

10  Any  benefit  or  cost  for  the  UK  resulting  from  modifications  introduced  in  the  successive  own  resources 
decisions has been neutralized. 
11 Since 2001, Germany, Austria, the Netherlands and Sweden pay only 25% of their normal financing share of 
the UK correction (Germany paid 2/3 of its normal financing from 1985 until 2000). 
12 The maximum cost to the UK of this measure cannot exceed EUR 10.5 billion (in 2004 prices) over the period 
2007-2013. The actual cost of this measure for the UK will most likely be much lower. 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
                                                 
•  The  Netherlands  and  Sweden  receive  a  gross  reduction  in  their  annual  GNI 
contributions for the period 2007-2013 only. In current prices, these gross reductions 
for 2011 amount to EUR 665.0 million for the Netherlands and EUR 164.9 million for 
Sweden13. 

Table  3  presents  the  direct  impact  of  these  various  corrections  in  the  draft  budget 
201214.  

Table 3:  

Impact  of  correction  mechanisms  granted  to  Germany,  the 
Netherlands, Austria and Sweden (EUR million) 

Impact of 
reduced VAT 
call rates 

Impact of lump 
sum GNI 
reduction 

Impact of 
reduced share in 
UK correction 
financing 

Germany 

1,143.7 

Netherlands 

Austria 

Sweden 

437.7 

38.9 

261.9 

-174 

638 

-20 

142 

681.1 

160.4 

76.6 

103.7 

Source:,DG Budget calculations based on draft budget 2012 

Combined 
impact 

1,650.9 

1,236.1 

95.6 

507.6 

•  Finally,  Member  States  retain  a  fixed  percentage  of  all  traditional  own  resources 
collected.  This  percentage  was  fixed  at  10%  when  these  resources  were  first 
transferred to the EU budget in the early 1970s. In 1999 the Berlin European Council 
decided  to  increase  it  to  25%.  These  retained  amounts  do  not  correspond  to  actual 
collection costs and can be considered a hidden correction mechanism. 

3. 

Assessment of the current EU financing system 

3.1. 

Assessment criteria 

Reviewing  the  current  financing  system  and  then  proposing  reforms  thereto  requires  robust 
assessment  criteria.  It  is  useful  to  identify  not  only  the  main  pros  and  cons  related  to  the 
constituent elements of a financing system – that is, the individual own resources as well as 
the  correction  mechanisms  –,  but  also  to  the  system  as  a  whole,  taking  into  account  the 
interrelation between these elements. Parts 2 and 3 of this report propose specific assessment 
criteria  for  individual  own  resources  and  corrective  mechanisms,  respectively,  whereas  this 
section focuses only on criteria for assessing the financing system as a whole. 

13 The Netherlands EUR 605 million and Sweden EUR 150 million in 2004 constant prices. These amounts are 
converted to current prices every year, using the GDP deflator. 
14 The impact of these corrections on the UK correction calculation in 2013 is not included. 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
The existing system can be assessed using four main categories of criteria15: 

  Budgetary criteria: ensuring a sufficient and stable EU financing and budgetary discipline. 

  Integration criteria: ensuring financial autonomy, transparency and a link to EU policies. 
Another  important  aspect  of  this  criterion  is  the  principle  of  fiscal  equivalence  for  the 
provision of (public) goods and services - that primarily those individuals benefiting from 
certain spending programmes should also be those financing it. 

  Efficiency  criteria:  internalising  externalities,  implementing  the  subsidiarity  principle, 

limiting operating costs. 

  Equity criteria: ensuring fairness at the level of Member States plus horizontal and vertical 

equity for the taxpayers.  

3.2. 

Budgetary criteria 

The existence of a GNI-based residual contribution in combination with the Inter-institutional 
agreement16,  and  not  least  the  existence  of  a  multiannual  financial  framework  has  ensured 
budgetary discipline and smooth adoption of the EU budget since 1988. The size of the EU 
budget is now constrained by agreements on expenditure rather than by scarcity of funding. 
This contrasts with the situation observed in the past17.  

It should be noted, however, that this good performance regarding budgetary criteria is, to a 
large extent, independent from the mix of own resources and the correction mechanisms. The 
same budgetary performance could be achieved were there to be a very small residual GNI-
based contribution (or another type of residual contribution) in combination with a radically 
different mix of own resources.  

3.3. 

Integration criteria  

The  financial  autonomy  of  the  Union  is  limited.  The  two  largest  sources  of  revenue  –  the 
VAT-  and  GNI-based  own  resources  –  display  many  of  the  characteristics  of  national 
contributions and are often perceived as such. They are provided by national Treasuries and 
are sometimes presented as an expenditure item in national budgets. This inevitably creates a 
tension which poisons every EU budget debate. National politicians often tend to judge EU 
policies and initiatives in terms of returns compared to their national contributions, rather than 
looking  first  at  the  overall  value  of  pursuing  certain  policies  at  the  European  level.  As  a 
consequence,  preference  is  often  given  to  policies  with  pre-allocated  expenditures  at  the 
expense of policies with potentially higher EU added value. Moreover, increasingly complex 
correction mechanisms have been developed in response to demands of net contributors to the 
EU budget. Overall, it can be argued that the increasing difficulties encountered in achieving 

15  See,  for  instance,  Cattoir,  Ph.  (2009),  "Options  for  an  EU  financing  reform",  Notre  Europe,  Paris  and 
Heinemann, F., Mohl, P. and S. Osterloh (2008), "Reform options for the EU own resource system", Research 
project 8/06 commissioned by the German Federal Ministry of Finance, ZEW, Mannheim, 18 January 2008. 
16  Inter-institutional  Agreement  of  17  May  2006  between  the  European  Parliament,  the  Council  and  the 
Commission  on  budgetary  discipline  and  sound  financial  management  -  Including  the  multiannual  financial 
framework 2007-2013 (OJ C 139 of 14.06.2006) 
17 See European Commission (2008c), chapter 2 et sq. 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
                                                 
agreement  on  budgetary  matters  in  the  EU  result  partly  from  the  way  the  EU  budget  is 
financed. 

The financing system is both opaque and very complex. As a result, it is almost impossible for 
EU  citizens  to  ascertain  who  effectively  bears  the  cost  of  financing  the  EU.  Issues  arise,  in 
particular regarding the VAT-based own resource (see Part 2.1). Furthermore, the EU budget 
is often presented as "an insatiable and very costly Leviathan, sucking national resources to 
finance  useless,  or  even  harmful  policies  that  benefit  a  few  well-organized  lobbies  of 
producers  –  but  when  it  comes  to  how  much  it  actually  levies  on  individual  taxpayers,  the 
amount quoted are usually grossly exaggerated"18.  

Lastly, except for traditional own resources the current financing sources of the Union do not 
contribute  to  -  or  support  EU  policies.  Some  alternative  own  resources  could  contribute  to 
achieving key EU policy objectives. As indicated in the EU Budget Review, the "introduction 
of  new  own  resources  would  mirror  the  progressive  shift  of  the  budget  structure  towards 
policies closer to EU citizens and aiming at delivering European public goods and a higher 
EU added value. It could support – and be closely linked to – the achievement of important 
EU or international policy objectives, for instance in relation to development, climate change 
or the financial markets."  

3.4. 

Efficiency criteria 

On the one hand, the operating costs of the current system are very limited. Customs and the 
other  duties  included  in  traditional  own  resources  (TOR),  and  VAT  would  be  charged  and 
collected by Member States regardless of whether or not there was an own resources system. 
Similarly Member States would need to calculate their GNI even if there was no GNI-based 
own resource. For TOR, the costs of maintaining the Customs Union, one of the foundations 
on which  the EU is  based, are not relevant.  Only the  passing-on by Member  States of TOR 
revenue  collected  (less  a  portion  retained  "by  way  of  collection  costs")  are  requirements 
directly related to own resources. For the VAT- and GNI-based own resources, the only direct 
costs  are  those  purely  administrative  costs  related  to  the  calculation  of  the  resource  and  the 
payment of the corresponding revenue to the Commission. All the costs related to the national 
collection of VAT and to recording GNI are not costs of the own resources system as such and 
should therefore not be taken into account as administrative costs related to the own resources 
system.   

Overall, the costs which devolve upon the Commission and Member States resulting from the 
need  to  manage  the  own  resources  system  have  not  been  quantified.  However  a  qualitative 
analysis  suggests  they  are  likely  to  be  marginal,  particularly  as  the  extra  requirements 
(resulting directly from the fact that the revenue concerned is an own resource) are few and 
are usually very limited in scope.  

On  the  other  hand,  contrary  to  market-based  instruments,  the  VAT-  and  GNI-based 
contributions  do  not  provide  incentives  to  economic  agents  and,  though  the  resource 
administration  costs  are  marginal,  there  is  no  dividend  from  the  European  dimension.  As 
discussed in Part 2 of this report, the use of alternative financing sources at EU level could 

18 See Begg, I., Enderlein, H., Le Cacheux, J. and M. Mrak (2008), "Financing of the European Union Budget", 
Study  for  the  European  Commission,  Directorate  general  for  Budget  (contract  N°30-CE-0122101/00-72,  29 
April 2008. 

EN 

   EN 

 
 
 
 
 
 
 
 
                                                 
lead to efficiency gains in the form of reduced administrative costs or by taking into account 
cross-border externalities.  

3.5. 

Equity criteria 

Many Member States still perceive their contributions to- or benefits from the EU budget as 
being  unfair19.  Among  the  numerous  inconsistencies  and  problems  related  to  the  correction 
mechanisms, it is useful to bear the following issues in mind: 

  The  unique  situation  which  led  to  setting  up  the  UK  rebate  no  longer  prevails.  The 
combination  of  low  relative  prosperity  and  an  excessive  budgetary  burden  which 
characterized  the  UK's  relative  position  compared  to  other  Member  States  in  the  1980's 
has gradually faded away.   

  The  corrections  on  the  revenue  side  partially  undo  the  impact  of  certain  expenditure 
policies. It appears at best inconsistent that Member States benefiting from redistributive 
packages to poorer regions through the cohesion policy see their benefit reduced through 
increased contributions to the budget to finance the corrections on the revenue side. Some 
of the corrections on the expenditure side would in turn increase the UK correction (and 
impact on rebates on its financing for some Member States). Finally, some Member States 
receive corrections on both sides of the budget. 

  The  capping  of  the  VAT-base  (at  50%  of  GNI)  is  supposed  to  remedy  the  regressive 
aspects  of  the  VAT-based  own  resource,  which  is  seen  as  disproportionately  penalising 
the  less  affluent  Member  States.  However,  in  practice,  the  size  of  the  VAT  base  is  not 
proportional  to  Member  States'  GNI.  Some  of  the  richest  Member  States,  such  as 
Luxembourg  and  to  a  lesser  extent  Ireland,  are  subject  to  capping  and  thus  see  their 
contributions reduced. Furthermore, some doubts are raised as to the regressive character 
of the VAT at national level (see Annex to this report). 

  The justification for allocating 25% as "collection costs" for traditional own resources is 
weak.  While  the  10%  retained  until  2000  could  reasonably  be  considered  to  be 
compensation  for  expenses  incurred  by  Member  States  (customs  and  audit  services,…), 
this is not the case for 25%, which was agreed to allow certain Member States to decrease 
their payments to the EU budget. For those Member States which collect a large share of 
customs duties at important EU entry points, an increase of the collection costs represents 
a net decrease in their financial contribution to the EU budget since the increase in their 
GNI contribution is smaller than the increase in the collection costs retained. This notably 
benefits Belgium (entry point of Antwerp), the Netherlands (Rotterdam harbour) and to a 
lesser extent Denmark (Copenhagen harbour). 

Overall, the focus on juste retour issues is probably an important factor explaining why the 
financial  solidarity  (total  net  transfers  as  a  percentage  of  GNI)  operated  through  the  EU 
budget has decreased over time20.  

19 The contribution of the Polish government to the budget review (9.4.2008, pp. 8-9) states, for instance, that 
"an increase of contributions to the EU budget based on GNI reinforces the pressure on increasing the total size 
of rebates granted to most affluent member states... the applied correction mechanisms of the Community own 
resources  system  is  of  degressive  character,  imposing  greater  burdens  on  less  affluent  member  states  and 
citizens. Degressive character of own resources system results from [the] existence of rebates." 

EN 

   EN 

 
 
 
 
 
 
 
 
 
                                                 
Besides, it should be borne in mind that, even if GNI probably correlates better with economic 
prosperity  than  any  specific  tax,  it  is  a  somewhat  crude  and  imperfect  tool21.  Apart  from 
methodological issues, there are also practical measurement problems, illustrated for instance 
by the considerable revaluation (around 10 %) of the Greek GNI series in mid-2007. Overall, 
as  with  most  statistical  indicators,  the  harmonization  of  "macro-economic  statistics…  could 
still be improved"22. It should also be noted that agreed improvements in GNI measurement 
are  not  easily  applied  to  the  calculation  of  own  resources  as  is  shown  from  the  lengthy 
discussions on FISIM23. 

4. 

Views of the stakeholders – public consultation 

Many  stakeholders  expressed  their  views  on  the  current  as  part  of  the  Budget  Review 
consultation which took place in 2007-2008.  

The following sections present an abstract of the summary of  the contributions received for 
consultation24. The Commission received close to 300 contributions reflecting a broad range 
of  opinions  and  perspectives.  It  is  not  a  comprehensive  account  of  all  the  interesting  ideas 
expressed in the consultation but it does convey a broad sense of the most recurrent themes 
and issues raised at the time. 

It  is  important  to  keep  in  mind  that  the  following  represents  a  snapshot  of  views  expressed 
before  the  financial  and  economic  crisis  fully  hit  the  European  economy.  In  view  of 
considerable economic and budgetary adjustments required since then, public finances in the 
EU  have  evolved  significantly  and  the  views  of  stakeholders  have  also  changed  in  many 
countries. 

4.1.   Reform of the own resources system 

"The guiding principles most frequently mentioned for the own resources system are fairness, 
effectiveness,  simplicity,  transparency,  equity,  sufficiency  of  means,  sustainability  and 
stability.  

Two  main  options  for  systems  to  finance  the  EU  command  considerable  support:  moving 
towards  a  system  exclusively  based  on  Traditional  Own  Resources  (TOR)  and  the  resource 
based on Gross National Income (GNI); or moving away from a contributions-based system 
towards a system based on a new own resource. Although many Member States highlight the 
merits of GNI-based contributions, an increasing number of them also express their readiness 

20 See Richter, S. (2008), "Facing the monster 'juste retour': on the net financial position of Member States vis-à-
vis the EU budget and a proposal for reform", wiiw Research Reports, 348, May 2008.  
21 Measurement problems can notably arise in the following areas: the underground economy; capital gains and 
losses;  household  services;  volunteer  work;  non-renewable  natural 
imputed  elements; 
commuters/cross-border  work.  See  Aubut,  J.  and  F.  Vaillancourt  (2001),  Using  GDP  in  Equalisation 
Calculations: Are there Meaningful Measurement Issues?, October 2001. 
22 Contribution of the European Court of Auditors to the budget review consultation, §26, 9 April 2008. 
23  See  Council  Regulation  No 448/98,  which  completed  and  amended  the  European  System  of  Accounts 
(ESA 95, as laid out in Commission Regulation No 2223/96 subsequently modified) and which was included in 
the own resources system only as of 2010 (Council Decision No 2010/196 of 16.3.2010). 
24  See  SEC(2008)2739  of  3.11.2008.  The  contributions  can  be  found  on  the  following  webpage: 
http://ec.europa.eu/budget/reform/issues/read_en.htm 

resources; 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
                                                                                                                                                         
 
to discuss other options based on an alternative financing source. There are very few negative 
opinions  on  Traditional  Own  Resources,  which  is  a  well  known  and  accepted  part  of  the 
financing  system.  Some  draw  attention  to  the  fact  that  the  collection  fees  retained  by  the 
Member States do not correspond to effective  costs incurred and  call for their reduction or 
elimination." 

"A large number of respondents indicate that eliminating the resource based on a statistical 
value added tax (VAT) could contribute to a more transparent and simple financing system, 
without  greatly  affecting  its  current  functioning.  A  clear  majority  of  Member  State 
governments would be in favour of such a reform. Many other respondents share this view. 
Active support for maintaining the VAT-based resource is very limited. Some suggest to end it 
in the context of a broad reform encompassing the development of new own resources. Many 
respondents  express  their  satisfaction  with  the  GNI-based  resource:  it  is  seen  as  fair, 
transparent  and  relatively  simple.  As  a  residual  resource,  it  contributes  to  a  smooth 
budgetary process with balanced budgets. In many cases, the respondents wish that the GNI-
based contribution be expanded further – mostly at the expense of the VAT-based resource." 

"Many  respondents  support  the  idea  of  financing  a  larger  part  of  the  EU  budget  with  new 
own  resources.  While  recognizing  that  this  would  raise  a  number  of  technical  and  political 
issues, many (among them also a significant number of Member States' governments) indicate 
that they are open for discussion. The development of new own resources is the most favoured 
approach regarding the reform of the financing system for all categories of respondents with 
the exception of the Member States' governments, albeit with different views over what kind of 
new resource might be desirable. On the other hand, a number of respondents, in particular 
among the Member States, explicitly reject the idea of creating an EU tax to finance the EU 
budget. However, with very few exceptions, they do not put into question the existing acquis, 
notably  the  fact  that  customs  duties  are  an  important  source  of  EU  financing.  When 
alternative  non-tax  based  own  resources  are  mentioned,  very  few  stakeholders  explicitly 
reject them." 

"Various potential alternative own resources are mentioned, often in relation to the acquis or 
to  specific  EU  policies.  Resources  related  to  the  environment  and  in  particular  climate 
change are among the most prominent candidates. More specifically, contributors refer to the 
allocation  of  all  or  part  of  the  revenue  from  emission  trading;  CO2  or  carbon  taxation; 
energy,  petrol,  fuel  or  kerosene  taxation;  flight  duties,  maritime  transport  taxation  and 
vehicles  taxation.  Resources  based  on  VAT  or  financial  transaction  taxation  are  both 
mentioned  by  several  contributors.  In  a  number  of  cases,  respondents  suggest  that  a 
progressive approach would be needed to develop a new financing source of the budget." 

4.2.   Corrections 

"There  is  very  heavy  opposition  among  all  categories  of  contributors  against  any  kind  of 
corrections, exceptions or compensations. The clear majority view is that abolishing existing 
exceptions  and  correction  mechanisms  is  an  indispensable  step  in  making  the  EU  budget 
more  equitable  and  transparent.  Only  a  small  minority  of  Member  States  are  in  favour  of 
maintaining  corrections  or  introducing  new  ones.  However,  some  respondents  point  to  the 
political difficulty of removing all correction mechanisms and suggest that all Member States 
should  at  least  be  treated  equally  in  this  respect.  According  to  a  small  number  of 
contributors,  mainly  from  one  Member  State,  a  way  to  do  so  would  be  a  generalised 
correction mechanism or a more limited variant based on some elements of the budget." 

EN 

   EN 

 
 
 
 
 
 
 
"Several respondents express their scepticism with regard to the possibility of eliminating all 
correction  mechanisms  while  further  developing  the  GNI-based  resource.  They  base  their 
views  on  the  observation  that  there  used  to  be  a  strong  parallelism  in  the  past  between  the 
development  of  national  contributions  and  the  increase  in  the  number  and  amount  of 
corrections." 

4.3. 

Future financing model 

"Overall, several models seem to be considered. The most popular one among Member States 
is  a  model  based  on  GNI  with  the  elimination  of  all  corrections  and  the  elimination  of  the 
VAT-based  contribution.  A  minority  model  among  Member  States  would  be  to  develop 
alternative financing sources while also eliminating all the corrections. Some Member States 
suggest that this could come as a second step after extending the GNI-based resource or in a 
longer term perspective. The two models are found in close proportions in the responses of 
other  public  bodies,  while  the  latter  is  clearly  favoured  by  NGOs,  academics  and  other 
respondents.  Respondents  from  academia  or  other  types  of  respondents  often  favour  the 
development of alternative own resource." 

The public consultation on the Budget Review was followed by a large conference bringing 
together  stakeholders,  academics  and  prominent  political  representatives.  One  session 
examined  how  to  reform  the  existing  EU  financing  system25.  The  debates  centred  on  the 
assessment  of  existing  resources,  the  merits  and  possible  problems  related  to  alternative 
resources and the issue of corrections. The possible contribution of alternative resources was 
discussed  with  regard  to,  notably,  broader  tax  policy  objectives,  the  link  to  existing  EU 
policies  and  the  EU  acquis,  the  reform  of  EU  spending  and  the  debate  on  juste  retour. 
Particular attention  was paid  to  resources related  to climate/energy, corporate  income, VAT 
and other indirect taxes. Correction mechanisms were widely criticized. 

capital 

e.g.  VAT, 

The  debate  with  participants  focused  mainly  on  the  type  of  new  genuine  own  resource  to 
introduce, 
needed, 
regressivity/progressivity  issues  and  citizens  support.  The  necessity  to  reinforce  the 
independence  of  the  EU  budget  vs.  national  budgets  (with  a  crucial  role  of  the  EP  in  this 
respect)  and  the  urgency  of  reform  (20  years  after  the  introduction  of  the  "temporary"  GNI 
resource,  it  is  time  to  stop  endless  debate  on  the  quest  for  a  "perfect"  new  genuine  own 
resource) were underlined. 

neutrality 

income 

fiscal 

tax; 

the 

5. 

Arguments for a reform – policy context 

Overall, the above analysis highlights the following driving elements and justifications for a 
reform of the EU financing system. 

25 See http://ec.europa.eu/budget/reform/conference/programme_en.htm 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
                                                 
5.1. 

The EU financing system is outdated 

The EU financing system has evolved considerably since 1957 from national contributions to 
a  financing  mainly  based  on  statistical  aggregates,  which  display  no  link  to  EU  policy 
priorities (see section 1).  

In parallel, a collection of correction  mechanisms  have  been introduced  based  on  principles 
set out at the Fontainebleau European Summit in June 1984 (see section 2). 

As a result of these evolutions, the current financing system performs poorly with regard to 
most assessment criteria. The financing system is opaque and complex. This limits democratic 
oversight  of  the  system.  Many  Member  States  perceive  the  system  to  be  unfair.  More 
importantly perhaps, the way the EU budget is financed creates a tension which poisons every 
debate  about  the  EU  budget.  It  also  leads  some  people  to  question  the  benefits  of  EU 
membership itself (see section 3).  

For many years, EU financing has primarily been treated as an accounting mechanism with 
two main objectives: ensuring sufficient financing of EU expenditures and incorporating the 
increasing number of correcting mechanisms. This approach has now reached its limits.  

5.2. 

The Lisbon Treaty creates a new legal framework 

The Treaty on the Functioning of the European Union (TFEU) introduces important changes, 
not only for EU budgetary procedure, but also the way the EU budget is financed (section 1): 

  Article 311(3) TFEU now provides that the Council "may establish new categories of own 
resources or abolish an existing category" in the context of an own resources Decision. 
This  opens  the  door  to  reducing  the  number  of  existing  resources  and  to  creating  new 
ones. 

  Article 311(4) TFEU newly provides that the "Council, acting by means of regulations in 
accordance  with  a  special  legislative  procedure,  shall  lay  down  implementing  measures 
for  the  Union's  own  resources  system  in  so  far  as  this  is  provided  for  in  the  [own 
resources]  decision".  This  provision  introduces  the  possibility  of  defining  specific 
implementing  measures  related  to  the  own  resources  system  in  an  implementing 
regulation within the limits set out by the own resources Decision. 

This  new  framework  creates  an  opportunity  to  make  the  own  resources  system  sufficiently 
flexible within the framework and limits set out by the own resource Decision.  

5.3. 

The EU financing system needs to be adapted to a new environment 

Except for the traditional own resources, the EU resources currently display almost no link to 
- nor do they support - EU policy objectives (see section 3). This led numerous contributors to 
the public consultation to promote new own resources based on the acquis and, in particular, 
emerging EU policy priorities (see section 4). 

At the same time, important elements of the current financing system need to be preserved, 
such  as  the  traditional  own  resources  and  a  residual  GNI-based  own  resource  permitting 
budgetary  stability  and  a  balanced  budget.  But  the  latter  can  be  achieved  with  a  smaller, 

EN 

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residual  GNI-based  own  resource  and  with  a  fundamentally  different  mix  of  resources  (see 
section 3). 

Besides, the recent financial crisis creates a new context which needs to be taken into account 
when designing the future architecture of the EU budget. EU financing system could play a 
substantial  role  in  the  Union-wide  budgetary  consolidation  efforts.  Five  heads  of  States  or 
governments  stressed  that  "the  next  multiannual  financial  framework  will  come  as  Member 
States make extraordinary efforts to clean up public finances"26.  

Developing the own resources system could contribute to the wider budgetary consolidation 
efforts  undertaken  by  Member  States.  The  progressive  introduction  of  new  resources  could 
open the door for other resources to be reduced, phased-out or dropped. As a result Member 
States  contributions  to  the  EU  budget  would  diminish  and  Member  States  would  have  an 
additional degree of freedom in managing scarce national resources. As indicated in the EU 
Budget  Review,  introducing  new  own  resources  "is  not  an  argument  about  the  size  of  the 
budget – it is a debate about the right mix of resources". 

26  Letter  from  David  Cameron,  Angela  Merkel,  Nicolas  Sarkozy,  Mark  Rutte  and  Mari  Kiviniemi  to  the 
President of the European Commission on 18 December 2010. 

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ANNEX 1 
Summary of financing of the general budget by class of own resource and by Member State – Budget 2011* (in EUR) 

Traditional own resources (TOR)

VAT- and GNI-based own resources

Net sugar sector 
levies (75 %)

Net customs duties (75 
%)

Total net traditional own 
resources (75 %)

p.m.   Collection costs (25% 
of gross TOR)

VAT-based own 
resources 

GNI-based own 
resources 

Reduction in favour 
of Netherlands and 
Sweden

United Kingdom 
correction

Total 'national contributions'

Share in total 
'national 
contributions' (%)

Total own resources

(1)

(2)

(3)=(1)+(2)

(4)

(5)

(6)

(7)

(8)

(9)=(5)+(6)+(7)+(8)

(10)

(11)=(3)+(9)

 6.600.000  
 400.000  
 3.400.000  
 3.400.000  
 26.300.000  
 0  
 0  
 1.400.000  
 4.700.000  
 30.900.000  
 4.700.000  
 0  
 0  
 800.000  
 0  
 2.000.000  
 0  
 7.300.000  
 3.200.000  
 12.800.000  
 200.000  
 1.000.000  
 0  
 1.400.000  
 800.000  
 2.600.000  
 9.500.000  

 1.617.000.000  
 48.700.000  
 205.000.000  
 321.500.000  
 3.570.000.000  
 21.200.000  
 188.800.000  
 206.800.000  
 1.268.000.000  
 1.555.200.000  
 2.030.700.000  
 28.100.000  
 19.600.000  
 41.500.000  
 14.700.000  
 104.600.000  
 11.300.000  
 1.908.300.000  
 172.000.000  
 357.100.000  
 138.200.000  
 110.600.000  
 71.400.000  
 113.500.000  
 152.000.000  
 489.500.000  
 2.978.300.000  

 1.623.600.000  
 49.100.000  
 208.400.000  
 324.900.000  
 3.596.300.000  
 21.200.000  
 188.800.000  
 208.200.000  
 1.272.700.000  
 1.586.100.000  
 2.035.400.000  
 28.100.000  
 19.600.000  
 42.300.000  
 14.700.000  
 106.600.000  
 11.300.000  
 1.915.600.000  
 175.200.000  
 369.900.000  
 138.400.000  
 111.600.000  
 71.400.000  
 114.900.000  
 152.800.000  
 492.100.000  
 2.987.800.000  

 541.200.000  
 16.366.667  
 69.466.667  
 108.300.000  
 1.198.766.662  
 7.066.667  
 62.933.333  
 69.400.000  
 424.233.334  
 528.700.000  
 678.466.667  
 9.366.667  
 6.533.333  
 14.100.000  
 4.900.000  
 35.533.334  
 3.766.667  
 638.533.333  
 58.400.000  
 123.300.000  
 46.133.334  
 37.200.000  
 23.800.000  
 38.300.000  
 50.933.334  
 164.033.334  
 995.933.334  

 488.276.100  
 50.703.900  
 195.863.100  
 289.130.700  
 1.653.923.250  
 21.597.900  
 190.045.350  
 305.838.000  
 1.577.470.500  
 2.797.328.100  
 1.727.718.300  
 26.898.000  
 18.468.900  
 35.444.400  
 47.477.700  
 126.576.000  
 9.148.950  
 276.721.000  
 296.038.350  
 543.004.800  
 246.720.750  
 138.123.000  
 54.279.000  
 64.378.800  
 251.985.600  
 167.499.100  
 2.525.317.500  

 2.582.463.970  
 258.346.033  
 971.819.342  
 1.716.241.222  
 18.237.237.068  
 102.458.098  
 884.622.223  
 1.519.248.418  
 7.361.097.188  
 14.195.949.972  
 10.999.666.044  
 125.204.687  
 130.290.516  
 202.702.841  
 220.998.980  
 683.175.478  
 42.586.490  
 4.274.354.793  
 2.043.771.712  
 2.576.425.769  
 1.148.434.615  
 871.444.032  
 252.657.640  
 479.759.755  
 1.347.384.528  
 2.746.004.388  
 12.599.048.395  

 24.197.489  
 2.420.682  
 9.105.873  
 16.081.048  
 170.881.511  
 960.025  
 8.288.842  
 14.235.241  
 68.972.916  
 133.014.961  
 103.066.026  
 1.173.158  
 1.220.812  
 1.899.310  
 2.070.743  
 6.401.302  
 399.032  
- 624.989.585  
 19.149.984  
 24.140.912  
 10.760.744  
 8.165.364  
 2.367.383  
 4.495.312  
 12.624.890  
- 139.156.091  
 118.052.116  

 177.464.316  
 18.352.242  
 73.482.459  
 112.069.456  
 218.288.783  
 5.994.912  
 52.733.338  
 93.051.846  
 487.693.002  
 965.915.065  
 717.904.941  
 8.528.579  
 8.980.382  
 13.953.783  
 14.989.737  
 47.407.944  
 2.933.041  
 50.712.043  
 23.976.663  
 191.435.563  
 81.599.600  
 67.205.154  
 17.929.084  
 36.948.401  
 87.119.114  
 33.248.018  
- 3.609.917.466  

 3.272.401.875  
 329.822.857  
 1.250.270.774  
 2.133.522.426  
 20.280.330.612  
 131.010.935  
 1.135.689.753  
 1.932.373.505  
 9.495.233.606  
 18.092.208.098  
 13.548.355.311  
 161.804.424  
 158.960.610  
 254.000.334  
 285.537.160  
 863.560.724  
 55.067.513  
 3.976.798.251  
 2.382.936.709  
 3.335.007.044  
 1.487.515.709  
 1.084.937.550  
 327.233.107  
 585.582.268  
 1.699.114.132  
 2.807.595.415  
 11.632.500.545  

3,19%
0,32%
1,22%
2,08%
19,75%
0,13%
1,11%
1,88%
9,25%
17,62%
13,19%
0,16%
0,15%
0,25%
0,28%
0,84%
0,05%
3,87%
2,32%
3,25%
1,45%
1,06%
0,32%
0,57%
1,65%
2,73%
11,33%

 4.896.001.875  
 378.922.857  
 1.458.670.774  
 2.458.422.426  
 23.876.630.612  
 152.210.935  
 1.324.489.753  
 2.140.573.505  
 10.767.933.606  
 19.678.308.098  
 15.583.755.311  
 189.904.424  
 178.560.610  
 296.300.334  
 300.237.160  
 970.160.724  
 66.367.513  
 5.892.398.251  
 2.558.136.709  
 3.704.907.044  
 1.625.915.709  
 1.196.537.550  
 398.633.107  
 700.482.268  
 1.851.914.132  
 3.299.695.415  
 14.620.300.545  

 123.400.000  

 17.743.600.000  

 17.867.000.000  

 5.955.666.667  

 14.125.977.050  

 88.573.394.197  

 0  

0

 102.699.371.247  

100,00%

 120.566.371.247  

* Amending Budget 4/2011 (in EUR) 

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ANNEX 2 
Exceptions introduced by the European Council in December 2005 on the expenditure 
and income side of the budget27 

Earmarked for Projects 

  €865  million  for  the  nuclear  power  plant  Ignalina  (Lithuania)  and  €375  million  for  the 

nuclear power plant Bohunice (Slovakia) 

  €200 million for the peace process in Northern Ireland (United Kingdom) 

Earmarked for Regions 

  €879 million for five Polish Objective 2 regions (€107 per citizen) 
  €140 million for a Hungarian region (Közép-Magyarország) 
  €200 million for Prague 
  "phasing-out" support for a Finnish Region and Madeira, which were originally "phasing-

in" regions 

  €100 million for the Canary Islands 
  €150 million for Austrian border regions 
  €75 million for Bavaria 
  €50 million for Ceuta and Melilla (Spain) 
  €225 million for eastern German Länder 
  €136 million for the most remote regions (€35 per citizen) 
  €150 million for the Swedish regions in Objective "Competitiveness and Employment" 

Special Funds for Member States 

  Absorption rate for Poland raised by 4% 
  "phasing-in" support for Cyprus, despite never being Objective 1 region 
  €2,000 million for Spain, to be distributed freely among Structural Fund Objectives 
  €1,400 million for Italy (predefined distribution) 
  €100 million for France (Objective: "Regional Competitiveness and Employment") 
  €47 million for Estonia (€35 per citizen) 
  €81 million for Lithuania (€35 per citizen) 
  Additional payments from rural development: 

€1,350 million for Austria 
€460 million for Finland 
€500 million for Ireland 
€500 million for Italy 
€20 million for Luxembourg 
€100 million for France 
€820 million for Sweden 
€320 million for Portugal 

27 Source: list mainly based on "Europe for growth: for a radical change in financing the EU", report prepared 
by J. Haug, A. Lamassoure and G. Verhofstadt with the collaboration of D. Gros and P. De Grauwe, G. Ricrad-
Nihoul and E. Rubio coordinated by C. Perrin, Notre Europe, April 2011. 

EN 

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Special Conditions 

  50%  increased  support  for  the  former  exterior  borders  to  Romania  and  Bulgaria, 

compared to regular support for border regions 

  private  co-financing  can  be  counted  in  for  Structural  Fund  supported  projects  in  new 

 

Member States (per capita GDP <85% of EU average) and eastern German Länder 
in  the  new  Member  States  (<85%),  VAT  can  be  considered  eligible  cost  for  Structural 
Fund projects 

Special Conditions in Legal Bases 

  departing from "n+2" rule for new Member States (<85%) in 2007-2010 
  building  projects  are  eligible  for  support  in  the  new  Member  States  (EU10  +  Romania, 

Bulgaria) 

  20%  of  funds  from  the  first  pillar  (Agriculture)  can  be  used  by  each  country  for  rural 

development, disregarding general rules such as cofinancing 

  special funds for rural development in Portugal (€320 million), without cofinancing 

Special Conditions for Financing the Budget 

  rate-of-call for VAT own resource contribution is reduced by 25% for Austria (from 0.3% 

to 0.225%) 

  rate-of-call  for  VAT  own  resource  contribution  is  reduced  by  50%  for  Germany  (from 

0.3% to 0.15%) 

  rate-of-call  for  VAT  own  resource  contribution  is  reduced  by  66%  for  Sweden  and  the 

 

Netherlands (from 0.3% to 0.1%) 
the Netherlands get €4,230 million (GNI own-resource). This amount is in 2004 constant 
prices and equals to more in current prices. 

  Sweden gets €1,050 million (GNI own resources). This amount is in 2004 constant prices 

 

and equals to more in current prices. 
the rebate for the UK is kept, reduced by certain phased-in payments for the new Member 
States. 

  Member  States  retain,  "by  way  of  collection  costs",  25%  of  the  amounts  collected  for 

traditional own resources. 

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PART 2:  

REFORMING THE OWN RESOURCES SYSTEM 

Part 1 examined the functioning of the current financing system and explained why it should 
be  reformed.  This  Part  examines  first  the  simplification  of  Member  States'  contributions 
through the elimination of the current VAT-based resource in parallel with the introduction of 
new own resources. Next, it presents a summary assessment of potential new own resources, 
which could fully replace the existing VAT-based own resource and reduce the scale of the 
GNI-based  resource.  The  simplification  of  all  correction  mechanisms  is  examined  in  Part  3 
below. 

In the Budget Review, the Commission indicated that the "introduction of a new phase in the 
evolution of EU financing could include three closely linked dimensions – the simplification 
of  Member  States'  contributions,  the  introduction  of  one  or  several  new  own  resources  and 
the  progressive  phasing-out  of  all  correction  mechanisms.  As  changes  were  phased  in, 
essential  elements  of  the  EU  financing  system  should  be  retained:  a  stable  and  sufficient 
financing  of  the  EU  budget,  respect  for  budgetary  discipline  and  a  mechanism  to  ensure  a 
balanced budget". 

The following analysis of actual and potential own resources is underpinned by a number of 
criteria set out in the Budget Review and further explained in the Annex:  

1.  "They should be more closely linked to the acquis and the objectives of the EU to increase 
the  coherence  and  effectiveness  of  the  entire  budget  in  the  achievement  of  EU  policy 
priorities. In this respect it is important to keep in mind Article 2.2 of the Own Resources 
Decision28  which  states  that  "revenue  deriving  from  any  new  charges  introduced  within 
the  framework  of  a  common  policy  shall  also  constitute  own  resources  entered  in  the 
general budget of the European Union." 

2.  They  should  be  cross-border  in  nature,  based  on  a  system  covering  the  whole  internal 

market. 

3.  They  should  have  a  harmonised  base  to  ensure  an  equal  application  of  the  resource 

throughout the Union.  

4.  If feasible, the proceeds of a new resource should be collected directly by the EU outside 

national budgets. 

5.  They should be applied in an equitable and fair way, and not exacerbate the question of 

corrections.  

6.  The cumulative impact on particular sectors should be taken into account. 

7.  They should seek to avoid a heavy new administrative responsibility for the EU in terms of 

collection." 

28 

Council decision 2007/436/EC, Euratom (7 June 2007). 

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1. 

Simplifying Member States' contributions 

1.1.  Context 

The  VAT-based  own  resource  was  established  in  1970  when  it  was  decided  to  replace 
Member  State  contributions  by  "own  resources".  But  instead  of  creating  a  genuine  own 
resource  based  on  actual  VAT  revenues,  the  VAT  resource  is  levied  on  a  theoretical 
harmonised  base  in  order  to  compensate  for  national  derogations  from  the  Union's  VAT 
legislation,  and  varying  tax  rates.  It  requires  complex  calculations  so  that  first  VAT 
contributions only occurred from 1979 onwards after almost a decade of initial harmonisation 
process. Moreover, because of the perceived tendency of the VAT base to be relatively higher 
in  less  prosperous  Member  States,  rules  for  limiting  the  base  as  a  percentage  of  GNI 
("capping") have been applied since 1988. The VAT based contribution for capped Member 
States is in practice based on their GNI. 

The  European  Parliament  (in  the  "Lamassoure  resolution"29)  remarked  that  the  VAT-based 
resource  changed  from  the  intended  genuine  own  resource  with  a  strong  direct  link  to 
European  citizens  to  a  purely  statistical  device  for  calculating  a  Member  State  contribution 
and therefore proposed its elimination as a first step towards introducing a new own resource.  

At  Member  State  level,  Finland  presented  a  proposal  for  a  new  own  resources  decision  in 
2004 in which it proposed to eliminate the VAT-based resource. During the preparation of a 
study  on  the  own  resources  system,  commissioned  by  DG  Budget  in  2008,  a  questionnaire 
was  sent  to  Member  States'  budgetary  officials  asking  them  to  assess  the  current  system  of 
own resources. Views about the VAT-based resource were generally negative. More than 2/3 
of respondents considered this resource as either negative or very negative due to its complex 
administration and/or the VAT resource having become obsolete after the introduction of the 
GNI-based resource30. 

Within  the  framework  of  the  consultation  process  on  the  budget  review  in  2008,  a  large 
number of respondents indicated that eliminating the VAT-based resource could contribute to 
a  more  transparent  and  simpler  financing  system,  without  affecting  its  current  functioning 
much.  This  view  was  taken  by  15  Member  States.  Additionally,  5  Member  States  seemed 
implicitly  in  favour  of  replacing  the  VAT-based  by  the  GNI-based  own  resource.  Only  two 
Member  States  gave  cautious  support  to  maintaining  the  VAT-based  resource  or  suggested 
eliminating it in the context of a broader reform encompassing the development of new own 
resources. 

The Court of Auditors has criticised the VAT resource remarking that: "…the VAT resource is 
levied  on  a  "virtual"  basis  (harmonised  VAT  base  which  may  be  subsequently  capped  and 
takes  into  account  compensation  arrangements  for  UK)  which  is  complex  to  the  point  of 
incomprehensibility;  the  Court  recommends  that  consideration  should  be  given  to  the 

29 EP resolution of 29/03/2007 on the future of the European Union's own resources, P6_TA(2007)0098, § D and 
22. 
30  Study  on  financing  the  European Union budget, I.  Begg, H.  Enderlein, J.  Le  Chacheux,  M.  Mrak,  29  April 
2008, p. 61. 

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question whether the VAT resource still constitutes an appropriate part of the own resources 
system."31 

A  number  of  organisations  and  academics  supported/suggested  the  elimination  of  the  VAT 
resource and replacing it by the GNI own resource or by new genuine own resources32. 

1.2. 

Assessment of the VAT-based own resource 

The  following  assessment  of  the  VAT-based  own  resource  can  be  made  based  on  the 
assessment criteria set out in the Budget Review:  

  Being a statistical construction, the VAT-based own resource has only a superficial link to 
the  acquis  and  the  objectives  of  the  Union,  notably  in  the  VAT  area.  Even  though  it  is 
related to a wide-based tax it is not visible at all to the EU citizens. 

  While  it  relates  to  a  VAT  system  defined  at  EU  level  which  covers  the  whole  internal 
market, the current statistical VAT-based own resource does not have an obvious cross-
border dimension. 

  Due  to  the  complexity  of  the  VAT-based  own  resource,  there  are  doubts  about 
accountability  of  the  current  scheme.  According  to  the  Court  of  Auditors,  the  current 
financing system is simply "not fully auditable"33. 

  The  VAT-based  own  resource  is  not  autonomous.  It  is  transferred  from  Member  States 

own revenues and, de facto, appears as a national contribution to the EU budget. 

  This resource was originally perceived as inequitable and regressive.  This explains in part 
the capping system which now benefits six Member States (see Part 1) and the progressive 
diminution  of  the  uniform  rate  of  call  used  for  this  resource.  This  traditional  view  is 
challenged however by a factual analysis based on recent VAT data (see Annex). 

  Last,  although  it  creates  only  limited  additional  administrative  burdens,  there  would  be 
some  administrative  savings  were  the  VAT-based  own  resource  to  be  eliminated  or 
replaced by a simpler system. However, savings would only be obtained if there was no 
longer any need to calculate the uncapped VAT-base for the UK correction. 

The Commission indicated in the context of the Budget Review that "compared to the GNI-
based own resource, the current VAT-based own resource has little added value. To re-create 
a comparable tax base, it results from a mathematical calculation rather than passing directly 
from  the  citizen  to  the  EU.  As  such  it  contributes  to  the  complexity  and  the  opacity  of  the 
contributions. Ending the VAT-based resource in its current form would simplify the system of 
contributions  in  parallel  with  the  introduction  of  a  new  own  resource".  This  merely 
confirmed  a  position  already  taken  in  its  2004  report  on  EU  financing,  which  suggested 
replacing the statistical VAT-based own resource by a genuinely tax-based own resource34. 

31  Response  by  the  European  Court  of  Auditors  to  the  Commission's  communication  "Reforming  the  budget, 
Changing Europe", 9/4/2008. All the contributions made for the budget review consultation can be found on the 
Commission website at http://ec.europa.eu/budget/reform/issues/read_en.htm 
32 For instance, see F. Heinemann, P. Mohl and S. Osterloh, Reform Options for the EU, 2007. 
33 It should, however, be underlined that revenue is one section of the budget which has been granted unqualified 
discharge for many years. 
34 "Commission's Report on the operation of the own resources system", COM(2004)505, 14 July 2004. 

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1.3.  Impact of ending the VAT-based own resource 

As  part  of  an  overall  agreement  encompassing  the  introduction  of  one  or  several  new 
own resources, the VAT-based resource could be eliminated from 1 January 2014.  

The  elimination  of  the  current  statistical  VAT resource  would  have  no  direct  impact  on  the 
existing VAT legislation (VAT Directive).  

The main consequences resulting from such a reform would be as follows: 

  A simplification of the contributions to the EU budget through the elimination of the most 

controversial and complex own resource. 

 

 The UK correction, which is based on the UK share of the overall uncapped VAT base, 
could  no  longer  be  calculated  on  this  basis.  An  overall  reform  of  the  correction 
mechanisms (Part 3) would introduce a further simplification.  

  Sufficiency  and  stability  of  revenue  would  be  guaranteed  as  long  as  there  is  a  residual 

resource such as the GNI-based resource. 

  There  would  be  some  administrative  savings  in  the  Commission  and  in  the  Member 
States. [However, such savings would only be realized if there was no longer any need to 
calculate the uncapped VAT base for the UK correction.] 

  The  direct  impact  of  eliminating  the  VAT-based  resource  would  be  negligible.  The 
elimination of the VAT resource would only very slightly modify the financing shares of 
Member States.  

There  would  be  transitional  issues  related  to  the  structure  of  the  resource.  The  data  is 
collected in arrears and is subject first to reconciliation with payments made on forecast data 
and then to later correction as a result of inspection activity. There are also open items from 
previous  years  requiring  resolution.  It  is  unlikely  that  all  the  finalisation  activity  could  be 
completed before five years after elimination of the resource.  

2. 

Developing new own resources 

2.1.  Context 

In the Budget Review adopted on 19 October 2010, the Commission indicated its intention to 
submit  proposals  on  own  resources  as  part  of  its  overall  proposals  on  the  next  Multiannual 
Financial  Framework.  New  own  resources  could  fully  replace  the  existing  VAT-based  own 
resource and reduce the scale of the GNI-based resource.  

The  introduction  of  new  own  resources  would  mirror  the  progressive  shift  of  the  budget 
structure  towards  policies  closer  to  EU  citizens  and  aimed  at  delivering  European  public 
goods  and  genuine  EU  added  value.  It  could  support,  and  be  closely  linked  to,  the 
achievement of important EU or international policy objectives.  In the context of economic 
crisis  and  budgetary  consolidation,  a  new  own  resource  could  also  give  extra  room  for 
manoeuvre  to  national  governments  by  reducing  the  extent  of  national  contributions  to  the 
budget.  

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Considerable technical work has been undertaken by the Commission services to identify the 
advantages and disadvantages of a number of potential candidates as own resources, based on 
criteria defined in the Budget Review. The following sections summarize some of the main 
findings of this work, while the Annex presents a far more detailed analysis.  

2.2.   Financial Transaction Taxation (FTT) 

2.2.1.  Context 

There  is  the  potential  for  widely  differing  taxes  on  financial  transactions,  from  the  "broad-
based FTT" affecting transactions on stocks, bonds, currencies and derivative products traded 
on organised markets or over-the-counter, to the simple stamp duty or transfer tax on stocks 
and bonds – sometimes referred to as the "narrow-based FTT". 

FTT benefits from wide popular support, which could facilitate its acceptance. It is favourably 
perceived  by  a  number  of  MEPs,  including  in  an  own  resources  context.  The  European 
Parliament resolution of 10 March 2010 on FTT "calls on the Commission and the Council to 
assess  the  potential  of  different  financial  transaction  tax  options  to  contribute  to  the  EU 
budget"35.  A  number  of  Member  States  (Austria,  Belgium,  France,  Germany…)  have 
expressed some support for a FTT. The conclusions of the Heads of State or Government of 
the Euro area of 11 March 2011 indicate that "the Heads of State or Government agree that 
the introduction of a financial transaction tax should be explored and developed further at the 
Euro area, EU and international levels".  

In  the  absence  of  significant  progress  at  G-20  level,  an  EU  initiative  on  a  FTT  could  be  a 
pragmatic first step towards the longer-term development of a FTT at global level.  

In  the  Communication  on  Financial  Sector  Taxation  [COM(2010)549],  the  Commission 
identified the risk of relocation which would undermine the ability to generate revenue. This 
requires a careful definition of the tax base and the tax rate. Introducing such a FTT on a EU-
wide scale could, furthermore, reduce the possibilities of tax avoidance currently found with 
existing Member States' transaction taxes, would ensure a more coherent tax framework, and 
would eliminate one source of fragmentation of the Internal Market. 

2.2.2.  Main results 

The financial crisis has led to debates about a possible additional tax on the financial sector. 
Our  current  analysis  confirms  that,  under  specific  conditions,  a  FTT  is  technically  feasible. 
Given  the  Commission's  commitment  to  pursue  the  FTT  at  global  level,  and  despite  some 
positive aspects of a FAT, it is appropriate as a first step, to focus on a FTT solution at EU 
level to allow the EU to lead by example to create global momentum for action and to avoid 
interference with the forthcoming proposals on resolution framework and bank levies.  

Technically, the  FTT offers  the advantage that using a single,  harmonised tax instrument to 
tax  the  financial  sector  would  be  positive  from  a  Single  Market  perspective,  as  it  would 
prevent the risk of fragmentation from introduction of a patchwork of national levies.  

35  European  Parliament  resolution  on  "financial  transaction  taxes  –  making  them  work",  P7_TA(2010)0056, 
adopted by 529 votes against 127 and 19 abstentions. 

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A  FTT  targeted  at  the  trading  of  financial  institutions  and  with  differentiated  rates  would 
specifically answer the mandate of the European Council and the request from the European 
Parliament. The objectives of an FTT are threefold:  

  Revenue-raising  objective:  a  FTT  would  generate  a  new  stream  of  public  revenue,  thus 
leading  to  a  reduction  in  Member  States'  contributions  to  the  EU  budget.  Financial 
institutions would contribute their fair share of the costs of the recent crisis; 

  Corrective  objective:  overly  risky  activities  by  financial  institutions  should  not  be 

encouraged;  

  Internal  Market  objective:  the  internal  market  for  financial  services  should  be  preserved 

from fragmentation resulting from the setting up of uncoordinated national taxes. 

Implementing  a  FTT  in  EU  as  a  first  step  while  mitigating  risks  identified  would  require 
defining  a  harmonised  base,  fixing  low  rates  differentiated  by  products  groups  based  on 
trading by financial institutions. The monitoring of the tax would rely on the implementation 
of foreseen regulatory changes in the financial sector (OTC derivatives, MiFID…). 

The following elements could be considered for an implementation: 

  The collection  of the  tax  should,  to the extent possible, be based directly on the trading 
books,  accounting  and  internal  control  systems  of  financial  sector  institutions  and/or  be 
operated  automatically  through  information  systems  or  trading  platforms.  A  number  of 
anti-avoidance  flanking  measures  for  example  based  on  the  (forthcoming)  regulatory 
measures  would  be  necessary  to  ensure  a  successful  implementation  of  the  tax.  In  this 
way,  risk  of  relocation  and  substitution  of  contracting  parties  could  best  be  mitigated, 
although not fully avoided. 

  The  main  taxpayers  should  be  the  financial  institutions  operating  financial  transactions, 
i.e.  banks,  investment  firms,  other  financial  institutions,  also  under  supervision,  such  as 
insurance  companies,  stockbrokers,  pension  funds,  UCITS/alternative  investment  funds, 
etc.  Specific  measures  to  cover  professional  activity  by  unregulated  agents  should  be 
envisaged. 

  In  order  to  reduce  the  risks  of  tax  avoidance  and  market  relocation,  the  FTT  should  be 
conceived using as broad a basis as possible. The tax base should preferably be defined on 
the basis of trading carried out by financial institutions. The scope of financial instruments 
could include shares, bonds, their substitutes and related derivatives whose exact list is to 
be  determined.  Inclusion  of  currency  trading  should  be  further  analysed  with  a  view  to 
compatibility with the Treaty. The taxable amount for derivatives would be the notional 
value everywhere it can be determined.  

  In order to reduce the risk of market disruptions, a very low tax rate would be imposed on 
the  transactions.  To  the  extent  possible,  the  rate  structure  should  promote  virtuous 
behaviours,  for  instance  by  favouring  the  use  of  regulated  markets.  Differentiated  rates 
could  be  applied  to  different  groups  of  instruments,  reflecting  risks  of  relocation  and 
underlying  valuation  methods  (e.g.  notional  for  derivatives).  For  own  resources,  an 
indicative  reference  tax  rate  for  bonds  and  shares  of  0.1%  and  of  0.01%  for  derivative 
products could be suggested.  

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A  FTT  focusing  on  the  trading  of  financial  institutions  could  generate  significant  revenues. 
Although  revenues  projections  are  subject  to  uncertainties,  recent  estimates  by  the 
Commission  under  very  conservative  assumptions  assume  revenue  of  more  than  EUR  30 
billion EUR per year for the EU-27 by 2020 for the taxation of bonds, stocks and derivatives. 
They could raise up to about 50 billion should currency transactions be included in the taxable 
base. 

The cumulative impact of a FTT with the regulatory reform of the financial sector needs to be 
carefully considered to avoid a downward effect on main macroeconomic variables.  

2.3.   Financial Activities Tax 

2.3.1.  Context 

The  idea  of  developing  a  Financial  Activities  Tax  (FAT)  gained  prominence  following  an 
IMF report to the G-20 on financial sector taxation. The IMF proposed a FAT levied on the 
sum of the profit and remuneration of financial institutions, which could also be designed to 
target economic rents or excessive risk taking.  

2.3.2.  Main results 

The  debate  on  VAT  policy  following  the  VAT  green  paper  later  this  year  will  be  a  most 
appropriate  opportunity  to  discuss  FAT  as  a  compensation  scheme  for  VAT  exemption  on 
financial services. 

Most recent analysis on Financial Sector Taxation shows that the FAT is most convincing in 
the  form  of  the  addition-method  FAT  applied  at  source.  The  addition-method  FAT  could 
partly address the VAT exemption of the financial sector. However, the integration with the 
current  VAT  system  is  difficult  and  the  FAT  could  not  solve  the  problem  of  irrecoverable 
VAT  without  such  integration.  With  regard  to  the  economic  incidence  of  the  tax,  the  FAT 
could potentially be passed on to consumers in the form of higher interest rates spreads, but it 
would at least partly also tax some of the rents of the sector. 

The administrative implementation of the FAT could draw on existing accounting information 
to  reconstruct  a  cash-flow  profit.  In  fact,  the  FAT  elements  could  be  implemented  using 
existing corporate income tax systems as a starting point. 

A FAT could lead to differences in treatment between financial institutions subject to the tax 
and  quasi-financial  institutions  outside  its  scope,  i.e.  the  shadow  banking  sector.  The  entire 
financial  sector  includes  banks,  credit  card  companies,  insurance  companies,  consumer 
finance  companies,  stock  brokerages,  management  funds  companies,  investment  funds  and 
some  government  sponsored  enterprises.  A  number  of  MNEs  have  very  large  financial 
activities  without  qualifying  as  financial  institutions.  For  these  reasons,  recent  proposals 
suggest a very wide definition of the financial sector to cover all relevant activities. In order 
to  catch  also  intra-group  financing  and  shadow-banking  activities,  all  the  enterprises 
conducting more than a certain threshold of financial activities would become subject to the 
FAT too. 

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The  addition-method  FAT  could  have  a  good  fit  with  regulation  since  the  tax  contribution 
from the FAT would be correlated with the individual contributions of banks to systemic risk. 
It  could  be  applied  at  the  Member  State  of  residence  of  the  subsidiary  (with  dividends 
payments  within  a  group  of  companies  exempted)  and  in  the  Member  State  of  location  for 
foreign permanent establishments of non-EU financial institutions. 

Owing  to  the  high  mobility  of  significant  parts  of  the  financial  sector,  the  risks  of 
fragmentation  of  the  Internal  Market,  double  taxation  and  distortion  of  competition, 
coordinated action at EU-level would appear justified - but a FAT would not need to entail 
full harmonisation or a centralization of revenue for the EU budget. In fact, a link between a 
FAT and an own resource to finance the EU budget was not made in previous Commission 
work and this report highlights additional difficulties which could arise from using a FAT as 
an own resource.  

In particular, a fully harmonized FAT centrally collected at EU level is excluded.  

  From  a  legal  point  of  view,  whereas  Article  115  TFEU  only  provides  for  the 
"approximation  of  such  laws,  regulations  or  administrative  provisions  of  the  Member 
States  as  directly  affect  the  establishment  or  functioning  of  the  internal  market",  a 
centrally collected EU resource would require fully harmonized rules (under the principle 
of equal treatment).  

  From an administrative point of view, the FAT being a new corporate tax, would require 
considerable administrative capacities throughout the Union to levy the tax and check tax 
declarations based on companies' accounts. Member State administrations would therefore 
need  to  collect  and  manage  the  tax.  Furthermore,  substantial  administrative  resources 
would be necessary at EU level to supervise Member State collection systems.  

  Politically,  a  FAT  would  face  similar  obstacles  towards  harmonization  as  any  form  of 
corporate tax, as further described in section 2.8. As an own resource, a FAT could only 
be  conceived  as  a  system  of  revenue-sharing,  whereby  Member  States  would  transfer  a 
limited  share  of  the  FAT  levied  by  their  administration  to  the  EU  budget.  Due  to 
differences  in  the  FATs  between  Member  States,  such  a  mechanism  would  likely  raise 
opposition from a number of Member States on fairness grounds. 

A FAT would likely have an impact on the financial sector, and there are substantial risks of 
investment relocation as well as profit-shifting. However, if properly conceived, the tax could 
reduce  existing  negative  externalities,  contribute  to  a  more  efficient  allocation  of  resources 
throughout  the  economy,  and  the  revenue  collected  could  be  usefully  recycled  by 
governments. It would, in any event, have a limited impact on GDP in the long-run.  

Based  on  conservative  assumptions  on  profit  shifting  and  relocations  the  addition-method 
FAT could provide total revenue of EUR 24.6 billion for 2009 if levied at a rate of 5%, part of 
which could be transferred to the EU budget.  

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2.4.   Auctioning revenue from the EU Emission Trading System 

2.4.1.  Context 

The EU Emissions Trading System (ETS) is the cornerstone of the European Union's policy 
to combat climate change and the key tool for reducing industrial greenhouse gas emissions in 
a  cost-effective  manner.  It  has  been  in  operation  since  2005  (1st  trading  period).  Since  1 
January  2008  (2nd  trading  period)  it  applies  to  30  countries  (EU-27,  Norway,  Iceland  and 
Liechtenstein).  An  amendment  to  the  EU  ETS  Directive  agreed  in  July  2008  will  bring  the 
aviation sector into the system from 2012. Important design changes agreed in the December 
2008  European  Council  will  apply  from  2013  to  2020  (3rd  trading  period)  and  beyond.  In 
particular, the significantly increased share of auctioning as a method to allocate allowances 
will further increase the effectiveness of the EU ETS.  

Proposals on the EU ETS were not made with a view to making it an EU own resource; this 
option was presented for the first time in the Budget Review in October 2010. The different 
economic  structures  and  energy  mix  lead  to  a  significantly  varying  economic  burden  of  the 
ETS among the Member States. The effects of an own resource linked to the ETS would thus 
be asymmetric and regressive at this point in time. As a consequence, the Commission did not 
propose  any  share  of  the  allowances  to  be  auctioned  by  the  Commission,  or  any  share  of 
revenues to be allocated to the EU budget. Furthermore, political earmarking of revenues and 
the  distribution  of  auction  rights  were  a  particularly  sensitive  issue  in  agreeing  on  such  a 
system. It was also agreed that 50% of the auction revenues should be used for climate-related 
purposes. 

Pursuant to the revised ETS Directive (2009/29/EC), the Commission adopted an Auctioning 
Regulation.  The  timely  and  solid  conduct  of  the  procurement  to  set  up  a  common  auction 
platform is of major importance for the smooth functioning of the carbon market. Failure to 
deliver could undermine the EU ETS. 

2.4.2.  Main results 

The  EU  Emission  Trading  System  is  an  EU  project  dealing  with  a  cross-border  issue 
(greenhouse gas emissions having a global impact on climate). The revenue from auctioning as 
well  as  the  auctioning  process  is  part  of  the  acquis.  As  indicated  in  the  Budget  Review 
communication, possible new own resources should be more closely linked to the acquis and 
the objectives of the EU to increase the coherence and effectiveness of the entire budget in the 
achievement of EU policy priorities.  

It would make much sense to centralise auctioning at EU level instead of having 27 national 
auctioneers  selling  the  emission  allowances  arising  from  a  single  EU  policy.  A  centralised 
collection mechanism where the Commission would sell the emission allowances and transfer 
the proceeds to the EU budget could reduce the total administrative burden of managing the 
system and make it simpler and more transparent.  

Under  the  ETS  Directive  and  related  legal  acts,  emission  allowances  are  attributed  to  the 
Member States and are to be auctioned by auctioneers appointed by them. Transforming the 
system into an autonomous source of revenue for the EU budget could entail risks, including 
the re-opening of the ETS Directive even before the auctioning system is fully functional.  For 

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this reason, a fully centralised revenue collection system does not appear suitable as a short-
term option. 

An  alternative  to  a  fully  centralised  collection  of  auctioning  revenue  by  the  Commission 
would  be  the  development  of  a  revenue-sharing  mechanism.  The  Member  States  or  their 
auctioneers  could  transfer  a  share  of  the  revenues  from  auctioning  to  the  EU  budget,  thus 
creating a new, CO2-based contribution alongside the existing GNI-based contribution.  

A  step-by-step  process  –  first  revenue  sharing  and  then  centralised  auctioning  at  a  suitable 
point in the future – could be conceived in order to ensure full legislative stability at the start 
of the implementation of the auctioning system. In order to minimise the risk of re-opening 
the ETS Directive, a measure establishing ETS revenue as an own resource would be wholly 
separate  from  the  legislation  governing  the  ETS.  Thus,  even  after  a  (unanimous)  European 
Council  decision  was  taken  on  including  ETS  auctioning  revenue  in  the  own  resources 
system,  the  ETS  system  itself  would  continue  to  be  regulated  in  accordance  with  the 
appropriate  legal  base,  under  the  ordinary  legislative  procedure.  Depending  on  the  variant 
adopted,  amendments  would  need  to  be  made  to  the  Auctioning  Regulation  or  the  ETS 
Directive (or both).   

2.5.  Charge related to air transport 

2.5.1.  Context 

Air  transport  is  one  of  the  EU’s  success  stories.  The  liberalisation  of  the  EU  air  transport 
market in the early 1990s was a cornerstone of EU transport policy, and has generated broad 
economic benefits, notably through expanded air services, greater competition and lower air 
fares. The EU has responded to challenges resulting from 27 separate airspaces in the Single 
European  Sky  initiatives,  which  includes  the  establishment  of  the  €2.1  billion  SESAR  Joint 
Undertaking.  

The discussion on own resources takes place in a context where several Member States have 
introduced  an  airline  ticket  tax  or  are  introducing  it  (most  recently,  Germany  and  Austria).  
Mushrooming  aviation  taxes  could  have  a  negative  impact  on  the  proper  functioning  of  the 
Internal Market and lead to tax-related distortions of competition in the air transport sector.  
Setting  up  a  new  own  resource  related  to  air  transport  could  be  an  opportunity  to  ensure  a 
more coherent taxation of the sector across the EU.  

Furthermore,  aviation  currently  benefits  from  a  very  favourable  tax  regime  (virtually  no 
taxation  of  kerosene  and  no  VAT  on  air  tickets)  compared  to,  for  instance,  road  and  rail 
transport. The Commission adopted  recently a White Paper on transport36, which states that 
"many  branches  of  transport  [including  air  transport]  are  treated  favourably  in  terms  of 
taxation, in comparison to the rest of the economy". "Generally, these arrangements provide 
conflicting  incentives  with  respect  to  the  efforts  to  improve  the  efficiency  of  the  transport 
system  and  reduce  its  external  costs.  The  Commission  will  examine  proposals  to  achieve 
greater consistency between the various elements of transport taxation".  

At  the  same  time,  the  White  Paper  places  a  strong  emphasis  on  themes  such  as  cohesion, 
competitiveness, mobility and sustainability. An aviation tax could have an adverse economic 
impact  on  Member  States  or  regions  that  are  particularly  dependent  on  aviation  for  their 

36 COM(2011)144 of 28.3.2011. 

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economic  development,  such  as  island  states  or  peripheral  regions,  and  regions  heavily 
dependent  on  inbound  tourism.  The  European  air  transport  industry  is  also  facing 
international  competitive  pressures,  and  any  tax  which  falls  disproportionately  on  European 
airlines relative to their global competitors is likely to intensify those pressures.  

Therefore,  the  aviation  sector  opposes  strongly  any  new  tax  that  would  simply  be  added  to 
existing  Member  States'  taxes  and  to  the  Emission  Trading  System  (which  will  start  being 
applied  to  the  aviation  sector  from  2012).  However,  Member  States  and  the  industry  itself 
should have an interest in streamlining different national tax schemes via an EU aviation duty 
in order to ensure a level playing field for aviation companies, taking also into account future 
initiatives to be financed through the EU budget. 

2.5.2.  Main results 

Two  main  options  seem  relevant  as  possible  EU  own  resources  in  the  air  transport  sector.  
The departure tax could constitute a tax levied on passengers flying from an EU airport and 
could vary depending on the distance  and the class  of travel. A flight duty could tax flights 
instead of passengers. It could take into account a distance factor and other variables, such as 
a measure of the performance of planes. Particular provisions could be envisaged for specific 
types of passengers or flights (e.g. exemptions of transit passengers or flights), respectively. 

The tax could be levied using a decentralised model relying on Member State administrations, 
or  a  centralised  model  relying  on  the  EU  administration  or  Eurocontrol.  In  any  case,  the 
operators  would  pay  the  tax  to  the  administration  in  charge.  A  centralised  collection  would 
lead to important economies of scale and reduced operating costs for administrations and for 
the operators. Relying on Eurocontrol could be an efficient approach as it would rely on an 
existing administration and a single billing system for companies (no additional compliance 
cost).  However,  such  an  approach  would  require  the  unanimous  agreement  of  Eurocontrol's 
39 member countries, but it would also offer the opportunity to involve close partners of the 
EU (candidate and EEA countries, etc.) in the scheme. 

Setting up an aviation tax at EU level could be justified due to the cross-border dimension of 
aviation activity.  Experiences in various Member States (The Netherlands, Denmark, Malta, 
Ireland, etc.) show that it is very difficult for small Member States to set up an aviation tax 
alone  due  to  (the  risk)  of  traffic  displacement  to  neighbouring  countries.  Even  for  large 
Member  States  (Germany),  flight  relocations  can  be  significant.  Acting  at  EU  level  would 
offer the potential for important efficiency gains. A strong subsidiarity argument could thus 
apply for such a new own resource. 

As a new own resource, an aviation duty would help to reduce the national contributions to 
the EU budget. Due to the cross-border nature of the tax, the national origin of the levy would 
be  almost  impossible  to  estimate,  in  particular  with  a  centralised  collection  system.  The 
revenue  levied  with  an  aviation  tax  could  reach  EUR  20  billion  or  more  by  2020.  A  flight 
duty could potentially bring more revenue than a departure tax, or bring equal revenue with a 
lower duty rate, as it would tax all the flights (passenger and freight transport) rather than just 
passenger flights.  

The articulation with national aviation taxes would need to be carefully examined, notably the 
extent  to  which  a  crediting  mechanism  could  be  introduced  so  as  to  avoid  double  taxation.  
Proper  design  of  the  tax,  in  particular  a  departure  tax,  could  reduce  the  extent  of  flight 

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relocations observed today. Also, any air transport tax would fall in part on non-EU nationals 
and companies ('tax exporting').  

2.6. 

A new VAT resource 

2.6.1.  Context 

The development of a common VAT system has been one of the cornerstones of the Internal 
Market  and  an  important  aspect  of  the  development  of  an  own  resources  system.  Since  1 
January  2007  the  essential  piece  of  VAT  legislation  in  the  Union  has  been  Directive 
2006/112/EC (the 'VAT Directive').  

VAT represents a major source of revenue for national budgets and in many Member States it 
is  the  most  important.  Since  the  economic  and  financial  crisis,  several  Member  States  have 
recently markedly increased VAT rates or are considering doing so, either as a reaction to the 
crisis or in the context of a longer-term shift towards indirect rather than direct taxation. The 
majority of Member States now have a standard rate at or above 20%.  

With  the  publication  of  the  Green  Paper  on  the  future  of  VAT  on  1  December  2010,  the 
Commission launched a debate, with all stakeholders including Member States, on the current 
VAT system and the possible ways forward. The introduction of a new own resource based on 
VAT could be underpinned by this initiative. Broadening the tax base, reducing the scope for 
fraud, improving the administration of the tax and reducing compliance costs in the context of 
a broad reform of VAT, could deliver important results and generate new revenue streams for 
the Member States. A fraction of the gains derived from this initiative could be attributed to 
the  EU  level,  and  these  could  be  further  increased  as  the  VAT  system  improved  its 
performance. 

Furthermore, a genuine own resource based on VAT has been envisaged since the 1970s. The 
Commission considered it one of its three favoured options in 2004. The arguments in favour 
were and are its potential visibility for EU citizens, its buoyancy and stability, as well as the 
fact that VAT is already collected throughout the EU. However, there has not been a detailed 
proposal  regarding  a  new  VAT  resource  in  the  past  two  decades.  Assessing  this  candidate 
with regard to the criteria set out in the Budget Review thus requires its basic features first to 
be defined. 

2.6.2.  Main results 

Two  main  approaches  have  been  assessed  for  the  development  of  a  new  VAT  resource  to 
replace  the  current  statistical  VAT-based  own  resource:  a  parallel  system  to  that  of  the 
Member States and a revenue transfer mechanism.   

For  both  approaches,  a  narrow  base  has  been  retained  in  order  to  overcome  the  likely 
reluctance  to  apply  a  new  VAT  resource  on  goods  and  services  subject  to  zero  or  reduced 
rates  at  national  level  and  the  hurdle  of  the  high  degree  of  harmonisation  required  for  the 
functioning of a broad based VAT. 

The  new  VAT  resource  would  therefore  be  a  single  EU  rate  applied  on  all  the  goods  and 
services  currently  subject  to  the  standard  rate  in  every  EU  Member  States,  i.e.  the  tax  base 
would correspond to the smallest common denominator of national VAT systems. This means 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
that a supply subject to national VAT at the standard rate in a Member State would be subject 
to  the  new  VAT  resource  rate  unless  the  same  supply  is  subject  to  a  reduced  rate  or  an 
exemption in another Member State. 

A  new  VAT  resource  alongside  Member  States'  VAT  would  pose  serious  technical 
implementation problems and has therefore been discarded. Indeed, given that the scope and 
the rules of deduction of national VAT and the new VAT resource would be different and that 
no compensation between those taxes would be possible, the taxable persons would need to 
identify in their accounts each tax separately for each purchase and sale in order to complete 
parallel declarations determining their net position for each VAT.  

Moreover,  an  original  complete  legal  framework  covering  the  rules  on  the  scope  and 
exemptions of the new tax, the deductions, the obligations of taxable persons and the role of 
the national tax authorities, etc. would need to be created to ensure the proper collection and 
control  of  the  new  VAT  resource.  Tax  administrations  and  about  35  million  taxpayers, 
including the smallest retailers, would therefore in effect have had to deal with a double VAT 
system in order to allow the EU to collect the new resource.  

The  simplest  solution  with  similar  results  in  terms  of  revenue  but  with  limited  impact  on 
businesses and less impact on national tax administrations has been chosen. It would require 
the  latter  to  regularly  transfer  a  share,  corresponding  to  the  EU  rate,  of  the  VAT  receipts 
collected and stemming from transactions subject to the standard rate.  

On the  basis of  the VAT  returns, the tax administrations would apportion the VAT  receipts 
between  the  VAT  stemming  from  the  standard  rate  and  the  reduced  rates  and  would  then 
exclude  from  the  former,  on  the  basis  of  national  accounts  data,  consumption  data  or  other 
sources, the VAT stemming from the few transactions not subject to the new VAT resource.  

Unlike  the  existing  VAT-based  own  resource,  the  revenue  stream  would  not  be  capped  and 
would  not  be  the  result  of  the  current  complex  statistical  calculations  and  adjustments  to 
obtain a purely theoretical VAT base. It would result from the actual new VAT resource paid 
by all the European final consumers and then collected by the national tax authorities. 

Moreover, this system would closely link EU policies for VAT with EU budget policies. The 
revenue  would  be  increased  when  the  national  VAT  bases  are  broadened  and  the  scope  of 
zero  or  reduced  rates  diminished  by  the  Member  States  making  use  of  the  same  options  or 
derogations or by new European VAT rules imposing such moves. 

The  application  of  a  1.0%  rate  on  supplies  of  goods  and  services,  intra-Community 
acquisitions  of  goods  and  importation  of  goods  subject  to  a  standard  rate  of  VAT  in  every 
Member State pursuant to the VAT Directive would lead to revenue estimates of EUR 20.9 
billion  to  50.4  billion  (2009  data).  The  revenue  estimates  are  dependent  on  the  degree  of 
harmonization of VAT rules in the EU towards a broader based tax with a single rate: the first 
estimate assumes that there is no further harmonization of the VAT bases and of the scope of 
the standard rate in the EU37, while the second estimate assumes full harmonization with all 
the transactions being subject to the standard rate.  

37 The total harmonised VAT base in the EU (EU-27, 2009) has been decreased by extrapolating data for Ireland, 
where only 41.4% of the non exempted base is subject to the standard VAT rate (2006). 

EN 

   EN 

 
 
 
 
 
 
  
 
 
 
                                                 
2.7. 

Energy Tax 

2.7.1.  Context 

Several  key  aspects  of  energy  taxation  are  already  governed  at  EU  level  under  the  Energy 
Taxation Directive (ETD - Council Directive 2003/96/EC). In order to align the ETD to the 
new policy framework resulting from the climate and energy package and the development of 
an EU emission trading system, a Commission proposal to amend the ETD has recently been 
adopted38.  

Although  the  ETD  was  not  prepared  for  the  purpose  of  introducing  new  own  resources,  it 
nevertheless creates suitable conditions by harmonising tax bases and establishing minimum 
rates. In 2004, the Commission suggested that an EU levy be imposed on motor fuel used for 
road  transport.  The  Commission  concluded  that  "EU  rates  below  half  of  the  minimum  rates 
would be enough to finance half of the current EU budget".  

Since 2004, little progress has been achieved towards the approximation of excise duties on 
diesel used for professional transport. However, the rapidly evolving political context and the 
in-depth revision of the Directive provide a new framework for discussion of an EU Energy 
Tax. The modified system of energy taxation, which would include a CO2 tax plus an energy 
tax,  could  open  new  opportunities  and  entail  additional  issues  for  setting  up  a  new  own 
resource.  The  scope  of  the  own  resource  could  be  different  than  what  was  envisaged 
previously and include part or all sectors covered by the ETD.  
Furthermore, a potential link to the energy infrastructure needs, for which future EU budget 
support  will  be  needed,  could  also  be  envisaged.    It  should  be  recalled  in  this  context  that 
infrastructure funding at the  EU level,  whether coming from a well identified energy tax or 
from  another  budgetary  resource  of  the  EU,  remains  indispensable  as  recognised  at  the 
European Council of 4th February 2011.  

2.7.2.  Main results 

Considering the close link between energy consumption and CO2 emissions and the important 
developments  of  the  energy  taxation  framework  at  EU  level,  two  main  variants  of  this 
candidate have been identified.  

  The  EU  Energy  Levy  would  consist  of  applying  a  single  EU  rate  to  the  quantities  of 
energy  products  released  for  consumption  in  each  Member  State,  possibly  based  on  the 
energy content of the products.  

  The  EU  CO2  Levy  would  consist  of  attributing  to  the  EU  budget  (part  of)  the  revenue 
from applying the minimum rate of CO2-related taxation defined in the revised ETD. In 
addition,  it  could  be  envisaged  to  add  (part  of)  the  proceeds  from  auctioning  emissions 
allowances under the ETS.  

The EU Energy levy and the EU CO2 Levy would be closely related to the acquis, involve an 
important cross-border dimension and require a harmonised approach at EU level. To ensure a 
consistent  approach  regarding  CO2  emissions,  the  EU  CO2  Levy  should  preferably  be 
considered together with a resource based on the auctioning of emission allowances under the 
EU ETS. 

38 COM(2011)169 of 13.4.2011. 

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
                                                 
The EU Energy levy and the EU CO2 Levy could be collected either by the Member States or 
by the EU administration. Member States' collection would involve an annual computation of 
the levy and the transfer of corresponding revenue from the Member States to the EU budget.  
Centralised  EU  collection  would  involve  supplementary  operating  costs,  but  it  would  give 
more visibility and more autonomy to the EU resource.  

Both  variants  could  bring  substantial  resources  to  the  budget.  However,  as  long  as  the 
revenues  were  collected  by  the  Member  States  as  part  of  a  revenue-sharing  mechanism,  it 
could be seen as a contribution to be minimised. Differences between Member States would 
be observed in line with differences in the energy- or CO2-intensity of their economies. 

2.8. 

EU Corporate Income Tax (EUCIT) 

2.8.1.  Context 

The existence of 27 largely uncoordinated corporate income-tax systems in the EU is a source 
of considerable problems. The Commission has recently proposed its Common Consolidated 
Corporate Tax Base (CCCTB) initiative. 

2.8.2.  Main results 

While the CCCTB proposal constitutes a comprehensive and ambitious approach to solving, 
with  one  single  instrument,  the  existing  corporate  income  taxation  problems  within  the  EU, 
EUCIT  would  go  beyond  this  and  impose  a  harmonised  corporate  tax  base  to  all  business 
being involved or not in cross-border activities. This entails questions concerning respecting 
the subsidiarity principle and the appropriate legal base on which to act. It might, however, 
contribute to a more efficient allocation of investment in the Internal Market. 

However, in practice, EUCIT is certain to be confronted by considerable opposition, not only 
from the corporate world, which would oppose any compulsory harmonisation of both the tax 
base and the tax rates in the EU, but also from  many  Member States which wish to protect 
their sovereignty in this area.  

Moreover,  setting  up  such  a  system  would  generate  considerable  administrative  issues  and 
entail the re-organisation of national tax systems far beyond corporate taxation because of the 
close interaction of corporate income taxation with personal taxation. In any event, although 
the  EUCIT  would  need  to  be  levied  by  national  administrations,  and  substantial  control 
systems would also need to be set up at EU level. 

There  would  be  differing  impact  on  specific  sectors;  the  most  expensive  aspect  would  be 
transforming  transparent  companies  in  Germany,  Luxemburg  and  Austria  into  corporate  tax 
payers.  The  current  network  of  bilateral  conventions  aimed  at  eliminating  double  taxation 
would  also  need  to  be  revised.  In  addition,  adjusting  to  the  new  system  might  prove  very 
costly for companies, notably the 80% of EU companies active only in one Member State. 

Lastly, the prospects for adoption by the Council of the CCCTB could be materially damaged 
if the Commission were to propose a CIT making use of the CCCTB.  

EN 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With corporate income-tax revenues representing between 2% and 3% of GDP in the EU, the 
revenues from a EUCIT could easily reach billions of EUR per year. Given that the average 
statutory corporate income tax rate currently amounts to around 23%, a back-of-the-envelope 
calculation suggests that, assuming a comparable tax base size a EUCIT rate of less than 2% 
should  be  sufficient  to  consistently  raise  EUR  15  billion  in  revenue,  even  though  CIT 
revenues are one of the most fluctuating tax revenue sources in the economic cycle. Besides, 
autonomous  tax  collection  is  virtually  impossible  (millions  of  tax  payers  and  annual 
declarations).  

Simulations for the distributional effects of CCCTB on the base show that the formula with 
employee costs, assets and sales by destination equally weighted leads to an increase in the 
tax  base  (for  industrial  and  financial  groups  combined)  mostly  in  those  Member  States  in 
Central and Eastern Europe, as well as in Germany, Spain, France, Greece and Italy. 

EN 

   EN 

 
 
 
 
PART 3:  

SIMPLIFYING THE EXISTING CORRECTION MECHANISMS 

The current financing system is made rather complex by numerous corrections mechanisms. 
The most important of these mechanisms, which were described in detail in Part 1, are linked 
to revenues. The correction mechanisms are either temporary and will end at the end of 2013, 
or relate to the UK correction (the UK correction itself and the corrections on this correction 
granted to Germany, the Netherlands, Austria and Sweden). The following analysis therefore 
logically focuses on the UK correction and possibilities for its reform, bearing in mind that a 
change of this correction has an immediate impact on the related corrections. 

1. 

An evolving context 

1.1.  Origin  of  the  correction  mechanisms:  a  major  net  contributor  with  low  relative 
prosperity 

At  the  time  of  accession,  the  UK  had  a  small  agricultural  sector  with  a  large  proportion  of 
farm  produce  imported  from  outside  the  Community.  As  a  result,  very  little  of  the 
Community's  agricultural  spending,  which  represented  at  the  time  the  vast  majority  of  EU 
expenditure, was oriented towards the UK economy. On the other hand, the UK contributed a 
relatively  large  amount  to  the  financing  of  the  Community  budget  mainly  because  its  VAT 
base at the time represented a higher percentage of its GNP when compared to other Member 
States. Furthermore, the UK was not as prosperous as the other net contributors to the budget. 
This  structural  imbalance  became  a  major  issue  underlying  the  1975  referendum  on  the 
question of the UK's continued membership of the Community.  

After unsuccessful attempts at introducing a corrective mechanism, an agreement was reached 
at  the  Fontainebleau  European  Council  in  June  1984,  which  concluded  that  "expenditure 
policy is ultimately the essential means of resolving the question of budgetary imbalances". At 
the  same  time,  the  phrase  "any  member  State  sustaining  a  budgetary  burden  which  is 
excessive in relation to its relative prosperity may benefit from a correction at the appropriate 
time" opened the door to creating correction mechanisms. The UK correction was created by 
the Own Resources Decision of 7 May 1985. Since then there have been changes to the UK 
correction including corrections on its financing, initially only for Germany, and then also for 
the Netherlands, Austria and Sweden. 

1.2. 

From 1985 to 2005: a new context 

Those elements which justified the creation of the UK correction had evolved significantly by 
2005, when the current financial framework was agreed. This can be seen in Table 5 below: 

  Agricultural expenditure (first and second pillar) represented 50% of the 2005 budget vs. 

69% in 1984;   

  VAT-based contributions (traditionally viewed as unfavourable to the UK in comparison 
with GNI-based contributions) represented 16% of the 2005 budget vs. 57% in 1984;  

  The UK was the poorest of the net contributors in 1984 (93% of EU10 average GNI pc 
PPS versus Germany at 127% and France at 102%). In 2005, the UK situation at 117% of 
the  EU-25  average  was  better  than  both  Germany  (112%)  and  France  (106%).  In  other 
words, while the UK was one of the poorest Member States when it acceded, by 2005 it 

41

 
 
 
 
 
 
 
 
 
 
 
 
had become one of the richest. And while its prosperity level had been far below that of 
Germany and France, it was at higher level than these countries in 2005.  

Furthermore, the cost of enlargement (EU-12) was a new element fundamentally changing the 
composition of EU expenditure, which needed to be shared fairly among all Member States. 

This led the Commission to conclude that there was no longer any objective reason to treat the 
UK  differently  from  the  other  major  net  contributors.  Based  on  the  principle  of  equal 
treatment,  the  Commission  therefore  presented,  in  the  2004  Own  Resources  Report,  a 
proposal to introduce a generalised correction mechanism39. Although this proposal was not 
adopted, a limited reform of the correction system was nonetheless agreed.  

In  December  2005,  political  agreement  was  reached  to  exclude  an  important  part  of  the 
expenditure  in  the  12  new  Member  States  from  the  calculation  of  the  UK  correction.  This 
resulted in a reduction of the UK correction.  Nevertheless the amount of  the UK correction 
remains substantial – more than EUR 3.5 billion per year –, and higher than what it was until 
the mid-1990s (see Annex 1). 

Table 5: Evolution of key parameters (1984-2011) 

Share of CAP in budget 
(% of total) 

VAT-based contribution 
(% of total) 

UK prosperity 
(GNI per capita PPS) 

1984 

69% 

57% 

2005 

50% 

16% 

2010 

42% 

10% 

93% of EU-10 

117% of EU-25 

115.5% of EU-27 

Source: European Commission, DG Budget and DG ESTAT 

New  corrections  were  also  introduced  in  the  current  (June  2007)  Own  Resources  Decision. 
Unlike the UK correction, they are temporary and will automatically expire in 2013. This is 
true  both  of  the  differentiated  call-up  rates  for  the  VAT-based  contribution  which  benefit 
Germany,  the  Netherlands,  Austria  and  Sweden  and  the  gross  reductions  of  the  GNI 
contributions  for  the  Netherlands  and  Sweden  (see  section  2  of  Part  1).  Their  temporary 
nature was an important political decision taken in December 2005. However neither the UK 
correction nor the rebates on the rebate (Germany, the Netherlands, Austria and Sweden pay 
one quarter of their normal share) have expiration dates.  

1.3. 

Situation today: need for a new approach 

Major  trends  observed  in  2005  have  been  confirmed  in  recent  years  and  are  expected  to 
continue in the future.  

  CAP spending as a proportion of the total budget has continued decreasing as a share in 
the  EU  budget  and  the  VAT-based  contribution  is  now  a  marginal  element  in  the 

39 See COM(2004)505 Vol. 1 and 2 of 14.7.2004. 

42

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
financing  system.  Furthermore,  the  relative  prosperity  of  the  main  beneficiaries  of 
correction  mechanisms  (Germany,  The  Netherlands,  Austria,  Sweden  and  the  UK) 
remains largely  above the EU average following the enlargements of the  Union  in 2004 
and 2007 (see Tables 5 and 6).  

  Beyond 2013, it is expected that the relative weight of the agricultural sector in the total 
EU  budget  will  continue  to  decline  as  CAP  embraces  the  objectives  of  the  EU  2020 
agenda.  Furthermore  it  is  proposed  to  fully  eliminate  the  current  statistical  VAT-based 
own resource. With the cost of enlargement reaching its cruising speed, an increasing part 
of  transfers  organized  through  the  EU  budget  will  benefit  the  12  Member  States  which 
acceded the Union in 2004 and 2007, a policy that was actively supported by the major 
net contributors to the EU budget.  

However,  as  a  result  of  the  discrepancy  between  the  marked  evolution  in  the  factors  that 
justified the UK correction when it was introduced and the limited reform of this mechanism 
since  then,  the  UK  was  the  smallest  net  contributor to the EU budget in percentage of GNI 
over 2007-2010 despite having a relatively high level of prosperity (see Table 6). On the basis 
of the Fontainebleau agreement, which was consistently applied in the various own resources 
Decisions,  the  existing  correction  mechanism  granted  to  the  UK  generates  a  budgetary 
situation  which  is  considered  as  unfair  by  a  very  large  majority  of  the  Member  States.  It 
therefore appears difficult to justify the mere continuation of the current specific treatment of 
which this country benefits in the context of EU financing.  

At the same time, it must also be acknowledged that, without a correction mechanism, the UK 
would  have  been  one  of  the  largest  net  contributor  (in  %  of  GNI)  to  the  EU  budget. 
Notwithstanding  the  enormous  gains  derived  from  the  EU  and  successive  enlargements  for 
the UK economy, this fact can explain the reluctance towards abrupt changes to the existing 
correction mechanism in the UK. Consideration should therefore be given to the replacement 
of  a  mechanism  that  served  its  purpose  well  for  many  years  but  which  has  now  shown  its 
limits, by a more suitable mechanism. 

Table 6: Prosperity and net contributions 

Denmark 
Germany 
France 
Italy 
Netherlands 
Austria 
Finland 
Sweden 
United Kingdom 

Operating budgetary balances 
average 2007-2010 
(% GNI) 
-0.29% 
-0.32% 
-0.23% 
-0.26% 
-0.31% 
-0.18% 
-0.19% 
-0.27% 
-0.17% 

Prosperity 
2010 
(GNI pc PPS, EU-27=100) 
127.0 
120.2 
108.7 
98.2 
134.4 
124.7 
117.3 
125.3 
115.5 

Source: European Commission, DG Budget 

Table  6  illustrates  that  the  existing  net  balances  are  very  small  in  percentage  of  GNI,  in 
particular from a historical perspective these can certainly be considered as being rather low. 

43

 
 
 
 
 
 
 
 
 
 
 
 
More  generally,  Table  6  also  illustrates  that  countries  with  equivalent  levels  of  prosperity 
have significantly different levels of operating net balances to the EU budget40. This appears 
particularly clearly when the corresponding data is presented graphically (see Graph 2). This 
suggests that if the objective of the correction mechanisms was to achieve an equalization of 
net  balances  for  countries  with  similar  level  of  prosperity,  it  apparently  failed  to  reach  that 
goal. 

Graph 2: Operating net balances and relative prosperity 

140,0

130,0

120,0

110,0

100,0

90,0

80,0

DK

SE

NL

DE

AT

FI

UK

FR

IT

)
0
0
1
=
7
2
-
U
E

,

S
P
P
c
p

I

N
G

(

y
t
i
r
e
p
s
o
r
P

-0,10%

-0,15%

-0,20%

-0,25%

-0,30%

-0,35%

Operating budgetary balances 2007-2010 (% GNI)

More  importantly,  an  accounting  approach  focused  on  net  balances  is  certain  to  generate 
dissatisfaction  for  the  Member  States.  An  accounting  system  is  a  zero-sum  game  where  the 
gain  of  one  player  always  comes  at  the  expense  of  another  (see  Box  1).  This  comes  in 
contradiction  with  a  fundamental  feature  of  the  European  political  project,  which  aims  at 
creating  a  positive  sum-game,  notably  through  the  realization  of  common  projects  with  the 
EU budget. Instead  of  opposing Member States,  the European project  aims  at uniting  them, 
which some proponents of a juste retour concept sometimes forget. 

In  the  context  of  a  reform  of  EU  financing,  any  new  correction  mechanism  will  need  to  be 
carefully justified, not only by way of debatable accounting measurements (see below), but in 
view of the overall balance of benefits brought by the EU budget and policies, and reflect the 
relative prosperity of the Member States concerned. 

40  Belgium  and  Luxembourg  are  not  included  in  the  table.  Their  respective  budgetary  balances  vary  a  lot 
depending on whether administrative expenditures are taken into account. When these expenditures are not taken 
into account, as is the case for operating budgetary balances, these two countries appear as net contributors at 
levels comparable to Denmark, Germany and the Netherlands. However, when administrative expenditures are 
included,  as  is  the  case  of net  balances  calculations for  UK  correction purposes,  these  countries  appear  as  net 
beneficiaries of the EU budget. 

44

 
 
 
 
 
 
 
 
 
 
 
                                                 
2. 

Key principles to assess correction mechanisms 

2.1. 

Back to the basics: the Fontainebleau principle 

The  Fontainebleau  principle  constitutes 
the  political  foundation  of  the  correction 
mechanisms (see Part 1, section 2). This principle does not impose the use of correction 
mechanisms  at  any  time:  it  just  recognizes  that,  under  a  vaguely  set  of  defined 
circumstances, a correction may be used.  

Elements  subject  to  interpretation  include  the  notion  of  "budgetary  burden",  which 
may relate to gross national contributions, net balances (see Box 1), or any other notion of 
excessiveness in relation to the budget; "relative prosperity", which may relate to any notion 
of  macroeconomic  prosperity  (GDP,  GNI…)  measured  in  Euros  or  in  purchasing  power 
parities  and  compared  in  percentages  or  on  a  per-capita  basis;  the  "appropriate  time"  is 
equally a matter of interpretation. 

Box 1:   Budgetary balances revisited 

Although  net  balance  calculations  have  been  used  for  many  years,  this  notion  is  subject  to 
considerable criticism.  

As  an  accounting  exercise  aiming  at  attributing  to  specific  countries  expenditure  and 
contributions to the EU budget, net balance calculations ignore any notion of the added value 
of EU policies related to the budget. The fact that expenditures at EU level may in some cases 
lead to considerable economies of scale and avoid duplication of Member States expenditure 
is simply ignored.  

Net  balance  calculations  are  always  a  zero-sum  game.  This  means  that  the  accounting 
advantage  of  one  Member  State  comes,  by  definition,  at  the  expense  of  another  Member 
State.  Hence,  net  balances,  by  their  nature,  create  and  reinforce  antagonisms  in  budgetary 
discussions – and beyond.  

The  conventions  which  determine  net  balance  calculations  are  arbitrary  –  revenue  and 
expenditure allocation assumptions are highly questionable. Examples include: 

•  European programmes such as Erasmus, where EU assistance benefits both the Member 

State which students leave to study abroad and the Member State of destination; 

•  Research and innovation, where cross-border spill-overs are enormous and investments in 

one project may have EU-wide implications; 

•  Cohesion  policy,  where  a  significant  part  of  projects  financed  by  EU  funds  benefit 
companies  located  in  other  Member  States,  in  particular  "net  contributors"  to  the  EU 
budget; 

•  Agricultural  policy,  where  important  direct  aids  are  paid  in  each  Member  State  to  large 

45

 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
agri-food companies located in other Member States or in third countries; 

•  Home affairs, where transfers paid to one Member State are often of direct interest to its 

neighbours; 

•  Administrative  expenditure  to  the  benefit  of  the  entire  Union,  which  are  "allocated"  to 
those Member States where institutions are located (mainly Belgium and Luxembourg). 

In a nutshell, "it is difficult to break down expenditure by beneficiary Member State except in 
very special cases".41 

The arguments set out in Box 1 suggest that the design of a correction mechanism should not 
be  based  on  an  explicit  calculation  of  net  balances  as  is  currently  the  case  for  the  UK 
correction.  Whereas  accounting  calculations  may  provide  useful  indicative  measures  of 
financial  flows,  they  do  not  constitute  a  sound  basis  to  build  a  correction  mechanism.  And 
they are certainly not the only parameter that should be looked at. 

Moreover,  a  formula-based  correction  mechanism  using  net  balances  calculations  is 
fundamentally inefficient. It reduces the incentive for the country concerned to spend money 
allocated in the context of EU policies. For instance, with the current UK correction, money 
not spent increases the net contribution of the UK, with a subsequent correction for 2/3 of the 
amount. Conversely, money rightly allocated to the UK is reduced mechanically via the UK 
correction.  This  can  have  important  consequences,  for  instance  when  EU  solidarity  fund  is 
spent  in  favour  of  the  UK  (e.g.  to  alleviate  the  dramatic  effects  of  floods  in  some  recent 
years): 2/3 of this spending is cancelled out by a reduction of the UK correction.  

Whatever system is conceived for the future, the concept on which the current UK correction 
is based will need to be fundamentally revised in the light of past experience.    

2.2. 

Four guiding principles to design a new system 

This  report  therefore  proposes  four  guiding  principles  for  defining  and  assessing  possible 
correction mechanisms for the future: 

  Fairness: In line with the Fontainebleau principle, any correction should compensate 
for  a  budgetary  burden  which  is  excessive  in  relation  to  the  relative  prosperity  of  a 
Member  State.  A  correction  should  therefore  ensure  a  level  playing  field  for  Member 
States in similar positions, taking into account all relevant elements. At the same time all 
Member States should contribute to the financing of a correction.   

  Transparency  and  simplicity:  A  correction  mechanism  needs  to  be  easy  to 
understand. The benefit for the recipient(s) and the financing of the correction need 
to be clearly identifiable and unequivocal, thus facilitating parliamentary oversight. 

  Limitation in time: A correction mechanism is a response to a situation prevailing at 

41 See Le Cacheux, J. (2005), "The poisonous budget rebate debate", Notre Europe, Studies & Research, N°41. 

46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
a  specific  time.  In  line  with  the  Fontainebleau  principle,  it  is  closely  related  to  the 
structure of expenditure and it should therefore not apply beyond the duration of a 
Financial Framework. 

  No  reduction  in  incentives  for  implementation:  Member  States  profiting  from  a 
correction  should  not  become  reluctant  to  implement  EU-programmes  in  their 
country.  As  was  explained  above  this  problem  currently  exists  with  the  UK-
correction. In practice, a correction should be determined ex ante. 

3. 

Alternative correction mechanisms 

Based  on  the  above  principles,  this  section  looks  at  the  design  of  various  alternative 
mechanisms.  

There are two main approaches (with some variants): a lump sump system and a generalised 
correction mechanism. 

  In  a  lump  sum  system,  all  existing  corrections  would  be  transformed  into  a  lump  sum 
gross  reduction  on  GNI  payments:  the  UK  correction,  the  "rebates  on  the  rebate"  for 
Germany, the Netherlands, Austria and Sweden would be eliminated as well as the hidden 
correction  consisting  in  a  retention  of  25%  of  traditional  own  resources  as  "collection 
costs". The use of GNI reductions would apply strictly to those Member States for which a 
perceived  excessive  budgetary  burden  can  be  demonstrated.  It  would  be  an  ad  hoc 
solution  comparable  with  the  current  gross  reductions  for  the  Netherlands  and  Sweden 
agreed  as  a  part  of  the  package  in  December  2005.  Such  a  system  would  be  able  to 
address directly any future problems, while simplifying the current system considerably. 

  In a generalised correction mechanism (GCM), the UK correction would be replaced by 
the  GCM  and  no  other  corrections  would  be  applied.  The  GCM  (limited  in  scope  to 
certain categories of expenditure or not) with no restriction on the amount of corrections 
and 100% refund rate (as compared to currently only 66% for the UK correction) would 
have a considerable impact on accounting net balances. However, compared to the simple 
and  transparent  approach  of  granting  lump  sums  there  seems  to  be  no  advantage  to  this 
approach (see below). 

Benchmarking against the key principles set out for reforming the correction mechanism, the 
simple and transparent approach of granting lump sums seems preferable to the systematic but 
complex GCM: 

  Fairness:  both  approaches  have  the  potential  to  tackle  excessive  budgetary  burdens. 
However,  GCM  only  does  so  with  regard  to  one  parameter,  namely  the  (debatable) 
measure of net balances in percentage of GNI, whereas the lump sum system lends itself 
to  tailor-made  solutions  taking  into  account  all  relevant  parameters  related  to  potential 
budgetary imbalances and relative prosperity.  

  Transparency and simplicity: in general, gross reductions implemented via GNI lump sum 
payments  are  simple  and  transparent  with  corresponding  amounts  precisely  known  in 
advance.  The  GCM  is  quite  complex  and  it  is  as  opaque  as  the  current  UK  correction 
mechanism. 

47

 
 
 
 
 
 
 
 
 
 
 
 
  Limited  in  time:  experience  of  past  negotiations  suggests  that  it  is  easier  to  limit  the 
duration  of  ad  hoc  corrections  than  systematic  correction  mechanisms;  once  a  formula-
based system is installed it is likely to persist.  

  No reduction in incentives for implementation: the GCM with 100% refund rate could be 
regarded as even worse in this respect than the UK correction mechanism. Those national 
governments paying would have lower incentives to implement additional EU expenditure 
programs (or certain programmes with a limited GCM). Lump sum payments do not have 
any negative impact on incentives to implement EU programmes because they are agreed 
ex-ante and do not depend on ex-post budget executions. 

Table 7: assessment of alternative correction mechanisms 

Main relevant assessment criteria 

Current UK 
correction 

GNI lump 
sums 

GCM 

Fairness 

Transparency and simplicity 

Limited in time 

No negative impact on incentives to 
implement EU budget  

- 

-- 

-- 

- 

+ 

++ 

++ 

++ 

+ 

- 

- 

-- 

48

 
 
 
 
 
 
ANNEX 1. THE AMOUNTS OF THE UK CORRECTION OVER 1984-2011 

0,36%

0,35%

0,35%

0,33%

0,32%

0,31%

0,33%

0,31%

0,30%

0,32%

0,30%

0,30%

0,30%

0,29%

0,32%

0,32%

0,31%

0,33%

0,28%

0,27%

0,26%

0,26%

0,27%

0,26%

0,22%

0,22%

0,22%

6,877

4,922

4,896

5,613

5,548

5,285

5,197

5,254

4,841

3,996

4,133

3,558

3,842 3,800

0,10%

3,519

2,195 2,151

2,517 2,452

2,787 2,660

2,940

2,541 2,574

2,276

R
U
E
n
o

i
l
l
i

b
n

i

n
o
i
t
c
e
r
r
o
c
K
U
e
h
t

f
o
t
n
u
o
m
A

7

6

5

4

3

2

1

0

0,18%

1,879 1,814

1,000

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Year of the UK correction

Note: The amounts of the UK correction for 2008-2011 are provisional. 

0,40%

0,35%

0,30%

0,25%

0,20%

I

N
G
%

0,15%

0,05%

0,00%

49