CELEX: 
Language: en
Date: 1003-03-03
Title: Proposal for a Council Decision on the system of the European Communities' own resources # Proposal for a Council Regulation on the implementing measures for the correction of budgetary imbalances in accordance with Articles 4 and 5 of the Council Decision of (...) on the system of the European Communities' own resources

COMMISSION OF THE EUROPEAN COMMUNITIES
                                                       Brussels, 3.8.2004
                                                       COM(2004) 501 final/2
                                                       2004/0170 (CNS)
                                                       2004/0171 (CNS)
   CORRIGENDUM
   Annule et remplace la page 8 du document
   COM(2004) 501 final du 14.7.2004.
   Concerne uniquement la version EN.
                                          Proposal for a
                                    COUNCIL DECISION
                 on the system of the European Communities’ own resources
                                          Proposal for a
                                  COUNCIL REGULATION
   on the implementing measures for the correction of budgetary imbalances in accordance
      with Articles 4 and 5 of the Council decision of (…) on the system of the European
                                  Communities’ own resources
                                 (presented by the Commission)
EN                                                                                       EN
 ---pagebreak---                               EXPLANATORY MEMORANDUM
   1.  INTRODUCTION
       The European Union creates a community of shared aims. Parts of the EU budget
       serve a clear cohesion goal. Other parts fund the achievement of specific objectives
       through EU agreed programmes. As a result, net beneficiaries of, and net
       contributors to, the EU budget will always exist, although the policy benefits accrue
       to the Union as a whole.
       Budgetary balances (also called net balances), measured by the difference between
       contributions to and receipts from the EU budget, fail to account fully for the benefits
       accruing to Member States from participating in the EU. For example, research or
       border protection expenditure benefits not only the immediate recipients but also
       gives rise to spill-over effects transcending national borders1. It may not be possible
       to quantify the extent of these spill-overs, but their consideration would modify the
       assessment of the accounting imbalances.
       The definition of budgetary balances is also fraught with significant conceptual and
       accounting problems. Numerous choices have to be made in computing budgetary
       balances on the items to be included in the receipts and expenditure flows, and on the
       reference periods (e.g. cash vs. accrual figures, surpluses from previous years, etc.).
       The resulting budgetary balances vary significantly depending on the choices made.
       Nevertheless, the size of some of these imbalances has been at the centre of
       discussions. After years of budgetary stalemate and agonizing discussions, the 1984
       Fontainebleau agreement introduced the existing UK correction, which was given
       effect by the own resources decision of 7 May 1985. The decision was based on the
       following general principle2:
       '… 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.'
       The principle of a generalised correction was therefore already acknowledged by the
       European Council in 1984 ('any Member State'). The decision for granting a
       correction should be based on two criteria: the size of the budgetary imbalance
       ('excessive') and the wealth of a Member State compared to the EU as a whole
       ('relative prosperity').
       The justifications for granting a correction on an exclusive basis to the UK are today
       less relevant than at the time of the Fontainebleau European Council, since several
       other Member States can legitimately claim that their current situation is comparable
       to the UK's (section 2). Furthermore, the cost of enlargement should be fairly shared.
       Consequently, it is argued that, in light of the principle set in the Fontainebleau
   1
      These spill-over effects include the spending of income generated in the receiving Member State on
      goods or services produced in another Member State, the purchase of financial asset denominated in
      various Member States currencies etc.
   2
      See Fontainebleau European Council, ‘Conclusions of the Presidency’, Bulletin of the European
      Communities, 6-1984.
EN                                                  2                                                    EN
 ---pagebreak---        conclusions, the conditions exist for the introduction of a generalised correction
       mechanism. The parameters defining such a correction mechanism are examined and
       a proposal is made which would respect the twin goals of:
       • preventing excessive negative budgetary balances combined with a reduction of
           differences between net contributors at comparable levels of prosperity;
       • ensuring that the financing costs of the mechanism are kept at a reasonable level.
   2.  CURRENT SITUATION OF THE UK COMPARED TO OTHER NET CONTRIBUTORS
       The following two subsections examine the relative prosperity and the size of the net
       budgetary balances for all net contributors to the EU budget3.
       2.1. Relative degree of prosperity
       The table below gives an overview of the gross national income (GNI) per capita
       expressed in purchasing power standards (PPS4) for the year 2003 for all Member
       States that were net contributor in the year 20025.
              Table 1. GNI per capita of net contributors (in PPS)
                                  (EU-15 average. = 100)
                                             2003                   1984
          United Kingdom                    111.2                    90.6
          Denmark                           111.1                   104.0
          Austria                           109.8                     --
          Netherlands                       106.6                    95.0
          Sweden                            104.6                     --
          France                            104.2                   104.0
          Germany                            98.6                   109.6
          Italy                              97.3                    92.9
       This table clearly illustrates that in 2003- GNI per capita, expressed in PPS, ranges
       between 97% and 111% of the EU-15 average for all net contributors to the EU
       budget. At 111.2%, the UK's relative prosperity is at the top of the range. This is in
       sharp contrast with the situation in 1984, when the UK was the least prosperous of
       the net contributors.
       In view of the dramatic shift in the UK's position compared to the other net
       contributors, it is legitimate to re-consider the existing correction system, in light of
       the Fontainebleau principle whereby a Member State's net balance should be viewed
       in relation to its relative prosperity.
   3
      The assessment and proposal made in this communication are based on the more detailed information
      and analysis contained in the technical annex to the Commission’s own resources report.
   4
      The PPS is an artificial currency that reflects differences in national price levels that are not taken into
      account by exchange rates. This unit allows meaningful volume comparisons of economic indicators
      among countries. Data on PPS are calculated by Eurostat.
   5
      Net balances presented in this document, like those used for the UK correction, are calculated including
      administrative expenditure. For this reason, Belgium and Luxembourg do not appear among the net
      contributors.
EN                                                    3                                                            EN
 ---pagebreak---       2.2. Net budgetary balances before UK correction
      The net budgetary balance of the UK for the year 1985 (the first year for which the
      correction was calculated) amounted to -0.48% of GNI before correction. (Although
      accurate data are not available for the other Member States, Germany was the only
      other major net contributor to the EU budget at that time.) As illustrated in the table
      below, the UK’s net balance has on average remained at a comparable level in recent
      years. Over the period 1996-2002 the net budgetary balance – before UK correction
      and including administrative expenditure - of EU-15 net contributors, was on average
      the following:
                  Table 2. Net budgetary balances before UK correction
                  for EU-15 selected members (annual averages 1996-2002)
                                                                in % of GNI
         United Kingdom                                             -0.47%
         Germany                                                    -0.44%
         Netherlands                                                -0.43%
         Sweden                                                     -0.38%
         Austria                                                    -0.24%
         Italy                                                      -0.06%
         France                                                     -0.04%
      If the current system remained unchanged, average net budgetary balances for the
      period 2008-20136 would deteriorate for all net contributors across-the-board
      because of the financing cost of enlargement. According to Commission estimates
      and assuming expenditure levels equal to the financial perspective ceilings as
      proposed by the Commission in its communication of 10 February 20037, the
      estimated net balances of the net contributors would be the following.
         Table 3. Estimated net budgetary balances before UK correction
                    for EU-15 selected members (annual averages 2008-
                    20138)
                                                   In % of GNI
         United Kingdom                            -0.62%
         Netherlands                               -0.55%
         Germany                                   -0.52%
         Sweden                                    -0.47%
         Austria                                   -0.37%
         Italy                                     -0.29%
         France                                    -0.27%
         Denmark                                   -0.20%
         Finland                                   -0.14%
      Under the assumption that the level of agricultural expenditure for the EU-25 agreed
      by the Brussels European Council in October 2002 and the ‘cohesion’ expenditure
   6
     Details on the hypotheses used in calculating these estimates are presented in the technical annex to the
     own resources report.
   7
     COM(2004) 101 final.
   8
     As corrections are reimbursed one year later, averages in this table and the following ones are
     calculated over a six-year period since the 2007 correction is to be paid in 2008 and the 2013 correction
     would take place in 2014.
EN                                                   4                                                         EN
 ---pagebreak---        proposed by the Commission under the so-called Objective 1 and Cohesion fund
       remained unchanged, a reduction of the overall level of payment appropriations from
       the 1.14% of GNI proposed by the Commission to, say, 1.00%, would only have a
       very limited impact on the size of the estimated net balances. This is because the
       expenditure for the new Member States would in essence not be touched and the
       reduction would be achieved by drastically cutting the other non-agricultural
       expenditure going to the EU-15 and/or external actions that do not enter into the
       allocated expenditure. As a consequence, the resulting reduction of own resources
       payments for the net contributors would to a large extent be offset by a
       corresponding reduction in EU allocated expenditure in these same Member States.
       In the absence of any correction mechanism, the UK would have been on average the
       largest net contributor over the last 7 years, and would probably remain the largest
       net contributor to the EU budget over the period till 2013. However, the net balances
       of NL, DE and, to a lesser extent, SE have been and are expected to remain of a
       comparable order of magnitude. As shown in the previous section, all these three
       Member States are currently relatively less prosperous than the UK.
       Whether the size of net budgetary balances is ‘excessive’ in view of the relative
       prosperity of the Member States concerned largely depends on the political
       perception of the acceptable degree of financial solidarity within the Union. If the
       UK net balance was judged ‘excessive’, then the application of the Fontainebleau
       principle would rather point to the extension of a correction mechanism to other
       Member States, who – at lower levels of prosperity - bear negative net balances of a
       similar order of magnitude.
       In any event, granting a correction on an exclusive basis to one Member State
       appears to be unjustified, especially when taking into account the expected evolution
       of the net budgetary balances in the enlarged Union under unchanged conditions, as
       illustrated in the next section.
   3.  ESTIMATED NET BALANCES WITH UNCHANGED OWN RESOURCES DECISION
       Estimates indicate that over the period 2007-2013 the UK correction will increase by
       more than 50% compared to the average over the latest 7 years to reach an estimated
       € 7.1 billion from € 4.6 billion in the period 1997-2003.
       As a result of the additional expenditure required for enlargement, net balances of all
       the EU-15 will deteriorate. Although the enlargement to 10 new Member States was
       unanimously agreed at the Berlin European Council in March 1999, the UK insisted
       and obtained that enlargement-related expenditure be taken into account9 when
       calculating the UK correction, thus shielding it from most of the financial
       consequences of enlargement. That is the main reason for the expected future
       increase in the UK correction.
   9
      Pre-accession expenditure relating to actual payments in the last year before accession of any acceding
      country is permanently deducted from the allocated expenditure.
EN                                                   5                                                        EN
 ---pagebreak---        As a consequence, the cost for the Member States that pay a full share in the
       financing of the UK correction, including all the new Member States, will increase
       proportionally.
       Should the current own resources decision remain in force, the average net balance
       for the net contributors over the 2007-2013 period after UK correction is estimated to
       be as follows:
           Table 4. Estimated net budgetary balances after UK correction
                             (annual averages 2008-2013)
                                                            in % of GNI
          Netherlands                                          -0.56%
          Germany                                              -0.54%
          Sweden                                               -0.50%
          Austria                                              -0.38%
          Italy                                                -0.41%
          Cyprus10                                             -0.37%
          France                                               -0.37%
          Denmark                                              -0.31%
          Finland                                              -0.25%
          United Kingdom                                       -0.25%
       According to these estimates, the UK will become (together with Finland) the
       smallest net contributor to the EU budget, in evident contradiction with the
       Fontainebleau principle mentioned above. The current system of a unique correction
       for the UK therefore must be reconsidered. Instead, the generalization of the
       correction mechanism, evolving from the existing correction would allow bringing
       the system closer to the original objective of avoiding excessive budgetary burdens
       in relation to the relative prosperity of Member States. By introducing a sort of
       ‘safety net’ for large net contributors beyond a certain level, it may also facilitate a
       more constructive approach to ensure the budgetary means to meet the policy
       challenges of the enlarged Union.
   4.  OUTLINING A GENERALISED CORRECTION MECHANISM
       4.1. General outline of the mechanism
       The proposed generalised correction mechanism has to be seen in the context of the
       Commission overall ‘package’ for the post-2006 financial framework. The final net
       position of Member States before and after correction is thus likely to be affected by
       decisions to be taken on the expenditure side of the package.
       The generalised correction mechanism is to be calculated on the basis of the net
       budgetary balance of each Member State in relation to the budget of the EU. The
       mechanism should be triggered beyond a threshold, expressed as a percentage of
       each Member State’s GNI, reflecting the minimum accepted level of unlimited
       financial solidarity between Member States. and representing a sort of basic
       reasonable net contribution. Net positions exceeding such a threshold will be eligible
   10
      Throughout this document estimates are based on areas controlled by the Republic of Cyprus.
EN                                                 6                                              EN
 ---pagebreak---    for a correction (partial refund). The amount of the correction is to be based on the
   part of the net balance exceeding this threshold, multiplied by a refund rate (i.e. the
   percentage of the amount in excess of the agreed threshold to be compensated). If the
   sum of all corrections exceeds a total predetermined volume, the refund rate is
   reduced accordingly. Annex 1 explains the steps required and the functioning of the
   proposed correction mechanism.
   4.2    The level of the threshold
   Simulations have been run for different levels of the threshold (using a refund rate of
   66%) ranging from zero to 0.50% of GNI.
   The total sum of the corrections at different threshold levels is estimated as follows:
         Table 5. Estimated gross corrections (average 2008-2013)
          Level of the threshold             Sum of all corrections
          (as a % of GNI, EU-27)               (in billion of euros)
                  0.00%                                 25.8
                  0.10%                                 19.8
                  0.20%                                 13.8
                  0.25%                                 11.1
                  0.30%                                  8.8
                  0.40%                                  5.2
                  0.50%                                  1.9
   A threshold level of around -0.25% would represent a sort of neutral point whereby
   the estimated future cost of financing the generalised correction mechanism would be
   equal to the estimated future cost of financing the current UK correction mechanism.
   A threshold lower than 0.25% would mean that the Member States paying in full the
   UK rebate (they currently bear more than 90% of the total cost) would have to pay
   more than the estimated cost of financing the current UK correction mechanism in
   the future. With a threshold higher than 0.25%, the mechanism would be less costly
   than financing the estimated future UK correction for those Member States,
   including all net recipients from the EU budget.
   The table above illustrates that the total sum of the corrections with a 0.25%
   threshold would be substantially higher than the estimated level of the future UK
   correction with the current own resources decision (ORD) unchanged. Applying a
   threshold of -0.25% would generate a level of (gross) corrections slightly above € 11
   billion, which is significantly higher than the approximately € 7 billion average (net)
   UK correction for the same period. This difference is linked to the assumption that
   the financing of the corrections would be shared by all Member States according to
   their share in GNI (see section 4.3 below).
   So an overall volume of up to € 11 billion of corrections could be financed before the
   GCM became more expensive than the continuation of the current ORD for those
   Member States who would not benefit from the GCM.
   The impact of introducing a generalised mechanism with a threshold is not linear.
   The effect on Member States’ net balances, compared to the current situation, is
   influenced by a combination of the following elements: a) the level of the Member
EN                                         7                                               EN
 ---pagebreak---    States’ budgetary imbalance before correction; b) the level of the threshold; and c)
   the financing rules under the existing UK correction.
   All major net contributors to the EU budget (UK, DE, NL, SE) would benefit from
   the correction mechanism with thresholds lower than or equal to 0.50% of GNI.
   Smaller net contributors would receive corrections depending on the threshold level.
   The relative position of each individual net contributor, compared to their estimated
   future position under the current ORD, is determined by a combination of the
   following two factors:
          ¾     the size of the negative net balance before correction, whereby larger net
                contributors such as DE, NL, SE tend to benefit more at lower threshold
                levels (compared to smaller net contributors);
          ¾     the current financing regime of the UK correction, whereby Member
                States currently benefiting from a special arrangement (DE, NL, SE, AT)
                tend to benefit less at higher threshold levels (compared to smaller net
                contributors).
   Any future ‘fairer’ mechanism should ensure in particular that the resulting financing
   cost does not lead to a heavier burden than under the current UK correction
   mechanism for ‘cohesion’ Member States.
   4.3. Financing rules
   Technically the correction could be financed in three different ways:
   • Member States who receive a correction do not participate in the financing. Under
      this option the entire burden of the financing would be concentrated on countries
      representing less than 50% of the total EU-27 GNI, many of them with relatively
      low levels of prosperity. Consequently, their net budgetary position would either
      deteriorate in an unacceptable manner, or the volume of the corrections would
      have to be severely restricted. Furthermore, distortions could result when a
      Member State with a net position just below the threshold would have to
      participate in the financing of the corrections and another Member State just
      above the threshold would be excluded from the financing.
   • Member States participate in the financing of all corrections except their own.
      This alternative would add considerable complexity to the proposal, since it would
      entail a separate financing round for each of the corrections.
   • All Member States participate in the financing of all corrections. Their financing
      share in the global amount of the corrections would be determined by their share
      in GNI.
   For sake of feasibility, transparency and simplicity, all Member States should
   participate in the financing of all corrections (third option).
   Although these financing rules are equivalent to adding the amount of the corrections
   to the expenditure side of the budget (whereby it would also be financed exclusively
   through an increase of the marginal resource GNI), it is proposed to maintain the
EN                                         8                                               EN
 ---pagebreak---        GCM on the revenue side of the budget, as done for the existing UK correction.
       Adding the corrections to expenditure would artificially inflate the level of budgetary
       expenditure with a corresponding decrease of available margins under the global
       expenditure ceilings.
       4.4. Comparing corrections levels
       A threshold set at -0.35% of GNI will give rise to an estimated average volume of
       gross corrections of around € 7 billion for the period 2007-2012 (to be financed in
       2008-2013).
       The generalisation of the correction mechanism combined with the change in the
       financing rules means that the comparison with the level of the correction under the
       current system is somewhat blurred. As all Member States, including those
       benefiting from such a mechanism, will participate in the financing of all corrections,
       the overall net correction will always be lower than the gross correction, whereas
       under the current system there is no difference between net and gross correction
       (what the UK gets is what other Member States pay).
       The resulting net balances of the large net contributors after the correction will be
       higher than the established threshold because of the combined effect of the partial
       refund and the participation in the financing of the correction system. Conversely,
       the burden for Member States having to pay fully their share of the financing cost
       and not benefiting from the correction is lower than at present even if the overall
       gross correction is larger. Thus, with a threshold set at 0.35% of GNI and a
       maximum predetermined correction volume set at € 7.5 billion, the combined burden
       for these Member States would be even lower (by about € 1 billion) than the average
       level paid during the 2001-2004 period and much lower when compared to the
       estimated cost of the continuation of the current system over the next financial
       framework (see table 6).
   5.  THE COMMISSION’S PROPOSAL
       Any correction mechanism entails an additional complication to the financing of the
       budget. Therefore the basic proposal should be relatively and sufficiently transparent.
       In this respect, the current parameters of the UK correction calculation should be
       modified only where necessary and simplified whenever feasible.
       The Commission therefore proposes to use the following parameters for a
       generalised correction mechanism:
       – keeping the categories of revenue to be taken into account (VAT + GNI)
          unchanged. Any other existing complication11 should be abolished;
       – keeping the expenditure headings included in the allocated expenditure
          unchanged;
   11
      Such as the calculation of the 'UK advantage' and the TOR windfall gains.
EN                                                   9                                         EN
 ---pagebreak---        – simplifying the financing by basing it only on GNI shares, whereby all Member
           States would participate in the financing of the global amount of the corrections in
           proportion to their relative prosperity;
       – setting the threshold level at -0.35% of GNI;
       – using the refund rate as the adjustment variable with a maximum rate of 66%, to
           be reduced automatically when the agreed maximum refund volume is exceeded
           in a given year;
       – capping the maximum available refund volume at € 7.5 billion.
       In absolute terms, the UK would be by far the largest beneficiary from the
       generalised correction mechanism, receiving on average a net compensation in
       excess of € 2 billion per year, approximately twice as much as the net amount DE
       would receive.
       The table below illustrates the estimated net budgetary balances for the period under
       consideration with the proposed GCM and compares them with the other two
       alternative scenarios.
             Table 6. Estimated net budgetary balances (average 2008-2013)
                                                      in % of GNI
                                       GCM             Current ORD No correction
         United Kingdom               -0.51%             -0.25%          -0.62%
         Netherlands                  -0.48%             -0.56%          -0.55%
         Germany                      -0.48%             -0.54%          -0.52%
         Sweden                       -0.45%             -0.50%          -0.47%
         Austria                      -0.41%             -0.38%          -0.37%
         Italy                        -0.35%             -0.41%          -0.29%
         France                       -0.33%             -0.37%          -0.27%
         Cyprus                       -0.33%             -0.37%          -0.28%
         Denmark                      -0.25%             -0.31%          -0.20%
         Finland                      -0.19%             -0.25%          -0.14%
         Spain                         0.26%              0.23%           0.32%
         Ireland                       0.51%              0.47%           0.56%
         Malta                         1.10%              1.06%           1.16%
         Belgium12                     1.27%              1.21%           1.32%
         Slovenia                      1.34%              1.31%           1.40%
         Portugal                      1.54%              1.50%           1.60%
         Greece                        2.20%              2.16%           2.25%
         Hungary                       3.09%              3.06%           3.15%
         Czech Republic                3.21%              3.17%           3.26%
         Slovakia                      3.31%              3.27%           3.36%
         Estonia                       3.79%              3.76%           3.85%
         Poland                        3.80%              3.76%           3.85%
         Lithuania                     4.44%              4.41%           4.50%
         Latvia                        4.45%              4.40%           4.51%
                      13
         Luxembourg                    5.84%              5.80%           5.89%
   12
      When excluding administrative expenditure, Belgium and Luxembourg appear as net contributors.
EN                                                10                                                EN
 ---pagebreak---       With the proposed mechanism, on average, the net balances of the largest net
      contributors would be at comparable levels, with the UK, DE, NL and SE all
      between -0.51% and -0.45%, to be compared with a range between -0.56% and -
      0.25% under the UK correction mechanism (and between -0.62% and -0.47% with
      no correction). Several Member States (FR, IT, CY and AT) would have net balances
      averaging between -0.40% and -0.30%, with A somewhat higher than the other three.
      DK and FI would be the two remaining smaller net contributors with estimated
      average net balances of -0.19% and -0.25%, respectively.
      Even with a threshold level of -0.35%, the largest net contributors will end up having
      net balances above the threshold because of the combined effect of the partial refund
      and the participation in the financing of the correction system. Nonetheless, the
      resulting net budgetary balances for net contributors would be more in line with the
      Fontainebleau principle when compared to the current system.
      On the other hand, the estimated burden of financing the overall correction for all the
      other Member States would be lower than under the current system.
   6. TRANSITIONAL MEASURES
      It is appropriate that the introduction of the generalised system for correcting
      budgetary imbalances (GCM) shall be accompanied by transitional measures for the
      UK to alleviate the financial impact of the changeover for this Member State. In
      order not to increase excessively the total cost of the corrections, the application of
      the generalised system should be progressively phased in for the other eligible
      Member States.
      The option presented here is relatively straightforward and is based on the one hand
      on additional top-up payments for the UK and on the other hand a phasing-in of the
      other Member States into the GCM (while the UK would enter immediately into the
      GCM).
      6.1    Additional top-up payments for the UK
      In addition to the corrections the UK will receive under the GCM, it is proposed to
      grant the following top-up payments to the UK over a 4-year period:
      • in 2008: € 2.0 billion
      • in 2009: € 1.5 billion
      • in 2010: € 1.0 billion
      • in 2011: € 0.5 billion
      These top-up payments would alleviate the financial impact of the introduction of the
      GCM for the UK in 4 gradual steps. The UK has received in recent years a net
      correction of on average € 4.6 billion annually over the period 1997-2003. Under the
      GCM the UK is expected to receive € 2.1 billion annually on average over the
      period. The proposed transitional measures raise this annual average amount to € 3.1
      billion.
EN                                          11                                                EN
 ---pagebreak---    Since these lump sum payments represent a phasing-out of the current system, they
   would continue to be financed according to the current financing rules, i.e.: the UK
   does not participate in the financing and the share of DE, NL, AT and SE in the
   financing is restricted to 25% of their normal share.
   It is further proposed that neither these payments to the UK nor their financing
   should impact the calculation of the corrections under the proposed generalised
   correction mechanism (GCM). Specifically this means:
   • the corrections under the GCM will be based on Member State's net balances
       excluding the effect of the top-up payments;
   • the top-up payments to the UK will not be taken into account for the maximum
       available refund volume (the cap).
   6.2    Phasing-in of the GCM for the other Member States
   In order to offset the increased cost brought about by the proposed top-up payments
   for the UK so as to limit the overall financing cost during the transitional period, it is
   appropriate to foresee a phasing-in period for the other Member States into the GCM.
   (In order to preserve the logic presented in the previous paragraph, the UK should
   fully enter into the GCM immediately.)
   To this effect it is proposed to phase-in the refund rate, which is applied to the part of
   any Member State's net balance in excess of the threshold, in the following way for
   all Member States (except the UK, which would be granted 66% as of the first year):
   • in 2008: 33%
   • in 2009: 50%
   • in 2010: 50%
   • in 2011: 66%
   6.3    Results of simulation
   The overall volume of the corrections (so including both the top-up payments to the
   UK and the GCM) resulting from this proposal for a transitional regime would be €
   7.205 million compared to € 6.771 million under the proposed GCM on average over
   the period 2008-2013. This represents an increase of approx. € 430 million per year.
   The net balances resulting from the application of this combined phasing-in are
   presented in the table below. The table allows for the comparison with the situation
   before correction, the situation under the current own resources decision and the
   situation under the GCM without transitional period.
EN                                        12                                                  EN
 ---pagebreak---       Estimated net budgetary balances for net contributors (average 2008-2013)
                                          in % of GNI
                               Without       Current UK     GCM with      Commission
                              correction      correction      0.35%        Proposal:
                                                           threshold &      GCM +
                                                          cap at € 7.5 bn transitional
                                                                             period
                                  (1)             (2)           (3)            (4)
        Belgium                 1,32%           1,21%         1,26%          1,26%
        Czech Republic          3,26%           3,17%         3,20%          3,20%
        Denmark                -0,20%          -0,31%        -0,26%         -0,26%
        Germany                -0,52%          -0,54%        -0,48%         -0,49%
        Estonia                 3,85%           3,76%         3,79%          3,78%
        Greece                  2,25%           2,16%         2,19%          2,19%
        Spain                   0,32%           0,23%         0,26%          0,25%
        France                 -0,27%          -0,37%        -0,33%         -0,34%
        Ireland                 0,56%           0,47%         0,51%          0,50%
        Italy                  -0,29%          -0,41%        -0,35%         -0,36%
        Cyprus                 -0,28%          -0,37%        -0,33%         -0,34%
        Latvia                  4,51%           4,40%         4,45%          4,44%
        Lithuania               4,50%           4,41%         4,44%          4,43%
        Luxembourg              5,89%           5,80%         5,83%          5,83%
        Hungary                 3,15%           3,06%         3,09%          3,09%
        Malta                   1,16%           1,06%         1,10%          1,09%
        Netherlands            -0,55%          -0,56%        -0,48%         -0,50%
        Austria                -0,37%          -0,38%        -0,41%         -0,41%
        Poland                  3,85%           3,76%         3,79%          3,79%
        Portugal                1,60%           1,50%         1,54%          1,53%
        Slovenia                1,40%           1,31%         1,34%          1,33%
        Slovakia                3,36%           3,27%         3,30%          3,30%
        Finland                -0,14%          -0,25%        -0,20%         -0,20%
        Sweden                 -0,47%          -0,50%        -0,45%         -0,46%
        United Kingdom         -0,62%          -0,25%        -0,51%         -0,46%
   7. CONCLUSION
      On the basis of its review of the own resource system, the Commission is of the view
      that the existing correction mechanism on an exclusive basis is no longer justified
      and proposes the introduction of a generalised mechanism to correct excessive
      negative budgetary imbalances.
EN                                          13                                             EN
 ---pagebreak---                                                 ANNEX 1
                   Key features of the proposed generalised correction mechanism
        Under the proposed mechanism, calculating the corrections involves the following
        steps:
        1.     Calculate the aggregate amount of all expenditure allocated to each Member
               State. Allocated expenditure, as for the current correction mechanism, includes
               all categories of expenditure that are ‘internal’ to the EU13.
        2.     Calculate the percentage share of each Member State in total allocated
               expenditure.
        3.     Determine the percentage share of each Member State in own resources
               payments. Since traditional own resources are excluded from the categories of
               revenue to be taken into account, the combined share in VAT and GNI own
               resources is used to calculate any Member States’ share in EU budgetary
               revenue14.
        4.     Deduct (2) from (3) above for each Member State, to obtain the corresponding
               percentage showing the corresponding positive/negative balance.
        5.     For each Member State, multiply the percentage resulting from (4) above by
               total allocated expenditure, to obtain the net budgetary contribution/benefit
               expressed in euros.
        6.     Multiply the threshold corresponding to the reasonable net contribution (RNC)
               by the GNI (in €) of each Member State and deduct from the result obtained
               under (5).
        7.     If the result obtained under (6) is greater than zero, multiply the result under
               (6) by the refund rate to obtain the correction for each Member State and
               reduce the refund rate as necessary if the sum of all corrections exceeds the
               predetermined maximum refund volume (see below).
   13
      This includes virtually the total amount of the current expenditure headings 1 (agriculture) and 2
      (structural operations) as well as the vast majority of expenditure under headings 3 (internal policies)
      and 5 (administration), excluding only some minor items of expenditure that cannot be reasonably
      allocated to any individual Member State. Headings 4 (external policies), 6 (reserves) and 7 (pre-
      accession expenditure) relate explicitly to ‘external’ expenditure and are therefore not taken into
      account.
   14
      A proposal for a generalised correction mechanism should be as simple and transparent as possible.
      Therefore all existing complications in the UK rebate calculation which are related to the preservation
      of the UK’s 1984 revenue position (share in uncapped VAT, calculating the ‘advantage’ as well as the
      ‘TOR windfall gains’), should be abolished.
EN                                                  14                                                         EN
 ---pagebreak---             The total cost of the correction mechanism, i.e. the sum of all corrections is limited
            by a maximum available refund volume (MARV). The MARV should be determined
            ex-ante for the period of the financial perspective as a yearly ad-hoc amount15.
            Net positions exceeding the RNC are eligible for a partial refund: the corrective
            percentage or the refund rate (RR), to be applied to the part of the Member State's
            net budgetary balance exceeding the threshold (RNC). This refund rate is a
            dependent variable for which an upper limit of 66% (currently used for the UK
            correction) applies. The actual refund rate will be derived from the available refund
            volume. Thus, the refund rate is automatically reduced when the application of the
            66% maximum refund rate breached the MARV.
            The partial refund is made ex-post as currently done for the UK correction.
            The resulting formula for calculating the generalised correction mechanism is the
            following:
                       TPx Ex                      
            C xRR =         −  * E − RNC * Yx  * RR
                       TP E                        
            if C xRR > 0
            where RR = 0.66 if     ∑Cx
                                         0.66
                                         x    ≤ MARV and
                      MARV
            RR =              * 0.66 if ∑C    0.66
                                                   > MARV
                     ∑ Cx0.66
                      x
                                         x
                                              x
   Where: TP = Total VAT- and GNI-based payments made by all Member States in respect of year t
          TPx = VAT- and GNI-based payments made by Member State x in respect of year t
          E = Total allocated expenditure in respect of year t
          Ex = Expenditure allocated to Member State x in respect of year t
          C xRR = Correction (at refund rate RR) to be granted to Member State x in respect of year t
          RNC = Reasonable net contribution (= threshold) expressed in % of GNI
          Yx = GNI of year t of Member State x
          RR = Refund rate
          MARV = Maximum available refund volume
          ∑ x
              C x0.66 = Total sum of corrections if RR is equal to 0.66
   15
          Fixing the level of the MARV is clearly a discretionary decision which is not a-priori subject to any
          binding constraint. However, political realism would suggest that the cost of financing the corrections
          should not exceed the equivalent of the estimated future financing cost of the UK correction for those
          Member States currently financing a full share (i.e. all except UK, D, NL, S and A).
EN                                                      15                                                        EN
 ---pagebreak---                                                              2004/0170 (CNS)
                                                Proposal for a
                                         COUNCIL DECISION
                   on the system of the European Communities’ own resources
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty establishing the European Community, and in particular Article
   269 thereof,
   Having regard to the Treaty establishing the European Atomic Energy Community, and in
   particular Article 173 thereof,
   Having regard to the proposal from the Commission16,
   Having regard to the opinion of the European Parliament17,
   Having regard to the opinion of the Court of Auditors18,
   Having regard to the opinion of the European Economic and Social Committee19,
   Whereas:
   (1)     The European Council meeting in Berlin on 24 and 25 March 1999 concluded, inter
           alia, that the system of the Communities' own resources should be equitable,
           transparent, cost-effective, simple and based on criteria which best express each
           Member State's ability to contribute.
   (2)     The Communities' own resources system must ensure adequate resources for the
           orderly development of the Communities' policies, subject to the need for strict
           budgetary discipline.
   (3)     According to Council Decision 2000/597/EC, Euratom of 29 September 2000 on the
           system of the European Communities' own resources20, gross national income (GNI)
           for the year is defined at market prices as provided by the Commission in application
           of the European system of integrated economic accounts (hereinafter referred to as the
           ‘ESA 95’) in accordance with Regulation (EC) No. 2223/96.
   16
           OJ C […], […], p. […].
   17
           Opinion delivered on (OJ C […], […], p. […]).
   18
           OJ C […], […], p. […].
   19
           OJ C […], […], p. […].
   20
           OJ L 253, 7.10.2000, p. 42.
EN                                                    16                                          EN
 ---pagebreak---    (4)  It is appropriate, should modifications to the ESA 95 result in significant changes in
        GNI as provided by the Commission in accordance with Regulation (EC) No 2223/96,
        that the Council decide whether these modifications apply for the purposes of own
        resources.
   (5)  According to Article 3(1) and 3(2) of Council Decision 2000/597/EC, the Commission
        calculated the new percentages of the ceiling for own resources and the ceiling for
        appropriations for payments, expressed in two decimal places, in December 2001 on
        the basis of the formula therein.
   (6)  According to the communication21 from the Commission to the Council and the
        European Parliament on the adaptation of the ceiling of own resources and the ceiling
        for appropriations for commitments following the entry into force of Decision
        2000/597/EC, Euratom of 12 December 2001, the maximum ceiling of own resources
        is set equal to 1.24 % of the Communities' GNI at market prices and an overall ceiling
        of 1.31 % of the Communities' GNI was set for appropriations for commitments.
   (7)  It is appropriate that a similar method be used in the future on the occasion of changes
        in the ESA 95 which may have effects on the level of GNI should Council decide that
        these modifications apply for the purposes of own resources.
   (8)  Following the implementation in EU law of the agreements concluded during the
        Uruguay round of multilateral trade there is no longer any material difference between
        agricultural duties and customs duties. It is therefore appropriate to eliminate this
        distinction in the area of the EU budget.
   (9)  It is appropriate that the value added tax bases of the Member States continue to be
        restricted to 50 % of their GNI.
   (10) In the interest of transparency and simplicity it is proposed to establish the uniform
        rate of VAT as a fixed percentage. In order to avoid that this technical change has an
        impact on Member States’ payments of the VAT resource, the fixed rate should reflect
        the current uniform rate of call. The uniform rate of VAT should therefore be fixed at
        0.30 %.
   (11) The European Council of 25 and 26 June 1984 concluded that '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'. Since several Member States at
        comparable levels of prosperity are sustaining a similar budgetary burden, it is
        appropriate to replace the correction for budgetary imbalances granted to the UK
        under Article (4) of Council Decision 2000/597/EC with a generalised system for
        correcting budgetary imbalances.
   (12) It is appropriate that the introduction of the generalised system for correcting
        budgetary imbalances shall be accompanied by transitional measures for the UK to
        alleviate the financial impact of the changeover for this Member State. In order not to
        increase excessively the total cost of the corrections, the application of the generalised
        system should be progressively phased in for the other eligible Member States.
   21
        COM(2001) 801 final.
EN                                              17                                                 EN
 ---pagebreak---    (13)     The Commission shall continue to examine the possibilities of modifying the own
            resources structure by introducing a genuinely tax-based own resource to be
            operational from 1 January 2014 and shall submit a corresponding proposal to the
            Council.
   (14)     Provisions must be laid down to cover the changeover from the system introduced by
            Decision 2000/597/EC, Euratom to that arising from this Decision.
   HAS LAID DOWN THESE PROVISIONS, WHICH IT RECOMMENDS TO THE
   MEMBER STATES FOR ADOPTION:
                                                 Article 1
   The Communities shall be allocated own resources in accordance with the rules laid down in
   the following Articles in order to ensure, in accordance with Article 269 of the Treaty
   establishing the European Community (hereinafter referred to as the ‘EC Treaty’) and Article
   173 of the Treaty establishing the European Atomic Energy Community (hereinafter referred
   to as the ‘Euratom Treaty’), the financing of the budget of the European Union.
   The budget of the European Union shall, without prejudice to other revenue, be financed
   wholly from the Communities' own resources.
                                                 Article 2
   1.       Revenue from the following shall constitute own resources entered in the budget of the
   European Union:
   (a) levies, premiums, additional or compensatory amounts, additional amounts or factors,
   Common Customs Tariff duties and other duties established or to be established by the
   institutions of the Communities in respect of trade with non-member countries, customs duties
   on products coming under the former Treaty establishing the European Coal and Steel
   Community as well as contributions and other duties provided for within the framework of the
   common organisation of the markets in sugar;
   (b) the application of a uniform rate valid for all Member States to the harmonised VAT
   assessment bases determined according to Community rules. The assessment base to be taken
   into account for this purpose shall not exceed 50 % of GNI for each Member State, as defined
   in paragraph 7;
   (c) the application of a rate — to be determined pursuant to the budgetary procedure in the
   light of the total of all other revenue — to the sum of all the Member States' GNIs.
   2.       Revenue deriving from any new charges introduced within the framework of a
   common policy, in accordance with the EC Treaty or the Euratom Treaty, provided that the
   procedure laid down in Article 269 of the EC Treaty or in Article 173 of the Euratom Treaty
   has been followed, shall also constitute own resources entered in the budget of the European
   Union.
   3.       Member States shall retain, by way of collection costs, 25 % of the amounts referred
   to in paragraph 1(a).
EN                                                  18                                             EN
 ---pagebreak---    4.        The uniform rate referred to in paragraph 1(b) shall correspond to 0.30 %.
   5.        The rate fixed under paragraph 1(c) shall apply to the GNI of each Member State.
   6.        If, at the beginning of the financial year, the budget has not been adopted, the previous
   uniform VAT rate and rate applicable to Member States' GNIs shall remain applicable until
   the entry into force of the new rates.
   7.        For the purposes of applying this Decision, GNI for the year is calculated at market
   prices as provided by the Commission in application of the ESA 95 in accordance with
   Regulation (EC) No 2223/96.
   Should modifications to the ESA 95 result in significant changes in the GNI as provided by
   the Commission, the Council, acting unanimously on a proposal of the Commission and after
   consulting the European Parliament, shall decide whether these modifications shall apply for
   the purposes of this Decision.
                                                             Article 3
   1.        The total amount of own resources assigned to the Communities to cover
   appropriations for payments may not exceed 1.24 % of the total GNIs of the Member States.
   2.        Appropriations for commitments entered in the general budget of the European Union
   must follow an orderly progression resulting in a total amount, which does not exceed 1.31 %
   of the total GNIs of the Member States.
   An orderly ratio between appropriations for commitments and appropriations for payments
   shall be maintained to guarantee their compatibility and to enable the ceiling pursuant to
   paragraph 1 to be respected in subsequent years.
   3.        In the case of modifications to the ESA 95 which result in changes in the level of GNI
   that apply for the purposes of this Decision, the ceilings for payments and commitments as
   determined in paragraphs 1 and 2 shall be recalculated by the Commission on the basis of the
   following formula:
                     GNI t − 2 + GNI t −1 + GNI t ESA current
   1.24%( 1.31%) *
                   GNI t − 2 + GNI t −1 + GNI t   ESA modified
   where t is the latest full year for which Eurostat data are available.
                                                             Article 4
   1.        Any Member State sustaining a negative budgetary imbalance in excess of a threshold
   equivalent to a certain percentage of its GNI shall be granted a correction. The total amount of
   the corrections in a given year shall not exceed a maximum available refund volume
   expressed in euro. The Council, in accordance with the procedure laid down in Article 279(2)
   of the EC Treaty, shall lay down the implementing measures for the calculation of the
   corrections and their financing, in particular the threshold and the maximum available refund
   volume.
EN                                                              19                                     EN
 ---pagebreak---    The corrections shall be established by:
   (a) calculating for each Member State the budgetary imbalance as the difference, in a financial
   year, between:
   - the percentage share of that Member State in the sum of the total VAT-based and GNI-based
   own resources payments, and
   - the percentage share of that Member State in total allocated expenditure;
   (b) multiplying the difference thus obtained by total allocated expenditure;
   (c) deducting from the result under (b) the value of that Member State's GNI multiplied by the
   threshold;
   (d) if the result obtained under (c) is positive, multiplying this result by a refund rate, fixed at
   a maximum of 0.66 and, if necessary, reduced proportionally to respect the maximum
   available refund volume.
   2.       The following transitional measures shall apply:
   (a) In addition to the corrections resulting from the application of Article 4(1) of this
   Decision, the United Kingdom shall receive the following payments:
   in 2008: € 2.0 billion
   in 2009: € 1.5 billion
   in 2010: € 1.0 billion
   in 2011: € 0.5 billion
   These amounts shall be financed in accordance with the rules laid down in Article 5 of
   Council Decision 2000/597/EC, Euratom.
   These amounts and their financing shall not be taken into account for the calculation of the
   corrections mentioned under Article 4(1)(d) of this Decision.
   (b) The maximum refund rate mentioned under Article 4(1)(d) of this Decision shall be
   phased-in for all Member States other than the United Kingdom according to the following
   schedule:
   in 2008: 33%
   in 2009: 50%
   in 2010: 50%
   in 2011: 66%
                                                 Article 5
   1.       The cost of the corrections shall be borne by all Member States in accordance with the
   following arrangements: the distribution of the cost shall be calculated by reference to each
   Member State's share in total EU GNI.
EN                                                  20                                                  EN
 ---pagebreak---    2.      The correction shall be granted to any Member State by a reduction in its payments
   resulting from the application of Article 2(1)(c). The costs borne by all the Member States
   shall be added to their payments resulting from the application for each Member State of
   Article 2(1)(c).
   3.      The Commission shall perform the calculations required for the application of Article
   4 and this Article.
   4.      If, at the beginning of the financial year, the budget has not been adopted, the
   correction granted to any Member State and the costs borne by all the Member States as
   entered in the last budget finally adopted shall remain applicable.
                                               Article 6
   The revenue referred to in Article 2 shall be used without distinction to finance all
   expenditure entered in the budget.
                                               Article 7
   Any surplus of the Communities' revenue over total actual expenditure during a financial year
   shall be carried over to the following financial year.
                                               Article 8
   1.      The Communities' own resources referred to in Article 2(1)(a) shall be collected by
   the Member States in accordance with the national provisions imposed by law, regulation or
   administrative action, which shall, where appropriate, be adapted to meet the requirements of
   Community rules.
   The Commission shall examine at regular intervals the national provisions communicated to it
   by the Member States, transmit to the Member States the adjustments it deems necessary in
   order to ensure that they comply with Community rules and report to the budget authority.
   Member States shall make the resources provided for in Article 2(1)(a) to (c) available to the
   Commission.
   2.      Without prejudice to the auditing of the accounts and to checks that they are lawful
   and regular as laid down in Article 248 of the EC Treaty and Article 160C of the Euratom
   Treaty, such auditing and checks being mainly concerned with the reliability and effectiveness
   of national systems and procedures for determining the base for own resources accruing from
   VAT and GNI and without prejudice to the inspection arrangements made pursuant to Article
   279(1)(b) of the EC Treaty and Article 183 point (c) of the Euratom Treaty, the Council shall,
   acting unanimously on a proposal from the Commission and after consulting the European
   Parliament, adopt the provisions necessary to apply this Decision and to make possible the
   inspection of the collection, the making available to the Commission and payment of the
   revenue referred to in Articles 2 and 5.
EN                                                 21                                             EN
 ---pagebreak---                                                      Article 9
   The Commission shall submit to the Council a proposal to modify the own resources structure
   by introducing a genuinely tax-based own resource to be operational from 1 January 2014.
                                                    Article 10
   1.      Member States shall be notified of this Decision by the Secretary-General of the
   Council and the Decision shall be published in the Official Journal of the European Union.
   Member States shall notify the Secretary-General of the Council without delay of the
   completion of the procedures for the adoption of this Decision in accordance with their
   respective constitutional requirements.
   This Decision shall enter into force on the first day of the month following receipt of the last
   of the notifications referred to in the second subparagraph. It shall take effect on 1 January
   2007.
   2. (a) Subject to (b), Decision 2000/597/EC, Euratom shall be repealed as of 1 January 2007.
   Any references to the Council Decision of 21 April 1970 on the replacement of financial
   contributions from Member States by the Communities' own resources22, to Council Decision
   85/257/EEC, Euratom of 7 May 1985 on the Communities' system of own resources23, to
   Decision 88/376/EEC, Euratom, to Decision 94/728/EC, Euratom, or to Decision
   2000/597/EC, Euratom shall be construed as references to this Decision.
   (b) Articles 2, 4 and 5 of Decisions 88/376/EEC, Euratom, 94/728/EC, Euratom and
   2000/597/EC, Euratom shall continue to apply to the calculation and adjustment of revenue
   accruing from the application of a uniform rate valid for all Member States to the VAT base
   determined in a uniform manner and limited between 50 % to 55 % of the GNP or GNI of
   each Member State, depending on the relevant year, and to the calculation of the correction of
   budgetary imbalances granted to the United Kingdom for the years 1988 to 2006.
   (c) For amounts referred to in Article 2(1)(a) which should have been made available by the
   Member States before 28 February 2001 in accordance with the applicable Community rules,
   Member States shall continue to retain 10 % of these amounts by way of collection costs.
   Done at Brussels,
                                                      For the Council
                                                      The President
   22
           OJ L 94, 28.4.1970, p. 19.
   23
           OJ L 128, 14.5.1985, p. 15. Decision repealed by Decision 88/376/EEC, Euratom.
EN                                                      22                                          EN
 ---pagebreak---                                   EXPLANATORY MEMORANDUM
   The purpose of this proposal is to lay down the implementing measures for the correction of
   budgetary imbalances laid down in the Council Decision on the system of the Communities'
   own resources of (.........). The present proposal for a Council Regulation replaces the
   “Calculation Method" of 29 September 200024.
   24
          Calculation, financing, payment and entry in the budget of the correction of budgetary imbalances in
          accordance with Articles 4 and 5 of the Council Decision on the system of the EU´s own resources
          (Council of the European Union, 10646/00 ADD 2).
EN                                                    23                                                       EN
 ---pagebreak---                                                            2004/0171 (CNS)
                                             Proposal for a
                                      COUNCIL REGULATION
   on the implementing measures for the correction of budgetary imbalances in accordance
       with Articles 4 and 5 of the Council decision of (…) on the system of the European
                                     Communities’ own resources
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty establishing the European Community, and in particular
   Article 279(2),
   Having regard to the Treaty establishing the European Atomic Energy Community, and in
   particular Article 183 thereof,
   Having regard to Council Decision 200x/xxx/EC, Euratom of (…) on the system of the
   European Communities' own resources25, and in particular Articles 4 and 5 thereof,
   Having regard to the proposal from the Commission26,
   Having regard to the opinion of the European Parliament,27
   Having regard to the opinion of the Court of Auditors,28
   Whereas:
   (1)     According to Council Decision of (…) the correction for budgetary imbalances
           granted to the UK under Article (4) of Council Decision 2000/597/EC shall be
           replaced with a generalised system for correcting excessive negative budgetary
           imbalances.
   (2)     According to Council Decision of (…), the Council shall lay down the implementing
           measures for the calculation of these corrections and their financing, in particular the
           threshold and the maximum available refund volume.
   (3)     It is appropriate to define the categories of expenditure and revenue to be taken into
           account for the calculation of the corrections.
   (4)     It is appropriate to lay down the rules for entering the corrections in the budget.
   25
           OJ L […], […], p. […].
   26
           OJ C […], […], p. […].
   27
           OJ C […], […], p. […].
   28
           OJ C […], […], p. […].
EN                                                  24                                              EN
 ---pagebreak---    HAS ADOPTED THIS REGULATION:
                                                      Article 1
   1.       The calculation of the amount of the correction based on the budgetary imbalances of
   Member States of year t in accordance with Article 4 of Council decision (…) shall be
   established by:
   (a)      calculating for each Member State the budgetary imbalance as the difference between:
   - the percentage share of that Member State in the sum of the total VAT-based and GNI-based
   own resources payments relating to year t, and
   - the percentage share of that Member State in total allocated expenditure;
   (b)      multiplying the difference thus obtained by total allocated expenditure;
   (c)      deducting from the result under (b) the value of that Member State's gross national
   income (GNI) multiplied by the threshold;
   (d)      if the result obtained under (c) is positive, multiplying this result by a refund rate,
   fixed at a maximum of 0.66 and, if necessary, reduced proportionally to respect the maximum
   available refund volume.
   2.       The result obtained by steps (a) to (d) above corresponds to the following formula:
             TPx Ex                        
   C xRR =          −  * E − RNC * Yx  * RR
             TP E                          
   if C xRR > 0
   where RR = 0.66 if       ∑C
                             x
                                  0.66
                                  x    ≤ MARV and
            MARV
   RR =               * 0.66 if  ∑C    0.66
                                            > MARV
           ∑ Cx0.66
            x
                                  x
                                       x
   Where: TP = Total VAT- and GNI-based payments made by all Member States in respect of year t
            TPx = VAT- and GNI-based payments made by Member State x in respect of year t
            E = Total allocated expenditure in respect of year t
            Ex = Expenditure allocated to Member State x in respect of year t
            C xRR = Correction (at refund rate RR) to be granted to Member State x in respect of year t
            RNC = Reasonable net contribution (= threshold) expressed in % of GNI
            Yx = GNI of year t of Member State x
            RR = Refund rate
            MARV = Maximum available refund volume
             ∑x
                C x0.66 = Total sum of corrections if RR is equal to 0.66
EN                                                       25                                             EN
 ---pagebreak---    3.      For the purposes of calculating the corrections, VAT-based and GNI-based payments
   shall not include the payments relating to the corrections.
                                               Article 2
   1.      The threshold referred to in Article 1 shall be equal to 0.35 % of the GNI of the
   relevant Member State.
   2.      The maximum available refund volume (MARV) referred to in Article 1 shall be equal
   to euro 7.5 billion.
                                               Article 3
   1.      The distribution of the total cost of the corrections in accordance with Article 5 of
   Council decision (…) shall be calculated in proportion to each Member State's share in total
   EU GNI in year t.
   2.      The correction shall be granted to any Member State by a reduction in its payments
   resulting from the application of Article 2(1)(c) of Council decision (…).
   3.      The cost of the corrections borne by all Member States shall be added to their
   payments resulting from the application for each Member State of Article 2(1)(c) of Council
   decision (…).
                                               Article 4
   1.      The concept of expenditure to be used in the calculation of the corrections shall
   correspond to actual payments (execution of appropriations for payments) made in the year in
   question (year t) under that year's appropriations for payments as well as payments under
   carryovers of non-executed appropriations for payments to the following year (from year t to
   year t+1). Only utilised appropriations for payments, i.e. the amount of payments actually
   made, shall be taken into account.
   2.      The allocation of expenditure across the Member States shall be governed by the
   following rules:
   In general, payments shall be allocated to the Member State in which the principal recipient
   resides. However, in those cases where the Commission is aware that the recipient in question
   acts as an intermediary, the payments shall be allocated whenever this is possible to the
   Member State(s) in which the final beneficiary(ies) is(are) resident, in accordance with their
   shares in these payments.
   Total allocated expenditure shall be based on total expenditure of the general budget of the
   European Union, excluding the following two main categories of expenditure:
   -       Expenditure on external policies, including pre-accession or enlargement-related
   expenditure in non-member countries as well as other expenditure benefiting recipients
   outside the Union, such as development co-operation expenditure, research expenditure spent
   outside the EU, administrative expenditure paid to recipients outside the Union, etc.
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 ---pagebreak---    -       Expenditure that cannot be allocated or identified due to conceptual or other
   difficulties, such as expenditure on representation, on missions and on formal and other
   meetings as well as payments related to cross-border Community initiatives, promotion of
   inter-regional co-operative operations and other cross-border actions.
                                                 Article 5
   1.      The amount of the corrections shall be budgeted in two steps:
   (a)     The result of the first provisional calculation of the amount of the corrections for year t
   shall be entered in the preliminary draft budget of year t+1. The calculation shall be based on
   the most recent data available for both revenue and expenditure.
   (b)     The result of the definitive calculation of the amount of the corrections for year t shall
   be budgeted in an amending budget of year t+3. The calculation shall be based on the data on
   VAT bases, GNI and allocated expenditure relating to year t as known at 31 December of year
   t+2, which shall, where applicable, be converted into euro according to the annual average
   exchange rate of the year t.
           In order to calculate the share of each Member State in the sum of the total VAT-
   based and GNI-based own resources payments the budget of year t shall be recalculated on
   the basis of the outturn of appropriations for payments for year t, reduced by other revenue
   relating to year t (not including the balance of the previous exercise or other balances or
   adjustments of balances relating to previous years) and the actual amount of traditional own
   resources made available in year t. The remaining amount shall be financed by the VAT-
   based own resource up to the uniform rate of call of VAT and by the GNI-based resource for
   the residual amount necessary to balance the budget.
   2.      The financing of the corrections referred to in paragraph (1)(a) above shall be
   calculated on the basis of the latest data on Member States GNI for year t, available when the
   preliminary draft budget is drawn up.
   3.      A definitive calculation shall also be made in respect of the financing of the
   corrections for year t referred to in paragraph (1)(b) above. The calculation shall be based on
   Member States’ GNI in year t, as known at 31 December of year t+2, which shall, where
   applicable, be converted into euro according to the annual average exchange rate of the year t.
   The definitive financing data shall be compared with the payments relating to the corrections
   for year t already entered in the budget in year t+1. The balances per Member State shall be
   entered in an appropriate budgetary chapter of the amending budget referred to under
   paragraph (1)(b) above and converted into national currency according to the annual average
   exchange rate of the year t.
                                                 Article 6
   This Regulation shall enter into force on the day following that of its publication in the
   Official Journal of the European Union. It shall take effect as stipulated in Article 10 of
   Council decision (…).
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 ---pagebreak---    This Regulation shall be binding in its entirety and directly applicable in all Member States.
   Done at Brussels,
                                                 For the Council
                                                 The President
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