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European Union (Finance) Bill

Explanatory Notes

Policy background

2 The European Union (Finance) Bill reflects the political agreement reached at the 2013 February European Council (FEC) on the revenue side of the 2014 to 2020 Multiannual Financial Framework (MFF). The financing system (the "own resources" system) for the 2014 to 2020 MFF, as agreed by the FEC, sees very little change to the system in place for the 2007 to 2013 MFF; there will be no new Own Resource, no EU-wide taxes, and no change to the UK abatement.

3 Under the current Own Resources Decision (Council Decision of 7 June 2007: 2007/436/EC, Euratom), the EU budget is financed primarily from own resources, consisting of:

a. Levies and duties on trade with non-member countries in agricultural goods including sugar;

b. Customs duties on trade with non-member countries. Together with 3(a), these are called "traditional own resources" or TOR ;

c. The yield from applying a call-up rate to a hypothetical harmonized VAT base, assuming an identical range of goods and services in each Member State; and

d. A fourth resource based on Gross National Income (GNI), the call-up rate of which is determined by what is required (given all other revenue) to balance the budget on the one hand and the total EU GNI on the other hand.

4 The new Own Resources Decision (ORD) retains the existing categories of own resources and does not introduce any new own resources or EU-wide taxes to finance the EU budget.

5 The Member States' "retention rate" for Traditional Own Resources (TOR), which covers Member States' collection costs for customs duties, is reduced from 25% to 20%. This means a larger share of the EU budget will be financed from TOR with a corresponding reduction in GNI-based contributions. Notwithstanding, this change will have no impact on the ultimate cost of the EU budget to the UK (see Financial Implications).

6 For the period 2014 to 2020, the ORD re-introduces the reduced rate of call for VAT-based contributions for Germany, the Netherlands and Sweden, which will be fixed at 15% for these Member States compared to 0.3% for all other Member States. Austria, which benefited from a reduced call rate for its VAT-based contributions over 2007 to 2014, will revert to a standard call rate (0.3%) over the 2014 to 2020 MFF.

7 For the period 2014 to 2020, the ORD also re-introduces reductions in the GNI-based contributions of the Netherlands and Sweden, and introduces a reduction in these contributions for Denmark. These reductions constitute lump sum corrections for these Member States and they are fixed at €695 million, €185 million and €130 million per year respectively. Reductions in GNI-based contributions of €30 million in 2014, €20 million in 2015 and €10 million in 2016 are provided also to Austria. All amounts are expressed in 2011 prices.

8 The ORD lays down the own resources ceilings for payments (1.23% of total Member States GNI) and commitments (1.29%) and sets out the method for calculating subsequent changes to these ceilings following the introduction of European Systems of Accounts 2010 (ESA 2010) by all Member States.

9 The ORD retains the current mechanism for the UK abatement and the way it is financed by other Member States. Three time-limited transitional provisions in the abatement text have been deleted, as they expired at the end of 2013: (i) enlargement-related adjustment to total allocated expenditure; (ii) a phase-in schedule for the "disapplication" of the UK abatement to non-agricultural expenditure in Member States that have acceded to the EU after 30 April 2004, which is now fully phased-in; and (iii) a cap on the cost to the UK of the abatement "disapplication".

10 The ORD sets out the procedures for Member States' financing of the annual EU budget through the own resources system. These include (i) the "universality principle" - which states that own resources shall be used without distinction to finance all expenditure entered in the Union's annual budget; (ii) the treatment of budget surpluses - any surplus over total actual expenditure shall be carried over to the following financial year; and (iii) the legal requirement for Member States to collect own resources and make them available to the European Commission.

Prepared 8th June 2015