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EU Looking At New Tax-Based Funding Model

by Ulrika Lomas,, Brussels

24 January 2017

A new report has recommended a rethink on how the European Union is funded, proposing the use of either revenues from carbon tax, a common corporate income tax, or from value-added tax (VAT), as currently, but under reformed arrangements.

The report was prepared by the High Level Group on Own Resources, which was established in February 2014. The Group is charged with examining how the revenue side of the EU budget can be made more simple, transparent, fair, and democratically accountable. It is composed of ten independent members and is chaired by Italy's former Prime Minister, Mario Monti.

"Own resources" are different types of revenue that member states have decided to attribute to the EU for its financing. Current own resources are: customs duties levelled at the points of entry of the single market; VAT-based own resource; and gross national income (GNI)-own resource, which is calculated once the other two components are known, to ensure that the budget is balanced. In the case of VAT, a standard percentage is levied on the harmonized VAT base of each country; the VAT resource accounts for around EUR14bn (USD14.96bn). The GNI-own resource represents around two-thirds of the EU's total of own resources.

The volume of the EU budget is constrained by two limits. The own resource ceiling defines the maximum amount of revenue that can be asked from member states, expressed as a percentage of GNI. The multiannual financial framework payment ceiling defines a maximum amount in absolute value annually. The EU does not have the power to levy taxes; only national authorities do.

The report says that a range of possible new own resources could partially replace the GNI-based contributions of member states. These could include a reformed VAT-own resource, an EU corporate income tax, a financial transaction tax, or an 'other financial activities' tax. It said these options would contribute to the better functioning of the Single Market, and, in the case of VAT and corporate tax, promote fairer taxation, combat tax fraud, and avoidance.

Other possibilities include either a carbon levy, proceeds from the European emissions trade system, an electricity tax, a motor fuel levy, or an indirect tax on imported goods produced in third countries with high emissions.

The report stressed that introducing new resources would not mean that the EU will have new tax powers. It said it is therefore wrong to speak of "EU taxes."

Instead, the recommendations would need to be implemented under the EU's current treaties. Any new own resource would have to be introduced in the Own Resources Decision (ORD), which is the main legislative text governing these issues. If the Commission decides to propose a modification of the ORD, the unanimous agreement of member states in the Council is required, following consultation by the European parliament. For an amendment to enter into force, it must be ratified in all member states.

Monti commented: "The EU budget is one of the main tools for the EU to achieve its objectives – and needs in-depth rethinking."

"New resources would help us move to a more simple, transparent, fair, and democratically accountable system. Now is the moment to make the financing of our European project fit for the future. Let's not waste this opportunity," he added.

TAGS: tax | value added tax (VAT) | tax avoidance | budget | corporation tax | tax planning | carbon tax | Italy | trade | European Union (EU) | Europe | Tax | Financial Transactions Tax (FTT)

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