Own resources mechanism

Own resources are a highly political issue: besides the whole question of the Communities' financial independence, their source is a major factor in shaping the relationship between the EU's citizens, its Member States and its institutions. So the debate over the Communities' own resources is closely linked to the wider debate over the future of European integration and the struggle between two contrasting visions, between the federal and the inter-governmental approach.

The 1970 decision on own resources set the Communities apart from other international organisations, which all rely for funding on contributions from their members.

Towards financial autonomy for the EU: the national contributions to own resources

Under the Treaty of Rome of 25 March 1957 the European Economic Community was to be financed by national contributions for a transitional period before changing over to a system of own resources. The principle was set down in Article 201 of the Treaty, which stated: "Without prejudice to other revenue, the budget shall be financed wholly from own resources." Own resources can be taken to mean a source of finance separate and independent of the Member States, some kind of revenue assigned once and for all to the Community to fund its budget and due to it by right without the need for any subsequent decision by the national authorities. The Member States, then, would be required to make payments available to the Community for its budget.

In 1965 a first attempt to transfer customs duties and agricultural levies - the "natural" own resources deriving from Community policies (the customs union and the common agricultural policy) - foundered in the face of French opposition, which prompted the Luxembourg compromise. But the 1966 target date for the changeover to a system of financing that would guarantee the Community some measure of independence was not kept. It was not until the Hague summit in 1969 that the Heads of State or Government, in an effort to revive the Community after some years of difficulty, finally took the decision to go ahead with the change. On 21 April 1970 the Council adopted a decision assigning to the Communities (with a single budget following the Merger Treaty of 8 April 1965) own resources to cover all their expenditure. The Decision marked the end of national contributions, through which the Member States had enjoyed some scope for controlling the policies undertaken by the Communities, and the beginning of an independent system of financing by "traditional" own resources (agricultural levies and customs duties) and a resource based on value added tax (VAT).

Where do own resources come from?

Traditional own resources are considered as the "natural" own resources, since they are revenue collected by virtue of Community policies rather than revenue obtained from the Member States as national contributions. Own resources currently come from customs duties, agricultural levies, sugar contributions, a fixed-rate portion of value-added tax (VAT) receipts and a fixed-rate levy on gross national income (GNI).

Customs duties are levied at external frontiers on imports under the common customs tariff that was introduced in 1968 (two years ahead of schedule). The Treaty of Rome had earmarked customs duties as the principal resource to be assigned to the European Economic Community (EEC) to finance its expenditure. European Coal and Steel Community (ECSC) customs duties have been included since 1988.
Agricultural resources: the most important of these are the agricultural duties earlier known as levies. They were introduced in 1962 and assigned to the Community by the Decision of 21 April 1970. Originally they were charges in amounts varying according to price levels on the world and European markets. Following transposal of the multilateral trade agreements (Uruguay Round, April 1994) into Community law, there is no longer any difference between agricultural duties and customs duties. Agricultural duties are nothing more than import duties charged on agricultural products imported from non-member countries.

Besides agricultural duties, there are also levies on the production of sugar, isoglucose and inulin syrup. But unlike the levies on agricultural imports, they are charged on Community sugar producers. The 2000 own-resources decision that is currently in operation allows Member States to retain 25% of traditional own resources to cover collection costs.

Value added tax (VAT). VAT resources were introduced by the 1970 Decision because the traditional own resources were not sufficient to finance the Community budget. But the need to harmonise the VAT base meant more delay, with the result that this complex resource did not come into use until 1980. It is obtained by applying a given rate to a base determined in a uniform manner. From 1988 to 1994 the base could not exceed 55% of the Member States' gross national product (GNP). After 1995 the limit was lowered to 50% of GNP for Member States with a per capita GNP below 90% of the Community average. Between 1995 and 1999 the new limit was gradually extended and now applies to all the Member States.

The 1970 Decision limited the maximum call-in rate of VAT to 1% of the base. The second own resources Decision of 7 May 1985 raised the ceiling to 1.4% from 1 January 1986 to coincide with the accession of Spain and Portugal. This increase was designed to meet the costs of enlargement. The 2000 own-resources decision finally cut the maximum call-in rate to the current level of 0.5% of the harmonised and capped VAT base.

Gross national income (GNI). In 1988 the Council decided to introduce a fourth own resource based at the time on gross national product (GNP), which was meant to replace VAT as the resource for balancing the budget. The decision of 24 June 1988 also set the ceiling for own resources as a percentage of GNP. The figure was 1.14% for 1988 and 1.27% for 1999. The current own-resources decision extends the application of the European System of Accounts 1995 (ESA95) to the EU budget. In ESA95, the concept of gross national product has been replaced by gross national income, and the reference to GNP has accordingly been replaced by GNI in the own-resources decision. But to leave the amount of own resources made available to the Communities unchanged, the ceiling on own resources as a percentage of EU GNI has been adapted, the new ceiling being 1.24%.

The GNI-based resource is obtained by applying a rate fixed each year under the budget procedure to a base representing the sum of the gross national incomes at market prices. It is calculated by reference to the difference between expenditure and the yield of all the other own resources. It is the "key" resource, not only because it finances the bulk of the budget but also determines the cap on the VAT base, how the cost of the UK rebate is shared out, and the ceiling on total resources that the Community can receive.

Own resources are collected by the Member States and made available to the Community every month, being credited to an "own resources" account opened by the Commission at each national treasury or national bank. Traditional own resources are credited each month as they are collected. VAT own resources and the GNI-based resource, on the other hand, are made available to the Commission on the first working day of each month at the rate of one twelfth of the estimate entered in the Community budget. Given the specific needs involved in payment of agricultural expenditure, the Commission sometimes calls on the Member States to pay VAT and GNI resources a month or two in advance in the first quarter of the year.

Other revenue. The budget is not financed entirely from own resources but also by taxes and deductions from staff remuneration, bank interest, third-country contributions to certain Community programmes (research, for instance), reimbursement of Community grants not used, interest on late payments and balances from previous years.

The exceptional measure for the UK

In 1984 the Fontainebleau European Council decided to introduce a correction for the United Kingdom. This mechanism gives the United Kingdom a rebate equivalent to 0.66% of its negative net balance. The cost of financing the UK rebate is shared between the other Member States according to their share of GNI (except in the case of Austria, Germany, the Netherlands and Sweden, whose share is reduced by three quarters). The cost is spread over the other twenty-two Member States.

See also