The next generation of EU own resources: Questions and Answers - Main contents
OVERVIEW
How does the own resources system work today?
There are currently four own resources for the EU budget:
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-Customs duties, which are levied on imports, collected at the external borders of the EU, and go directly to the EU budget. Member States retain 25% of the amount as collection costs.
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-The Value Added Tax own resource, which has been simplified as of 2021. A uniform call rate of 0.3% applies to the value added tax bases of all Member States.
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-The own resource based on non-recycled plastic packaging waste is the main novelty of the previous Own Resources Decision from 2020. Member States contribute €0.80 per kilogramme of their plastics packaging waste that is not recycled. A correction is applicable for less prosperous Member States.
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-The Gross National Income (GNI) own resource remains the main source for financing the EU budget. All Member States contribute according to their share in the EU27 GNI. Some Member States benefit from a gross reduction. The call rate is adjusted to finance the part of the budget not covered by other revenue sources.
These four own resources account for more than 90% of revenues. Other sources of revenues include taxes and other deductions from EU staff salaries, bank interest, contributions from non-EU countries to certain programmes, interest on late payments and fines.
Why is the Commission proposing new own resources?
Following the unprecedented economic crisis triggered by the COVID-19 pandemic, the EU agreed on NextGenerationEU, the largest stimulus package ever financed through the EU budget. NextGenerationEU currently deploys more than €800 billion (in current prices, €750 billion in constant 2018 prices), raised on capital markets, to fund specific recovery and resilience actions in a limited period of time, in order to boost economic growth and invest in a greener and more digital future.
On 16 December 2020 the European Parliament, the Council and the Commission agreed to accompany NextGenerationEU with a roadmap to introduce new own resources. The three institutions agreed that 'the expenditure from the Union budget related to the repayment of the European Union Recovery Instrument should not lead to an undue reduction in programme expenditure or investment instruments under the Multiannual Financial Framework' and that 'the institutions will work towards introducing sufficient new own resources with a view to covering an amount corresponding to the expected expenditure related to the repayment.'
What is the composition of the Own Resources package?
The European Commission proposes an amendment of the Own Resources Decision to introduce three new categories of own resources based on:
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-the carbon border adjustment mechanism;
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-the revised EU Emissions Trading System (ETS), and
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-a share of the residual profits of the largest and most profitable multinational enterprises that are allocated to EU Member States following the agreement by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting to address the Tax Challenges Arising from the Digitalisation of the Economy (OECD/G20 Inclusive Framework agreement).
How much revenue will the package deliver?
According to the Commission's proposal, the new own resources will be introduced gradually as of 1 January 2023. Once they have reached their cruising speed, on average over the period 2026-2030, revenues for the EU budget are estimated to reach up to €17 billion per year (in constant 2018 prices). These revenues will be used for both the repayment of NextGenerationEU and the financing of the Social Climate Fund. These estimates are subject to uncertainties, in particular due to the market price for carbon allowances over time and the need to work on the finalisation and subsequent implementation of the OECD/G20 Inclusive Framework Pillar One.
How will the new own resources contribute to the repayment of NextGenerationEU?
The repayment of the borrowing for NextGenerationEU will be spread over more than three decades, to be concluded by 2058. Sufficient revenue is needed to cover the Union's repayment needs for the non-repayable part of the borrowing, in line with the funding structure and repayment profile of NextGenerationEU. An amount of €15-16 billion in current prices corresponds to a linear repayment profile from the Union budget for non-repayable support based on the Commission's issuance planning for NextGenerationEU, including the maturity structure.
The three institutions have agreed that new own resources should raise an amount that is sufficient to cover the expected expenditure for the repayment of the principal and the interest of the funds borrowed under NextGenerationEU. However, repayments will ultimately be financed through the general budget as there is no ‘earmarking' of own resources in line with the universality principle of the EU budget.
New own resources could enable repayment of NextGenerationEU borrowing already under the current multiannual financial framework. To that end, the Commission is putting forward a proposal for a targeted revision of the current multiannual financial framework, which would enable accommodating repayment of NextGenerationEU borrowing upon the introduction of new own resources.
Is the Commission proposing EU taxes with this package?
The Commission does not propose EU taxes with the amendment of the Own Resources Decision. The Emissions Trading System and the carbon border adjustment mechanism are market-based instruments; their ancillary effect is the creation of new revenue for Member States. The OECD/G20 Inclusive Framework agreement tackles tax avoidance and aims at ensuring that profits are taxed where economic activity and value creation occur. A future EU Directive on the reallocation of taxing rights will support implementing the international agreement in line with requirements of the EU Single market. These instruments have their own merits. The purpose of the revision of the Own Resource Decision is to allocate a share of the revenues generated by these instruments to the EU budget.
How will the EU collect the own resources?
The modalities for the making available and for the control and supervision of the own resources are defined in separate legal acts. The Commission will make the relevant proposals in the first half of 2022.
How do the proposals today relate to the Fit for 55 package?
The proposed own resources are consistent with and complementary to the Fit for 55 package. The latter is a set of several legislative proposals aimed at reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
Emissions trading and the carbon border adjustment mechanism aim at achieving environmental objectives. It is appropriate that a share of their revenues is allocated to the EU budget, because they are pan-European mechanisms based on European objectives and principles.
Furthermore, the EU budget - including NextGenerationEU - strongly contributes to financing the transition to a climate-neutral economy. In particular, a new Social Climate Fund will provide dedicated funding to investments in renovation, new heating and cooling systems, and cleaner mobility. The Social Climate Fund will be financed by the EU budget with a financial envelope of €72.2 billion in current prices (corresponding to €58.4 billion in 2018 prices) over the period 2025-2032. The total financial envelope of the Fund would in principle correspond to an amount equivalent to around 25% of the expected revenue from the new emissions trading system for buildings and road transport.
What does the Commission's proposal mean for Member States?
The Commission proposal achieves a good balance between the different needs and priorities of Member States:
The package preserves the fiscal sovereignty of Member States. The Commission does not propose new taxes. On the contrary, only a share of the revenues generated by these EU instruments are channelled to the EU budget.
At the same time, the package addresses fairness with the solidarity adjustment mechanism. Furthermore, the new own resources contribute to financing the Social Climate Fund which will address the social impacts of the transition to a low carbon economy. New sources of revenues are therefore indispensable for the adoption of the overall ‘Fit for 55' package.
Last, new own resource are indispensable in the long term to maintain a sizable EU budget which will remain capable of financing, in addition to existing traditional policies, priorities such as research and investment, space and migration.
Emissions Trading System own resource
How will the proposed emissions trading own resource work?
The Emissions Trading System is a pan-European instrument, which generates revenues for Member States. Today, this mechanism applies to the power generation and industrial sectors, as well as aviation within Europe. With the Fit for 55 package, it will be progressively extended to the maritime sector, while gradually by 2026 all aviation allowances will be auctioned. Moreover, the revision of the Emissions Trading Directive foresees a new Emissions Trading System covering road transport and buildings.
The Commission proposes that a limited share of the total revenues from most of the auctioning of emission allowances and allowances not auctioned for which Member State have some discretionary flexibilities becomes part of the EU budget.
The Commission also proposes a temporary solidarity adjustment mechanism to avoid an excessively regressive impact on contributions from the emissions trading for some Member States. This mechanism will notably limit the contribution from low-income and carbon-intensive Member States - and make sure that higher-income Member States with a low carbon intensity pay a fair contribution.
Why should revenues from emissions trading become own resources?
The Emissions Trading System is a pan-European climate instrument, also generating revenues. Installations and aircrafts already covered by the system are subject to the same rules across the EU. There is a single carbon price across the EU for the sectors covered. Similarly, the new Emissions Trading System for building and road transport will apply across the EU. It is therefore appropriate that a limited share of the revenues from the Emissions Trading System is transferred to the EU budget.
How will the solidarity adjustment mechanism for the ETS own resource work?
With the new solidarity mechanism applied to the ETS based own resource, the contribution share of lower income Member State should be limited to one and a half time their share in EU Gross National Income (GNI). Similarly, to ensure that all Member States pay a fair share, the share of the ETS own resource should not be disproportionate to the relative prosperity of Member States.
Carbon Border Adjustment Mechanism own resource
How will the carbon border adjustment mechanism own resource work?
With the objective of climate neutrality by 2050 and the ambition to cut more rapidly European emissions by 2030, the EU needs to implement higher reduction targets in the coming decades. To ensure that the EU's effort is not frustrated by carbon leakage, a carbon border adjustment mechanism will be put in place in a way that is compatible with the World Trade Organisation (WTO). It will apply to iron and steel, cement, aluminium, fertilisers and electricity in a first phase.
The carbon border adjustment mechanism (CBAM) will ensure that products imported from outside the EU incur costs for their CO2 emissions aligned with EU products that are currently subject to the EU Emissions Trading System. Importers will need to acquire a sufficient amount of certificates to cover the embedded emissions of their imported goods. This means imported goods should be priced, as if they had been produced in the EU. In case those goods have paid a carbon price at the origin, this will be deducted to avoid double cost. Such a mechanism promotes cleaner industries in non-EU countries, encourages third countries to introduce carbon pricing measures and ensures fairness for EU companies.
75% of the revenues stemming from the sale of these certificates will be transferred to the EU budget. Member States will consequently be able to retain 25% of the revenues generated by the sale of Carbon Border Adjustment Mechanism certificates. The CBAM will start to generate revenues after a transitional period (2023-2025).
Why should revenues from the carbon border adjustment mechanism become an own resource?
The Carbon Border Adjustment Mechanism addresses the risk of carbon leakage and supports the EU's increased ambition on climate mitigation. It is compatible with WTO.
Due to the pan European nature of this instrument, it is appropriate that the relevant revenues accrue to the EU budget as an own resource.
Own resource based on the reallocated profits of very large multinational companies
How will the own resource based on OECD/G20 Inclusive Framework Pillar One work?
Pillar One of the OECD/G20 agreement envisages a reallocation of profits of multinational companies, from a number of sectors, with a consolidated global turnover of at least €20 billion and pre-tax profit margin above 10% based on the concept of end market jurisdictions where goods or services are used or consumed. Member States will provide a contribution proportional to the taxable reallocated profits.
Although all the details of the implementation of Pillar One of the international corporate taxation reform are not settled yet, the own-resources-proposal of 22 December 2021 demonstrates the Commission's commitment to ensure that this OECD/G20 agreement is swiftly and successfully implemented. Its use as a basis for an EU own resource can further contribute to the repayment of NextGenerationEU.
The Commission has committed to propose a Directive in 2022 implementing this agreement in line with the requirements of the single market. The own resource will enter into force once this Directive should be transposed into national law subject to the ratification and effective application of the tax reform by international partners.
Revision of the MFF
Why is the Commission proposing to amend the MFF regulation 2021-27?
The Commission is proposing a targeted revision of Council Regulation (EU, Euratom) 2020/2093 of 17 December 2020 establishing the 2021-2027 MFF for the following purposes:
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-an increase of the Multiannual Financial Framework ceilings for the years 2025, 2026 and 2027, for the Social Climate Fund proposed in July 2021 as part of the Fit for 55 package;
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-the introduction of an automatic adjustment of the Multiannual Financial Framework ceilings based on new own resources actually accrued to the EU budget, which would allow for the possibility to start the repayment of NextGenerationEU borrowing as of 2024.
Why does the Commission propose to increase the MFF ceilings for the Social Climate Fund?
The Commission proposed on 14 July a new financing instrument for the period 2025-2032: the Social Climate Fund, with an overall financial envelope of €72.2 billion in current prices, of which €23.7 billion (in current prices) for 2025-2027.
A corresponding increase of the relevant 2021-2027 MFF expenditure ceilings (which are expressed in 2018 prices) for the years 2025, 2026 and 2027 is necessary to finance the related expenditure for the new Fund. It is thus proposed to increase the ceilings by €20.9 billion (2018 prices), which corresponds to the envelope of €23.7 billion in current prices proposed in July 2021.
In line with the Fund's objectives to alleviate the effects of the new emissions trading for buildings and road transport on vulnerable households, micro-enterprises and transport users, the Fund is frontloaded to 2025, to enable Member States to anticipate the effects of the extension.
For the period 2025-2032, the Fund will be financed by general revenue under the Union budget, which will include as of 2026 the revenues from the emissions trading for buildings and road transport as foreseen in the amendment to the Own Resources Decision.
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