Britain will oppose plan for direct tax to finance EU

The European Commission was on collision course with Britain last night over leaked plans for a direct Europe-wide tax, and a system that could share out the benefits of the UK's annual €3bn (£2bn) budget rebate.

The Government pledged to oppose both measures, which are put forward in a draft document on how to finance the EU's annual €100bn budget.

The paper, which will be considered by the European Commission in 11 days' time, will call for a revamp of the complex system of VAT revenues and duties which finance European spending.

Instead the paper suggests three alternative sources of cash for the EU: a percentage of VAT revenues (which partly fund the EU at present), an energy tax, or a proportion of corporate tax income. Any one of these would replace the current, complex system.

In 2005 the EU's national governments will take decisions on the next spending round covering 2007 to 2013, and any one can wield a veto.

The Commission argues that a more transparent system, under which people know how the EU is funded, would improve the link between it and its citizens.

Nevertheless any direct tax will be opposed by the UK, which argues that taxation must be determined by national parliaments, and thinks that an EU tax would increase Europhobia in Britain.

Some of the options may prove practically difficult too. Each member state has a different corporate tax regime, making it difficult to envisage one rate being applied across the EU.

The UK is also highly resistant to any plans to replace its budget rebate with a system that allows all countries that pay more into EU coffers than they receive to claim some back.

The rebate was won by Margaret Thatcher in Fontainebleau in 1984 after she demanded Britain's "money back" because the UK is a big paymaster but receives relatively little in farm subsidies. But other net contributors, including Germany, the Netherlands, Sweden and Austria, say the system is unfair because they do not benefit.

And because every country has to contribute to funding the rebate, it has proved controversial among the new and relatively poor nations of Eastern Europe, which will have to pay when they join the EU.

The leaked documents come as the European Commission prepares a paper on its proposals for financing the EU between 2007 and 2013.

So far there is no agreement within the Commission on how much it thinks spending should be increased. Suggestions include 1.15 per cent, 1.22 per cent or 1.24 per cent of gross national income. At present about 1 per cent is being spent, and six countries, including Germany, the UK and France, have called for a 1 per cent ceiling in 2007-2013.

A spokeswoman for the EU budget commissioner, Michaele Schreyer, said: "We are interested in having more autonomy for the EU budget and a more transparent system."

But a British official argued: "Such matters should be decided by national parliaments accountable to their populations. A tax would be unpopular and would increase Europhobia." He added that the British rebate was "not negotiable" although the Government might be willing to consider a system "as long as our current position is protected". The last time Tony Blair negotiated the EU's budget, at a summit in Berlin in 1999, he resisted any significant curb on the rebate. But the price for that was that France managed to protect its financial interests too, by staving off efforts to reform the common agricultural policy from which it benefits hugely.

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