Work
22.June 2006 - 00:00
Effect of the grey economy on the Member States' contributions burden
The European Union’s own resources are made up of levies on agriculture and sugar production, customs duties collected at the EU’s external borders, a contribution derived from the VAT base, a contribution based on GNI and a number of miscellaneous items of income. Of these, the amount of both the VAT and the GNI contributions for each Member State is naturally influenced only by that share of economic activity which takes place legally.
The grey economy annually causes significant damage to the EU countries’ economies, and its repression is one of the EU's most important tasks. However, the situation in the Member States varies greatly, and it is estimated that the value of undeclared work — to take one example — as a proportion of GNP ranges between 1.5 % and 30 % from one EU country to another.
That being so, the EU’s own resources system favours, at least indirectly, those Member States with the relatively largest grey economy and highest levels of undeclared work and corruption. Conversely, those Member States which have succeeded in their efforts to combat the grey economy lose out, since a relatively higher membership contribution means a higher general tax burden and thus a distortion of competition.
What does the Commission propose to do to enhance the effectiveness of the fight against the grey economy, undeclared work and corruption, and thus to improve the operation of the internal market and create greater fairness in the allocation of the burden of contributions among the Member States?
Answer given by Mrs Grybauskaitė on behalf of the Commission
The own resources of the Communities are drawn from customs duties and agricultural levies, a VAT contribution and a share of gross national income (GNI), with the last being by far the largest source. The shadow economy may affect all these sources. The Commission shares the Honourable Member’s concerns about the level of fiscal fraud, though the operation of national tax systems lies primarily within the competence of Member States. The organisation of tax administrations and the definition of their control strategies are under the competence and responsibility of the Member States.
The Commission acknowledges that variations in the importance of the shadow economy may affect Member States’ relative contributions to the GNI resource, now accounting for between two thirds and three quarters of the Community’s income, and accepts that these variations can influence Member States’ budget payments. The calculation of GNI may be affected by VAT frauds in the Member State concerned(1).
However, the shadow economy is a very complex phenomenon and extremely difficult to measure. The Commission’s statisticians have no estimations of the extent of the shadow economy in the Member States. The main weakness in all estimations of the shadow economy published in recent years by certain experts and researchers lies in their inability to identify the part of the shadow economy that is already included in the GNI of Member States.
In order to ensure equity among Member States as regards their contributions to the Community budget, in February 1994 the Commission adopted its decision on exhaustiveness(2), imposing the application of a common methodology designed to ensure that estimations of GNI are exhaustive and cover activities that are legal per se but remain undeclared to the authorities.
As for illegal activities, as defined by each Member State’s national legislation (e.g. drugs trafficking), the Commission is working closely with the national statistical services, through the work of the GNI Committee in which they are all represented, to identify the possibilities for the development of reliable and comparable methods of estimation.
The existence of a shadow economy reduces Member States’ VAT receipts and thus diminishes national contributions to the own resource based on this tax. The Commission examined the Member States’ VAT procedures and made recommendations for their improvement in its fifth report under Article 12 of Council Regulation (EEC, Euratom) No 1553/89(3) on VAT own resources, which was transmitted to the Parliament in January 2005. The Commission is following up this report with the national tax administrations.
While respecting the principle of subsidiarity, the Commission's role is to ensure an increasingly common and comprehensive approach by all Member States in the fight against tax fraud. For this reason the Commission announced in its legislative and work programme for 2006 a communication with a view to launching a debate on an overall anti-fraud strategy at EU level. The communication to the Council, the Parliament and the European Economic and Social Committee concerning the need to develop a coordinated strategy to improve the fight against fiscal fraud was duly adopted by the Commission at its meeting on 31 May 2006.
Moreover, as regards — inter alia — large scale transnational VAT fraud, the Commission has made a proposal for a regulation of the Parliament and of the Council on mutual administrative assistance for the protection of the financial interests of the Community against fraud and any other illegal activities(4). The aim of the proposal is to facilitate the circulation of information to combat fraud and any other illegal activities affecting the financial interests of the Community.
It would introduce a system of cooperation both amongst the administrative authorities of the Member States and between those authorities and the Commission, by communicating information on transactions which are of particular significance at Community level. It is aimed at transactions likely to affect the Community’s revenue or expenditure, violations of VAT legislation and laundering of the proceeds of such illegal activities.
The proposed regulation also provides for the use of financial information from the anti-money laundering sector as financial information on suspicious transactions can also give indications about EC fraud at a very early stage of fraud operations and therefore facilitates their detection and prevention.
(1) The Court of Auditors has stated that ‘as the Commission has pointed out, these differences in degree of efficiency (“the degree of efficiency shown by the national authorities in collecting VAT”) are not without effects on the Community's finances’ because the calculation of GNP could be affected. ‘This could affect not only the financial breakdown among Member States, but also the maximum ceiling of budgetary resources which is established as a percentage of GNP’. Consequently, even if VAT were to be removed from the own resources system, VAT fraud would continue to affect the proper functioning of the system because of the reduction in GNP officially recorded in the country concerned; Special Report No 6/98 concerning the Court's assessment of the system of resources based on VAT and GNP, OJ C 241, 31.7.1998.
(2) Decision 94/168/EC, Euratom, OJ L 77, 19.3.1994.
(3) OJ L 155, 7.6.1989.
(4) COM(2004)509.
The European Union’s own resources are made up of levies on agriculture and sugar production, customs duties collected at the EU’s external borders, a contribution derived from the VAT base, a contribution based on GNI and a number of miscellaneous items of income. Of these, the amount of both the VAT and the GNI contributions for each Member State is naturally influenced only by that share of economic activity which takes place legally.
The grey economy annually causes significant damage to the EU countries’ economies, and its repression is one of the EU's most important tasks. However, the situation in the Member States varies greatly, and it is estimated that the value of undeclared work — to take one example — as a proportion of GNP ranges between 1.5 % and 30 % from one EU country to another.
That being so, the EU’s own resources system favours, at least indirectly, those Member States with the relatively largest grey economy and highest levels of undeclared work and corruption. Conversely, those Member States which have succeeded in their efforts to combat the grey economy lose out, since a relatively higher membership contribution means a higher general tax burden and thus a distortion of competition.
What does the Commission propose to do to enhance the effectiveness of the fight against the grey economy, undeclared work and corruption, and thus to improve the operation of the internal market and create greater fairness in the allocation of the burden of contributions among the Member States?
Answer given by Mrs Grybauskaitė on behalf of the Commission
The own resources of the Communities are drawn from customs duties and agricultural levies, a VAT contribution and a share of gross national income (GNI), with the last being by far the largest source. The shadow economy may affect all these sources. The Commission shares the Honourable Member’s concerns about the level of fiscal fraud, though the operation of national tax systems lies primarily within the competence of Member States. The organisation of tax administrations and the definition of their control strategies are under the competence and responsibility of the Member States.
The Commission acknowledges that variations in the importance of the shadow economy may affect Member States’ relative contributions to the GNI resource, now accounting for between two thirds and three quarters of the Community’s income, and accepts that these variations can influence Member States’ budget payments. The calculation of GNI may be affected by VAT frauds in the Member State concerned(1).
However, the shadow economy is a very complex phenomenon and extremely difficult to measure. The Commission’s statisticians have no estimations of the extent of the shadow economy in the Member States. The main weakness in all estimations of the shadow economy published in recent years by certain experts and researchers lies in their inability to identify the part of the shadow economy that is already included in the GNI of Member States.
In order to ensure equity among Member States as regards their contributions to the Community budget, in February 1994 the Commission adopted its decision on exhaustiveness(2), imposing the application of a common methodology designed to ensure that estimations of GNI are exhaustive and cover activities that are legal per se but remain undeclared to the authorities.
As for illegal activities, as defined by each Member State’s national legislation (e.g. drugs trafficking), the Commission is working closely with the national statistical services, through the work of the GNI Committee in which they are all represented, to identify the possibilities for the development of reliable and comparable methods of estimation.
The existence of a shadow economy reduces Member States’ VAT receipts and thus diminishes national contributions to the own resource based on this tax. The Commission examined the Member States’ VAT procedures and made recommendations for their improvement in its fifth report under Article 12 of Council Regulation (EEC, Euratom) No 1553/89(3) on VAT own resources, which was transmitted to the Parliament in January 2005. The Commission is following up this report with the national tax administrations.
While respecting the principle of subsidiarity, the Commission's role is to ensure an increasingly common and comprehensive approach by all Member States in the fight against tax fraud. For this reason the Commission announced in its legislative and work programme for 2006 a communication with a view to launching a debate on an overall anti-fraud strategy at EU level. The communication to the Council, the Parliament and the European Economic and Social Committee concerning the need to develop a coordinated strategy to improve the fight against fiscal fraud was duly adopted by the Commission at its meeting on 31 May 2006.
Moreover, as regards — inter alia — large scale transnational VAT fraud, the Commission has made a proposal for a regulation of the Parliament and of the Council on mutual administrative assistance for the protection of the financial interests of the Community against fraud and any other illegal activities(4). The aim of the proposal is to facilitate the circulation of information to combat fraud and any other illegal activities affecting the financial interests of the Community.
It would introduce a system of cooperation both amongst the administrative authorities of the Member States and between those authorities and the Commission, by communicating information on transactions which are of particular significance at Community level. It is aimed at transactions likely to affect the Community’s revenue or expenditure, violations of VAT legislation and laundering of the proceeds of such illegal activities.
The proposed regulation also provides for the use of financial information from the anti-money laundering sector as financial information on suspicious transactions can also give indications about EC fraud at a very early stage of fraud operations and therefore facilitates their detection and prevention.
(1) The Court of Auditors has stated that ‘as the Commission has pointed out, these differences in degree of efficiency (“the degree of efficiency shown by the national authorities in collecting VAT”) are not without effects on the Community's finances’ because the calculation of GNP could be affected. ‘This could affect not only the financial breakdown among Member States, but also the maximum ceiling of budgetary resources which is established as a percentage of GNP’. Consequently, even if VAT were to be removed from the own resources system, VAT fraud would continue to affect the proper functioning of the system because of the reduction in GNP officially recorded in the country concerned; Special Report No 6/98 concerning the Court's assessment of the system of resources based on VAT and GNP, OJ C 241, 31.7.1998.
(2) Decision 94/168/EC, Euratom, OJ L 77, 19.3.1994.
(3) OJ L 155, 7.6.1989.
(4) COM(2004)509.