EU asks for taxing power to pay for bigger budget

Reuters News
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Posted: Jun 29, 2011 6:29 PM
EU asks for taxing power to pay for bigger budget

By Charlie Dunmore and Julien Toyer

BRUSSELS (Reuters) - - The European Union proposed on Wednesday introducing a 1 percent sales tax and a levy on financial transactions as part of plans to boost its seven-year budget to almost one trillion euros.

The proposed new taxes are designed to reduce the amount EU governments must pay to Brussels, the Commission said, while increasing the bloc's budget by about 5 percent to more than 970 billion euros ($1,374 billion) between 2014 and 2020.

"In the current times of fiscal austerity all across the EU, the Commission has presented an ambitious but realistic proposal," the bloc's budget chief, Januz Lewandowski, said in a statement.

But Britain immediately rejected the Commission's analysis, saying it had underestimated the degree of austerity being felt in European capitals.

"The EU budget increase that the commission has proposed today is unrealistic.... The EU has to take the same tough measures national governments are taking across Europe to tackle public deficits," Prime Minister David Cameron's office said.

"Britain will also oppose new EU taxes which will introduce additional burdens for business and damage EU competitiveness."

The budget plan included proposals for a freeze in EU agricultural and administrative spending at 2013 levels, a sharp increase in research and development spending, and new budget lines for cross-border energy, transport and technology projects.

NEW TAXES UNLIKELY

EU diplomats questioned the likelihood of the value added tax (VAT) and financial transaction levy ever being adopted, with the opposition of just one EU country such as Britain enough to block the unanimous agreement needed.

"It is clear that there is a strong ideological opposition to the project from several countries, including the UK," said one EU diplomatic source who asked not to be named.

Any effort by Brussels to introduce taxes is likely to meet stiff opposition in some countries while the idea of a transaction tax has been criticized by the European Central Bank, Britain and others.

"I do not support the introduction of ... a new European tax. Taxation is a national competence," Dutch finance minister Jan Kees de Jager said in a statement.

Legislative proposals for the VAT and transaction taxes will be put forward in October. The Commission said the new EU VAT charge would replace the current system under which states pay a part of purchase tax revenues to the EU budget.

The tax on transactions is aimed at generating up to 50 billion euros ($71 billion) a year for the EU's budget, officials said.

To reduce the threat of financial institutions simply relocating to avoid paying the levies, the Commission will propose applying different rates of tax according to the type of financial transaction, one source said.

For example, for global markets such as derivatives the proposed tax rate will be 0.01 percent, whereas the rate for government bond transactions would be 0.1 percent.

It remains difficult for Brussels to go it alone after the world's major economic powers in the Group of 20 repeatedly failed to reach agreement on taxes such as one on transactions.

Under the proposals, farm spending will total 371.7 billion euros between 2014 and 2020, with a further 15.2 billion for new programs, giving an average annual budget of about 55 billion euros ($78 billion).

The common agricultural policy (CAP) consumes the largest share of the bloc's 140 billion euro annual budget, and while countries including Britain have urged cuts, main beneficiary France said it should remain at least at its current level.

Other elements included a 60 percent rise in research and development funding, and 16 billion euros over seven years to promote democracy and growth in regions bordering the EU such as North Africa and the Western Balkans.

Administrative spending by the EU's institutions will be frozen at 5.7 percent of the overall budget, and the Commission will order a review of EU officials' pay and conditions.

The Commission's budget must now be unanimously approved by EU governments, and spending priorities also agreed by EU lawmakers, which is expected to take at least 18 months.