Brussels mulling new VAT for its budget

The draft EU budget for the 2014-2020 period includes controversial proposals for EU 'own resources' that comprises a tax on financial transactions and an EU-wide value-added tax (VAT).

European Commission President Jose Manuel Barroso has had to respond to early criticism from member states. "This is an extremely serious, credible proposal, and to say 'no' to something which was only adopted two or three hours ago is not serious or credible," he said.

The UK has already called the proposals "unrealistic". Denmark and Sweden were also quick to criticise the plans.

The commission documents also include two options to increase EU 'own resources', controversial in some member states who fear it will curb their control over the EU institutions. A tax on European financial transactions could enable the EU to raise up to 40% of its own revenue by 2020. While Germany and France have backed the move, Britain fears it would cause an exodus of activity from the London's financial heartland unless implemented at a global level.

A second option would see the creation of a EU-wide sales tax. The new VAT would be levied at a fixed percentage by governments and transferred directly to EU coffers. Current member state contributions based on VAT would be abolished.

The Commission also said that it wanted to simplify the rebate system through a new practice of annual lump-sum reductions for Germany, Britain, Sweden and the Netherlands. Former British prime minister Margaret Thatcher won an annual adjustment in 1984 to compensate for the fact that Britain paid more into EU coffers than it received. The cheque is currently worth over €3 billion a year.

Wednesday's proposals are only the start of a lengthy negotiation between member states and the European Parliament over the future EU spending plan, with a final agreement expected at some point in 2012.

MEPs have already insisted that they want a five percent increase in the long-term budget, with the incoming Polish EU presidency planning to hold a meeting between all parties late this autumn.

Under the commission blueprint, EU spending would rise to €971.52 billion over the seven-year period, with €1,025 billion pledged in commitments. This compares with €925.5 billion and €975.77 billion under the current period (2007-2013), although there is little change in terms of gross national income (GNI).

The budget for the EU's common agricultural policy (CAP) is set to remain largely the same. The current two-pillar structure of the CAP will be maintained, with €281.8 billion pencilled in for direct payments to EU farmers, and €89.9 billion for rural development projects.

A further €376 billion would go to boosting underdeveloped areas under the commission plans, with co-financing requirements relaxed for countries receiving funding support such as Greece.