There is in fact no such proposal from the European Commission at this time. The Commission has invited Council to discuss the options suggested by the Commission for direct EU taxation to fund, in part at least, the Union budget from 2014 onwards. In putting forward this suggestion, the Commission has identified VAT as one of three options for that direct EU tax.
Currently, the EU budget is financed by traditional own resources, mainly customs duties, a notional VAT resource whereby a common rate is applied to each member state's harmonised VAT base and a GNI related resource whereby a common rate is applied to each member state's gross national income. The essence of the current system is that the EU budget is mainly funded by contributions from the member states, whose unanimous agreement is needed to make any change to the system.
In a report published last July, the Commission considered a number of options in relation to the future financing of the EU budget. These were maintaining the current system; abolishing the current VAT resource in favour of greater reliance on the GNI resource; or introducing a direct EU tax to finance the budget. The direct EU tax approach was favoured by the Commission, which proposed that it be introduced from 2014.
Three options for such a direct EU tax were put forward by the Commission: A tax on energy consumption; the application of an EU rate to actual national VAT bases; or a tax on corporate income. While not expressing a distinct preference for any one of these options, the Commission noted that an EU tax on corporate income would require the most preparatory work.
With specific regard to the VAT option, the Commission envisaged that this would be implemented through an EU rate as part of the national VAT rate paid by taxpayers and on the same taxable base. The Commission suggested that the EU VAT and national VAT should appear as separate taxes on the invoice or receipt that a taxable person provides to a customer. It was not envisaged by the Commission that the overall VAT burden on citizens would increase as the EU rate would be offset by an equivalent decrease in the national rate.
Virtually all the member states, including Ireland, have clearly expressed their opposition to a new direct EU tax to finance the budget. In their view, the current system is efficient, effective and reasonably equitable though there might be some scope for improving matters on that latter point. Debate has centred instead on the other two scenarios outlined by the Commission for financing of the budget. These are retaining the current system or abolishing the current VAT resource and going to a more emphatically GNI based system. As they think the latter scenario would be more equitable, transparent and administratively less burdensome, Ireland and a majority of member states favour the more GNI based option.
The final decision on the Commission's proposals will form part of the agreement on the future financing of the EU for the period 2007-13. The current negotiations on future financing are due to conclude in a political agreement at the European Council next June.