Income from the value added tax (VAT), derived from the application of a uniform rate to the VAT assessment base of each member state, harmonized in accordance with agreed-upon rules.
By 1984 these resources had become insufficient and in 1988 the European Community created an additional category of revenue, based on the gross domestic product of each member state. At that time a revenue ceiling of 1.2 percent of total European Community GNP was set. This was subsequently raised to 1.21 percent in 1995 and ultimately to 1.27 percent in 1999. At the same time, the VAT rate was gradually reduced from 1.4 percent to 1 percent in 1999, and the VAT base was also cut.
In addition to following a principle of capacity to pay, the European Community has also shown concerns with equity and attempts to rationalize anomalous situations. The former is illustrated by the fact that the budget of the European Union has a cohesion fund to reinforce equity and that those eligible for assistance under the cohesion fund had their VAT base capped at 50 percent of GNP in 1995. As noted earlier, the UN assessment scale provides for relief to nations affected by anomalous situations, such as a sudden and temporary severe distortion of the foreign exchange values of their currencies. Such situations have also arisen in the European Community. In one instance, it was agreed by the member states of the European Union that the financing of one of the members needed a specific correction. In 2000 this decision was confirmed and, moreover, new rules were established with respect to the correction, with the share of the financing of the correction of some of the counties going down and a ceiling on the amount of the correction.