Calculation of CMO subsidy basis not as easy as it seems

Recognised producer organisations in the fruit and vegetable sector can claim Common Market Organisation (CMO) subsidy. The basis for this subsidy is the value marketed production (VMP). In a judgment of 29 June 2017, the General Court of the EU (Court) explained how the VMP should be calculated. As will be explained in this blog, it follows from the judgment that the calculation of the subsidy basis seems to be quite complicated.

Case

In order to be eligible for EU-funded CMO subsidy, producer organisations need to have an approved operational program (OP). The maximum eligible amount of subsidy is 4.1% of the VMP in the so-called reference year. The reference year is determined by the Member States, but in any event, precedes the year in which the OP is implemented.

The VMP equals the production of the members sold by the producer organisation in the reference year. In this context, the United Kingdom (UK) had allowed producer organisations to take into account the production of all new members when calculating the VMP, regardless of whether they were members of another producer organisation or not prior to joining the producer organisation claiming subsidy. After discovery of this UK practice, the European Commission (Commission) excluded various expenditures from EU funding by a decision of 13 November 2015. In particular, a flat-rate correction of EUR 1,849,194.86 was applied for the years 2008 to 2012. The inadequate controls by the UK had, according to the European Commission, resulted in a systematic overestimation of the VMP. The UK appealed to the Court against the flat-rate correction.

Judgment of the Court

The calculation of the VMP was governed by Regulation 1433/2003 until 1 January 2008 and then by Regulation 1580/2007. The latter Regulation was replaced as of 21 June 2011 by the current Regulation 543/2011 [note: hyperlink to the unconsolidated version!]. Regulation 1433/2003 and Regulation 1580/2007 are implementing regulations and thus constitute secondary EU law. Both regulations contained corresponding provisions on the calculation of the VMP. However, it was not explicitly regulated how to deal with the production of new members of a producer organisation. In this regard, the Court starts by setting out how secondary EU law should be interpreted. First of all, when the wording of secondary EU law is open to more than one interpretation, preference must, if possible, be given to the interpretation which renders the provision consistent with the TFEU. Furthermore, not only should the wording of the provision be taken into account, but also the context and the objectives of the context to which it belongs. If the exact scope cannot be determined on the basis of a textual and historical interpretation, it is important to interpret the provision based on its purpose and overall structure. Finally, an implementing regime must be consistent with the provisions of the basic Regulation as far as possible.

According to the Court, both Regulation 1433/2003 and Regulation 1580/2007 stated that Member States should avoid duplicate counting. Such a duplicate counting can, according to the Court, only occur if a new member was previously member of another producer organisation which also claimed CMO-subsidy. Furthermore, Regulation 1433/2003 and Regulation 1580/2007 explicitly state that only production sold through a producer organisation may be included in the calculation of the VMP. In the Court's view, this means that the production of a non-aligned producer cannot be part of the VMP. Based on Regulation 2200/96 (CMO Basic Regulation on Fruit and Vegetables applicable until 30 June 2008), the Court ruled that recognised producer organisations' aim is “ensuring that production was planned and adjusted to demand, particularly in terms of quality and quantity, and of promoting the use of cultivation practices, production techniques and environmentally sound waste-management practices in particular to protect the quality of water, soil and landscape and to preserve or encourage biodiversity”. Only production of producers who are members of a recognised producer organisation has been produced in accordance with this objective. Consequently, the rule that only the production of new members who were previously members of another producer organisation in the reference year may be included in the calculation of the VMP, is in accordance with the provisions of the basic Regulation.

The UK put forward the calculation of the VMP by recently recognised producer organisations. Both Regulation 1433/2003 and Regulation 1580/2007 provided that, in the absence of historical data, "the value of marketable production" which the producer organisation had indicated for its recognition, could be considered as VMP. According to the Court this is a different situation and therefore cannot be used to interpret the provisions in question. Also, the fact that the current Regulation 543/2011 explicitly stipulates that the value of the marketable production may be included in the calculation of the VMP in respect of all new members, does not lead to a different interpretation. The Court considers that the method for determining the VMP has been amended Lastly, the Court rejects the UK’s argument thatthat recently recognised producer organisations and existing producer organisations are treated unequally, as it is does not concern the same situations. All in all, the UK’s action is dismissed.

Comments

Unfortunately, the judgment does not seem convincing. The arguments used by the Court to dismiss the action look far-fetched. Certainly in light of the clear contraindications made by the UK’s.

Both Regulation 1433/2003 and Regulation 1580/2007 stated that the VMP also includes the production of members who joined the producer organisation. It is not stipulated that these members had to be members of another producer organisation before. However, the calculation of the VMP requires duplicate counting to be avoided. This stipulation is understandable. Indeed, according to recital 12 of Regulation 2200/96, EU spending (on CMO subsidies) must remain "manageable". Therefore, there is a "cap" on the maximum support that EU producer organisations can receive: 4.1% of their VMP. The question then arises whether the manageability of EU spending is threatened if a producer organisation takes into account the marketable production of new members who previously were not members of another producer organisation when calculating the VMP? There are indications for a negative answer. With regard to recently recognised producer organisations, the VMP equals the marketable production of all members. In addition, Article 51 paragraph 5 of the current Regulation 543/2011 explicitly states that the marketable production of all new members may be included in the VMP of a producer organisation. It is not obvious that this confirmation, as the Court assumes without explicitly explaining its reasoning, is an amendment of the calculation method. Regulation 543/2011 does not offer any indication for this conclusion (see, for example, recital 35). It follows from recitals 11 and 21 of Regulation 1182/2007 that membership of producer organisations should be made more attractive. In addition, the CMO subsidy is intended to bring about changes in the sector. These goals will adversely be affected if an existing producer organisation is impaired of including the marketable production of new members in its VMP. We have to wait and see whether the UK appeals to the Court of Justice.

Eric Janssen, lawyer for CMO law