Factbox: The European Union budget explained

BRUSSELS Thu Nov 22, 2012 12:36pm EST

BRUSSELS (Reuters) - European Union leaders face a long and grueling battle to agree future spending plans worth 1 trillion euros ($1.28 trillion) at a summit starting in Brussels on Thursday.

Negotiations over the long-term budget often descend into undignified squabbles over how much each country pays into the bloc's coffers, and what they get back through the various forms of funding.

Below is a guide to the EU's complex budget structure and its major contributors and recipients:

HOW IS IT AGREED?

The EU budget - known in Brussels jargon as the multiannual financial framework (MFF) - is agreed in advance for a period of seven years. EU governments must approve the budget unanimously, and any deal must be rubber-stamped by the European Parliament.

The MFF agreement fixes maximum limits on EU spending for the seven-year period in question. Actual spending levels are decided in annual budgets agreed before the start of each financial year, and are typically set at least 10 percent below the maximum ceilings.

Budget figures are usually expressed in two different numbers: commitments and payments. Commitments are legal pledges to fund future projects and programs, provided the criteria for funding are met, whereas payments are forecasts for actual spending. Because not all commitments result in actual demands for cash, payment figures tend to be lower than commitments.

HOW IS IT FUNDED?

There are three main sources of funding for the budget:

* Direct contributions from national budgets based on a percentage of member states' gross national income (GNI), which account for about 75 percent of the total.

* A 75 percent share of all customs duties collected on imports from outside the bloc, which accounts for about 13 percent of the total.

* A small share of national value added tax (VAT) receipts, which makes up about 11 percent of inflow.

The remainder of about 1 percent comes from taxes on EU officials' salaries and fines paid by companies for breaching EU competition rules.

HOW IS IT SPENT?

Out of payments totaling 127 billion euros in 2011, the main areas of expenditure were:

* Agricultural subsidies - 56 bln euro (44 pct)

* Development aid for poor EU regions - 42 bln euro (33 pct)

* Research, innovation and education - 11 bln euro (8.5 pct)

* Salaries and administration - 8 bln euro (6 pct)

WHO ARE THE BIGGEST CONTRIBUTORS?

The main net contributors (including any rebates) to the EU budget in 2011 in absolute terms were: Germany (9 billion euros), France (6.4 billion euros), Italy (5.9 billion euros) and Britain (5.5 billion euros).

The biggest net contributors in 2011 calculated as a percentage of GNI were: Italy (0.38 pct), Belgium and the Netherlands (0.36 pct), and Germany, Denmark and Finland (0.34pct)

WHO ARE THE BIGGEST BENEFICIARIES?

The top net recipients in absolute terms in 2011 were: Poland (10.9 billion euros), Greece (4.6 billion euros), Hungary (4.4 billion euros) and Spain (2.9 billion euros).

The main net recipients as a percentage of GNI last year were: Hungary (4.7 pct), Lithuania (4.6 pct), Latvia (3.6 pct) and Poland (3.1 pct).

Sources: EU Financial Report 2011; European Commission

(Compiled by Charlie Dunmore; editing by Luke Baker)