The principles underlying the establishment of the EEA EFTA budget are set out in Article 82 and Protocol 32 of the EEA Agreement. In the substructure of the EFTA Standing Committee, the Working Group on Budgetary Matters is responsible for coordinating the procedure establishing the budget in cooperation with the Commission. It also audits and controls the final EEA EFTA budget.

There are two kinds of EU expenditure that the EEA EFTA States contribute to: operational and administrative. The EU operational expenditure is the total EU programme budget less the administrative expenditure. EEA EFTA contributions to the operational costs of the EU programmes are calculated according to Article 82.1 of the EEA Agreement. A proportionality factor based on the relative size of the gross domestic product (GDP) figures of the EEA EFTA States, compared to the total GDP of the EEA, is calculated every year on the basis of the latest available statistical data. The annual EEA EFTA financial contribution to operational costs is reached by multiplying the proportionality factor with the amount of the relevant EU budget line. In 2014, the proportionality factor is 3.03%. The contribution to the EU operational costs represents the major part of the EEA EFTA budget.

In addition to contributing to the EU's operational expenditure, the EEA EFTA States contribute to the administrative costs of the European Commission. This contribution is negotiated individually for each programme on an annual basis. The administrative cost contribution is both financial and in kind. The financial cost contribution is towards the fixed overhead costs of the Commission, such as rental of offices. It is also towards expenses of missions, meetings and publications directly linked to EEA EFTA participation in a given programme. The in kind contribution refers to the EEA EFTA States’ supply of human resources to the European Commission through the secondment of national experts. These experts are employed in the different directorates-general of the European Commission in charge of the programmes with EEA EFTA participation. These experts are cost-free for the European Commission as their salary and benefits are covered by their employer in their home countries. FP7 is an exception to this arrangement as its budget also covers all administrative costs. There is therefore no need for any additional in kind contribution from the EEA EFTA States.

The EEA EFTA budget, like the EU budget, contains two types of appropriations: commitments and payments. The commitment amount of an EU programme is the ceiling decided by the EU budgetary authority (European Parliament and Council). Within this financial envelope, the European Commission has a mandate to sign contracts and thereby commit the EU to pay out programme funds to project applicants. The total commitment amount is decided for a multiannual period and is broken down into yearly commitment amounts. As the implementation period of each project is multiannual, the committed funds are not paid out in full the year of signature but spread over several years. It goes without saying that yearly commitments and payments within one programme differ.

An important principle of EEA EFTA contributions to the EU budget is that they are additional to the EU budget. This means that these contributions are not included in the total EU budget based on the EU Member States' gross national income (GNI), but rather, added to it. The result of EEA EFTA participation is hence an increase of the programme funds compared to the initial amount in the EU decision for the activity in question. On this basis, stakeholders from the EEA EFTA States participate on an equal footing with stakeholders from the EU Member States in the competition for funds. The system is based on solidarity and not on "fair return" or national quotas.

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