The European Commission's reform of VAT on internet-delivered services such as software, ringtones and music has been adopted and will take effect from 2015.

Europe's finance ministers yesterday agreed the proposed measures, which means that they become EU legislation, shortly to be published in the Official Journal of the European Union. The proposal was hammered out in a political agreement on the issue last December.

VAT on "telecommunications, broadcasting and electronic services supplied to consumers "will now be charged at the rate in the country of the customer, not of the supplier, as is now the case.

The fact that the VAT rate of the supplier applied to online transactions led to firms such as Amazon, Skype and Paypal, relocating to Luxembourg, which has Europe's lowest VAT rate.

Luxembourg had long objected to the changes because it said it would lose tax revenue.

All the other changes announced will take effect from 2010, but the changes to consumer online services will only come into force in a staged process from 2015 in what is being widely seen as a concession to Luxembourg.

For business to consumer services outside of the definition of "telecommunications, broadcasting and electronic services", the VAT rate charged will be that of the supplier's country.

EU Commissioner for taxation and customs László Kovács said the new rules would eradicate inequalities in a system where the competition for business locations was skewed.

"This is particularly true of services which can be supplied at a distance where, as a result of current rules, businesses have been locating in countries with lower VAT rates. As a result, Member States have seen their revenues eroded," he said.

Luxembourg has claimed that it will lose €200m a year in revenues generated by its 15 per cent VAT rate, the lowest in Europe. Sweden's 25 per cent is the highest rate.

Under the compromise deal the entire VAT generated by a transaction will not be sent to the customer's country until 2019.

The new laws will also create a system that will automatically transfer VAT between countries to settle the debts created by the new agreement. This will replace a paper based system and will allow companies to claim back VAT from countries where they are not even registered for the tax.

"I am particularly proud of the new procedure to allow businesses to electronically claim VAT refunds from other Member States in which they are not registered but have paid VAT," said Kovács." This change from a paper-based to an electronic system means that refunds for businesses will be faster and easier.”

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