At present, many companies are taking advantage of the fact that VAT rates differ widely across the EU by registering their businesses in jurisdictions where VAT rates are low, particularly in Luxembourg and the Portuguese island of Madeira, which have the lowest rate of VAT in the EU, at 15%.

Examples of companies that have switched to Madeira include Wanadoo, the ISP owned by French company Freeserve, which moved in 2002, and Virgin.net.

However, many EU members are keen to address the situation by insisting that VAT is charged on the basis of the customer’s country of residence. According to EU Tax Commissioner Laszlo Kovacs, the activities of the companies in question are tantamount to tax avoidance, distorting intra-union competition.

“We want to avoid unfair tax competition because if we maintain the place of origin principle, in that case, businesses will establish themselves in the country with the lowest rates and that would certainly distort the competition,” stated Kovacs.

"Until there's greater harmonisation we would prefer the country of consumption as a principle,” he added.

Grasser commented: "We want to adjust the VAT system to the modern era of electronic trade and there are lots of services involved, including telecoms and pay-TV. We have to ask ourselves whether it makes sense if you have the very low rates applied by an offshore island in Europe being used as a way of distorting competition."

Grasser claims to be “confident” that the measure will be adopted by all 25 EU member states when finance ministers gather again next month, although Germany has warned that it will not be supporting the proposal, while Luxembourg and Portugal are also likely to be opposed.

The measure will need to be approved unanimously by all member states before it can be adopted.