Ecofin is seeking support for a change in the VAT charging rules so that consumers who buy items from e-commerce firms pay VAT at the rate of the country in which they are resident instead of the rate charged in the jurisdiction where the vendor is registered.

VAT in Luxembourg is charged at 15% - the lowest rate permitted in the EU - and the current rules have led dozens of major e-commerce firms such as eBay, Skype and iTunes to set up in the Duchy. Portugal is another member state with a low rate of VAT, which has helped to create a flourishing e-commerce industry in the Portuguese island of Madeira.

The proposals are designed to simplify the tax system for businesses in the EU, as well as make it easier for governments to crackdown on fraud. But any change in EU tax legislation requires the unanimous support of all 27 member states and Germany, which currently holds the six month rotating presidency of the EU, has been forced to put the plan on the backburner while Luxembourg is persuaded to come on board.

Speaking after the Ecofin meeting, EU Tax Commissioner said that Luxembourg feared losing "a considerable proportion" of its national wealth should the proposal become reality.

"Here, an essential interest of Luxembourg was at stake and therefore today I had no other possibility than to say no," Luxembourg finance minister, Jean-Claude Juncker later told reporters.

Moreover, the Luxembourg government stands to lose an estimated EUR220 million (US$300 million) annually in tax revenues if the new VAT system goes into place.

Ecofin ministers have set a deadline for the end of the year to try and reach a compromise agreement that would be acceptable to Luxembourg. Kovacs said that he was "confident" a deal will be struck.

The long-awaited rules were held up by Germany last year after Berlin demanded that it would only agree to the proposals if allowed to put in place additional changes to VAT rules to crack down on missing trader fraud, which is said to cost EU governments tens of billions of euros in lost revenues every year.

Germany, following the UK, is keen to introduce the reverse charging system, whereby VAT is paid at the point of consumption which prevents fraudulent traders from being able to import goods and sell them on without paying the appropriate amount of VAT to the relevant tax authority. Increasing trade in high value but easily transportable items such as mobile phones and hand-held computer devices has led to an escalation of this type of fraud in recent years.