EU - ECOFIN VAT reform stalled by Luxembourg until next year at earliest - source

Hopes of EU finance ministers reaching an agreement on value added tax (VAT) reform by the end of the year faded as Luxembourg said it would not agree to a compromise which delayed the implementation of new rules for VAT on services, a source close to negotiations said.

The European Commission and ministers had said they hoped to resolve the problem by the end of the year, but the impasse which emerged on the matter in June now looks set to continue indefinitely.

According to the source, Jean-Claude Juncker, prime minister of Luxembourg, said he could not agree to a compromise 'neither today nor in December'.

Whilst 18 or 19 member states are happy with the compromise, which would see the implementation date for reform set back several years, Luxembourg is holding out for a revenue-sharing system where a portion of the revenue received by the supplier's state would be passed to the consumer's member state, the source said.

Under current rules, VAT is calculated according to the tax rules of the country where the supplier of the service is based. This has encouraged Internet and telecoms companies to set up shop in countries with the lowest VAT rates.

At 15 pct, Luxembourg has the lowest VAT rate normally allowed in the EU, which has attracted companies such as AOL, Apple (nasdaq: AAPL - news- people ) and Skype to set up shop there.

The proposed reform would see VAT charged at the rate of the country where the end customer is based.

In July, German finance minister Peer Steinbrueck, whose country held the rotating EU presidency, said he saw 'concrete proposals' on the proposed European VAT reforms by the end of the year.

The commission is also calling for simplification and rationalisation of VAT within the EU, with tax commissioner Laszlo Kovacs saying in July that 'a new framework for reduced rates is needed'.