EU finance ministers failed to agree a fundamental reform of the EU sales tax regime yesterday following staunch opposition from Luxembourg.

The grand duchy, which has a population of 480,000, blocked a deal that would have streamlined the way Vat is levied and collected in the EU, which has a population of 480 million.

Luxembourg took the unusual step of standing up to its EU partners because it feared the loss of hundreds of millions of euro in Vat revenues that it receives from internet firms.

The grand duchy has a Vat rate of 15 per cent - the lowest in the EU. Under the current EU sales tax regime, all internet sales of digital products such as music and video downloads are levied in the country where the seller is based. This has enabled Luxembourg to attract e-commerce firms such as AOL, eBay, Amazon and iTunes, which gain a competitive advantage by levying its low Vat rate.

The failure of the ministers to reach accord means that Irish technology firms selling digital services such as music and films online will continue to be at a disadvantage to multinational competitors.

ICT Ireland, a lobby group for the technology industry, said it was disappointed, as Ireland's Vat rate of 21 per cent was not competitive against other states.

The rest of the reform package was adopted, including the creation of a one-stop shop in member states for firms to file EU-wide Vat returns and the formalising of closer co-operation between national tax authorities.

The European Commission also agreed to a request from Austria to study the impact of introducing a pilot programme, known as a general reverse charge mechanism, to crack down on so-called carousel Vat tax fraud.

But the crucial business-to-consumer segment of the package will have to be revisited under the Portuguese presidency, with no guarantee of a deal.

Luxembourg's prime minister and finance minister, Jean-Claude Juncker, told a meeting of EU finance chiefs that the grand duchy would lose the equivalent of 1 per cent of gross domestic product in tax revenue if the full reform was adopted.