The European Commission has called for a two-year extension for the European Union's value-added-tax rules on digital downloads and broadcasting, when they expire at the end of this year.

The rules are contained in the EU's 2002's e-commerce VAT directive, but it has limited shelf life as broader tax plans were already planned. The Commission had hoped that permanent VAT rules would have been agreed earlier. A reform package currently being discussed by EU finance ministers aims to simplify how the sales tax is applied to services -- and includes long-distance services such as broadcasting, telecoms and advertising.

However, the ministers have so far failed to reach a deal, and the only way to avert a tax maelstrom when the rules expire is to extend them. "If we don't have an agreement or an extension before the end of the year, there will be no VAT rules on broadcasts and downloads," said Commission tax spokesman Maria Assimakopoulou. "It would be chaos: no-one would know what VAT rate to apply, if at all."

Ministers will make a last attempt at a deal in Brussels Tuesday (Nov. 28), but if it proves elusive, an extension to the 2002 directive will be the only option.

All tax changes in the EU require unanimity among the 25 member states -- soon to be 27 -- creating a high hurdle in the way of any reforms. VAT accounts for a fifth of the tax revenues of EU national governments and two fifths of the EU's own budget.

The 2002 rules tax services in the country where the customer resides rather than where the supplier is located. They also charge VAT of up to 25% on online retailers from outside Europe. The directive applies to digital downloads, online subscriptions, purchases on auction Web sites like eBay, and music services offered by the likes of Apple and RealNetworks.

The standard rate varies amongst the EU member states from 15% to 25%. The standard VAT rate also applies to the vast majority of content supplied via traditional media, including music, software and video.

The directive says no obligations will be imposed on non-EU suppliers selling to business customers in the EU "since the VAT will be paid by the importing company under self-assessment arrangements". But the rules require suppliers of digital products from outside the EU to charge VAT on sales to private consumers.

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