A comprehensive European VAT shake up will intensify competition between member states.

KPMG made the prediction after European finance chiefs voted through a package of major changes to the EU VAT system.

The main difference will mean that in 2015, VAT applied to online services will be applied at the rate of the country where they are bought, rather than the location of the company which sells them.

To soften the blow, European policy makers agreed a revenue sharing agreement will see countries selling goods receive a 30% cut of the VAT revenue.

Their share will drop to 15% in 2017 and fall to zero by 2019.

Luxembourg, which offers a 15% rate of VAT, surprisingly agreed to the radical reform package at a recent meeting of ECOFIN in return for an agreement to shelve the changes until 2015 instead of incorporating them in 2010 and the revenue sharing arrangement.

Amanda Tickel, tax partner at KPMG in the UK, said:'This is an absolutely massive shake-up to the European VAT system, including a novel solution to share VAT receipts for a period to gain Luxembourg's agreement. Companies will be poring over the details to see what the ramifications will be for them when they supply services cross border.'

Tickel added: 'The VAT package presents a complex and administratively burdensome set of rules for business to consumer companies- the seven year lead time is an opportunity for business and tax authorities to work together to achieve a workable legal framework.'

Further reading:

EU sales tax wrangle settled