The European Commission (EC) is specifically targeting media products as it seeks to extend its tax net to goods sold on the Internet.

The proposals, which will be detailed in the next two months, focus on virtual goods such as music, software and, by implication, streamed or downloadable film content. "We have in the pipeline a proposal on Internet commerce, but it is not commerce in the sense of distance selling of physical goods," said EC tax official Stephen Bill.

The new proposals are born out of a study examining the ways in which Europe's Value Added Tax (VAT) or sales tax systems are failing. But while the proposed tax may be intended to plug a loophole, the move is bound to be unpopular in many parts of Europe and abroad.

Problems arise due to the "dis-intermediation" of transactions (the elimination of the distribution middleman), cross border sales and the difficulties associated with making companies collect EU national taxes.

The US has already warned the EU not to push ahead with the tax as it believes that its companies are being targeted. These were precisely the companies cited by Bill at a Brussels press conference yesterday: "The Internet is giving rise to huge operations like Amazon.com, Sony Corp and Time Warner because the beauty of the Internet business model is that it cuts out the middlemen."

Within Europe the tax is likely to be fiendishly complicated without further harmonisation of taxes between EU states, which has already been opposed by some countries. Bill did offer one olive branch to the EU's film sector, when he said that there may be exemptions to the new tax for small firms.

Any direct imposition on goods or services sold on-line is also likely to increase the likelihood of tax competition between the EU and the rest of the world. The phenomenon is at the heart of Hollywood's dispute with Canada over "runaway productions."