The European Union (EU) today (Tuesday, May 7) approved rules that will require non-European firms to apply a sales tax (VAT) to films, games and software that are sold over the internet into the EU.

The new rules, which take effect from July next year, are intended to put foreign firms on the same footing as European companies which sell online-delivered products within the EU. The rules extend to pay-per-view and subscription services. European firms had been seen by the EU as at a competitive disadvantage to US companies operating within the union.

"I welcome the decision of the Council (of ministers) to adopt these rules on applying VAT to digital products," European Commissioner Frits Bolkestein said in a statement. "They will remove the serious competitive handicap which EU firms currently face in comparison with non-EU suppliers of digital services both when exporting to world markets and when selling to European consumers."

Foreign firms will have to register for VAT in one of the 15 EU countries and apply that country's VAT rates. The US has already warned the EU that sees the rules as discriminatory and that it will take the issue to the World Trade Organisation for judgement.

"We continue to be concerned about the potential for discrimination against non-EU companies in terms of the tax rates required to be charged and the administrative and compliance burden," Tara Bradshaw, a spokeswoman for the US Treasury.

Rasmus Ramstad, CEO of Svensk Filmindustri and new chairman of industry lobby association EFCA, said: "This may level the playing field between European and US firms within the EU, but what we seek is a more general levelling for digitally delivered goods. We want videos, DVDs and services to be treated as cultural goods and to carry the lower rates of VAT that books and cinema tickets are already eligible for. The directive needs to be revised by the end of this year."