Irish consumers who pay to download "virtual goods" such as software or music from websites based outside the European Union will be charged value added tax (VAT) under a new EU regulation agreed yesterday.

The decision, which will not be implemented until it passes a consultation with the European Parliament, will probably increase the cost of digital products for European consumers who buy from firms located outside the EU. It would also remove the competitive advantage enjoyed by US internet firms, which up until now have not had to charge a sales tax to European consumers.

The rules, which had already been agreed by officials at a preparatory meeting, were simply rubber stamped by the 15 finance ministers meeting in Brussels yesterday, according to EU sources.

Under the new law, European firms will pay only their home country's VAT. Non-EU companies will have to charge customers the rate where the customer lives, ranging from 15 per cent in Luxembourg to 25 per cent in Sweden.

The new system for charging sales tax is likely to be extremely complex to operate and has been strongly opposed by the US which wanted a moratorium on sales tax on digital products. The US introduced a two-year moratorium late last year for its own firms.

Last week the Bush administration said it still had "serious concerns" because in some cases, the EU directive would allow European companies to charge less tax than their US competitors.

Deputy US Treasury Secretary Mr Kenneth Dam said the Bush administration would try to convince the EU that the rules were unworkable.

The trade in "virtual goods" is expected to increase dramatically over the next few years. Irish companies will have to charge 21 per cent VAT to European customers. Mr Brendan Butler, director of ICT Ireland - a body which represents software firms in the Republic expressed concern that the Republic's standing as an e-commerce hub may be undermined because of its relatively high sales tax compared to other EU states.