Malta is insisting that VAT on the hire of yachts and the use of other yachting facilities is to be paid in the country where the service is consumed and not where it is bought.

The issue was raised a few weeks ago by the Maltese authorities in the context of reforms to the VAT system being discussed by member states aimed at simplifying its rules.

Under a European Commission proposal, a new scheme would give traders who are currently liable to pay VAT in several member states the option to use a single place of compliance in the member state where they are established.

For example, an Italian company or individual residing in Italy who hires a yacht berthed in Malta for a year will start paying VAT in Italy.

Malta is objecting to this scheme where yachts and yachting services are concerned, insisting that VAT should be paid at the place where the service is consumed.

Government sources yesterday explained that Malta has already put forward a proposal in this sense and consensus among member states in favour of Malta's position is building up.

"We have invested a lot of money in the yachting industry and it does not make sense for the country not to benefit from taxes to be paid on these services.

"We are only contesting the services related to yachting. For us it is clear that in this business, VAT has to be paid in the place of consumption.

"Some member states are landlocked and, therefore, it makes no sense that they get proceeds from an industry they don't even have."

Sources close to the Commission said the EU executive is in agreement with the Maltese proposal. "We think that what Malta is stating is fair. The majority of member states have already told us they will support this proposal but there is one member state that is still opposing," a source said.

Without naming it, he said the country concerned is a Mediterranean member state with a large yachting industry.

Further discussions on the issue are expected to continue during the upcoming meeting of EU finance ministers next month.

To become law, taxation proposals have to be approved unanimously by all 27 member states.