The European Commission is set to propose rules on Wednesday designed to make digital companies pay their fair share of tax and preparing to hit US tech giants such as Google and Facebook.
The Commission is expected to propose that companies with significant digital revenues in Europe pay a 3 per cent tax on their turnover, according to a draft seen by Reuters last week.
If backed by EU states and lawmakers, whose support is far from certain, the tax would apply to large firms with annual worldwide revenue above 750 million euros ($919 million) and annual “taxable” EU revenues above 50 million euros.
The tax, designed as a short-term measure before the EU finds a way to tax profits, could also encompass other high-profile US firms such as Airbnb, Amazon and Uber.
The legislation comes as the United States unsettles Europe with its own tax reform and the threat of a trade war along with reports that Facebook user data was accessed by a consultancy to help President Donald Trump win the 2016 election.
EU antitrust authorities have also been busy investigating the business practices of Amazon, Google and Apple, leading to accusations, which the Commission denies, that it is targeting Silicon Valley.
The proposals require backing from the European Parliament and the 28 EU countries, but they are divided on the issue. EU tax reforms need the backing of all member states to become law.
Large EU states have accused the tech firms of paying too little tax in the bloc by routing some of their profits to low-tax member states such as Ireland and Luxembourg.
US tech companies themselves have said they are paying tax in line with national and international laws and, in some cases, that the tax should be paid in the United States on profits repatriated there.
The proposal is to tax companies according to where their digital users are based.
A senior EU diplomatic predicted it would be hard to push through the legislation, among the most important for the bloc, because of deep divisions between larger countries set to gain more tax income and smaller ones set to lose.
Smaller countries also fear becoming less attractive to multinational firms.
Ireland has warned that the proposals risk merely re-slicing the tax cake, rather than actually taxing more. Some countries also believe that smaller companies should also face a bill, reports Reuters.
The tax is expected to apply to digital advertising, which would bring in companies such as Google and Facebook, and to online platforms offering “intermediation services”.
Tech industry groups have complained that it is wrong to tax revenues as that would unduly hit companies, such as Amazon, with thinner margins.