At present, digital businesses pay a lower rate of tax on their profit than traditional businesses because the virtual nature of what they sell allows them to shop around different jurisdictions for the lowest corporate tax rate.
Tech companies may have to pay more tax under new proposals announced by the European Commission.
No companies are explicitly named in the document, although digital companies affected include those with a threshold of 7 million euros ($8.6 million) in revenue in a taxable year, companies with more than 100,000 users in a member state, and ones in which more than 3,000 business contracts for digital services are created each year.
European Trade Commissioner Cecilia Malmstrom, who will lead negotiations on behalf of the 28-state European Union, said it was not clear from her talks with US counterparts this week what would satisfy the ultimate arbiter in the White House.
The tax would apply to large firms with annual worldwide revenue above 750 million euros ($920 million) and annual "taxable" European Union revenues above 50 million euros.
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"We estimate this could generate at least five billion euros a year if the tax is imposed at three percent".
The Commission said its "preferred long-term solution" is a tax on digital profits where they are generated, even if companies do not have a physical presence in the country.
The EU's proposed changes are a response to the boom in digital businesses, such as social media companies, collaborative platforms and online content providers.
The proposal talks about how digital companies are leading the e-commerce markets in the recent years, and nine of world's top companies are digital-based companies where there was only one twenty years ago.
However, some smaller countries fear the proposed tax would undermine their ability to attract multinationals and see the measure as more likely to shift tax revenue to bigger European Union countries rather than raising more money.
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"But under today's rules those profits are not taxed", Mr. Moscovici said, adding: "The current legal vacuum is creating a substantial shortfall in the budgetary revenues of our member states".
"My wish is that we can continue to preserve worldwide trade rules that are good for all and that the powers that have contributed to putting them in place will assure that they are respected", he said. "We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution", said commission vice president Valdis Dombrovskis.
A majority of MEPs last week supported plans to set a minimum level of corporation tax and distribute income from firms based on where the revenue was generated.
"But this win-win situation raises legal and fiscal concerns", he said. Smaller member states, like Ireland and Luxembourg, see it differently: they view as another way of cutting the European cake with the bigger member states doing the cutting.
The proposed digital tax plan is "not a response, not a retaliation" to the U.S. tariffs, insisted Moscovici, adding that is has been "prepared for months and months".
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