On March 21, the European Commission proposed new rules to ensure that digital business activities are taxed in a “fair and growth-friendly” way across the EU.This followed an OECD report on March 16 that revealed a lack of international consensus about taxing digital operators.The same day the OECD published its report, US Treasury Secretary Steven Mnuchin announced: “The US firmly opposes proposals by any country to single out digital companies. Some of these companies are among the greatest contributors to US job creation and economic growth.”The EU clearly thinks that US digital companies can contribute more to European tax revenues. But Israeli and other digital companies also need to know what’s in store.Why does the EU want new rules for taxing the digital economy? According to the European Commission, today’s international corporate tax rules do not capture business models that can make profit from digital services in a country without being physically present.In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge. For example, a user contributes to value creation by sharing his/her preferences (e.g.liking a page) on a social-media forum. This data will later be used and monetized for targeted advertising.The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example.What is the European Commission proposing? The Commission made two legislative proposals.The first proposal responds to calls from several EU member states for an interim tax that covers the main digital activities of large multinational groups that currently escape tax altogether in the EU.Second, in the long term, the EU proposes a more general tax on a share of digital profits.Short-term European Union proposal: Interim tax on large multinationals This interim tax would be imposed on revenues (rather than profits). It targets activities that are currently not effectively taxed, and it should begin to generate immediate revenues for EU states.It should also help to avoid unilateral measures to tax digital activities in certain EU member states that could lead to a patchwork of national responses, which would be damaging for to the EU single market. This refers to measures put forward by the UK and France.The proposed tax would apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues: • created from selling online advertising space; • created from digital intermediary activities that allow users to interact with other users and which can facilitate the sale of goods and services between them; • created from the sale of data generated from user-provided information.Tax revenues would be collected by the member states where the users are located and will only apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50m.This should help to ensure that smaller start-ups and medium-sized businesses remain unburdened. An estimated €5 billion in revenues a year could be generated for EU member states if the tax is applied at a rate of 3%.This system will apply only as an interim measure, until the comprehensive reform has been implemented with built-in mechanisms to alleviate the possibility of double taxation.Long-term EU proposal: General reform of tax rules for digital activities This proposal would enable EU member states to tax profits (rather than revenues) that are generated in their territory, even if a company does not have a physical presence there. The new rules would ensure that online businesses contribute to public finances at the same level as traditional “brick-and-mortar” companies.A digital platform will be deemed to have a taxable “digital presence” or a virtual permanent establishment in a member state if it fulfills one of the following criteria: • It exceeds a threshold of €7m. in annual revenues in a member state; • It has more than 100,000 users in a member state in a taxable year; or • More than 3,000 business contracts for digital services are created between the company and business users in a taxable year.The new rules will also change how profits are allocated to member states in a way that better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.It appears that each EU member state would apply its own tax rates to resulting profits.Next steps: The legislative proposals will be submitted to the EU Council for adoption and to the European Parliament for consultation.The EU will also continue to actively contribute to the global discussions on digital taxation within the G-20 and the OECD.Comments: These EU proposals would change the international tax rules considerably, without international consensus. They will affect non-EU online operators adversely – from Israel to the US, Asia and Africa. We haven’t heard the last word in this matter.As always, consult experienced tax advisers in each country at an early stage in specific email@example.com The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.