Big US online companies such as Facebook, Google, Airbnb and Uber could be hit with a new turnover levy on their activities in the EU, if a European Commission proposal due next Wednesday becomes law.

With a large number of the big digital companies having their European headquarters in Ireland, this is a big issue in Irish politics.

The commission’s plan will have two components; a "comprehensive solution" that will take some time to implement; and a "targeted solution" that will take the form of a levy on turnover, which member states could implement swiftly.

According to some background documents in circulation, the levy could be in the range of 1% to 5% of turnover (figures are not definitive yet, and various drafts have different numbers in them).

The money raised would be divided out among the EU member states depending on where data driven transactions take place. Effectively this would mean the states with the biggest populations are getting the bulk of the money raised.

The key to how the tax would be levied, and how it would be divvied up among the member states, is the data generated by users of the internet.

In particular, the levy would apply to companies that turn user data into money by selling targeted advertising (or raw user data), such as Facebook, Google, Twitter, Instagram and "free" Spotify.

The levy would also apply to platforms or marketplaces that charge a fee for connecting buyers and sellers of goods or services, such as Airbnb or Uber.

Excluded from the terms of the levy would be companies that make digital content or solutions available for a fee, which is pretty much any service not paid for by advertising revenue. Examples include paid for Spotify, or other paid streaming services, such as Netflix or gaming platforms that charge a fee.

One commission briefing document refers to "scenarios targeted by this measure" being those "where users play a very active role in the value creation of the business".

In other words, users do not merely "consume" a good or service (such as in the traditional brick-and-mortar business model), but their participation in a digital activity constitutes an essential input for the business carrying out that activity, that will later be "processed and monetised".

The proposals will have turnover thresholds that - depending on one's point of view - either protect start-ups, or target the very big companies, those that can make the best use of the vast amounts of data they collect from users.

One figure that crops up frequently is a global turnover of €750m - the point at which a company would be liable for the tax (this is also the figure used for country-by-country reporting of tax affairs of big multinationals).

It would also have to have a minimum turnover of €10m inside the EU, although this figure could be higher.

The temporary levy differs radically from normal corporate tax principles, because it is a tax on turnover, not on profits.

It has some similarities with VAT (and the Commission’s proposed mechanism for collecting and allocating the levy is based on existing VAT mechanisms), but normal credit that businesses can obtain for VAT will not be available.

In that sense, it is more akin to excise.

Part of the sales pitch to member states is that the levy would open an entirely new revenue stream for national treasuries, so every state stands to gain money from tax.

However, the cost of the levy would be allowable as a deduction against corporation tax. This could result in some reduction in the amount of corporate income liable for taxation in Ireland. 

But in the case of the big US internet companies, the main impact may fall on the shareholders in those companies. European consumers may also have the levy passed on to them, depending on the business model of the companies.

The digital tax proposal will be on the agenda for discussion by EU leaders at their summit in Brussels on 22 March. 

Taoiseach Leo Varadkar spoke about it last week, following his meeting with President of the European Council Donald Tusk, expressing again Ireland’s clear preference for dealing with digital tax at a global level via the OECD. 

He also said tax should, as a general principle, be charged where value is created "and that is done where something is designed, marketed and made, not where it is sold".

The "targeted solution" is being promoted as a temporary tax, to be used by EU countries while they await a global solution.

It is being promoted as a way of avoiding barriers in the single market.

That is because a number of countries are looking at introducing levies on digital companies (such as the so-called "Google tax" in France and the UK). 

To head off this pressure, and avoid new tax barriers, the Commission wants everyone to adopt the same framework for the levy, and ultimately the "comprehensive solution", which it hopes would replace the levy.

The "comprehensive solution" requires an overhaul of international taxation, which is what the OECD has been working on for years through its BEPS process (anti-Base Erosion and Profit Shifting), which is aimed at clamping down on tax avoidance by multinational companies.

Of the 15 actions to be developed, point one was taxation of the digital economy, but this measure has made no progress.

On his visit to Dublin last Thursday, the Secretary General of the OECD, José Ángel Gurría said his organisation is due to issue a final report on digital taxation in 2020, with an interim report due in April (though the outlines may be presented at a G20 meeting in Argentina next week).

Outlining the difficulties of the global approach he said: "He are not talking about taxing a company or a few companies. We’re talking about how you tax an increasingly digitalised economy in the world."

The European Commission’s "comprehensive" proposal due next week seeks to tack closely to the OECD approach, so as to avoid becoming a new barrier to trade.

Like the OECD approach, it concentrates on updating the original OECD tax principles on where a company becomes liable for tax.

In the existing tax treatment, a company is tax resident (and therefore tax liable) if it has a "permanent establishment" in a country. 

That is, a physical presence.

This was easy enough to define in a world where trade involved physical goods or services delivered by people, but with modern telecommunications, trade had developed in ways that fall outside the scope of the "permanent establishment" rules. 

To overcome this, the Commission is to propose changing tax law to encompass a "digital permanent establishment". 

This would define a digital presence in a country, allowing that country to have taxing rights over the digital business carried out by that entity in that country. 

This would mean Germany, for example, would have a right to tax the activities of Facebook in Germany, using German corporate tax rules, even if the actual activity was carried out by an office in Ireland or the USA.

The idea is to overcome objections to the idea that the digital economy is different to the bricks and mortar economy, whilst protecting the revenue bases of countries that are becoming increasingly eroded as more and more business is being done digitally.

The Commission’s "comprehensive" proposal follows the same logic as the "targeted approach" to the extent that it says in the digital economy "a significant part of the value of a business is created where the users are based and data is collected and processed".

The issue of digital taxation is highly controversial among the EU member states.

A group of ten countries rallied around a French proposal last September in favour of a digital "equalisation tax" to levy the internet giants based on turnover. 

Ireland was one of a smaller number of states that openly opposed the move. Since then, the Commission, led by taxation commissioner Pierre Moscovici, has been winding up the political pressure to try to win the unanimity required in the council for legislation.

But a Commission report naming seven countries (including Ireland) for facilitating "aggressive tax planning" by multinational companies, provoked a strong rebuke for Commissioner Moscovici from Luxembourg’s prime minister Xavier Bettel last Tuesday. 

Tax is always a sensitive topic in the EU, and particularly now with the Common Consolidated Corporation Tax Base proposal in the mix, the state aid action by Commissioner Vestager against Ireland (over Apple), Luxembourg, Belgium and the Netherlands, all for corporate tax arrangements, and negotiations over filling the funding gap in the post-Brexit EU budget starting. National governments are feeling particularly touchy.

It is also going to be a big issue in transatlantic politics, and the timing could not be much worse, coinciding as it does with US President Donald Trump’s announcement of steel and aluminium tariffs sparking fears of a trade war. 

But be clear - this EU tax proposal has been in the works a long time: the political signal to hurry up the process came last September in Tallinn, and the December ECOFIN gave the green light to publish the plan that will be announced on Wednesday 21 March.

Mr Trump’s tariff threat only popped out last month.

The US has been strongly opposed to setting up a special tax regime for digital companies, although the US is open to discussions about permanent establishment and profit attribution rules being updated.

Nevertheless, the transatlantic political background is pretty toxic, and as most of the companies that look like being caught in this digital tax plan are American, this could become even uglier.