The European Commission (EC) proposed rules on Wednesday to make digital companies pay their fair share of tax, pointing to U.S. tech giants such as Google, Facebook and Amazon.

Current tax rules in Europe are not currently designed to cater for companies that are global, virtual or have little or no physical presence. But today, 9 of the world's top 20 companies by market capitalisation are digital, compared to 1 in 20 ten years ago. The challenge for Europe is to make the most of this trend, while ensuring that digital companies also contribute their fair share of tax. Digital companies currently have an average effective tax rate half that of the traditional economy in the EU.

Profits made through lucrative activities, such as selling user-generated data and content, are not captured by today's tax rules.

The European Commission's legislation proposals aim to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels.

This proposal would enable Member States to tax profits that are generated in their territory, even if a company does not have a physical presence there.

A digital platform will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a Member State if it fulfils one of the following criteria:

• It exceeds a threshold of €7 million in annual revenues in a Member State
• It has more than 100,000 users in a Member State in a taxable year
• Over 3000 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 which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.

A second proposal responds to calls from several European Member States for an interim tax which covers the main digital activities that currently escape tax altogether in the EU.

This interim tax ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for Member States.

Unlike the common EU reform of the underlying tax rules, this indirect tax would apply to revenues created from certain digital activities which escape the current tax framework entirely. EC said that the system would apply only as an interim measure, until the comprehensive reform be implemented and has inbuilt mechanisms to alleviate the possibility of double taxation.

The tax will apply to revenues created from activities where users play a major role in value creation, such as those revenues:

• created from selling online advertising space
• created from digital intermediary activities which 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 European 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 €50 million.

The legislative proposals will be submitted to the EUropean Council for adoption and to the European Parliament for consultation.

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 investigating the business practices of Amazon, Google and Apple, leading to accusations, which the Commission denies, that it is targeting Silicon Valley.

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.

U.S. 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.

Smaller European 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.