EU-based online merchants insist an upcoming European Commission digital tax proposal targeting online platforms such as Amazon and Airbnb will drive sales out of Europe to non EU-based companies, especially those in China.

Ecommerce Europe, which represents 75,000 companies selling goods and services online, warned in a letter to the commission that the scope of the revenue-based digital service tax (DST) on “intermediate services” needs further evaluation. The structure of the proposal’s digital tax would ensnare companies with European headquarters for EU operations, but excuse companies outside the bloc—unfairly making EU business more expensive and costing jobs, the group said.

“The scope of the DST measure should be reconsidered further to a detailed Impact Assessment with regard to the effect on European” small and medium-sized enterprises, the Brussels-based trade group said in a March 5 letter to European Commission President Jean-Claude Juncker. The letter was obtained by Bloomberg Tax.

The European Commission is slated to release its proposal in March. The proposal is part of the EU’s short-term approach to prod large internet companies into paying more tax.

Revenue Threshold

Based on a draft copy of the proposal seen by Bloomberg Tax, the European Commission will call for a tax on online platforms such as Inc., Airbnb Inc., and Uber Technologies Inc., with revenue between 10 million and 20 million euros ($12.4 million and $24.8 million).

“This threshold limits the application of the tax where there is a significant level of revenues derived from a digital activity carried out at EU level and would serve to target more effectively the most relevant cases,” the proposal said.

Besides the transaction on online platforms, the proposal will include a levy on the advertising revenues of companies such as Google Inc., Facebook Inc. and others with a global sales turnover of 750 million euros. It will also include a long-term plan via an amendment to the pending EU common corporate tax base that would establish a “virtual” permanent establishment.

Amazon, Google, Facebook, Airbnb, and Uber are U.S.-headquartered companies, but they have European headquarters for their EU operations.

Company Location

Ecommerce Europe’s main problem with the upcoming proposal relates to where the tax on online platforms will be levied. According to the proposal, the tax should be levied where the company using the online platform to sell goods or services is located “irrespective of the underlying transaction such as the supply of accommodation services or supply of transportation services.”

But this means companies outside the EU won’t have to pay the levy, Ecommerce Europe said.

“We believe the proposal as it stands now will increase the cost base of European merchants compared to Chinese merchants,” Luca Cassetti, the association’s director of EU public affairs, told Bloomberg Tax in a March 12 interview.

EU merchants have faced discrimination until recently due to an EU rule that allowed low-cost goods to be imported into the EU free of VAT, Cassetti said. That exemption was eliminated when EU member nations approved, in 2017, an overhaul of EU VAT rules for electronic commerce.

“The problem is that this proposal will erase the benefits of eliminating the exemption on low-cost import consignments,” Cassetti said.

Netflix, Spotify Exemption

The online merchants also expressed bewilderment that the upcoming proposal will exempt the sale of online services such as Netflix Inc., Spotify Ltd., and online gaming companies.

“The fact is that the margins for profit for the sale of goods are much lower than they are for services such the sale of online movies or music,” Cassetti said.

Ecommerce Europe urged the commission to consider a deduction for EU companies, similar to the one the draft would provide to online service providers such as Netflix and Spotify, according to its letter.

The commission declined to comment on the specifics of Ecommerce Europe’s complaints.

“The proposal is still being finalized,” a commission official told Bloomberg Tax March 12. “We will have no comment on its content until it is officially proposed.”

Member Nations’ Objections

After the proposal is released, it must be approved by EU-member nations in the Council of Economic and Financial Affairs. A number of countries—led by Ireland, Luxembourg, Malta, and Cyprus—insist the EU must wait for an agreement in the Organization for Economic Cooperation and Development before the EU adopts a short-term digital tax.

The commission, however, has said the EU must move ahead to prevent EU single-market distortion caused by member states adopting national digital taxation measures. To date, three EU members—Slovakia, Italy, and Hungary—have adopted various versions of a national digital tax.