Brussels - EU member states have failed to agree on a controversial digital tax ahead of a self-imposed year-end deadline, while a new Franco-German compromise proposal for a narrower levy also ran into headwind.

Tries

For months, member states have been trying to hash out a deal to tax internet giants such as Facebook and Google, with time running out to reach decisions ahead of European Parliament elections in May next year.

Proponents argue that traditional companies pay far more tax on their profits than their digital counterparts. But others are sceptical that it could work if applied only in the EU, fearing it could harm the bloc's appeal as a business hub.

Failure

Despite months of negotiation, member states failed to agree on a proposal - championed by France and Austria - to impose an EU-wide revenue tax on digital firms above a certain size.

EU tax initiatives require unanimous approval among the EU's 28 member states.

Most EU capitals agree that the issue should primarily be addressed by the Organisation for Economic Cooperation and Development (OECD), which counts 36 countries, including the United States and Japan.

Franco-German plan

The most recent proposals had sought to take work at the OECD level into account, but that failed to win over sceptics such as Ireland.

Under the Franco-German plan, presented to ministers, online firms would pay a minimum 3-per-cent tax on their advertising income only.

Paris and Berlin want the measure to be agreed by March and implemented from January 2021, if no global approach is agreed upon by then.

Austrian Finance Minister Hartwig Loeger, whose country holds the EU's rotating presidency, welcomed the initiative as an "important first step" towards a fully-fledged digital tax.

But other ministers expressed reluctance.

Harsh criticism

"The Franco-German proposal falls short of the ambition that we are envisaging," said Spanish Finance Minister Nadia Calvino.

Her Estonian, Slovenian and Italian counterparts voiced similar reservations, while Finland's Petteri Orpo said he had "serious concerns."

The Oxfam campaign group also criticized the compromise.

"France and Germany's weak proposal will let most tech giants off the hook. Big digital companies will remain largely untaxed for years to come, while governments try to agree reforms that will bring the tax system into the digital age," said Marissa Ryan of the charity.

Digital tax initiatives

The European Commission has estimated that traditional companies typically pay around 23 per cent tax on profits, compared to between 8 and 9 per cent for internet firms, some of which pay little or no tax at all.

Several EU countries have launched national digital tax initiatives, prompting concerns that this could lead to a patchwork of national rules.

The commission had proposed an interim 3-per-cent revenue tax for all digital firms posting annual sales of at least 750 million euros (855 million dollars), or online sales of at least 50 million euros in Europe.

It will now adapt its proposal to take the Franco-German compromise into account, commission Vice President Valdis Dombrovskis said.