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Data Governance Act: main elements and business implications

Executive Vice-President, Margrethe Vestager, presented, on 25 November 2020, the European Commission’s new Data Governance Act (PDF), the first proposal to come out of its 2020 European Data Strategy. The Act was postponed several times since September, with a working draft leaked by several news outlets early November receiving serious criticism. The official document, published in November, has been adjusted and seems to have taken on board some of the concerns expressed. In this blog post, Dr2 Consultants explains the main elements of this Act and its business implications.

Main elements of the proposed Data Governance Act

The European Commission decided to opt for a regulation as the legal instrument for its Data Governance Act due to the predominance of elements that require a uniform application which would not leave margins of implementation to the Member States, in order to create a fully horizontal EU framework. These are the key elements of the draft regulation:

Re-use of data produced by the public sector

The Data Governance Act proposal aims to increase the amount of data available for re-use within the EU by allowing public sector data to be used for purposes different than the ones for which the data was originally collected. The type of data targeted by the Act are, for example, data generated by GPS, or healthcare data, which if put to productive use, could contribute to improving the quality of services. The data collected could be re-used for commercial or non-commercial activities and the Commission estimates that the implementation of the measures proposed could increase the economic value of data by up to €11 billion by 2028.

Data intermediaries

The Commission believes that, in order to incentivize individuals to share their data, they should trust the process by which those data are handled. To this end, it proposes to create “data intermediaries”, which will handle the sharing of data by individuals, public bodies and private companies. These data sharing service providers will come as a European alternative to the existing major tech platforms.

To uphold trust in said intermediaries, the Commission proposes to put in place several protective measures. First, intermediaries will have to notify public authorities of their intention to provide data-sharing services. Second, they will have to commit to the protection of sensitive and confidential data. Finally, the Commission will impose strict requirements to ensure the intermediaries’ neutrality. These providers will have to distinguish their data sharing services from other commercial operations, and are prohibited from using the data exchanged for any other purposes. Certain services that have been excluded from becoming new data intermediaries as part of the regulation include cloud service providers and data advertising brokers, data consultancies, or providers of data products.

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The early draft of the Data Governance Act, leaked in November, had caused controversy with regards to these intermediaries, as it required that they be legally established in the EU or EEA. This approach was strongly defended by Internal Market Commissioner, Thierry Breton, who has long been a champion of “data sovereignty”. The leaked proposal highlighted that this requirement was to facilitate the supervision of intermediaries’ compliance with the requirements of the Act.

However, several experts criticized the measures, saying that they would discriminate against foreign companies and therefore, violate the EU engagements as part of the World Trade Organization (WTO). The WTO forbids countries to require providers of data sharing services from abroad to be legally based within their own country.

Many businesses had also reacted with worry to the leaked document, claiming that the restriction of data flows could result in a loss of billions of euros in digital trade.

Despite Commissioner Breton’s strong defense of the so-called “data localization” aspect, other Commissioners, including Vice-President Vestager herself, were less favorable towards this approach, resulting in the Commission’s backtracking on this aspect in the final proposal. As it stands, the Data Governance Act only requires intermediaries to either have a place of establishment in the EU, or to designate a representative in Europe.

However, restrictions on the transfer of sensitive data to third countries remain in the final proposal.

Sector-specific data spaces

The proposed Act also aims at creating sector-specific data spaces to enable the sharing of data within a specific sector. For example, the Act plans for the creation of data spaces for transport, health, energy or agriculture.

Data altruism

The Data Governance Act also aims at creating favorable conditions for “data altruism”, meaning encouraging individuals to voluntarily donate personal data to serve the general interest. To do so, “personal data spaces” will be created to ensure that the data shared will only be used for purposes that individuals who donated it agreed to, such as, for example, medical research. Non-for-profit organizations will have the opportunity to sign up into a public register of “data altruism organization”.

European Data Innovation Board

Finally, the draft Data Governance Act plans for the creation of a European Data Innovation Board. Its missions would be to oversee the data sharing service providers (the data intermediaries) and provide advice on best practices for data sharing.

The Member of the European Parliament Miapetra Kumpula-Natri (S&D, Finland), who is the rapporteur for the Industry, Research and Energy Committee’s (ITRE) draft initiative report on the Data Strategy, welcomed the “ambitious” proposal. She called the Commission’s decision to leave it to national bodies to protect sensitive data “fair enough as compromise, but not good for the single market and harmonization”. The deadline for amendments of the draft report ended on 12 November and the final Committee vote is expected in January 2021.

European Parliament and Council review of Data Governance Act

The Data Governance Act is currently being reviewed by the Council of the EU and the European Parliament.

The Presidency of the Council of the EU presented a first compromise text of Data Governance Act on 22 February 2021.  The compromise text notably focuses on better aligning the proposal  with the GDPR, specifically with regards to the definition of certain concepts, such as ‘data sharing service provider’ or ‘data altruism’. The compromise text also amends the proposal to include obligations to ensure interoperability between data sharing services, or obligations for data altruism organizations to provide easy withdrawal mechanisms and high level of security for the storage and processing of data collected based on data altruism.

Within the European Parliament, the Industry, Research and Energy Committee (ITRE) is responsible for the Data Governance Act. It held a first exchange of views with the Commission on 18 March. Generally, MEPs welcomed the proposal, but joined the Council’s position in stressing the importance of guaranteeing the consistency of the DGA with existing Data legislation, such as the GDPR, ePrivacy Directive or Open Data Directive. MEPs also underlined the need to facilitate access to data-sharing for SMEs, and called for better clarification of the role of data intermediaries. Those concerns are transcribed in the amendments proposed in the ITRE Committee’s Draft Report on the file, presented by rapporteur Angelika Niebler (EPP, Germany) on 26 March 2021.

Next steps

The Council of the EU, through the Working Party on Telecommunications and Information Society, is continuing its work towards the adoption of a Council position. Within the European Parliament, committees for opinion (Committee on Internal Market and Consumer Protection and Committee on Civil Liberties, Justice and Home Affairs) will vote on the Data Governance Act on 21 June and 1 July, respectively, followed by ITRE Committee on 15 July. The vote in plenary is planned for the September plenary session (13-16 September).

Data Governance Act’s potential implications for businesses and next steps

In terms of potential implications for businesses, some industry representatives have already raised concerns about the extra barriers to data flows that the draft Act risks creating through the assessment provision of third countries’ data protection regimes, with the option of blocking the transfer of highly sensitive data, the definition of which is, so far, unclear. An additional issue that has been also highlighted is that the Act could allow for discrimination on the basis of a quasi-licensing scheme it would set up, requiring companies to notify the authorities if they want to become service providers. Given the vague wording of the proposal, it could allow for selective revocation of said licenses, giving authorities the power to remove certain providers from the list.

In the third quarter of 2021, the Commission is also expected to present the Data Act, attempting to create an environment conducive to increased data sharing among businesses and governments.

Dr2 Consultants continuously monitors the developments around the EU Data Strategy. Should you be interested in further information on the Data Governance Act proposal and how it could impact your organization, you can reach out to Dr2 Consultants at info@dr2consultants.eu or find more information on our website.

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Digital euro: its arrival and the impact on the FinTech industry

The European Commission, as part of its ambition to digitalize society, is powering a movement for the digitalisation of finance. With this goal in mind, the European Commission, together with the European Central Bank (ECB), is studying the question of issuing a digital euro. In this article, Dr2 Consultants shares some insights into the background of the digital euro plans and the potential impact on the FinTech industry.

As part of the EU’s efforts towards accelerating the development of a strong European digital finance sector, and taking into account digitalization, emerging innovations in payments provided by the FinTech sector, and the growth of crypto-assets, the European Commission is evaluating, together with the European Central Bank (ECB), the need for and feasibility of issuing a digital euro. Their decision will also be informed by the 8.000 responses to the public consultation that ran between October and January 2021.

The official decision whether to pursue this project will come mid-2021, but its uptake seems inevitable, considering the support for the project at the Commission and at the national level, and in the context of Central Banks from third countries which are also starting to issue their own digital currencies.

Why a digital euro?

The need for a digital euro comes from the increasing digitalization of financial services and is made even more pressing by the rise of crypto-currencies offered by private foreign actors, combined with the COVID-19 pandemic which has accelerated the shift away from cash.

A digital euro would be considered a safer alternative to crypto currencies, such as Bitcoin or Ethereum. The European Commission and the ECB have expressed their concerns regarding crypto-currencies because of the volatile aspect of their price, since their value is not intrinsic but based on demand, and because they are mostly issued by foreign actors. On the contrary, the digital euro would be backed by the ECB and by national central banks of Member States, combining the efficiency of a digital payment instrument with the safety of central bank money.

The digital euro would be equivalent to the banknotes and coins we know today, but in a digital form. It would be an electronic form of payment, coming as an additional means to pay next to cash as we know today, and issued and guaranteed by the European Central Bank and national central banks.

What are the key challenges?

The issuing of a digital euro is however not without challenges. The main challenge will be to prevent people from completely abandoning traditional savings accounts in favor of digital wallets, weakening traditional commercial banks of the eurozone. To mitigate this risk, the ECB wants the digital euro to be only a means of payment, and not a form of investment that could compete with other financial instruments. There are also concerns with regards to privacy and security. If the ECB and the Commission decide to go through with the project, the regulatory framework surrounding the digital euro will need to include measures to mitigate those risks. Further consultation with stakeholders will most likely have to take place to further assess the risks and continue to define the various use-cases.

Next steps

Although the decision to pursue a digital euro is not yet official, Dr2 Consultants’ digital team is keeping a close eye on the developments as the EU is already paving the way for it, especially as it tries to regulate and limit the use of crypto currencies within the Single Market. The Commission proposal for a regulatory framework for crypto assets, published in September 2020, puts all significant crypto currencies under the supervision of the European Banking Authority. The ECB is also calling for higher regulation of crypto currencies, and especially of stablecoins (crypto currencies whose value is tied to an outside asset, such a national currency or  gold), as Big Tech such as Facebook aim to launch their own digital coins.

Lear more about our policy monitoring services here.

Potential impact on the FinTech Sector

The digitalization of finance is intrinsically linked to the FinTech sector. The term, a combination of “financial” and “technology”, refers to the use of digital and new technologies to ease or fasten financial operations. Most FinTech firms are start-up firms that have managed to enter a previously closed financial ecosystem. The FinTech industry has been growing rapidly, mainly thanks to an increased need for on-demand and digital finance but also regulatory changes such as the Payment Services Directive 2.

FinTech firms have created and brought on the market a variety of new means of payments and financial services. These innovations are slowly being regulated, either directly through financial policy, but also through policy developments targeting what fuels these innovations (e.g. regulating AI technologies or the way we access and share data). The European Commission will continue down that path through its Digital Finance Strategy, and by supporting new large-scale project such as the digital euro.

As explained by Mr. Fabio Panetta, Member of the Executive Board of the ECB, the key feature for success will be to make the digital euro interoperable with private payment solutions, making it possible for all market participants to offer products to European users. Dr2 Consultants expects that the uptake of the digital euro would create commercial opportunities for FinTech companies, but also likely attract new players to the market, creating more competition for existing firms. Especially, traditional banks could be inclined to up their digital capacities and services further, through innovation or acquisition.

Dr2 Consultants continuously monitors the developments in the discussion on digital finance and supports its clients on these matters. Should you be interested in further information on the digital euro and how it could impact your business, you can reach out to Dr2 Consultants at info@dr2consultants.eu or find more information on our website.

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Digital tax: insights into the latest global and EU developments

Digital tax: insights into the latest global and EU developments

The rise of digitalisation and the dynamic technological advancements continue to influence the way we work, travel and communicate. In the past year, Dr2 Consultants has analyzed the impact of the COVID-19 pandemic for several of its clients. What clearly stems from the various analysis performed is that the Coronavirus has acted as a catalyst for a global transition towards a more digital world, resulting in behavioral changes with lasting effects. Against this backdrop of a rapidly growing digital economy, there is a need for a modern, stable regulatory and tax framework to address the technological developments and challenges. Over the past few years, there have been European and global initiatives regarding a reform on the international corporate tax framework and the implementation of digital taxes. While digitalization is encouraged and promoted as it can benefit the economy and society, digital companies have also been urged by lawmakers across the world to contribute their fair share to society.

On the EU level, in the context of the EU’s recovery from the pandemic, the European Council has tasked the European Commission to put forward proposals for additional EU own resources, one of which is a proposal for a digital levy. On the international level, the Organisation for Economic Co-operation and Development (OECD) has been working on a global solution regarding digital taxation by facilitating the negotiations between more than 100 countries over the past two years.

This Dr2 Consultants’ blog post presents the latest developments on digital taxation on both global and European level and provides a brief analysis of the potential impact of the future initiatives on businesses.

Background of digital taxation

In the past few years, the international community has been trying to reform the international tax system to address the digitalization of the global economy. The OECD has been tasked with designing a global compromise solution, with 137 countries participating in the negotiations. The new global digital tax regime, if adopted, will have an impact on various digital companies. Specifically, the main issue at stake has been the question of where multinational companies should pay taxes: in the country where they are headquartered or in countries where their customers reside. Since May 2019, the OECD has been hosting public consultations and negotiations to address the tax challenges of the digitalization of the economy (Pillar 1) and to address tax avoidance through a global minimum tax (Pillar 2). In particular, pillar one has been quite contentious, with strong disagreements between the United States and several EU countries.

The lack of agreement on digital taxation either on OECD or EU level could result in legal fragmentation and add a substantial burden to businesses around the world.

Besides the OECD’s efforts to reach a global solution, a group of EU Member States and the UK have proceeded with the implementation of national digital taxes to remain in force (at least) until an international agreement is reached. In 2019, France started applying a 3% digital services tax on big tech companies with revenue of more than €750 million of which at least €25 million generated in France. Italy and Austria have been applying their own digital levies of 3% and 5% respectively, since January 2020. Also the UK approved a 2% tax, applied from April 2020. Spain and the Czech Republic are currently in the process of discussing such taxes and the Belgian government has announced it will start work on a national digital levy in 2023 in case there has been no progress on OECD or EU level beforehand. The growing number of countries imposing national digital taxes makes the OECD negotiations and the EU’s upcoming proposal more and more pertinent. In fact, the lack of agreement on either level could result in legal fragmentation and add a substantial burden to businesses around the world.

Recent OECD developments

After failing to reach an agreement in 2020, the negotiating countries at the OECD level have set a new deadline to agree on a global compromise solution – end of June 2021. Between 27 and 29 January, the OECD held the 11th meeting of the OECD/G20 Inclusive Framework, to take stock of the state of play of the negotiations up to that point. Finance ministers from several countries, such as the UK, Italy, Germany and Canada, have expressed hopes that a global digital tax deal could be reached by the summer. They cautioned, however, that there was still outstanding work, specifically on Pillar 1. The demonstrated optimism has been confirmed by the newly appointed U.S. Secretary of Treasury, Janet Yellen, who has started bilateral talks with some of her European counterparts, showing commitment to continue the talks on a global tax agreement.

However, the change of the U.S. administration is not necessarily a sign for a complete reversal of the U.S. position on a global digital tax. While the new Biden administration is expected to remove the controversial proposal for the inclusion of a provision regarding “safe harbours”, allowing U.S. tech giants to opt out of the new regime, Secretary Yellen has stated in her Senate Confirmation Hearing that in case no deal is reached, the U.S.A. will consider the application of retaliatory tariffs. For the moment, the U.S. Trade Representative (USTR) has criticized the adoption of national digital taxes, but has refrained from imposing tariffs, while the OECD negotiations continue.

Recent EU developments

On 14 and 18 January, the European Commission launched, respectively, a roadmap and a public consultation on ‘a fair & competitive digital economy – digital levy.’ The initiatives aim to gather stakeholders’ feedback and views on the introduction of a digital tax to address the issue of fair taxation of the digital economy. The new initiative, according to the roadmap, is to be designed in a way that is compatible with the international agreement to be reached in the Organisation for Economic Co-operation and Development (OECD) as well as broader international obligations. The new EU digital levy initiative could potentially include a corporate income tax top-up to be applied to all companies conducting certain digital activities in the EU, a tax on revenues created by certain digital activities conducted in the EU, and/or a tax on digital transactions conducted business-to-business in the EU.

Potential implications of digital taxation for businesses

Dr2 Consultants expects the new initiative regarding EU digital taxation by the European Commission to have an impact on businesses engaging and operating in the digital economy, including foreign businesses operating in the EU. In addition, it will also affect tax compliance costs, tax revenues, competitiveness of EU digital companies, and ultimately consumers. While stating that the Commission proposal is not supposed to interfere with the OECD negotiations, and previously committing to withdrawing its proposal in case of an agreement at the OECD level, the European Commission has recently confirmed that it will move forward with publishing a proposal on an EU digital levy in June 2021, regardless of the outcome of the global negotiations.

While the digital tax measures are generally supposed to target large digital companies, their effects are likely to have a wider impact.

The upcoming Commission proposal is likely to use an eventual OECD agreement as a basis and add additional requirements for businesses operating within the EU, the details of which remain unclear for the moment. However, such approach could pose a risk of legal fragmentation and might encourage more EU Member States to adopt national digital tax measures in the meantime. Furthermore, businesses are fearing unilateral measures, national or European, as they might lead to double taxation, market distortion and retaliation from other countries. Both the EU and the OECD initiatives will likely target automated digital services and consumer-facing businesses, such as search engines, social media platforms, online marketplaces and businesses selling goods and services to consumers online. It has been clarified that intermediate products and components for consumer products would be out of scope, with some of them remaining subject to possible exceptions. In terms of thresholds, companies falling under the scope of the initiatives will have revenues of at least €750 million, with sales in each country reaching a specific revenue threshold. However, the details of the scope of the future initiative are still a subject of debate at the OECD negotiations. Similarly, as the EU proposal is in a very early stage, one might infer that the OECD requirements will translate as minimum requirements in the EU proposal.

While the digital tax measures are generally supposed to target large digital companies, their effects are likely to have a wider impact. When being confronted with a new digital tax, there are various ways in which companies can integrate it into their business model. As can already be seen from the introduction of unilateral digital taxes in some European countries, some companies might decide to absorb the additional costs themselves, while others might decide to pass on the extra costs to their business customers or users via price increases.

Next steps

Dr2 Consultants advises businesses to pay close attention to these developments in the coming months. In particular, on the OECD level, leaders are expected to continue with the negotiations regarding a global digital tax regime, and potentially reach an agreement by the end of June 2021. According to Pascal Saint-Amans, Head of taxation at the OECD, the best-case scenario would be reaching a high-level agreement on taxation by June, and then clarifying the details of the agreement during the Indonesia Presidency of the G20 in 2022. Furthermore, even when a full agreement is reached, given the fact that 137 countries participate in the negotiations, the implementation of the new rules will be a time-consuming endeavour.

On the EU side, the Commission proposal on an EU digital levy is expected in June 2021, after which the discussions will continue in the Council of the EU, as taxation matters are decided by unanimity. Although the European Parliament does not have a definitive say on tax matters, the EU Parliament’s Economic Affairs’ Committee (ECON) has already released a draft report, calling for an EU solution on digital tax and stressing the importance of a level playing field for providers of traditional services and digital services in the EU.

Dr2 Consultants continuously monitors the developments of the discussion on the new global, EU and national tax regimes, and supports its clients on these matters accordingly. Should you be interested in further information on digital taxation and how it could impact your business, you can reach out to Dr2 Consultants at info@dr2consultants.eu or find more information on our website.

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Digital Markets Act: the European Commission’s plans for regulating digital ‘Gatekeepers’

On 15 December, the European Commission published a proposal for a Regulation on the  Digital Markets Act (DMA). Together with the Digital Services Act (DSA) it forms the foundation of the European digital strategy, aiming to create a safe digital space in which the rights of all users of digital services are protected and to establish a level playing field to foster innovation, growth, and competitiveness, within the EU and globally.

Which businesses will be affected by the new Digital Markets Act proposal?

The Digital Markets Act addresses certain behaviors of platforms acting as “gatekeepers”. It establishes a set of narrowly defined criteria for qualifying a large online platform as a so-called “gatekeeper”. To be identified as a gatekeeper, the company should provide core platform services, including online intermediation services, online search engines, online social networking services, video-sharing platform services, number independent interpersonal communication services, operating systems, and cloud computing services. The Commission proposes three key cumulative criteria with quantitative thresholds related to strong economic position, sizeable turnover, large number of users, and an entrenched position in the market that must be met to be defined as a “gatekeeper”. Companies will have to assess if they meet these criteria and provide their assessment to the European Commission, who will designate if companies are gatekeepers or not. The Commission can identify gatekeepers that meet these criteria but do not meet the quantitative thresholds, taking into account other factors (e.g. entry barriers derived from network effects and data, scale and scope effects that the provider benefits from, business or end-user lock-in, etc.). Those companies declared as gatekeepers will be obliged to comply with the new obligations established by the Digital Markets Act.

Do’s and don’ts for gatekeepers:

Among the list of obligations for gatekeepers, the Commission considers allowing interoperability for third-parties with the gatekeeper’s own services in certain situations, allowing business users to access the data they generate using the gatekeeper’s services and providing companies with the necessary tools and information to verify their advertisements hosted by the gatekeeper. Additionally, gatekeepers must allow business users to offer products and services through third-party online intermediation services, different from the gatekeeper, at different prices or conditions and let business users promote their offers and conclude contracts with customers acquired via the core platform service outside the gatekeeper’s platform.

Among the prohibitions for gatekeepers, they may no longer treat services and products offered by the gatekeeper itself more favorably in ranking than similar services or products offered by third-parties on the gatekeeper’s platform. Gatekeepers may not prevent consumers from linking up to businesses outside their platforms or prevent users from un-installing any pre-installed software or app if they wish so. Finally, gatekeepers may no longer combine personal data sourced from these core platform services with personal data from any other services offered by them (gatekeepers) or with personal data from third-party services.

How will the Digital Markets Act be enforced?

The European Commission will have investigative and enforcement powers regarding the Digital Markets Act and will be able to impose fines of up to 10 percent of the company’s total worldwide annual turnover, with the provision of periodic penalty payments of up to 5 percent of the average daily turnover. In case of systematic infringements of the Digital Markets Act obligations by gatekeepers, additional remedies may be imposed on the gatekeepers after a market investigation. Such remedies will need to be proportionate to the offence committed. If necessary and as a last resort option, non-financial remedies can be imposed. These can include behavioral and structural remedies, such as the divestiture of (parts of) a business.

What implications could the Digital Markets Act proposal have for companies?

Stakeholders from various sectors quickly reacted to the new proposal for a Digital Markets Act by pointing out that while the proposal was a good starting point, there was still a lot of work to be done. One of the criticisms concerns the negative implications of the concept of ‘gatekeepers’, with industry representatives arguing that the scope of the new proposal should look at strategic market status instead, similarly to the approach of the U.K.’s Competition and Markets Authority. As the asymmetric obligations under the Digital Markets Act will only apply to certain companies, there has been a push to include market share as a main criterion, instead of turnover. Additionally, there are concerns about the Commission’s increased enforcement powers which could result in a less objective process. Furthermore, industry representatives tend to point out the possibility of the Digital Markets Act leading to the creation of parallel national rules addressing the same issues and resulting in legal fragmentation across the EU.

Given the targeted nature of the Digital Markets Act, the impact is expected to be limited to around a dozen companies, in particular Big Tech companies, and while it does not target small companies and startups, it is expected that the DMA will impact their abilities to scale in the EU. Furthermore, the fact that the Digital Markets Act appears to specifically target a handful of companies is a source of criticism for several stakeholders as it makes it harder to develop new products to support small businesses in Europe.

Next steps in the legislative process

After the publication of the Digital Services Act and Digital Markets Act proposals, they will be the subject of long and likely arduous discussions in the Council of the EU and in the European Parliament. As confirmed by the Portuguese Presidency of the Council of the EU, the Digital Markets Act will be discussed in the Working Party on Competitiveness and Growth, falling within the remit of the Competition Council formation. Work on the proposals in the Council has already started in the first week of January, as the Digital Services Act and the Digital Markets Act will be the key files for the Portuguese Presidency.

In the European Parliament, the Internal Market Committee (IMCO) will take the lead for both files, with the Industry (ITRE), Justice (JURI) and Culture (CULT) committees poised to submit opinions on the DSA, and the Economic (ECON), Industry (ITRE) and Justice (JURI) committees on the DMA. The EP’s IMCO Committee will hold a first exchange of views on both files on 11 January.

In terms of the time frame for adopting the Digital Markets Act, France has announced a highly ambitious plan to conclude the negotiations for both proposals, so including the DSA as well, during its Presidency of the Council of the EU in the first half of 2022. The Commission shares this objective for the co-decision process to be finalized in a year and a half, however, it is useful to remember that other recent and major files, such as the General Data Protection Regulation and the Copyright Reform, took respectively 5 and 2.5 years to be adopted.

Dr2 Consultants closely monitors the developments on this file for its clients. If you would like to know more about the proposal, and how it might impact your business, please contact Dr2 Consultants.

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Tax initiatives on the digitalisation of the economy and their implications for businesses

Today, on 12 October, Pascal Saint-Amans, head of tax policy at the Organisation for Economic Co-operation and Development (OECD), announced that an agreement on the establishment of a global digital tax would be postponed until mid-2021. The original deadline for the end of negotiations between 137 countries was the end of 2020. However, due to major political differences, particularly on which companies should be included in the new regime and whether the rules would be mandatory, as well as the effect of the COVID-19 pandemic, negotiators will need more time. As part of its announcement today, the OECD also published updated proposals for the two areas of its digital tax plan: Pillar 1 and Pillar 2.

In the past few years, the international community has been trying to reform the international tax system in order to address the digitalisation of the global economy. The new global digital tax regime, if adopted, will have an impact on various digital companies. Specifically, the main issue at stake has been the question of where multinational companies should pay taxes: in the country where they are headquartered or in countries where their customers reside. Over the past two years, the OECD has been tasked with designing a global compromise solution, with 137 countries participating in the negotiations. Since May 2019, the OECD has been hosting public consultations and negotiations to address the tax challenges of the digitalisation of the economy (Pillar 1) and to address tax avoidance through a global minimum tax (Pillar 2).

OECD’s proposals to address global tax

The first pillar aims to ensure big digital and multinational companies are taxed in the places where they generate profit, not where they book them. The OECD suggests targeting consumer-facing firms with a significant footprint around the globe, notably revenues of at least €750 million, and whose sales in each country reach a specific revenue threshold. It has been the more contentious OECD approach, with strong disagreements between the United States and several EU countries. The OECD’s second pillar aims to set a global minimum corporate tax rate to stop countries lowering corporate tax rates in an attempt to shift company headquarters to their jurisdictions. The second pillar has proven less controversial and discussions focus mainly on what that rate should be and whether there would be any exceptions. Despite ideas to decouple the two pillars in order to appease the United States and expedite the negotiation process, an agreement cannot be achieved without committing to both pillars.

On 12 October, Mr. Saint-Amans stated that while many of the details of these proposals have been already agreed upon, there are still difficult political choices to be made, including the idea of ‘safe harbor’ making the entire digital tax agreement optional, for which the United States has been negotiating. By accepting a safer harbor regime, governments would have the possibility to choose whether to adopt the rules or not, thus allowing companies to adopt or disregard Pillar 1 of the proposal.

The OECD will present the two blueprints at the meeting of G20 finance ministers on 14 October, for which a report is already available. Furthermore, today a public consultation was launched on the reports of the two blueprints, inviting stakeholders to send their written comments to the OECD by 14 December. Public consultation meetings on the blueprints will be held in January 2021, for which the OECD will publish registration details in December 2020.

OECD’s negotiations: state of play

In June 2020, the United States temporarily withdrew from the OECD negotiations due to the COVID-19 crisis, internal political disagreement and the upcoming Presidential elections. This withdrawal marked a peak in the tensions between the United States and France. In 2019, after France adopted a national digital services tax, the US government launched an investigation, determining that France’s digital tax was unfair because it was discriminating against US companies. The two countries reached an agreement and sanctions were not imposed pending the OECD negotiations. Following the United States’ withdrawal, France, the United Kingdom, Spain and Italy suggested a “phased approach” to the digital tax talks, allowing more concessions so that a compromise remains within reach. The details of such an approach, however, are still not clear. On 9 and 10 October, a final round of negotiations took place, aiming to reach a compromise between the opposing positions of the United States and its EU negotiation partners. Deputy U.S. Trade Representative C.J. Mahoney urged Europe to support an OECD deal and signalled that the United States would be able to engage more deeply with the negotiations after the Presidential election on 3 November. Following these negotiations, it was announced that an agreement on the global digital tax would be postponed until mid-2021.

EU’s position on digital taxation

According to the European Council conclusions on the 2021-2027 Multiannual Financial Framework and Recovery Fund, published on 21 July, the European Commission will present a proposal for the introduction of an EU-wide digital tax in the beginning of 2021 with a view to its introduction at the latest by 1 January 2023. The Commission expects the tax to bring €1.3 billion to the EU in terms of revenue, in case the ongoing OECD negotiations fail to deliver an international agreement by the end of 2020. The Commission’s intention to come up with a proposal for a European digital services tax in the beginning of 2021 has been reaffirmed by Commission President Ursula von der Leyen in her State of the Union address. Furthermore, on 4 September, during a meeting with national tax officials in the High Level Working Party on Tax Questions, the European Commission presented their plans to launch a new digital tax in the summer of 2021. The tax is meant to feed into the EU budget necessary for the recovery plans. It is not clear how the negotiations at OECD level will impact the EU digital tax, as some say that the tax will come regardless of the progress at OECD level, while the Commission officially states it will only come forward with a new tax proposal if OECD negotiations fail. Following the outcome of the OECD negotiations, it is possible that the Commission might postpone its proposal to allow OECD negotiations to conclude in 2021.

National Digital Services Taxes

A group of EU Member States and the UK have adopted national digital services taxes to remain in force until an international agreement is reached. In 2019, France started applying a 3 percent digital services tax on big tech companies with revenue of more than €750 million of which at least €25 million generated in France. After considering its suspension in January 2020 until the end of the year in the hope of an OECD agreement, Paris recently stated that, in wake of the COVID-19 crisis, such a tax is necessary and will not be suspended. Italy and Austria have been applying their own digital levies of 3 and 5 percent respectively, since January 2020, and the UK has approved a 2 percent tax applied from April 2020. Spain and the Czech Republic are currently in the process of discussing such taxes and the new Belgian government has announced it will start work on a national digital levy in 2023 in case there has been no progress on OECD or EU level beforehand.

Business implications

The OECD proposal for a global digital tax regime will target automated digital services businesses and consumer-facing businesses such as search engines, social media platforms, cloud computing, content streaming and gaming, as well as online marketplaces and businesses selling goods and services to consumers online. It has been clarified that intermediate products and components for consumer products would be out of scope, with some remaining subject to possible exceptions.

Although, generally speaking, one can say that the target of digital taxes are normally large digital companies, the various ways in which these companies integrate the tax into their business models, may also have a direct impact on their business customers/users. With the unilateral development of digital taxes across Europe, some technology companies have decided to take on the additional costs themselves. However, other companies are going to announce price increases for their business customers/users as a result of the adoption of national digital taxes in some EU countries.

Dr2 Consultants continuously monitors the developments of the discussion on the new global, EU and national tax regimes. Should you be interested in further information on digital taxation and how it could impact your business, you can reach out to Dr2 Consultants at info@dr2consultants.eu or find more information on our website.

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Digital Ambitions in Flanders

The Flemish Government Agreement 2019-2024 was announced on Tuesday 1 October and was negotiated by N-VA, CD&V and Open Vld. Although the coalition agreement does not contain a separate chapter on digital topics, the new Flemish Government is committed to making innovation and digital transformation a priority in its policies. To achieve this, the agreement emphasizes that Flanders must raise to the top of the digital infrastructure. Moreover, the Flemish Government also wants to take the lead in experimenting with new digital applications and digital transformations in its services.

Lifelong learning

The agreement stresses the importance of digitalization to stimulate a culture of lifelong learning. Therefore, the new Flemish government wants to set up a Lifelong Learning Platform and aims to use smart data to proactively make people aware of career opportunities and threats on the labor market. In addition, embedded in the VDAB (Vlaamse Dienst voor Arbeidsbemiddeling en Beroepsopleiding, Flemish Office for Employment and Vocational Training) career platform, the Flemish government is developing a smart digital tool that will help Flemish people find their way in the private and public labor market. Citizens who do not have sufficient digital skills will be proactively tracked and supported to increase their self-reliance. However, already during the formative years in high school, the government wants to have an eye for digital innovations in the “classroom of the future” and for the corresponding IT applications. In addition, courses should be substantively up-to-date and respond to the reality of tomorrow, certainly also with regard to the necessary digital and transversal competences.

 

Artificial intelligence

Artificial intelligence will play an important role in the digitalization of Flanders. Therefore, the new Flemish Government is preparing an integrated plan for further digitalization of Flanders and the valorization of artificial intelligence. With this plan, the Flemish government wants to increase support for the policy programs and projects for Artificial Intelligence, Cyber Security, I-Learn and Mobilidata and ensure that these remain optimally tailored to the needs of Flemish companies and society as a whole. In addition, the government agreement states that the quality of life will also increase thanks to the efforts of AI. The Flemish AI policy plan fulfills the ambition to put Flanders on the world map in this strategic domain through research, training and practical applications in companies.

Digital security

The new Flemish government is also concerned about its digital security. Through the cyber-security policy plan, aimed at research, practical applications in companies and training, the coalition of N-VA, CD&V and Open Vld wants to develop in particular a resilient digital economy in Flanders. In this regard, also privacy is very important according to the government agreement. The government will, in accordance with international evolutions, develop standards for pooling, opening and exchanging data, with the utmost respect for user privacy. In addition, in the rapidly evolving media society where the impact of (social) media on society is enormous, the importance of media literacy and digital literacy should be increased to guard against fake news. Therefore, the Flemish government will continue to implement the media literacy policy together with the Knowledge Center Media Literacy so that they are able to pursue a coordinated policy throughout the media sector with other policy areas.

The ambition of Flanders is clear. The new government wants Flanders to be the world reference for a number of innovative technologies and sectors and to be a pioneer in digital entrepreneurship. Flanders must be the testing ground for companies and citizens who want to taste the digital applications of the future. The question remains, however, how these ambitions will be financed and how these priorities will be implemented concretely in order to give Flanders a leading (digital) position in the world.

What will be the digital agenda of the next European Commission?

Between early leaks from DG CONNECT to the individual grilling of Commissioners-designate, the digital agenda of the next European Commission is slowly taking shape – even if key questions remain.

 Digital policies: who does what?

The cross-checking of somewhat blurry portfolio titles, mission letters, the Commission’s new organizational chart, the attribution of DGs and finally the Commissioners-designate hearings shed some light on who will do what to set the digital agenda in motion.

Margrethe Vestager’s hearing set the tone, with a number of questions and declarations on expected digital files (a chance Sylvie Goulard, Commissioner-designate for the Internal Market, did not get). The Vice-President for Digital and Commissioner for Competition also used this occasion to clarify (though without going into details) that the execution of the digital portfolio will be in the hands of her colleagues – allowing her to keep separate her two jobs – and avoid any clash between possible conflicting objectives.

So, who are the Commissioners in charge of digital policies?

Goulard’s rejection today by the European Parliament might lead to some reshuffling, but as it stands, the following Commissioners will contribute to the EU’s digital agenda:

  • Didier Reynders, Commissioner-designate for Justice, on topics such as GDPR and Artificial Intelligence;
  • Věra Jourová, Vice President-designate for Values and Transparency, on issues like illegal content and disinformation – possibly contributing as well to the Digital Services Act;
  • Mariya Gabriel, Commissioner-designate for Innovation and Youth, who also mentioned AI in her hearing, in addition to the importance of investing in education, research and innovation, and ensuring synergies between the three;
  • Paolo Gentiloni, Commissioner-designate for the Economy, that will inherit the work on the Digital Tax;
  • Valdis Dombrovskis, Executive Vice-President for “An Economy that works for people”, that will continue the work on Fintech, cryptoassets, cybersecurity…;
  • And of course, now, there’s a big question mark on who will take on the files assigned to Goulard, including the groundwork on the Digital Services Act, Artificial Intelligence, cybersecurity, digital education and so on.

On what topics?

The new Digital Services Act – which will include a revision of the 2000 Ecommerce Directive, has been high on the agenda of the tech sector, and is clearly high on the Commission’s agenda as well. For anyone that has been closely following these developments, the hearings did not reveal anything. The new act will “upgrade” the existing liability rules for platforms and try to find the right balance to avoid hindering a growing European platform economy. Jourová added to the discussion by focusing on the fight against illegal content and disinformation and the responsibility of platforms.

Artificial Intelligence has been mentioned many times, but not in great details. Vestager highlighted again what should be the EU’s approach to AI, and Reynders argued in favor of a very horizontal, “ethics-by-design” approach. Vestager also confirmed that something will come in the first 100 days, without concretely saying what will come and under which form – since a legislative proposal seems relatively improbable under such deadline.

Access to data was briefly mentioned, with Vestager highlighting that the EU might need to regulate the way that companies collect, use and share data, so it can benefit the entire society.

Digital Tax remains on the agenda, with Gentiloni supporting an international solution, but not excluding a European one if an agreement cannot be reached.

On competition, Vestager highlighted that competition rules needed to adapt to digitalization, especially with the development of the platform economy and technologies such as AI, where access to data is crucial. Vestager also declared, after her hearing, that “she will move beyond fines in her second term […] to look at other measures to ensure a fair playing field”.

Remaining on the topic of Big Tech, Valdis Dombrovskis also announced that the Commission was looking into Facebook’s Libra, and that a legislative proposal on such cryptoassets was to be expected.

Beyond policy, the hearings confirmed that the European Commission will have to deal with a fragmented and vocal European Parliament, especially on digital matters.

Download our infographic on Margrethe Vestager’s hearing here.