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The Digital Services Act – How does it affect businesses in the EU?

The upcoming Digital Services Act (DSA) package, announced by the President of the European Commission, Ursula von der Leyen, in her political guidelines and in the Commission’s Communication “Shaping Europe’s Digital Future” of 19 February, is expected be published in the end of 2020. This will represent the Commission’s most ambitious plan to regulate digital services. The DSA package is expected to include a revision of the 2000 e-Commerce Directive (ECD), introduction of ex ante rules for ‘gatekeeper’ platforms and potential provisions for platform workers. So, how will this impact businesses in the EU?

When thinking about the impact of the DSA, one might initially think about big international platforms, and while those certainly can be impacted by the upcoming legislation, the implications for businesses in general can likely be much more far-reaching. The DSA is planned to have a more interventionist approach compared to its predecessor, the e-Commerce Directive, and will have broad implications for European and non-European businesses operating within the EU.

A wide range of information society services will be impacted by the new rules, one can think of transport and tourism platforms, e-commerce marketplaces, social media platforms, online sellers, data services, online search engine providers and more. The revision of the e-Commerce Directive is expected to be the most important overhaul of digital legislation of this decade, and given ongoing digitalization efforts, it is a crucial file to follow for many sectors. If you are interested in getting up to date insights into this topic, learn more about our monitoring services and get in touch with us.

Digital Services Act – what is it?

There are three main principles in the current e-Commerce Directive, which was adopted in 2000, for which the European Commission has to decide whether they will maintain them or make changes:

  • The internal market clause (i.e. country of origin principle) establishes that a provider of information society services is only subject to the rules of the Member State where it is established. It may then provide the services across the 27 other Member States without being subject to the rules of those other States.
  • The e-Commerce Directive (Art. 15) prohibits Member States from imposing general monitoring obligations on online intermediaries. In essence, this means that it is prohibited to require from intermediaries that they actively seek facts or circumstances indicating illegal activity.
  • The limited liability clause for online intermediary services (further explained below).

There are diverging views across the various digital sectors on the preferred course of action, depending on the interests at stake. Regardless of the direction the Commission will decide to take with its legislative proposal, it can be expected that these principles will have a prominent role in upcoming negotiations and debates.

The ex-ante rules for ‘gatekeeper’ platforms would address the issue of the level playing field in European digital markets, where, according to the European Commission, currently a few large online platforms act as gatekeepers. The rules will be aimed at ensuring that consumers have the widest choice and that the EU single market for digital services remains competitive and open to innovation. This could be done through additional general rules for all platforms of a certain scale, such as rules on self-preferencing, and/or through tailored regulatory obligations for specific gatekeepers, such as non-personal data access obligations, specific requirements regarding personal data portability, or interoperability requirements.

The Commission is also taking the opportunity to consult on other emerging issues related to online platforms, such as the opportunities and challenges that self-employed people face in providing services through online platforms. For instance, those working for food delivery applications or online transport platforms.

Digital Services Act: Implications for businesses

There will be various implications for various businesses depending on the sector concerned:

e-Commerce

If we take as an example “e-commerce”, the upcoming DSA will have two main implications. First, there will most likely be a re-evaluation of the role of e-commerce marketplaces. The focus of the current debate lies on the complex issue of the future of the limited liability principle, introduced by the e-Commerce Directive. The Directive includes an exemption from liability for digital services hosting illegal content if they are not aware of the illegality or, when they become aware, they act expeditiously to remove or block access to the illegal material. This is also known as “safe harbour”.

There are actors that say this clause is not enough, stating that liability for platforms should be extended, but there are others arguing that the current regime could disincentivize proactive content moderation measures. In this context, there has been discussion about the introduction of a potential “Good Samaritan” principle, which would aim to ensure that online intermediaries are not penalized for proactive measures against illegal content.

Second, the role of online sellers is an important element, as this is directly linked to EU’s inability to enforce its laws to non-EU based sellers and marketplaces, in particular when they have no legal representative in the EU.

Information society services

Another example of businesses that would be impacted by the new rules are information society services offering a wide range of services such as search engines, cloud services and other platforms. Those businesses generally consider it important that the core foundations of the e-Commerce Directive are respected, i.e. limited liability, no general monitoring obligations and the maintenance of the country of origin principle. Platforms can likely also be impacted by rules on transparency in online advertising, which are targeted by the DSA.

The introduction of ex ante rules for ‘gatekeeper’ platforms is planned to build on the transparency requirements for online platforms and the rules on provision of intermediation services between businesses and consumers, as stated in the Platform to Business Regulation (P2B), applicable since 12 July 2020. The Commission foresees the inclusion of perspective rules for platforms on self-preferencing, data access policies and unfair contractual provisions, as well as a data gathering framework allowing regulators to collect further information from gatekeepers on the workings of their platforms.

Furthermore, specific rules for gatekeepers of a certain size have been proposed, including rules against ‘blacklisted’ behaviour for all platforms or more tailored interventions on a case by case basis. Potential obligations for large platforms to share the data they obtain is expected to become an issue of debate. However, it is still unclear which platforms will be identified as gatekeepers, and which markets will the new rules focus on. Furthermore, the introduction of such rules, while aimed at protecting smaller EU businesses, might go against EU’s core antitrust principles if there is no evidence of systemic market failure.

Next steps

On 8 September, the Commission closed its public consultations on the DSA, which gathered contributions from platforms, companies, as well as business and consumer associations.

Meanwhile, three committees in the European Parliament: Committee on the Internal Market and Consumer Protection (IMCO), Committee on Civil Liberties, Justice and Home Affairs (LIBE), and Committee on Legal Affairs (JURI) are currently debating over their own-initiative reports, with final committee votes planned by the end of September, followed by a final vote during the October Plenary session.

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

Interested to know more about other upcoming EU legislative proposals? Read our blog post – Back to work: EU legislative proposals – 2020 outlook.

Summer recess – what’s next?

As EU leaders agreed on a new proposal for the new Multiannual Financial Framework and the Recovery Plan on 21 July, the European Parliament was given good food for thought over its summer recess. However, the new long-term budget is not the only priority on the EU agenda. The Commission is already chewing on a series of proposals to be expected later this year and in 2021. In fact, now is the moment to deliver input on some key, planned legislative proposals, as the Commission launched a series of public consultations that are open until after summer. Let’s have a look what is next after the 2020 summer recess.

Transport: smarter and greener

The green and digital transition as the twin priorities of the Von der Leyen Commission are also reflected in the upcoming transport initiatives. To deliver the ambitious European Green Deal climate neutrality objective, the mobility sector needs a 90% emission reduction by 2050. The Strategy for Sustainable and Smart Mobility, expected towards the end of the year, will be the overarching strategy for the delivery of the twin transitions in this area. Stakeholders can contribute to the public consultation until 23 September.

Expectedly, the strategy will include the integration of alternative fuels, in line with the recently published hydrogen strategy that already outlines a pathway for the deployment until 2050 in all modes. The strategy is also complemented by the upcoming FuelEU initiatives for the maritime and aviation sector. The FuelEU Maritime initiative, aimed at boosing alternative fuels in shipping specifically, is open for feedback until 10 September. The public consultation on ReFuelEU Aviation, initially planned for the first quarter of 2020, is still to be expected ahead of the Commission proposal this year.

Sustainability: a bigger role for tax

Taxation will become a more important instrument for the Commission to align consumer choices and business investments with its climate targets. On 23 July, public consultations on both the revision of the Energy Taxation Directive and the creation of a Carbon Border Adjustment Mechanism were launched. Having been unchanged since its adoption in 2003, the Energy Taxation Directive will be subject to a thorough review. The exact changes are yet to be determined based on the consultation outcome, however, what is clear is that it will include a correction of the minimum taxation rates for electricity, gas, and coal, as well as a tax exemption reduction for fossil fuels. The proposal, which is part of the European Green Deal, is scheduled for June 2021. The consultation is open for feedback until 14 October.

In addition, the Commission proposes a Carbon Border Adjustment Mechanism to prevent ‘carbon leakage’. This ‘CO2-tax’ internalizes emissions in the price of a product, so production does not shift to countries with lower climate ambitions. The exact instrument is still to be determined, and could take the form of an EU-wide import tax or an extension of the Emmission Trading System (ETS). The latter has already seen critical responses, as this may not be in line with WTO rules. The Commission plans to scrutinize the issue and present a proposal later this year. The revenues would directly contribute to the ‘own resources’ of the EU budget for the next seven years that would help finance the new €750 billion recovery plan. Stakeholders can deliver their contribution to the plan until 28 October.

Digital: fit for the COVID-19 reality

Following its pledge to make Europe ‘fit for the digital age’, the Digital Education Action Plan and the Digital Services Act are also high on the Commission’s agenda. The Digital Education Action Plan, due to be published in September this year, will be part of the Next Generation EU program. The COVID-19 crisis has seen schools and universities close their doors and increasingly turn to remote, digital teaching. The Action Plan aims to promote high-quality and inclusive education and training in the post-COVID digital reality. Feedback on the proposal can be delivered until 4 September.

Part of the Next Generation EU financing is the digital tax element of the Digital Services Act, to be presented by the end of 2020. The Digital Services Act is an attempt to regulate online platforms when it comes to illegal goods, product safety, political advertising and offensive content. The initiative may face intense debates before its approval, as previous attempts to implement an EU-wide Digital Taxation mechanism have so far been unsuccessful. The consultation remains open until 8 September.

Next steps

The Commission’s proposals on the above initiatives are expected before the end of 2020, except for the Energy Taxation Directive which is due in June next year. From the above-mentioned public consultations, it is evident that the European Commission is gearing up for a busy end-of-year period. Early (proactive) action is desirable for stakeholders that aim to represent their interests on these files, which will also be closely examined by the European Parliament and Council of the EU in 2021 (and later).

Want to know more about the upcoming initiatives, COVID-19, or other files that might affect your business? Please contact Dr2 Consultants to see what we can do for you.

The EU Budget proposal and its impact on the digital sector

On 27 May, the European Commission put forward its proposal for a major recovery plan. The plan includes not only a proposal for the EU’s Multiannual Financial Framework for 2021-2027 – The EU budget powering the recovery plan for Europe, but the European Commission also proposes to create a new recovery instrument, Next Generation EU.

Next Generation EU, with a budget of €750 billion, together with targeted reinforcements to the 2021-2027 EU budget with a proposed budget of €1.1 trillion, will bring the total financial firepower of the EU budget to €1.85 trillion. Including other schemes such as Support to mitigate Unemployment Risks in an Emergency (Commission’s safety net for workers), the European Stability Mechanism Pandemic Crisis Support (Eurozone’s enhanced credit line) and the European Investment Bank Guarantee Fund for Workers and Businesses (focused primarily on small and medium-sized companies), with a combined budget of €540 billion, significant funds will be available for European recovery.

Next Generation EU will raise money by temporarily lifting the European Commission’s own resources ceiling to 2.00% of EU Gross National Income, allowing the Commission to use its strong credit rating to borrow €750 billion on the financial markets. To help do this in a fair and shared way, the Commission proposes a number of new own resources among which extension of the EU Emission Trading System (ETS) to include maritime and aviation sectors, a carbon border adjustment mechanism, a digital tax and a tax on large enterprises.

Finally, the Commission has published an update of its 2020 Work Program, which will prioritize the actions needed to propel Europe’s recovery and resilience.

The future is digital

The outbreak of COVID-19 has highlighted the importance of digitization across all areas of the economy and society. New technologies have helped businesses and public services to keep functioning and have made sure that international trade could continue. It is expected that, in the long run, the pandemic will have triggered permanent social and economic changes: more remote working, e-learning, e-commerce, e-government. It has, therefore, become imperative for businesses and governments to invest in digitalization.

The twin transitions to a green and digital Europe remain the defining challenges of this generation. This is reflected throughout the Commission’s proposals, which stress that investing in digital infrastructure and skills will help boost competitiveness and technological sovereignty.

Implications for the digital sector

A new instrument, the Solvency Support instrument would be primarily aimed at countries hit hardest by the crisis and unable to provide state aid to their most vulnerable sectors. The distribution of this ‘immediate and temporary’[1] tool will also aim to prioritize green investment according to the Commission. While welcomed by poorer countries the instrument might not have the desired effect unless agreed upon and deployed quickly by the Member States.

The Strategic Investment Facility will be used to promote the green and digital transitions by investing in 5G, artificial intelligence, the industrial internet of things, low CO2 emission industry and cybersecurity. Since such investments might become significantly riskier in the aftermath of the pandemic, the Commission stands behind a common European approach to provide the crucial long-term investments for companies implementing projects of strategic importance. The Strategic Investment Facility will take a more forward-looking approach by focusing on ‘projects relevant for achieving strategic autonomy in key value chains in the single market.

The Digital Europe Programme will be used for the development of EU-wide electronic identities and for the building of strategic data capabilities, such as artificial intelligence, cybersecurity, secured communication, data and cloud infrastructure, 5G and 6G networks, supercomputers, quantum and blockchain. The Commission has managed to withstand the significant pressure from Member States to reduce the funding of the Programme and the digital transition remains one of its key priorities.

In terms of financial inputs, the digital sector would be affected by two of the newly proposed taxes, aimed at funding the Commission’s so called ‘own resources’ used to repay the recovery package. The new digital tax would come into play at EU level if no global solution could be reached at OECD level. If the tax is applied to companies with an annual turnover higher than €750 million, it could generate up to €1.3 billion per year for the EU budget. The other relevant provision is the new corporate revenue tax, which if applied according to the same principle as the digital tax at a rate of 0.1 percent could generate up to €10 billion annually.

The Commission tried to introduce a European digital tax last year but its proposal was blocked by several Member States. The chance of such a proposal being accepted at this date appear slim as unanimity is required and Ireland, amongst others, has been adamantly against it. However, with the departure of the UK who had previously provided strong backing for Ireland’s opposition, some form of digital taxation being accepted remains a possibility. The new corporate tax was also previously unsuccessfully introduced by the Commission in 2016 and would be aimed at ‘companies that draw huge benefits from the EU single market and will survive the crisis.’[2] The chances of the proposal being accepted are also relatively low with countries such as Ireland, Denmark, Luxembourg and the Netherlands strongly opposing it. The proposal might also provoke a ‘race to the bottom’ phenomenon where companies relocate to countries willing to provide them with the most favorable business conditions. While both taxes are facing strong opposition from some Member States, the alternative of increased national contributions might convince leaders that accepting a form of these levies would be the more politically savvy option.

In conclusion, the new EU budget proposal creates new opportunities and challenges for the digital sector with the potential application of new pan-European taxes but also with additional funding devoted to digitalization, increased connectivity and sustainable value chains. The Coronavirus pandemic has demonstrated the increasing importance of digitalisation for the daily functioning of the economy and the Commission’s proposal reflects that through a series of digital political priorities. Increased connectivity, investment in strategic digital capacities (artificial intelligence, cybersecurity, data and cloud infrastructure, 5G and 6G networks, blockchain and more) building a real data economy and legislative efforts on data sharing (a EU-wide Data Act), as well as a thorough reform of the single market for digital services (Digital Services Act expected in late 2020). The combination of budgetary provisions and policy priorities makes the moment beneficial for a transition to online business models, a trend which has appeared during the pandemic but is expected to remain for the next few years.

[1] Annex to the Commission Budget Communication, p 6.

[2] Commission Budget Communication, p 15.