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Digital Services Act

Digital Services Act proposal: the start of a new era in digital regulation

On 15 December, the European Commission published proposals for Regulations on the Digital Services Act (DSA) and the Digital Markets Act (DMA), with the goal to reform the digital space, creating a comprehensive set of new rules for all digital services, including social media, online market places, and other online platforms that operate in the European Union.

The proposed Regulation on a Digital Services Act aims to update the eCommerce Directive (ECD) from the year 2000 as well as introduce new binding, harmonized, EU-wide obligations which will have a significant impact on a wide range of digital services that connect consumers to goods, services and content. This blog post sheds some light on some of the main provisions of the Digital Services Act and their subsequent impact on businesses.

Which companies will be affected by the new Digital Services Act proposal?

The Digital Services Act proposal includes rules for online intermediary services. The obligations of different online players match their role, size and impact in the online ecosystem. Among the regulated groups are intermediary services offering network infrastructure (Internet access providers, domain name registrars), hosting services such as cloud and webhosting services, online platforms bringing together sellers and consumers such as online marketplaces, app stores, collaborative economy platforms and social media platforms, and very large online platforms. All online intermediaries offering their services in the EU Single Market, whether they are established in the EU or outside, will have to comply with the new rules. Micro and small companies will have obligations proportionate to their ability and size while ensuring they remain accountable.

An asymmetric approach: different obligations for different players

The Digital Services Act will introduce a series of new, harmonized EU-wide obligations for digital services, carefully graduated on the basis of those services’ size and impact. All intermediaries falling under the scope of the DSA will have obligations in terms of transparency and fundamental rights protection and would have to cooperate with national authorities. Additionally, all intermediaries not established in the EU but offering services in the Union will have to designate a legal representative in one of the Member States where the provider offers its services. The absence of general monitoring obligations, already enshrined in the ECD, will remain in place in the Digital Services Act. Additionally, the Commission has introduced a “good Samaritan” principle, under which providers of intermediary services are not excluded from liability exemptions because they carry out voluntary activities to detect and remove illegal content.

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For online platforms and hosting services, the proposal includes requirements for more detailed notice & action provisions. The proposal also introduces the concept of trusted flaggers, appointed by Member States authorities, whose notices should be processed with priority. Furthermore, the proposal introduces a “Know your business customer” principle, under which platforms will be required to obtain and verify identification information from the traders prior to allowing them to use their services. Finally, transparency obligations for online advertising will require online platforms to provide their users information on the sources of the ads they see online, including on why an individual has been targeted with a specific advertisement.

Platforms that reach more than 10% of the EU’s population (45 million users) monthly in average will be considered systemic in nature and will be subject to specific obligations to control their own risks. Very large online platforms will have to conduct yearly risk analyses, they will be subject at their own expenses to annual audits, adhere to transparency obligations for recommender systems as well as comply with additional measures for online advertising transparency. Finally, very large online platforms will have to appoint one or more compliance officers responsible for monitoring their compliance with the Digital Services Act Regulation. Member States will have to lay down the rules on penalties applicable to infringements of these rules by providers of intermediary services under their jurisdiction with the maximum not exceeding 6 percent of the annual income or turnover of the intermediary service.

Strengthened enforcement & cross-border cooperation

EU countries will be required to appoint a so-called “Digital Services Coordinator” to oversee enforcement of the regulation, which will have powers in terms of investigation, enforcement (including fines) and the imposition of access restrictions. Additionally, the coordinator would have the possibility of cooperating cross-border by requesting another digital service coordinator in a country of establishment to carry out an investigation. An independent advisory group of Digital Services Coordinators named the “European Board for Digital Services” will be established, which will contribute to the guidance and consistent application of the regulation and assist the digital service coordinators. For the case of very large platforms, the Commission will have direct supervision powers and, in the most serious cases, will be able to impose fines of up to 6 percent of the global turnover of a service provider.

What implications could the Digital Services Act proposal have for businesses?

Industry stakeholders’ responses to the proposal are mixed, with overall positive reactions to the extra harmonization measures, and the preservation of the ECD’s core principles. However, many raise concerns about the Act’s compatibility with other existing legislation, such as the Platform-to-Business Regulation and the Omnibus Directive, as well as the way the trusted flaggers’ concept would work in terms of transparency, an issue raised also by consumer protection groups. The inclusion of the requirement for non-EU companies to have a legal representative in the EU, while burdensome for such companies, has so far been accepted positively by European players as it would ensure a level playing field within the Single Market. Relating to the fines, the issue has been raised that the threat of significant fines for non-compliance might lead to preventive removal of content which might otherwise be considered legal, putting companies in the uncomfortable position of risking fines under the Digital Services Act or being criticized for violating freedom of expression by censorship.

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 welcome the fact that the core foundations of the e-Commerce Directive are maintained, i.e. limited liability, no general monitoring obligations and the maintenance of the country of origin principle. However, there will be extra obligations for ‘very large online platforms’, having more than 45 million users across the Union. These platforms will have to provide regulators and outside groups with greater access to internal data, and appoint independent auditors who will determine if these firms are compliant with the new rules. The biggest tech companies will also be forced to provide greater transparency on online advertisements. These extra obligations will require additional resources and also raise a question about the legislative coherence between the Digital Services Act on the one hand, and provisions in for instance the recently published European Democracy Action Plan on the other.

Finally, there have been concerns among Big Tech companies that the criteria for identifying very large platforms need to be clearer and more inclusive, with several accusing the Commission of selection bias. Furthermore, the Digital Services Act is likely to have significant consequences for gig economy companies, such as well-known travel accommodation websites, as the extra requirements against illegal content and the provision of information on users would allow local authorities to require the removal of unregistered properties and receive information on hosts with outstanding tax obligations. City authorities in big European cities such as Amsterdam, Berlin and Paris, had adopted rules against said platforms and the Digital Services Act would allow them to enforce them.

What to expect next in the legislative process?

Following the publication of the Digital Services Act in December, the DSA will likely be the subject of long and arduous discussions in the Council of the EU and in the European Parliament. 

European Parliament

Within the European Parliament, on 29 April, the Conference of Presidents, which gathers the leaders of all political groups, reached an agreement on which committee can take the leadership on the Digital Services Act (DSA), Initially, IMCO was assigned the exclusive competence on the legislative file in view of its impact on the Single Market legislation, but LIBE, JURI and ITRE also argued that they should have competence.

After a long-lasting debate, the President of the Conference of Committee Chairs, Mr. Antonio Tajani, proposed a solution. In order to reach a compromise, Tajani proposed to appoint all committees that challenged the leadership to be “associated” with IMCO under rule 57 of the European Parliament. Collaboration will take place through regular meetings between IMCO, ITRE, LIBE and JURI for the DSA proposal, and the rapporteurs of each committee will participate in all shadow meetings, the drafting of the IMCO reports, trilogue sittings and compromise amendments negotiations. All amendments of the associated committees will be voted in IMCO, while the mandate to enter trialogues will be voted in plenary, instead of committee sitting, to allow all associated committees to jointly vote and re-table amendments.

A parliamentary discussion on IMCO Rapporteur MEP Christel Schaldemose’s (Denmark, S&D) draft DSA report is set for 21 June. Within the LIBE Committee, MEP Patrick Breyer (Germany, Greens/EFA) has been appointed rapporteur. Within the JURI Committee, MEP Geoffroy Didier (France, EPP) has been selected as rapporteur. 

Council of the EU

As confirmed by the Portuguese Presidency of the Council of the EU, the Digital Services Act is discussed in the Internal Market Working Party, falling within the remit of the Competition Council formation. According to insights into a draft progress report on the DSA from the Portuguese Council Presidency, dated 27 April, there is overall support among the Member States for the ambition of the DSA proposal and the need to swiftly adopt it. A few issues have however been identified as sensitive political and legal issues, such as the need for effective implementation and better coordination between countries, their authorities and the Commission, in particular in terms of cross-border enforcement and the impact on the country-of-origin principle. Questions were also raised on enforcement vis-à-vis service providers established outside of the EU.  Further discussion will be needed on the scope, Article 6, Trusted Flaggers, the protection of trade secrets, out-of-court dispute settlements and the application date. The progress report will be presented to COREPER, after which it can be submitted to the Competitiveness Council on 27 May.

In terms of the time frame for adopting the DSA, France has announced a highly ambitious plan to conclude the negotiations for the proposal 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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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.