On December 15th, 2020, the European Commission published the first draft of the Digital Markets Act and Digital Services Act legislation. The legislation, which has been widely anticipated since its original announcement in July 2019, stands to substantially alter the business environment in the European Union for digital enterprises, particularly major online service providers, by raising the standards to be met by I.T companies and related businesses while increasing penalties for noncompliance.
The legislation could potentially change the trajectory of the online economy, which has increasingly come under the footprint of a handful of platforms and their subsidiaries. The European Commission refers to such firms as “gatekeepers” and intends to prevent the use of user data generated through a prevalent digital platform to develop a new service in an unrelated market with an unfair advantage over the competition.
The Digital Services Act was originally expected to be a consolidated measure for digital services operating in the EU single market. The legislation’s scope was expected to cover fair competition and establishing a level playing field, while standardizing safety regulations and delegating responsibilities. The Digital Services Act, along with the broader policy blueprint “Shaping Europe’s Digital Future”, went through public consultation between June and September of 2020.
In October 2020, the EU Parliament voted to approve further legislation to expand and toughen regulations on online services, with special emphasis on personalized advertising and content moderation policies. The increasingly monopolistic market structure of major social media services has resulted in overwhelming pressure for regulatory oversight over companies that define the online experience for users across Europe and the rest of the world. As a result of digital service providers’ comprehensive coverage of all online activity, the Digital Markets Act was drafted separately in order to specifically regulate business and marketing services provided by major social media portals. This pertains to marketing strategies for all businesses and enterprises, whether they market directly to consumers or provide services to other business.
The Digital Services Act applies to Europe domiciled digital enterprises, as well as overseas based service providers operating within the EU. Digital service enterprises based outside the EU will be required to appoint a legal representative in Europe. The legislation regulates not only the major digital social media service providers but also cloud storage, database and web hosting services, online commerce platforms, online retailers and professional service networking websites.
Under the Digital Services Act, all EU digital enterprises that serve online advertisements must ensure that the relevant content is clearly labeled as such, along with the identity of the advertiser and the user data that resulted in the advertisement being displayed. This applies not only to major platforms, but any online business that profits from advertising. Major platforms face additional reporting requirements, including a chronological account of all demographics to whom the advertisement was served. Major platforms are referred to as “Very Large Platforms” in the legislation, with the definition set at 45 million users or more. Very Large Platforms are not the same as “gatekeepers”, however. The “gatekeeper” category is reserved for truly ubiquitous services with numerous subsidiaries, such as Facebook and Google. A special set of extra restrictions will be reserved for these platforms in order to reduce the extent of their control over the entirety of global online access.
Business accounts on e-commerce platforms will be required to fully identify themselves and provide full documentation for external contractors that conduct sales to the e-commerce platform’s users. This may affect a considerable number of online sales channels, and businesses distributing merchandise through online sales in Europe should take note of the new records and identification requirements. Merchants will have to keep documentation on hand in order to show that their products and sales are compliant with EU laws. Any company that retails as a third-party supplier through a major commerce platform will have to prepare the relevant documentation to provide the platform operator once the legislation takes effect.
The Digital Markets Act is set to level the playing field for online businesses in the EU single market by preventing practices such as pre-installing software on hardware and other tactics that exploit major platform access to user data and preexisting user bases. “Gatekeeper” level platforms will be required to make their platforms compatible with external services other providers.
The EU Digital Services Act and Digital Markets Act creates new opportunities by leveling playing fields and protecting against monopolistic practices- it also creates identification and compliance requirements across the board for all businesses that advertise and sell products or services online in Europe. We will continue to keep you posted on further developments. In the meantime, if you have any enquiries regarding e-commerce projects or setting up a business in the EU single market, we are happy to provide a free initial consultation anytime.
About the Author:
Mr. Philip Yu
Mr. Yu holds a Bachelor of Commerce (Hon.) from the University of Toronto and L.L.B. (Hon.) from the University of London, and is a member of the American Institute of Certified Public Accountants, Certified Public Accountants of Australia and the Hong Kong Institute of Certified Public Accountants. Philip is experienced in handling cross border taxation issues, corporate restructuring and other cross border business solutions. He undertakes additional posts as Company Secretary, Authorized Representative and Independent Non-Executive Director for several listed companies on the Hong Kong Stock Exchange. He joined our firm in 2001 and currently the Managing Partner of the firm.
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