EU seeks to tighten the regulatory and fiscal net for digital companies

by Reed Smith
Contact

Introduction

The European Union (EU) has recently turned its attention to the thriving European digital economy. In two key areas, data protection and tax, the EU seeks to increase levels of regulation and impose new obligations on digital and technology companies. We explore below the effects of the proposed measures, and consider whether implementation will stifle innovation.

Data protection reforms

The high-profile EU data protection reforms (IP/12/46 and IP/13/57) are certainly progressing but, while the train has left the station, its precise arrival time (and destination) is less clear. The European Parliament has approved a draft General Data Protection Regulation (and law enforcement Directive), and has pronounced itself ready to negotiate with the Council and the Commission, aiming for agreement on the final law by 2014 (before the EU parliamentary elections in May). However, the Council does not appear entirely united on this timeframe. David Cameron is reportedly in favour of waiting until 2015 to finalise the law, to “get it right”. However, after the latest revelations of NSA spying on EU state leaders, there might be some risk of the EU passing reactionary legislation in this area in haste.

Even before details of the NSA’s surveillance activities in the EU became known, the reforms represented a challenging package for digital and technology companies in the EU, particularly SMEs. EU Commissioner Viviane Reding made much of the reduction in red tape that the reforms would offer businesses (such as, removing registration requirements and introducing a regulatory “one-stop shop”); however, we consider that the proposed law poses specific hurdles for technology companies and is unlikely to result in cost savings (the UK government’s impact assessment estimated overall additional annual net costs of £100m - £360m).

First, the draft General Data Protection Regulation raises the bar on obtaining individuals’ consent: this must be an explicit indication, a genuine, free and reversible choice and – most challengingly – the provision of a service cannot be made conditional on an individual consenting to the processing of more of his data than is needed for the contract.

Second, profiling is specifically regulated, which could have implications for online behavioural advertising or differential pricing. Individuals also have reinforced rights to call for the erasure and rectification of their data, which means a company will need to pass on that request to any party to which it transferred the data, unless to do so is disproportionate.

Third, there are also plans to increase restrictions on flows of data outside the EU, which is already a compliance minefield under the existing data protection regime, and to bring in compulsory reporting of data security breaches. Finally, fines of the greater of €100m or 5% of global annual turnover are mooted.

Tax reforms

Over the last couple of years, there has been an increasing recognition that global digital companies are able (within the law) to structure themselves in a way which does not adequately tax their profits in the countries where they operate. In October, the French government proposed a new “digital tax” to the European Commission, with the intention – from Spring 2014 – of making non-EU Internet companies pay taxes in the EU based on profits earned there. The French proposal aims to link the tax base of international Internet companies to the jurisdiction in which profits are earned, in order to prevent companies shifting profits to lower tax regions. Revenues from the new tax would then be allocated among the EU member states.

However, we consider the French proposal to be a step in the wrong direction. Base erosion and profit shifting is a global issue which needs to be addressed at a global level. If the EU were to impose its own rules in isolation, this would discourage businesses from starting or continuing to operate in the EU. The Organisation for Economic Co-operation and Development (OECD) is currently reviewing the taxation of the digital economy, and is set to deliver its findings within the next 18 months. All countries should support this OECD initiative, since it provides the best chance of a global solution – even if any such solution is likely to take several years to materialise.

Any new pan-EU tax would require the unanimous approval of all 28 member states before being introduced. However, the French digital tax proposal lacks the backing of a number of EU member states (including the UK). The concern is that France will nevertheless seek to implement its proposal in supporting member states, using the enhanced co-operation procedure. That procedure is currently being used by 11 member states (including France) to introduce a financial transaction tax (FTT). The legality of the FTT is being questioned because it has been drafted in a way which seeks to extend its scope beyond the jurisdiction of those member states implementing it, and yet without that extended scope the tax would be of limited effect (not least because businesses could more easily structure to avoid its impact). It is to be hoped that France learns from the FTT experience and does not push ahead with its digital tax proposal.

Conclusion

According to research by Belgium’s Vlerick Business School, Europe currently has the potential to generate at least 400,000 extra jobs in the EU digital economy. There is an argument that the EU should adopt light-touch, rather than draconian, legislation to achieve this. It is a truism that legislation constantly plays a losing game of catch up with technology, and for nothing is this more true than in relation to data, technology and digital content. However, to incentivise innovation EU legislators should adopt a balanced approach designed to spur growth.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith
Contact
more
less

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!