The Digital Services Act of the European Union

Until now the services offered by e.g. platforms are regulated via the E-Commerce-Directive which came into force at the beginning of the new millennium – when major and today well-known platforms like Facebook or Airbnb were not even existent at that time. Since then data and digital economy have become an integral part of economic activities all over the world.

Cities, Municipalities, Public Entities and Enterprises face a changing administrative and economic environment while the digital economy step by step is becoming part of the daily business in all members states of the European Union. The Digital Services Act is a necessity – and it has to contribute to keeping and protecting a strong public sector which can act within the boundaries of law to help administrations to treat all economic activities in a fair and proper way. It has also to safeguard reasons of public interest at all levels of government – a lesson Europe should have learned from the fight against COVID-19, which still keeps going on.

The opinion for a framework regulation of the collaborative economy initiated by Vienna in the Committee of the Regions (CoR) (opinion by municipal councillor Peter Florianschütz), which was unanimously adopted in the CoR plenary session in December 2019. The demands contained in the opinion are to be incorporated by the regions, cities and municipalities in the presentation of a Digital Services Act announced by the EU Commission for the end of 2020. The demands include access to data for enforcement purposes, the creation of legal certainty in the internal market, increased liability of platforms and an exception for the housing sector, as housing has been subject to special national regulations at national and local level for many decades. In other words: housing means housing.

Since February 2020 the IMCO committee of the European Parliament has exerted efforts to table an initiative report with elements to be addressed by a Digital Services Act (Rapporteur MEP Alex Agius Saliba).

The Digital Services Act is to be presented by the EU Commission in autumn 2020 in a legislative pact and will deal with various online offerings, i.e. platforms, online trading places and cloud services or “mixed services”. As has been the case for years, the issue of “hate speech” or the right to freedom of expression will dominate the debate, also in other legislative projects such as copyright and ancillary copyright law. The central regulatory basis to be amended or newly established is found in the E-Commerce Directive of 2000.

“Digital developing countries” 

This outdated regulation has contributed significantly to the fact that European countries have become digital “developing countries”, as Pascal Saint-Amans, head of the OECD tax department, recently put it in an interview with FAS . “European countries are digital developing countries because they import many digital services from, for example, the United States.” For example, a strongly developed country of origin principle in the EU means that globally active corporations are able to optimise their tax burden on these imports by locating in Ireland, for example, and taking advantage of a weak legal regulatory system. In addition to the network effect (i.e. that the more people use a network/platform, the greater the benefit of the network/platform and the less attractive alternative platforms become), this EU regulation has contributed significantly to the global strength of platforms originating outside the EU.

Cities, municipalities and regions are therefore not a day too early to take a detailed look at the implications of such regulation or to play an offensive role in the regulatory debate. For it is precisely in the cities and communities that the digital world meets its physical manifestation, i.e. the apartment offered on a platform or the scooter that is activated with the app. On 18 February, the European Parliament began to deal with the topic of digital services in the internal market. The Parliament is doing this in the context of a non-legislative own-initiative report, which has the character of a resolution, but which is intended to send clear signals to the Commission in the formation phase for drawing up a proposal. In this way, the European Parliament wishes to provide the Commission with a framework to ensure that Parliament’s concerns are properly taken into account in the proposal.

Shaping the digital future

In mid-February, the EU Commission presented its communication on “Shaping the Digital Future”, which, apart from documents already leaked in summer and autumn 2019, provides a clearer picture of the EU Commission’s strategy in this area. Based on the principles of “democracy”, “fairness”, “inclusion” and the “European social and welfare model”, the Commission wants to take the digital path to the future. The Commission is pursuing several objectives in a three-pronged approach. These include the approach of “technology that serves people”, a “fair and competitive digital economy” and an “open, democratic and sustainable society”. With regard to platforms, the EU Commission defines that more clarity is needed on “the role and obligations of online platforms”, especially with regard to illegal content (or illegal, dangerous or counterfeit goods). In addition, the EU Commission emphasises above all the protection of consumers or their data and focuses on “clearer rules on transparency, conduct and accountability of those who act as gatekeepers for information and data traffic”.

“Thresholds mandatory”

The debate on the Digital Services Act is already well underway in Brussels through the presentation of position papers and thematic events or evening receptions. Lobbyists from large digital companies are making a high-profile appearance, according to Facebook lobbyist and former MEP Nick Clegg, who recently announced in the Süddeutsche Zeitung: “We need to be regulated. On February 12, 2020 the City of Vienna in Austria together with the Representation of the EU Commission in Austria held a panel discussion on data and platform economics. Max Schrems (data protection NGO “none of your business”), Ingrid Brodnig (author and digital ambassador of Austria), Klemens Himpele (MA 23) as well as Heidrun Maier-de Kruijff (Association of the Public Economy and Social Economy of Austria) discussed with the representative of the EU, Marc Fähndrich, the central questions arising from different perspectives on the platform economy. The aim of the event was to define the tasks and duties that platforms have to fulfil in a newly designed digital economy based on EU regulations. Apart from the rejection of self-regulatory models, the need for threshold values for platforms was repeatedly stated that in order to prove small (and locally anchored) platforms with a lower level of regulation, it was imperative that very large platforms (measured in terms of user numbers and/or turnover figures as well as the degree of Europe-wide or regional market dominance, among other things) be given much stronger specifications. In addition, a European answer must be found to the question that although parts of the platform industry are theatrically and aggressively demanding regulations, in reality it is precisely US corporations that always take the legal route in case of doubt or that always postpone the application of rules due to their ability to get through long legal proceedings without any problems.

Coalition of cities for digital fairness

Vienna has been pursuing an approach for years, which the EU Commission has now also adopted in its communication of February 19: “What is prohibited outside the Internet must also be illegal on the Internet”. Vienna therefore wants to treat all economic activities – whether analogue or digital – equally. This approach also unites us in the fight for modern regulation at the EU level, where the city has been exchanging ideas with other metropolises in the area of platform economy for 5 years. Cities in the EU, which were quite sceptical about Vienna’s approach just a few years ago, are now in part in the process of considerably tightening up their approach and are working, for example, on a clear limitation of platform offers in the area of short-term letting. Prague has recently declared its position on this matter. It has certainly been registered that Vienna insists that large platforms must provide data for enforcement purposes (local tax) or that the city has sent clear signals to the platforms that platforms are “involved in a process of infringement of rights” through the possible hosting of offers in municipal construction, as stated in an excerpt from a letter to tourist platforms operating in Vienna published in January 2020.

An intensive debate has started and cities need to engage in a sustained dialogue with the EU institutions to underpin their interests. The first step towards this is a strong participation of cities and municipalities in the public consultation that will take place in the coming weeks. And Europe’s local authorities will have to be proactive: An EU official has called this process of developing a Digital Services Act a “bulldozer”. With a time horizon for drafting and decision-making that could extend over the entire legislative period until 2024.


The value of the data economy will increase to 739 billion euros by 2020. Over the last seven years, the average growth rate of revenues of the leading digital companies has been around 14%, compared to around 3% for IT & Telecom and 0.2% for other multinational companies. At the same time, the effective tax rates of traditional companies were 23.2%, compared to only 9.5% for digital companies.

There are two main reasons, why digital enterprises often have a reduce tax burden:

Firstly, the value creation of digital corporations takes place everywhere and simultaneously, without a company necessarily having to have a registered office in the country in which it is economically active. But many of the American technology groups such as Facebook or Google are also very active in the EU, for example in the collection and processing of data – a central component of the business model of many digital companies. International taxation laws, however, regard such companies as “routine tasks” that are not part of the value chain. For this reason, subsidiaries of digital companies often cannot be taxed in the EU.

Secondly, multinational companies have the possibility to shift profits through subsidiaries in a way that minimises their tax burden. To do this, subsidiaries in low-tax countries demand high prices from the parent company for the use of “intangible assets” such as software. Fictitious transfer prices are used to shift profits into tax areas where they are then only subject to very low corporate tax rates.

The highest rated companies in the world come from the digital economy. Those companies outperform the market average. Technology, media and telecommunications companies generate more economic profit than any other sector of the global economy – more than the combined economic profit of aerospace and defence, automotive components and food products companies. The new Internet platforms are increasingly attempting to expand their business areas to cover all areas of life (from housing, health to finance) and thus push corporate concentration even further and secure their supremacy in competition. Therefore, the regulatory framework has to ensure, that new emerging platforms (also from Europe) can benefit from the Internal Market. The EU must regulate accordingly platforms which develop business capabilities in the internal market from outside the internal market, so that the principle of a neutral level playing field is also maintained.

According to the current country of origin principle, the legal provisions of the state of establishment are decisive, if information society services are provided.

The cooperation of member states for enforcement reasons of other member states has to be established – for example: a Dutch based platform is in breach of Austrian, but not Dutch, rules. In some cases, Austria needs Dutch permission to prosecute. Thus, digital companies currently tend to use the principle of country of origin to opt for those Member States where conditions are optimal for them in terms of regulations, taxation or the entire legal system. Negative consequences for the effective fulfilment of public tasks are the result. Adequate and robust cooperation between the country of origin and the country of destination is needed. This can be achieved by strengthening the country of destination in terms of digital companies complying with the public interest in the member state operating in. In case of conflict between these two principles the national provisions of the state in which the service provider offers information, society services should apply.

There are certain passages of the current E-Commerce Directive, that outline areas where a deviation of the country of origin principle is possible and even areas where the whole Directive does not apply. It’s crucial to extend these areas to better reflect the issues the public sector is dealing with and to provide it with the necessary tools to protect its reasonable public interests. The regional and municipal levels are mostly challenged in this context.

A central problem of the digital economy from the point of view of regions, cities and municipalities is the often lacking access to data. In principle, data play a key role in being able to act effectively and administratively efficient in terms of the use of public resources. Without a suitable data basis, the mandates defined in laws by legislative bodies to regulate markets cannot be implemented, which means that laws are not enforceable. Data should be used by the competent authorities (or legally entrusted supervisory bodies) exclusively for the procurement of legal orders but must be made available by platforms via clearly defined electronic interfaces and in corresponding data quality.

In view of the agreement the European Commission reached with four large booking platforms (Airbnb, Booking, Expedia and Tripadvisor) on the access of data for the aggregation and processing via EUROSTAT, it needs to be addressed that the kind of aggregated data agreed upon is insufficient for law enforcement on European and national level. Generally speaking, aggregated data are collective data, i.e. in the tourism segment the total number of overnight stays or the number of guests in a certain period for a defined location. Aggregated data can be used to map market developments, for example. Without individual data, the following legal regulations, among others, that are valid in the EU cannot be implemented or can only be implemented inadequately: Regulations in the area of taxes and duties (local municipal tax), regulations in the area of tourism statistics, regulations in the area of building regulation, regulations in the area of regional planning, regulations in the area of registration, regulations in the area of the standardized omission of short-term rental in social housing.

In the area of short-term rentals, a structurally induced increase in housing shortages and an increase in rents can be observed in many European cities, i.e. developments that are partly caused by the emergence of accommodation platforms. Taking a closer look at the accommodation sector for example, we observe, that around 2.000 apartments in Vienna are already permanently withdrawn from the housing market due to short-term rentals. Even though this seems not high, short-term rental platforms offers are highly concentrated in touristic areas and in districts, where rents and housing demand are already high, while in the most inhabited districts there are few. The principle of “live-like-a-local” is therefore not given and results in a crowding-out effect. If these platforms growth of recent years is to continue at the same pace in the coming years, more than 40,000 apartments would already be permanently offered in 2022. Additionally, there is a huge discrepancy regarding the share of income. The top 20 percent of accommodation providers receive around two-thirds of the total monthly income. 6.5% of the total income goes to the lower 50 percent.

Analogous to the distorting of the boundaries between producers and consumers, the question of the boundaries between independent and dependent work arises with regard to employment. Flexible employment opportunities can lead to bogus self-employment and precarious working conditions. It is a question of protection against dismissal, minimum wages, occupational health and safety and working time regulations. Without an appropriate regulatory framework, the social security system can be severely impaired. Any future legislation proposed must also protect the growing numbers of platform workers in Europe.

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