Warsaw, 20^th September 2021

 

Position of the Union of Entrepreneurs and Employers on the draft act implementing the system of Extended Producer Responsibility

 

The draft act amending the act on the management of packaging and packaging waste and certain other acts presented by the Ministry of Climate and Environment contains solutions that give shape to the Extended Producer Responsibility (EPR) system to be implemented in Poland.

The obligation to implement solutions in the field of EPR, following the adoption of EU directives, aims to achieve specific environmental goals, including these in terms of recycling levels achieved for individual waste fractions. However, to achieve individual goals, it is essential to develop a measured and effective Extended Producer Responsibility scheme.

The Union of Entrepreneurs and Employers observes with concern that the EPR scheme provided for by the Ministry of Climate and Environment will not bring the desired results in terms of achieving environmental goals stemming from the ideas of circular economy or related to the European Green Deal. The sole effect of implementing EPR in the form presented in the draft act will be the increase in the burden on producers (by introducing a packaging tax), and as a result – another increase in prices.

In our view, the presented draft act in its current wording is not suitable for further proceedings. We call for the draft to be rewritten from scratch in the spirit of care for the environment and with the effectiveness of the system in mind; not to supply the public finance sector with additional revenue.

In connection to the above, the Union of Entrepreneurs and Employers shares a number of comments to the current project, as well as proposals for the future, which will allow to design an optimal EPR scheme that meets the goals and needs of all stakeholders. One should also remember that the final beneficiaries of the system must be citizens and the natural environment.

I. Para-tax character of the proposed EPR scheme

Under the government’s proposal for the EPR system, entrepreneurs producing packaged goods (producers/manufactures) are to be reduced to the role of passive payers who have no real influence on the shape and efficiency of the system. However, this will not entail relieving entrepreneurs of responsibility for the system’s efficiency. A complete separation of responsibility for the result from the possibility of influencing the way the system works is obviously not in line with the basic assumptions of the Waste Directive.

The draft act does not even guarantee the correct application of the net cost principle, i.e. the solution provided for in the Directive (Art. 8a sec. 4  (a), first indent) that would allow the inclusion of the revenues obtained from the sale of the raw material collected by the system in introductory fees. It is an important mechanism that allows for fair settlement of costs incurred by entrepreneurs.

The above framework means that the designed EPR scheme has a para-tax character. Entrepreneurs will be charged with another public levy, which – as the legislator admitted in the explanatory memorandum – will be passed on to consumers.

Apart from the reservations to the cost and organisational effectiveness of the implemented solution, it is necessary to point out a factor important from the consumers’ point of view, which is the increase in the prices of packaged goods. Already now, Poland is one of the European leaders in terms of inflation. The introduction of EPR in the proposed shape will lead to an increase in prices of basic necessities such as food, hygiene products and cleaning products to name a few.

In the opinion of the Union of Entrepreneurs and Employers, in order to implement an optimal EPR scheme, it is necessary to take into account the demands of producers who have declared their willingness to actually participate in the waste management system, thus having a real impact on activities increasing the volume and quality of collected waste. We believe that the EPR system should maximise the synergy between the actions of individual system participants, therefore producers should be allowed to become really involved in the system’s operations.

II. Producers’ responsibility for insufficient recycling levels

To begin with, it should be noted that the draft act is imprecise and does not specifically name the party to be responsible for recycling packaging waste from households.

Importantly, as has been mentioned earlier, regardless of which group of entities will actually recycle waste, in the event of failure to achieve the assumed levels – producers will be financially liable and will have to incur a product fee. This leads to an irrational situation in which entrepreneurs, without any organisational responsibility for the recycling process – will be held accountable for results beyond their control.

In the scheme being implemented, producers are required to pay a packaging fee, and the revenues from this fee ensure the efficient functioning of the EPR system as well as the achievement of specific recycling levels. The product fee will be a punishment against entrepreneurs for ineffective activities of municipalities in the field of waste management. We believe that the responsibility of producers for achieving recycling rates, formulated in this way, is unacceptable.

It is worth emphasising that the constraint to pay the product fee by entrepreneurs is highly probable due to the fact that the draft act does not provide for any tools aimed at increasing the volume and quality of packaging waste collected by municipalities. For this reason, and also due to the lack of financial liability of municipalities for failing to achieve recycling rates, local governments may not be sufficiently motivated to organise efficient waste management systems. In practice, situations may take place where the financial costs borne by the introductory entities (including the packaging fee and the product fee) exceed the costs of packaging waste management, which in itself is contrary to the Waste Framework Directive.

III. Division of packaging waste streams

The draft act divides packaging waste into two streams: waste from packaging intended for households and waste from other packaging (including that generated by trade or services and industrial). This distinction is important, because it determines the obligations (in the field of packaging waste management of this type) of the entity introducing products in packaging intended for households, primarily in the scope of paying the packaging fee in the case of independent fulfilment of these obligations.

In the proposed act, packaging intended for households is defined as the packaging in which a product is placed on the market for use in households and other places where similar products in packaging are used. It seems that the proposed definition is so general that it makes it impossible to clearly determine how to define and distinguish packaging intended for households from others, coming from trade, distribution or industry.

We assume that the authors of the draft act decided to introduce such a distinction from specific recitals of the directive, because the proposed solution is not required by Art. 8a of the Framework Directive and thus constitutes an over-regulation on the part of the Polish Ministry. However, it should be noted that neither the explanatory memorandum to the draft nor the Regulatory Impact Assessment indicate how the above-mentioned distinction of waste streams would contribute to a better functioning of the EPR system.

The Union of Entrepreneurs and Employers fails to see sufficient reasons as to why the introduction of such a solution would be justified. In our view, leaving this provision in its current wording may lead to significant interpretation uncertainty, in particular with regard to introducing products in packaging that can be used by households, trade, services or industry alike.

Furthermore, the separation of waste streams may adversely affect the situation of entities introducing small amounts of products, mostly small and medium-sized enterprises. This, however, is in contradiction with Art. 8a sec. 1(d) of the Framework Directive, therefore we call for the removal of the separation of waste streams from the draft act.

IV. Allocation of the revenues from the packaging fee

The provisions regulating the allocation of revenue from the packaging fee also indicate the para-tax nature of the proposed EPR scheme. According to the contents of the draft act, as much as 80% of the proceeds from the packaging fee will be transferred to communes or associations of communes. However, according to Art. 3 sec. 4 point 12 of the project, local governments will be able to allocate the funds received to cover the costs of receiving, transport and collection of municipal waste referred to in Art. 1. 6r sec. 2 point 1 of the Act on maintaining cleanliness and order in municipalities of 13^th September 1996.

The provision formulated in this fashion means that communes and associations of communes will be able to allocate the funds received not only to the management of packaging waste covered by the EPR system, but also to the management of all other municipal waste. Moreover, the draft act does not provide for any tools allowing for reporting of costs. Thus, post-factum determining what part of the funds was spent on the actual management of packaging waste covered by the EPR system may be very difficult in practice.

In the opinion of the Union of Entrepreneurs and Employers, the proposed regulation ought to introduce a restriction according to which local governments may allocate funds obtained from the packaging fee to the management of waste covered by the EPR system only. It feels unjustified to lead to a situation in which entrepreneurs finance the entire waste management system, including municipal waste. The lack of a link between the expenditure of funds obtained from the packaging fee and the real costs of packaging waste management absolutely violates Art. 8a sec. 4(a) of the Framework Directive.

V. Distribution of funds from the packaging fee between communes

As indicated in chapter IV of this document, the presented EPR scheme seems to be an extremely beneficial solution for municipalities (and their associations), as the revenues from the packaging fee will be a significant financial relief for local government finances.

In practice, however, it may turn out that some communes – at the expense of others – will receive funds disproportionate to their waste management needs. The above may occur due to unclear criteria for the allocation of funds obtained from the packaging fee.

The funds from the packaging fee are to be distributed among communes based on two criteria: the share of municipal waste prepared to be reused or recycled and the population index. These criteria will have different weights: 60% and 40% respectively.

It should also be noted that the criterion for municipal waste prepared for reuse and recycling has not been limited to packaging waste. Moreover, the indicator regarding the number of inhabitants is not sufficiently precise, as it does not indicate a specific source from which such data can be obtained or updated in subsequent years.

Designed this way, the system of dividing the packaging fee does not guarantee that communes will receive adequate funds for the execution of tasks related to waste management. The disbursement of funds is to be made on the basis of said criteria, but it is not known how the result obtained after calculating these indicators is to be used for the disbursement of the funds. Basing on the proposed regulations, it will therefore be possible to arbitrarily allocate funds to communes, also in an amount that does not correspond to the actual costs of providing services in the field of packaging waste management, which raises considerable reservations on the part of both communes and producers.

VI. Definition of packaged products’ introducer

The draft act introduces changes to the definition of “party placing packaged products on the market” by specifying the conditions for recognising retail enterprises introducing products in packaging. Such explanation is, however, insufficient and does not eliminate the uncertainty arising from the application of the amended provisions.

The act should also take into account different business models adopted by entrepreneurs, in which the producer is distinguished from the entity dealing with distribution. This applies, among others, to a wide range of companies operating in logistics, transport and e-commerce – all of which are developing sectors in Poland. Under the current regulations, qualifying the liability of a given entity is very difficult, as the definitions of the entity introducing products in packaging and placing them on the market are broad in scope, which prevents an unequivocal determination of the liability of a given entity.

Moreover, in our view, the proposed amendment ignores an important aspect of the functioning of entrepreneurs with regard to franchises implementing systemic solutions in line with circular or other pro-ecological initiatives. Groups of entrepreneurs associated in such networks, operating under the leadership and with the leading role of licensors (franchise operators), since they function within one economic organism which is similar to a corporation, should be able to jointly meet the criteria set out by the act in relation to obtaining the required levels of waste recycling, the content of recycled materials, possibility of separate collection and keeping a common system of records.

VII. Fee collection for processed waste in a circular economy

The definition of packaging intended for households does not distinguish between waste going to the enterprise’s circular economy management system that is to be recycled. While the intention of the legislator to impose a packaging fee on those placing products in packaging on the market in connection with the introduction of waste to municipal waste management systems is understandable, charging this fee for waste processed under the circular economy, which is a system much more efficient than municipal systems, is unjustified and contradictory with the directions of development established, for example, by Roadmap for transformation towards a circular economy, a resolution of the Council of Ministers of the Republic of Poland of 10^th September 2019, which assumes the implementation of a support system for enterprises whose business models operate in line with circular economy.

In relation to the above, Art. 18a of the draft act should be modified so that the method of calculating the due packaging fee takes into account the volume of waste recovered by the entity introducing products in packaging and recycled under circular economy, the volume of which should reduce the volume per which the fee is due.

VIII. Determining minimum remuneration for producer responsibility organisations in the form of a notice

Pursuant to the contents of the draft act, the remuneration that is due to producer responsibility organisations (PROs) for the execution of introductory obligations is to be specified in an agreement concluded between the PRO and the introducing party. The rates of remuneration resulting from the concluded contracts may not, however, be lower than the rates established by the minister responsible for climate and announced in the Public Information Bulletin. As is clear from the explanatory memorandum to the draft act: the minister will announce the minimum rates of remuneration in the form of a notice.

We must emphasise that announcing the minimum amount of remuneration for PROs in the form of a notice will constitute a violation of Art. 87 sec. 1 of the Constitution of the Republic of Poland. This provision contains a closed catalogue of sources of universally binding law, without mentioning a notice as a universally binding source of law. Therefore, the notice may not introduce norms of a general or abstract nature that would regulate the legal situation of an indefinite number of addressees.

Furthermore, the draft act does not indicate any range of amounts to be applied when establishing the minimum rates of remuneration. There is also no indication at all of any algorithm that the minister would use when setting these rates.

With this in mind, we ask for the minimum rates referred to above to be regulated at least by way of an ordinance or ministerial regulation, which would constitute an appendix to the proposed act. On the other hand, the act should contain (apart from the delegation to issue a regulation) a range of amounts or an algorithm that would be used to determine the minimum rates. It should be noted that it is impossible to comprehensively analyse the implemented EPR scheme without such important data as remuneration, which affects the costs of producers’ operations.

IX. Exclusion from the definition of hazardous substances

Art. 8 point 14(b) in the draft act is an important regulation, which is, however, limited to only one group of products. This provision excludes detergents from the definition of hazardous substances, and only them. At the same time, this exclusion does not cover a number of consumer packaging for non-detergents, such as air fresheners, repellents, disinfectants etc., which, when empty, do not pose a threat to the environment. We draw your attention to the fact that the composition of this type of products does not include substances classified as toxic or carcinogenic. Empty packaging ends up in the appropriate municipal waste streams, and the tiny leftover amounts of their contents do not have a more significant impact on the environment than the leftovers of other product categories. Moreover, it seems that the creation of an additional category of hazardous substances in relation to packaging waste is unjustified. The methods of dealing with waste which, due to its properties, create various types of hazards are described in separate regulations.

X. Problems with the application of the Act resulting from the adopted vacatio legis

Due to the construction of the draft act, the regulations it introduces are impossible to implement. The act is to enter into force on 1^st January 2023, so the first packaging fee is to be paid by entrepreneurs introducing products in packaging intended for households by 15^th February 2023. However, the rates of this fee must first be determined by a regulation that may not be issued on the basis of an act that has not yet entered into force, that is prior to 1^st January 2023. Furthermore, the issuance of such a regulation requires a positive opinion of the council advising the minister competent for climate matters. This council also cannot be appointed before 1^st January 2023, that is before the act enters into force. This construction of the draft act means that: either the minister will issue a regulation on the rates of the packaging fee on the basis of an act that is not yet in force or will issue it without consulting the council, or entrepreneurs will not pay the first packaging fee by 15^th February 2023 as the regulation will not yet be issued (full legislative path) and the rates will not yet be accepted by the council.

Summary

Taking into account the commentary collected above, we believe that the draft act in the presented form is not entirely suitable for further proceedings. The prepared amendment contains numerous fallacies of a structural and systemic nature. As a result, the implementation of the EPR scheme in the shape proposed will not only fail to contribute to the achievement of environmental goals, but will also increase the costs of producers’ operations, which will directly translate into increased prices of basic products.

Importantly, the draft is inconsistent with the basic assumptions of the directive. It seems rather difficult to expect a correct implementation of Art. 8a of the Waste Directive. Thus, the enforcement of the act in its present wording will sooner or later result in the necessity to amend it, which will result in even greater legislative chaos and regulatory uncertainty among domestic and international enterprises.

Therefore, it is necessary to ensure that the implemented EPR scheme meets the needs of all stakeholders of the system, which can be achieved thanks to an even distribution of workloads and powers with regard to all stakeholders. It is also necessary to get rid of the para-tax aspects of the implemented system. As of now producers are treated only as payers of a new public levy.

To sum up, the Union of Entrepreneurs and Employers appeals that works are commenced on a new EPR scheme, the framework of which and key solutions included in it will be developed in cooperation with all stakeholders involved in the system to be implemented.

 

See more: 20.09.2021 Position of the Union of Entrepreneurs and Employers on the draft act implementing the system of Extended Producer Responsibility

Warsaw, 17^th September 2021

 

Memorandum on the Digital Services Act

 

Introduction

The Internet as we know it today has largely been shaped by the Directive on electronic commerce adopted in 2000, also known as the e-Commerce Directive. Since then, online platforms have been brought to life, e-commerce has developed, and social media have emerged, and along with them new challenges related to how the Internet is used. To respond to these challenges, the European Commission has recently launched a number of legislative initiatives, including the Digital Services Act, referred to as DSA. A draft of the DSA was submitted by the Commission on 15^th December 2020 and the negotiation period began. On 3^rd September 2021, the Slovenian Presidency of the Council of the European Union presented a compromise text on which the following analysis is based.

In the foreseeable future, the DSA will amend the e-Commerce Directive and thus modernise the regulatory framework for the various Internet service providers. The Act can guarantee competition in digital markets under better conditions and may support business growth. At the same time, it is a major reform in terms of moderation and removal of illegal content on the Internet and introducing far-reaching changes to the way all actors on digital market operate.

In our view, the draft of the DSA requires certain modifications that will increase legal certainty, reduce disproportionate burdens on enterprises, and will actually support smaller entities. Before we move on to selected aspects of the DSA, however, we will place this new regulation in light of a broader trend to regulate the digital world. Next, we will discuss in this memorandum the three elements of the Act. First of all, we would like to point out that the DSA is not introducing any of the changes necessary to increase legal certainty in the context of the conditional exemptions from liability established by the e-Commerce Directive. Secondly, we will show that excessively detailed obligations in the context of reporting and removal of illegal content will worsen the ability of smaller players to compete. Thirdly, we will draw attention of the fact that the radical changes in digital advertising proposed by the European Parliament will have a negative impact on European consumers and entrepreneurs.

1. DSA in the context of digital regulations

An appropriate regulation of the digital economy is a priority on the agenda of the world’s largest organisations, including the World Trade Organization, the International Monetary Fund, the World Bank, the Organisation for Economic Cooperation and Development, and the European Union[1].

Over the past few years, many proposals have been made at the level of the European Union, aimed at regulating enterprises operating in the broadly understood digital world. The DSA is just one example of new regulations, including the GDPR, the P2B Regulation, the Regulation on preventing the dissemination of terrorist content online (Terrorist Content Online Regulation, or TCO), the Digital Markets Act (DMA), and the Directive on digital services tax.

A large number of new regulations may lead to the risk of conflicts between legal acts. First, the terms and conditions for the removal of illegal content are elaborated on in the DSA, the TCO as well as the Directive on Copyright and the Regulation on explosives precursors. While the last two pieces of legislation have a narrower scope than the DSA, the essence of all three is the regulation of illegal online content and, importantly, all three establish different obligations and liability thresholds for Internet service providers (ISPs). Secondly, the relationship between platforms and entrepreneurs is a subject of not only the DSA, but also the P2B Regulation and the DMA. Above all, new regulations – the DSA as well as the DMA – were proposed before it was possible to thoroughly assess the effects of implementing P2B.

Furthermore, the multitude of new regulations is a source of definition-related and procedural difficulties, which consequently reduces legal certainty. For companies active in the digital sector, this translates into the need to incur high costs related to compliance with the new rules. Paradoxically, however, such a large number of new regulations may become a barrier to entry and growth for European SMEs, while large foreign entities will easily adapt their business models to a new reality.

2. Conditional exemptions from liability for illegal content

One of the most important principles introduced by the DSA is the mechanism of conditional exemptions from liability for user-published content to be granted to providers of intermediary services. However, since the adoption of the old directive in 2000, new digital services emerged that have changed the way communicate, connect, consume and do business, and with them, doubts have arisen over the application of the directive. The European Commission has therefore committed itself to updating existing legislation[2].

The following section will analyse whether the draft DSA adequately addresses the interpretation problems regarding the liability exemptions established under the e-Commerce Directive. To this end, the following topics will be discussed: (i) terms and conditions of exemptions from liability for user-published content to be granted to providers of intermediary services; (ii) case-law of the Court of Justice of the European Union in this respect; (iii) changes in the scope of liability of providers of intermediary services in the draft DSA.

• Terms and conditions of exemptions from liability for user-published content to be granted to providers of intermediary services

Articles 12-14 of the e-Commerce Directive provide for conditional liability exemptions (so called “safe harbours”) for three types of intermediation services: mere conduit, caching, and hosting[3]. Moreover, Art. 15 of said directive prohibits the imposition of a general obligation to monitor intermediaries.

Mere conduit

Pursuant to Art. 12 of this directive, mere conduit is a service consisting in the transmission in a communication network of information provided by a recipient of the service, or the provision of access to a communication network. Liability in this case will be avoided if the provider of the service: a) does not initiate the transmission; b) does not select the recipient of the transfer; and c) does not select or modify the information contained in the transmission. Art. 12 sec. 2 specifies that the activities consisting in transmission and providing access specified in sec. 1 include the automatic, intermediate and transient storage of the information transmitted in so far as this takes place for the sole purpose of carrying out the transmission in the communication network, and provided that the information is not stored for any period longer than is reasonably necessary for the transmission. The conditional limitation of liability contained in this article, however, does not affect the possibility of a court or administrative authority of requiring the service provider to terminate or prevent an infringement

Caching

Art. 13 of the directive regulates “caching”, a service consisting in the transmission in a communication network of information provided by a recipient of the service. The service provider will not be liable for the automatic, intermediate and transient storage of the information transmitted performed for the sole purpose of making more efficient the information’s onward transmission to other recipients of the service upon their request, on condition that the service provider: a) does not modify the information; (b) complies with conditions on access to the information; (c) complies with rules regarding the updating of the information, specified in a manner widely recognised and used by industry; (d) does not interfere with the lawful use of technology, widely recognised and used by industry, to obtain data on the use of the information; and (e) acts expeditiously to remove or to disable access to the information it has stored upon obtaining actual knowledge of the fact that the information at the initial source of the transmission has been removed from the network, or access to it has been disabled, or that a court or an administrative authority has ordered such removal or disablement.

Hosting

Article 14 of the e-Commerce Directive defines hosting as a service consisting of the storage of information provided by a recipient of the service. The service provider will not be responsible for the information stored at the request of a recipient of the service, only if the service provider: (a) does not have actual knowledge of illegal activity or information and, as regards claims for damages, is not aware of facts or circumstances from which the illegal activity or information is apparent; or; (b) upon obtaining such knowledge or awareness, acts expeditiously to remove or to disable access to the information.

No general obligation to monitor

The last important element of the mechanism of conditional exemption is the absence of a general obligation to monitor established under Art. 15. Pursuant to this article, service providers are not required to monitor the information which they transmit or store, nor a general obligation actively to seek facts or circumstances indicating illegal activity. Such an injunction would risk excessive control over content and the removal of content that is legal but controversial, thereby censoring the Internet and hindering the freedom of speech.

At the same time, it should be remembered that neither conditional exemptions, nor the absence of a general obligation to monitor prevent intermediaries from being required to undertake appropriate steps against infringement of third party rights – by virtue of court orders or due diligence obligations[4].

• case-law of the Court of Justice of the European Union in the scope liability for user-published content to be granted to providers of intermediary services

There is widespread consensus that the conditional exemption mechanism is incomplete and presents a number of problems in its present form[5]. The following section discusses selected issues in this area, including: a subjective scope of application; the distinction between “active” and “passive” intermediaries; the effects of proactive measures; and the knowledge or awareness threshold for a conditional exemption.

Subjective scope of application

There are certain uncertainties as to the subjective scope of applying “safe harbours”. As has been noted, the conditional liability exemptions from the e-Commerce Directive do not apply to services provided by all intermediaries, but only to services that qualify as “information society services”[6]. Thus, this concept is a condition that determines the subjective scope of application of these safe harbours and shows the incomplete nature of the directive[7].

The Directive on electronic commerce does not include a definition of an information society service[8]. The definition in earlier Community legislation covers all services normally provided for remuneration, at a distance, by means of electronic devices for processing (including digital compression) and storage of data, at the individual request of the recipient. At the same time, recital 18 of the e-Commerce Directive states that “information society services are not solely restricted to services giving rise to on-line contracting but also, in so far as they represent an economic activity, extend to services which are not remunerated”.

In its case law, the CJEU applied Art. 14 of the directive to a search engine advertising service[9], sales on an online platform[10] and a social media platform[11]. Art. 12 of the directive has been applied to an ISP[12] and to an open Wi-Fi access service provider[13].

At the same time, the CJEU refused to qualify Uber’s services as those of an information society, thus negatively delimiting this definition[14]. In the Court’s opinion, a company providing a smartphone application that mediates between a passenger and a non-professional driver in booking a journey constitutes a transport service[15].

The distinction between “active” and “passive” intermediaries

The distinction between active and passive intermediaries is crucial from the perspective of service providers: passive intermediaries qualify for a conditional exemption from liability, but active intermediaries forfeit this privilege[16].

In some cases, determining whether a platform’s activity is active or passive is simple. The Papasavvas case of an online journal publishing company is a clear example of an active platform[17]. In the opinion of the CJEU, the company as a rule “has knowledge of the information posted and exercises control over that information”, and therefore cannot apply for conditional exemption from liability[18]. A good example of a passive intermediary can also be found in the case of Netlog, where the Court found that a social platform that stores information provided by users on its servers can make use of the “safe harbour”[19].

There is, however, considerable uncertainty as to the extent to which activities such as ranking building, indexing, sharing review systems, managing infrastructure and content hosted by platforms are actual control and thus an active intermediary role[20].

In this context, the connection to copyright is particularly important. The GS Media case concerned liability for linking to unauthorised content. The Court then held that “when the posting of hyperlinks is carried out for profit, it can be expected that the person who posted such a link carries out the necessary checks to ensure that the work concerned is not illegally published on the website to which those hyperlinks lead”[21]. Thus, the CJEU established a rebuttable presumption, which depends on whether or not the links were made for profit [22].

The effects of proactive measures

The e-Commerce Directive, as well as other legal instruments, urge intermediaries to step up their efforts to combat illegal or harmful content[23]. However, taking into account the aforementioned distinction between active and passive intermediaries and the lack of a general monitoring obligation under Art. 15 of the Directive, there are doubts as to what level of actions taken by platforms will not lead to the loss of the conditional exemption from liability[24].

A good example of this tension is the due diligence obligation in recital 48. It states that member  states have the right to require service providers “to apply duties of care, which can reasonably be expected from them and which are specified by national law, in order to detect and prevent certain types of illegal activities”.

The narrow understanding of due diligence indicates obligations “imposed by criminal or public law e.g. aid in investigation of crime or security matters, not as extending to duties under private law, e.g., to help prevent copyright infringement”[25]. In other words, due diligence may manifest itself in ex-post obligations, e.g. by removing content after gaining knowledge about its illegality, which, from the point of view of Art. 14 of the Directive, is not problematic, as well as in ex-ante obligations, i.e. measures that platforms must take before they become aware of the illegal nature of the content, which may result in the loss of conditional exemption from liability[26].

Nevertheless, member states retain the right to impose both types of obligations on platforms, and some ex-ante obligations are promoted by EU instruments, including “The EU Code of conduct on countering illegal hate speech online” of 2016 launched together with Facebook, Microsoft, Twitter and YouTube and signed by all these entities, the 2017 “Communication on Tackling Illegal Content Online” by the European Commission, and a Recommendation on measures aimed at the same goal[27].

Knowledge or awareness threshold for a conditional exemption

The case law of the Court of Justice of the European Union (CJEU) has provided criteria to determine when a service provider is aware of the illegal nature of an activity or information. The ruling in the L’Oréal case requires the interpretation of the principles set out in Art. 14 sec. 1 “as covering every situation in which the provider concerned becomes aware (…) of such facts or circumstances”. Thus, the Court emphasised that intermediaries may benefit from the liability exemption when they perform a purely technical, automatic, and passive role[28]. Despite the efforts of the European Court of Justice, in a very limited number of cases, many interventions or actions, especially in terms of content moderation, remain in the grey area[29].

• Changes in the scope of liability of providers of intermediary services in the draft DSA

As stated in the Introduction, the purpose of the DSA is to update the Directive on electronic commerce. It could therefore be assumed that solutions to the above-mentioned doubts would be among the most important priorities of the authors of the project.

Unfortunately, Articles 3-5 of the DSA replicate Articles 12-14 of the e-Commerce Directive, thus preserving the key problems that have arisen around the intermediary’s liability for content[30]. It should also be noted that the DSA uses the method of asymmetric regulation and imposes additional obligations on various entities. Thus, new regulatory layers are created that will lead to new interpretative doubts in the future.

The DSA seems to solve two minor problems. Firstly, the act was presented in the form of a regulation and not a directive. This means that it will be applied directly to the national orders of individual member states, thus avoiding the fragmentation of the digital single market. Secondly, the DSA includes a new Art. 6 for intermediaries’ liability which governs voluntary own-initiative investigations. According to it, intermediary service providers will not lose the possibility of exemption from liability due to carrying out “voluntary own-initiative investigations or other activities aimed at detecting, identifying and removing, or disabling of access to, illegal content”, or because they “take the necessary measures to comply with the requirements of Union law, including those set out in this Regulation”.

Even though the purpose of Art. 6 was to clarify the terms of liability, it raises a number of other doubts, especially in connection with additional obligations imposed on very large internet platforms.

At the same time, it is worth paying attention to the changes that were included in the compromise text presented by the Slovenian Presidency. Articles 3 and 4 remain unchanged; however, there are certain changes to Articles 5 and 6.

First of all, Art. 5 contains a new definition of online sales platforms, i.e. marketplaces. The very definition contained in Art. 2 (ia) defines marketplaces as online platforms that enable consumers to conclude distance contracts with entrepreneurs.

The proposed definition was intended to improve legal certainty, but leaves in our opinion much to be desired. A prerequisite for the recognition of a platform as a marketplace is the conclusion of a transaction between an entrepreneur and a consumer on a given platform. For example, if a consumer clicks on an advertisement for shoes on a newspaper’s website, it does not make the newspaper a marketplace. However, according to the currently proposed definition, this newspaper could be considered a marketplace, which would impose certain obligations on it.

Such a faultily constructed definition would be particularly severe in the face of an attempt by the European Parliament to introduce more stringent obligations for marketplaces. For example, one can recall the amendment introduced by MEP Alex Saliba regarding Art. 14a, according to which “marketplaces deserve special attention due to the large number of illegal activities detected on their Internet interfaces”, or additional provisions on marketplaces related to illegal offers proposed by, among others, French MEPs in Art. 22b. In our opinion, the above-mentioned amendments are attempts to differentiate responsibility due to the business model and constitute a departure from the general principle of asymmetric regulation based on the size of the enterprise. As a result, they can reduce legal certainty and increase the burden on entrepreneurs, and therefore should be assessed negatively.

Secondly, there is an amendment in recital 13 that extends the scope of hosting services to comments submitted to the platforms by users. In the compromise text proposed by the Slovenian Presidency, we read that “hosting comments on a social network should be considered an online platform service if it is clear that this is the main feature of the service offered, even if it is ancillary to the publishing of posts by service users”. In our opinion, such an amendment is technically impossible to implement. We draw attention to the fact that some user comments under live videos on online platforms are so-called live reactions. For this reason, it is not possible to monitor each transmission of this kind and investigate the users’ current reactions. Furthermore, the creators themselves usually have control over comments on their videos. They are free to disable comments on individual videos or approve comments that appear under their videos. Therefore, we evaluate the proposed change negatively.

Third, concepts such as acting in good faith and exercising due diligence have been introduced to Art. 6. However, we still do not know what is meant by due diligence. These amendments will therefore not increase legal certainty, but may allow platforms to better defend their interests in the event of a dispute by proving that they were acting in good faith.

Considering all the above-stated conclusions and taking into account the efforts of all parties involved in the works on the DSA, supporting this solution seems to be a squandered opportunity to simplify and systematise European law in this specific field.

3. Changes to the system of reporting and removal of illegal content

Another expectation that the DSA was hoped to fulfil was the regulation of appropriate procedures for reporting and removal of illegal content. The purpose of introducing a new mechanism is to ensure a balance between the protection of freedom of speech and the protection of personal and intellectual property rights. We can therefore observe a similar tension as with the conditional exemption from liability of service providers for user-posted content and the absence of a general obligation to monitor content.

First of all, it should be noted that the European Commission in the draft DSA decided to propose the introduction of a notice-and-action mechanism. Thus, it gave up the narrower obligation to notify and remove illegal content (notice and take down) as well as the wider obligation of the intermediary to control, so that illegal content does not reappear (notice and stay down)[31].

Secondly, it should be noted that the reporting and removal procedure for illegal content only applies to illegal content, not to harmful content. So it can be seen that the DSA maintains the division used thus far in the e-Commerce Directive. Furthermore, Art. 2(g) of the compromise text of the DSA defines illegal content as “any information which, in itself or by its reference to an activity, including the sale of products or provision of services is not in compliance with Union law or the law of a Member State, irrespective of the precise subject matter or nature of that law”. Therefore, the DSA does not provide a definition of illegal content, leaving it a gesture of national law of the Member States[32].

However, this definition raises serious doubts, namely the “reference to an activity” that is illegal. Such an unclear definition may in practice mean that legal content describing illegal activities will be removed. As an example that already raises problems at this point, one can cite the descriptions of activities in war zones and the materials documenting these activities. Naturally, this gives rise to the risk of excessive removal of content posted on the Internet and has serious consequences not only from the perspective of freedom of speech, but also the protection of other values.

Thirdly, the DSA quite precisely defines the elements that should be included in a notice in order for it to be considered a credible message or source of knowledge on which the intermediary’s liability for the content depends within the meaning of Art. 5 of the DSA[33]. Accordingly, upon receipt of the communication, if an intermediary wishes to retain the possibility of conditional exemption from liability, it should immediately proceed to remove illegal content or prevent access to it.

Another doubt arises in this context related to the risk of excessive removal of content. The EC’s proposal required the users to explain the reasons why they consider the content to be illegal. The explanation of the reasons may turn out to be largely subjective in practice. The EC did not require the user to prove the unlawfulness, nor does it foresee any consequences for users for false reports (except for multiple reports in bad faith). In its previous form, the provision did not provide adequate protection to content creators (personal and intellectual property rights) or intermediaries (liability for illegal content). However, the Slovenian Presidency introduced an important amendment here, the so-called requirement that the justification for the illegality of content be “sufficiently substantiated”. While this is a step in the right direction, the rationale is still subject to subjective scrutiny and platforms do not have clear guidelines for their actions, which may create a risk of excessive removal of content.

Consequently, the EC proposal required the intermediary to perform certain actions immediately after receiving a notice, including: “the provider of hosting services shall promptly send a confirmation of receipt of the notice to that individual or entity”[34]; “shall also, without undue delay, notify that individual or entity of its decision in respect of the information to which the notice relates”[35]; “providing information on the redress possibilities in respect of that decision”[36]. The DSA will apply horizontally to all types of online content. Given the multitude of different information and the potential nature of its unlawfulness, it cannot be reasonably expected that intermediaries will make all decisions at the same time. We therefore welcome the replacement by the Slovenian Presidency of “immediately” with “without undue delay”. In any event, burdening intermediaries with excessive liability would undoubtedly lead to excessive removal of legal content and infringement of the rights of their authors.

Ultimately, one should remember that the DSA obliges the intermediary not only to contact the notifier, but also the recipient. Art. 15 sec. 1 DSA states that the intermediary “shall inform the recipient, at the latest at the time of the removal or disabling of access, of the decision and provide a clear and specific statement of reasons for that decision”. The statement of reasons is subject to specific requirements and is to include, among others, the following information:

• whether the decision entails either the removal of, or the disabling of access to, the information and, where relevant, the territorial scope of the disabling of access;
• the facts and circumstances relied on in taking the decision;
• where applicable, information on the use made of automated means in taking the decision;
• where the decision concerns allegedly illegal content, a reference to the legal ground relied on;
• where the decision is based on the alleged incompatibility of the information with the terms and conditions of the provider, a reference to the contractual ground relied on[37].

The DSA specifies that the statement of reasons must be sufficiently clear and understandable, and as detailed and precise as is reasonably possible under the circumstances. An additional burden imposed on service providers is the requirement to publish decisions and statements of reasons in an anonymised form in a database managed by the European Commission.

There is no doubt that such detailed and extensive requirements will be counterproductive with regard to the goal that DSA was intended to achieve; that is, reducing the competitive advantage of the largest technology companies and levelling the conditions of competition with larger entities. The largest enterprises in the IT industry have sufficient infrastructure and resources to cope with the requirements described above. However, these obligations will not only be imposed on very large online platforms, but also on smaller platforms. Complicated content monitoring systems will become a kind of entry barrier for new enterprises, which may strengthen the competitive advantage of largest players.

4. Changes in the context of targeted advertising

Digital advertising plays an important role for Internet users, enterprises selling their products and services online, as well as platforms. It is not surprising, therefore, that it has become an object of interest for regulators. The third and final part of this memorandum examines the changes to digital advertising that have been proposed by the European Commission in the draft DSA, as well as by the European Parliament, namely the Committee on the Internal Market and Consumer Protection (IMCO) and the Committee on Civil Liberties, Justice and Home Affairs (LIBE).

The European Commission’s proposal

In its DSA proposal, the European Commission notes the important role that digital advertising plays in the online environment, as well as the risks it entails.

Interestingly, recital 52 of the preamble to the draft DSA mentions specific risks associated with digital advertising, i.e. advertisement that is itself illegal content, to contributing to financial incentives for the publication or amplification of illegal or otherwise harmful content and activities online, or the discriminatory display of advertising with an impact on the equal treatment and opportunities of citizens. In the face of these challenges, the EC proposes to make digital advertising more transparent so that users have the information they need to understand when and on whose behalf advertising is displayed. Service recipients should also have information on the main parameters used to determine whether a particular advertisement is to be displayed to them. Recital 63 of the preamble also requires very large online platforms to ensure public access to repositories of advertisements displayed on their online interfaces to facilitate supervision and research into emerging risks brought about by the distribution of advertising online.

IMCO report

A rather different approach was presented by the European Parliament. The IMCO report states that “pervasive collecting and use of users’ data to provide targeted, micro-targeted and behavioural advertising has spiralled out of control”. Furthermore, it finds the EC’s proposed new transparency requirements insufficient.

According to IMCO, ISPs should implicitly ensure that recipients of their services are not subjected to targeted, microtargeted and behavioural advertising unless the recipient has given voluntary, specific, informed and unambiguous consent. In other words, it proposes to introduce a default opt out and the need to obtain the consent of the data subject before processing personal data for targeted advertising.

LIBE opinion

The opinion presented by LIBE suggests that the DSA should provide for the right to use and pay for digital services anonymously. At the same time, LIBE advocates that digital and personalised advertising, for non-commercial and political advertising, be phased out. At the same time, behavioural advertising and personalised targeting in commercial advertising should only be possible if users have voluntarily consented to it, without risking exclusion from services, and without tiresome and repetitive consent banners.

Consequences

Proposals to increase transparency do not seem problematic, but actually desirable. Increasing the transparency of digital services is in the interest of users as well as intermediaries. However, it is apparent that the European Parliament is proposing a very different approach to digital advertising.

Indeed, if the amendment proposals submitted by IMCO and LIBE are included in the final text of the DSA, they will have a huge impact on the functioning of the online environment. It seems that the rapporteurs did not find the right balance between protecting users’ privacy and preserving the functionality or respecting the economic dimension of the Internet. It is primarily users who will suffer from the radical changes to digital advertising, because the model of free use of the Internet will be threatened. At the same time, European companies that sell their content and services online and creators who distribute their works in this manner will suffer. Significantly, for small and medium-sized enterprises, targeted advertising offers an opportunity to rationalise promotional costs. At the same time, the perspective of consumers is also important, for whom the lack of profiling in practice means an increase in spam.

Bearing in mind the above-mentioned arguments, we believe that the EU legislator should take a broader look at the issue of digital advertising, taking due account of the interests of all parties involved.

5. Conclusions

The Digital Services Act will introduce multiple far-reaching changes to the way all digital market actors operate: the providers of online services, the enterprises that use these services as well as the users. The DSA therefore represents an opportunity to improve competitive conditions and improve the market position of European SMEs. Having analysed the selected changes, we are compelled to conclude that the DSA in its current form does not fulfil this potential. Moreover, many of the proposed changes may even be counterproductive to the goal of improving the competitive situation on the market and lead to the deterioration of the position of smaller entities and the creation of new barriers to entry and expansion. We see these threats from several sources.

First of all, the DSA reproduces the conditional exemption mechanism established in the e-Commerce Directive and with it all the uncertainties that have built up over the 20 years of this directive being in force. In the compromise text presented by the Slovenian Presidency, we find several amendments that could worsen the current situation. The proposed monitoring of comments is technically impossible, and will in any case lead to excessive deletion of content and a restriction of fundamental rights. Moreover, the flawed definition of marketplaces could lead to an unjustified extension of the obligations specific to sales platforms to providers of other online intermediary services. Such a definition would be particularly severe in light of the stricter rules that the European Parliament is attempting to introduce for marketplaces. The introduction of such stricter rules is undesirable, because it differentiates between service providers based on their business model and is a departure from the principle of asymmetric regulation adopted throughout the DSA.

We find minor changes in the DSA, such as clarifying that investigation on one’s own initiative and acting in good faith with due diligence do not result in the loss of the safe harbour. Relative to all the uncertainties that exist, such a change only marginally increases legal certainty. It is also important to remember that the DSA is simultaneously building new regulatory safeguards, which will lead to new interpretive uncertainties and disputes in the future. Therefore, we believe that in this aspect the DSA does not live up to its potential and the EU legislator should put more effort into increasing legal certainty for enterprises active in the digital world.

Secondly, the DSA imposes extremely extensive, yet vague, obligations on digital enterprises to report and remove illegal content. Meeting such requirements will require significant resources from ISPs. As large online platforms have both the infrastructure and capital to adapt to new requirements, the DSA may paradoxically empower very large online platforms and create new barriers to entry and expansion for smaller companies.

Thirdly and finally, the radical changes proposed by the European Parliament in the context of digital advertising seem to ignore the interests not only of European entrepreneurs, who largely base their business models on digital advertising, but also of users who, thanks to digital advertising, can access content for free. If the changes to the DSA are adopted in the form proposed by IMCO or LIBE, we can expect big losses for European entrepreneurs as well as for the users themselves.

 

***

 

[1] Daniil Petrovich Frolov and Anna Victorovna Lavrentyeva, Regulatory Policy for Digital Economy: Holistic Institutional Framework.

[2] Explanatory Memorandum for the draft DSA.

[3] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape.

[4] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape, page 28.

[5] Ibidem; Sartor, Providers Liability: From the eCommerce Directive to the future; de Streel, Larouche, An Integrated Regulatory Framework for Digital Networks and Services; de Streel, Defreyne, Jacquemin, Ledger, Michel, Innesti, Goubert, Ustowski, Online Platforms’ Moderation of Illegal Content Online; Schulte-Nolke, Ruffer, Nobrega, Wiewórowska-Domagalska, The legal framework for e-commerce in the Internal Market. State of play, remaining obstacles to the free movement of digital services and ways to improve the current situation.

[6] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape.

[7] Ibidem.

[8] It is defined in Directive 98/34/EC of the European Parliament and of the Council of 22^nd June 1998 laying down a procedure for the provision of information in the field of technical standards and regulations and of rules on Information Society services, and in Directive 98/84/EC of the European Parliament and of the Council of 20^th November 1998 on the legal protection of services based on, or consisting of, conditional access.

[9] Judgment of 23^rd March 2010, Google France, C-236/08.

[10] Judgment of 12^th July 2011, L’Oréal, C-324/09.

[11] Judgment of 16^th February 2012, Netlog, C-360/10

[12] Judgment of 13^th January 2012, Scarlet Extended, C-70/10.

[13] Judgment of 28^th October 2016, McFadden, C-484/14.

[14] Judgment of 20^th December 2017, Uber Systems Spain SL, C-434/15; Judgment of 10^th April 2018, Uber France SAS, C-320/16.

[15] Ibidem.

[16] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape.

[17] Judgment of 31^st October 2014, Papasavvas, C-291/13.

[18] Ibidem.

[19] Judgment of 16^th February 2012, Netlog, C-360/10.

[20] European Parliament, Liability of online platforms.

[21] Judgment of 8^th September 2016, GS Media, C-160/15.

[22] Ibidem.

[23] European Parliament, Liability of online platforms.

[24] Ibidem.

[25] Edwards, Downloading Torts: An English Introduction to On-Line Torts’ in Snijders and Weatherill.

[26] European Parliament, Liability of online platforms.

[27] Joan Barta, The Digital Services Act and the Reproduction of Old Confusions.

[28] Ibidem.

[29] Ibidem.

[30] Ibidem.

[31] TKP, Procedura notice & take action w projekcie Aktu o usługach cyfrowych (Digital Services Act) (Notice and take action procedure in the draft Digital Services Act).

[32] Ibidem.

[33] Art. 14 sec. 2 lists the following elements: (a) an explanation of the reasons why the individual or entity considers the information in question to be illegal content; (b) a clear indication of the electronic location of that information, in particular the exact URL or URLs, and, where necessary, additional information enabling the identification of the illegal content; (c) the name and an electronic mail address of the individual or entity submitting the notice, except in the case of information considered to involve one of the offences referred to in Articles 3 to 7 of Directive 2011/93/EU; (d) a statement confirming the good faith belief of the individual or entity submitting the notice that the information and allegations contained therein are accurate and complete.

[34] Art. 14 sec. 4: “Where the notice contains the name and an electronic mail address of the individual or entity that submitted it, the provider of hosting services shall promptly send a confirmation of receipt of the notice to that individual or entity.”

[35] Art. 14 sec. 5: “The provider shall also, without undue delay, notify that individual or entity of its decision in respect of the information to which the notice relates, providing information on the redress possibilities in respect of that decision.”

[36] Ibidem.

[37] Art. 15 sec. 2 DSA.

 

See more: 17.09.2021 Memorandum on the Digital Services Act

Warsaw, 17 September 2021

 

ZPP’s contribution to the Commission’s consultation on the Vertical Block Exemption Regulation Revision

 

Background

The current Vertical Block Exemption Regulation (VBER) entered into force on 1 June 2010 and will expire on 31 May 2022 together with the Guidelines on Vertical Restraints. Therefore, the European Commission has started the evaluation process of existing legislation to propose a new, revised version of the VBER. In September 2020, the Commission Staff Working Document was published, outlining the main directions for reform, including the need to adopt the VBER to the challenges related to the growth of e-commerce.

In July 2021, the draft of the revised VBER was published. Our analysis of the draft VBER indicates that, while the revision aims to respond to challenges related to digitization, it will also have major implications for other industries.

Changes in dual distribution and its implications for franchising agreements

Particularly relevant in this context are the changes for dual distribution, meaning a situation where a supplier simultaneously distributes its goods or services directly to its customers as well as through independent distributors, for instance through franchising agreements. Until now, thanks to the VBER, companies exchanging information in a dual distribution system did not have to fear liability for infringement of competition law under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). However, due to the increased popularity of dual distribution and its possible undesirable effects on market competition, the EC decided to introduce stricter provisions in the revised VBER in this regard.

Changes in the draft revised VBER

The changes can be summarized as follows. First, VBER will not apply where dual distribution leads to “horizontal problems.” To this end, it is proposed to remove the exemption for all cases in which the parties’ combined retail market share exceeds 10 per cent (as opposed to the current 30 per cent). The draft revised VBER provides for an additional exemption, where a supplier and its distributors have a combined market share at the retail level of more than 10 per cent but do not exceed 30 per cent of the relevant market share within the meaning of Article 2(4)(a) or (b) of the VBER. Nevertheless, the exemption for the 10-30 per cent market share threshold will not apply in the case of an exchange of information between undertakings, and such exchange will have to be assessed under the rules for horizontal agreements.

Implications for franchise business model

First, it is important to note that franchising is a popular and important business model, which drives growth and employment in many sectors of the European economy. Franchising agreement are also important for SMEs, providing them with access to know-how and technology.

Second, it is essential to understand that exchange of information lies at the heart of the relationship between franchisor and franchisees. In any franchise business model, franchisor and franchisees exchange know-how and commercially sensitive information on every day basis. Franchisees receive access to know-how in return for the access to real time data about local customer demand, when then helps to maintain effective planning and product development.

As it stands, the draft revised VBER prevents or to a great extent disrupts the exchange of information in a franchising ecosystem. Moreover, it requires franchisor to differentiate between wholly owned operations and franchisees, what undermines the idea of the franchising business model.

Keeping the above-mentioned points in mind, it can be seen that proposed restrictions on the exchange of information will require franchisors and franchisees to radically re-evaluate their business models, which can have serious implications for the supply of various goods and services in the EU.

According to the CJEU judgements, any exchange of information that substitutes competition for practical cooperation, should be considered as infringing upon the Art. 101(1) TFEU. Hence, exchange of information between franchisors and franchisees can be impeded in a number of ways. Below we briefly summarize some of the most critical potential changes. 

Changes in the treatment of intermediation services and its implications for the marketplaces

Article 2(7) of the Draft VBER withdraws the benefit of an exemption for large parts of vertical relationships entered into providers of intermediary services with their retail activities (“hybrid platform”). Under the new rules, the block exemption will not apply when a hybrid platform enters into agreements with competing undertakings on the retail level. Nevertheless, the block exemption would continue to apply, if competition between two undertakings only exists on the retail level. Therefore, it can be seen that the Draft VBER lead to distortion of competition. Intermediary services providers without their retail businesses will be covered by the block exemption, and intermediary services with their retail businesses will not be covered by the block exemption, while the key criterion used by the Commission to assess who should benefit from the exemption and who should not is the competition with independent retailers on the retail level.

The Commission justifies withdrawal of the block exemption by stating that such agreements affect inter-brand competition and raise horizontal concerns. In our view however this does not justify the exclusion of vertical relationship between intermediary services providers and their retail businesses from the scope of VBER. The Commission should also take under consideration the costs related to this decision. Once the block exemption is withdrawn, the intermediary services providers will have to re-assess all business relationships with their retailers under the horizontal guidelines. The withdrawal of safe harbour will lead to increased transaction costs and increase barriers for SMEs, that use intermediary services providers as distribution channels to access larger pool of consumers. Consequently, proposed changes could harm consumers by leading to increased prices.

Given the above, Art. 2(7) of the Draft VBER will have serious implications for the entire retail industy and will force numerous businesses to re-shape their business models. Therefore, we believe that the Commission should revise Art. 2(7) of the Draft VBER entirely.

Incentives to intermediaries

Paragraph 179 of the Draft Guidelines provides that intermediary services providers may offer incentives to their users to sell their goods or services at a competitive level or to reduce their prices, while resale price maintenance remains prohibited. It is desirable to clarify what incentives would be considered as compatible with EU law and provide examples of such incentives to dispel doubts as to what is a permissible incentive and what is a prohibited influence on the prices charged by users of intermediary services.

 

See more: 17.09.2021 ZPP’s contribution to the Commission’s consultation on the Vertical Block Exemption Regulation Revision

Warsaw, 16^th September 2021

 

Debate hosted by the Union of Entrepreneurs and Employers: Emission allowances trading, price bubbles and energy prices

 

The European Emissions Trading Scheme cannot be considered as operating in accordance with the idea of a free market. The foundations of its operation artificially limit the supply of allowances. On the demand side, financial investors are free to take advantage of the fact that part of the buyers of EUA require them to run a business operations. The allowances have no price cap, as the penalty for emission without allowances does not release the allowance from the obligation to settle it. The conducted analysis suggests that price bubbles are emerging on the EUA market. These are the key conclusions of the report written by Marek Lachowicz and published by the Union of Entrepreneurs and Employers “EUA: Price bubbles and the competitiveness of Poland and the European Union”.

“The withdrawal of energy-intensive companies and the limited access to raw materials related to this phenomenon both pose a serious threat for the entire EU. At this point, we are optimistic and think in globalist terms about imports of raw materials. However, as the COVID-19 pandemic has shown us: in the event of an emergency, countries secures raw material supplies primarily for itself. Extending the ETS to aviation and maritime transport will make it more difficult to transport raw materials to the EU. So his is not even a shot to the knee, but actually to the pelvis. We should also remember that the transport of raw materials from abroad may offset any emission reductions that we achieve thanks to the ETS,” stresses Marek Lachowicz, economist and author of the report.

EUA prices have “bubble-genic” characteristics. Their changes over time are similar to those of the Brent crude oil and natural gas futures contracts. However, there is no long-term link between EUA prices and either the price of Brent crude oil or the GDP. This suggests that financial investors treat emission allowances as a class of speculative assets similar to crude oil.

The creation of price bubbles on emission allowances favours the relocation of energy-intensive enterprises outside the borders of the European Union. These companies often supply key raw materials, such as steel, which are the foundation for the competitiveness of EU industry. The possibility of a bubble emerging forces EUA mechanisms to set up reserves to offset increases in allowance prices, which significantly reduces the pool of available financial resources that could be allocated, for instance, to emission reduction technologies. The unpredictability of allowance prices also prevents real investment planning in the entire energy sector.

The President of the Jagiellonian Institute – one of Polish major think tanks, Marcin Roszkowski, looked at the issue at hand from a slightly different perspective: “The ETS is primarily a political instrument aimed at getting rid of the entire coal and gas industry in the energy sector and, as a result, focused on economic transformation. However, we cannot speak of a bubble in the emissions trading market, because political instruments do not create such bubbles.”

The COVID-19 pandemic has shown the fragility of value chains being based on imports of essential raw materials and semi-finished products. In the event of an international crisis, the Union’s potential technological advantage will be meaningless unless it is backed by the raw materials it required. The changes to the EU ETS system planned in the “Fit for 55” package do not solve the problem at hand, but worsen it. Reducing the number of free allowances for aviation as well as extending this system to maritime transport are a threat to the competitiveness of the Union as a whole. The possible consequences of the reforms proposed by the European Commission include an increase in the prices of goods imported to the EU, which might in turn lead to customs wars, especially should a carbon border tax be introduced

“The Commission’s argument in favour of the necessity to extend the ETS is its effectiveness. Yet, a number of ex-post studies have shown that the annual reduction in emissions achieved by the system ranges between 0.5-1%. Considering the huge costs for society and the low gains in emissions’ reductions, it seems essential to consider whether we should actually base – to a large extent – the EU energy transformation on this very instrument, combined with the equally dubious carbon adjustment mechanism, or not,” concludes Kamila Sotomska, Deputy Director of the Law and Legislation Department at the Union of Entrepreneurs and Employers.

 

See more: EUA: Price bubbles vs the competitiveness of Poland and the European Union – report by the Union of Entrepreneurs and Employers

Warsaw, 10^th September 2021

 

Statement of the Union of Entrepreneurs and Employers on the Polish New Deal tax package

 

Following multiple comments from the business community, including numerous postulates submitted by the Union of Entrepreneurs and Employers itself, the government has revised part of the solutions contained in the Tax Act implementing the assumptions of the Polish New Deal. While we appreciate and value openness to dialogue, we believes that the changes introduced to the draft act are still insufficient. We would also wish to draw attention to the pace at which this new regulation is being proceeded: the entire text of the draft submitted to Sejm, the lower house of the Polish parliament, is almost 700 pages long. One would think it should be subject to additional, comprehensive public consultations, the duration of which should correspond to the exceptional scope of the proposed act.

We support the increase in the tax-exempt amount as well as the valorisation of the second tax threshold. We also understand that these changes require financing. However, we are not on the same page with regard to the costs of these reforms, that they be borne almost exclusively by Polish small and medium enterprises. Furthermore, entrepreneurs will transfer the higher operating costs to the prices of products they sell and services they render, so that ultimately the benefits for that part of the society for which the tax wedge was to be reduced will be lower than assumed.

While the reduction from 9% to 4.9% of the healthcare premium for people running a proprietary business and paying flat tax is a noticeable reduction, we believe that the introduction of such (full) proportionality is a solution that directly affects Polish business, and indirectly – all consumers. An increased burden on companies translates into higher prices of products and services, and the Polish people are already facing price increases unseen for years.

We also find it rather difficult to comprehend that people who work on account of appointment will be covered by a health insurance premium of 9% of their income, which means that the effective tax rate on income in this group will amount to 41%. This will actually lead to the elimination of this form of taxation, as the overwhelming majority will switch to much cheaper forms of taxation. As a result, the state will lose part of the revenue stream.

In our view, leaving a lump sum healthcare premium for those who pay the flat tax would be the optimal solution. However, if for some reason the regulator deems it necessary to introduce proportionality in healthcare insurance premium for companies, we are convinced that there should be some “ceiling” on the amount transferred by entrepreneurs to the National Health Fund per month.

Although formally the taxes paid to the Fund are called a premium or “contribution”, their amount does not in any way determine the quality or frequency of the benefit. In other words, higher contributions to the healthcare system are not associated with an individual improvement in the quality of procedures. With this in mind, we believe that a maximum “contribution” should be defined and linked to, for instance, the minimum wage. The healthcare premium should amount to no more than, for example, 35% of the minimum wage per month. This way, the scale of increases in the burdens of entrepreneurs (and thus price increases) would be curbed.

The Union of Entrepreneurs and Employers advocated for a revenue tax. The presented solution in the form of a minimum CIT calculated on income is a step in the right direction. We emphasise, however, that, contrary to what was stated in the explanatory memorandum to the government draft act, this tax is not the brainchild of the Union of Entrepreneurs and Employers. Our Union proposed a simple revenue tax, without any reliefs and exemptions, in the form of a so-called Minimum CIT in the amount of 1% of revenues. Ultimately, we propose replacing all CIT with a universal revenue tax. Regardless of the changes introduced to our concept, we do appreciate the willingness to tax international corporations more effectively (and thus to level the playing field regarding competition between multinationals and small Polish companies). We will certainly be monitoring the effectiveness of this regulation, even though it is not the project we authored.

To sum up, we have hopes that changes of an even deeper nature will be introduced to the draft act by the Parliament. We strongly support the introduction of a higher tax-exempt amount and the increase in the second tax threshold. We agree with the solutions adopted in the form of lump sum tax on registered revenue, and we ask for similar ones with regard to appointment work relationships. We also appreciate the reduction in healthcare premiums to 4.9%, but the lack of a limit on its account is a matter we find worrying. And lastly, we approach the minimum CIT with caution, and categorically deny our authorship of this tax in this structure.

 

See more: 10.09.2021 Statement of the Union of Entrepreneurs and Employers on the Polish New Deal tax package

Warsaw, 15^th September 2021

 

Kamila Sotomska becomes Chief Expert on Digital Economy

 

The Union of Entrepreneurs and Employers continues to expand its team of experts in areas of particular importance for the development of the Polish economy.

We are, therefore, proud to announce that Ms Kamila Sotomska has been appointed Chief Expert on Digital Economy of the Union of Entrepreneurs and Employers.

She has authored and co-authored legislative positions, memoranda, and thematic reports, and her field of specialty revolves aroound issues related to European law. Before joining the Union of Entrepreneurs and Employers, she gained experience at the Representation of the European Commission in Poland as well as in law firms and consulting companies. She graduated from the Faculty of European Law at the College of Europe in Bruges (LL.M.) and the Faculty of Comparative Law at the University of Maastricht (LL.B.).

We encourage you to follow the opinions of our Chief Experts published on our website!

Warsaw, 6^th September 2021

 

Survey by the Union of Entrepreneurs and Employers: Polish New Deal in the eyes
of employees and the self-employed – clear pessimism regarding government’s proposals

 

The results of the survey commissioned by the Union of Entrepreneurs and Employers clearly indicate there is reluctance amongst respondents regarding the solutions included the Polish New Deal.

As many as 64% of all people surveyed believe they will be worse off as a result of the tax changes provided for in the Polish New Deal, while only 12% believe they can benefit from them. As many as 83% of all respondents are concerned that the planned increases in taxes will cause a further increase in prices. As the results of the research indicate there is a high risk of such a scenario, as 65% of entrepreneurs surveyed declared that tax changes would force them to increase the prices of their products or services.

As Cezary Kaźmierczak, President of the Union of Entrepreneurs and Employers, points out: “Such widespread disapproval of tax changes should give the government food for thought. Even among employees whose economic conditions will not change as drastically as the situation of entrepreneurs, there is opposition to the proposed solutions. Employees generally perceive the benefits of the Polish Deal as having very little impact on the situation of household budgets. For entrepreneurs, the originally proposed increase in the health insurance premium is, in turn, a heavy burden.”

In this study, people were also asked about potential sources of healthcare financing. According to the majority, as many as 56% of respondents, healthcare should be financed primarily from a more effective taxation of international corporations. Only 9% of participants surveyed expressed the opinion that higher expenditure on healthcare should result from higher taxation of Polish companies.

We encourage you to familiarise yourselves with the report summarising our quantitative study.

Warsaw, 7^th September 2021

 

Analysis of the Polish e-commerce market. Expansion potential of Polish companies

 

The Union of Entrepreneurs and Employers commissioned a study of the e-commerce market in Poland. In-depth interviews as part of that study were conducted in August 2021. The study is already the second analysis of the e-commerce market carried out by the Union.

The first report dedicated to the Polish e-commerce market, published in March this year, focused on the quantitative analysis of the market situation and development opportunities with the use of e-commerce for small and medium-sized companies.

This time, the study aimed to identify the reasons why Polish companies are afraid to utilise e-commerce tools or take advantage of international expansion, as well as on ways that can dispel these fears, and thus unlock the potential of Polish companies.

 

Find out more: 07.09.2021 On-line sales survey of companies