Impact on Life Sciences Companies of the Upcoming Global ‘Tax’ on the Use of Digital Sequence Information
October 2024, Covington Alert
I. About the Upcoming Decision on the ‘DSI Tax’
On 1 November 2024, the 196 countries that are party to the Convention on Biological Diversity (“CBD”) may agree on the terms and conditions of the “multilateral mechanism (“MLM”) for benefit-sharing from the use of digital sequence information.” The purpose of this mechanism is to extract funds from the private sector to finance recovery and preservation of Earth’s biodiversity. The widespread use of digital sequence information (“DSI”) from biological resources in product development is viewed as “profiting from biodiversity”, so that a percentage of that profit should be “fairly” shared.
The 196 countries will convene at a meeting called the Conference of the Parties, taking place late October 2024 for the 16th time since 1992 (“COP-16”). The only countries not party to the CBD are the Holy See and the United States. At that meeting, government officials will continue negotiations and may adopt a Decision of the COP. This Decision has been eight years in the making and is already available in draft form. Countries have put forward four possible models for the new DSI payment mechanism: (1) a product sales tax; (2) a corporate income tax for DSI-intensive certain sectors; (3) a broad VAT-style tax; and (4) a voluntary contribution by DSI users. So far, options one and two have attracted the widest support amongst countries.
The final COP-16 Decision, if adopted, will contain details on which sectors are expected to pay into the global fund (top candidates are pharmaceuticals, devices, agriculture and biotech), what will be the basis for calculating the payment (e.g., annual company turnover or product sales), at what percentage (1% or 0.1%), and who will receive the payments (countries, or a centralized global fund). Given these features, and for ease of reference, we will refer to the benefit-sharing system from digital sequence information as the ‘DSI Tax.’
This document is a Q&A responding to key queries that companies may have about the COP-16 Decision and the operationalization of the DSI Tax.
II. About the Payment Obligation
1. What is Digital Sequence Information that would trigger the payment?
Currently there is no definition of “Digital Sequence Information.” There has been preparatory work done suggesting that it might cover the use of (1) genomics, and/or (2) proteomics, and/or (3) metabolomics. Negotiators are leaning towards the broadest possible definition to ensure a broad payor base.
2. What is the calculation base for the DSI Tax?
Negotiators are considering three options:
First, when a company commercializes a product or process that “has benefited from the use of DSI” it will be expected to pay a percentage of its profits, revenue or turnover from those products or services. Hence, we refer to this option 1 as a product sales tax.
Second, as an alternative, companies that belong to a sector that is considered “highly reliant on”, or that “directly or indirectly benefits from DSI” would be expected to pay a percentage of its profits, revenue or turnover from those products or services. Hence we refer to this option 2 as a corporate income tax.
Third, when a company places on the market products or provides services “that have been developed or created using” DSI, the consumer will be expected to pay “1 per cent of the retail value” on those products or services. Hence we refer to this option 3 as a VAT-style tax.
3. How much will companies be expected to pay?
The bracketed, draft text states that companies will be expected to:
- Under option 1, the product sales tax: “contribute X% of the [profits][revenue][turnover] generated by products and services placed on the market that have benefited from the use of DSI to the DSI MLM.”
- Under option 2, the corporate income tax: “X% of their global [profits][revenue][turnover][sales] on all products.”
- Under option 3, the VAT-style tax: “1 per cent of the retail value of all products [and services] [that have been developed or created using][linked to the utilization of]” DSI.
For options 1 and 2, countries are considering that X may range from 0.1% to 1%. In any case, negotiators are hoping that the contribution would generate “billions” on an annual basis. Thus, the final percentage will be modulated depending on the scope of the payor base (i.e., companies and sectors in scope).
4. Will there be other obligations than payments?
Companies may also be required to share “non-monetary” benefits, such as capacity building in developing countries, knowledge transfer, or technology transfer.
III. About the Obligation for Countries to Implement the Tax on DSI
5. Are all 196 countries legally obliged to implement the DSI Tax?
A COP Decision agreeing the modalities of a DSI tax will not be legally binding on countries in the same way as treaties. They are known as “soft law” so that countries can lawfully refuse to implement a COP Decision if they so choose. However, since the Decision reflects political consensus of 196 countries, there is a strong expectation that all countries should implement the DSI Tax into national law. Not doing so would have a political and reputational impact for a country, with repercussions in other international negotiations (e.g., climate change).
6. Will the COP Decision on the DSI Tax be legally binding on companies?
The COP Decision is not legally binding on companies and countries must adopt national legislation to implement the payment obligations for companies. The EU has already adopted legislation in force from 2027 that is likely to oblige large companies to comply with the DSI tax implemented by other CBD parties.
7. How many countries will implement the DSI Tax into national law?
Covington has attended the negotiations on the draft COP Decision for years. On that basis, we expect that many Latin American (e.g., Brazil, Columbia, Argentina, Cuba), African (e.g., Egypt, Kenya, South Africa) and Asian (e.g., India) countries are likely to implement the COP-16 Decision. On the other hand, we have also observed that there are several countries which, while supporting the creation of a DSI MLM, have shown reluctance in implementing a mandatory “tax” or “levy” for companies (e.g., Korea, Switzerland). The most vocal opposition to any form of DSI Tax has come from Japan, who proposed option 4 on the voluntary contribution.
The chief negotiator of the European Union has stated in a meeting with business representatives early September 2024 that the EU has the legal authority to implement the COP Decision on DSI. He explained that the EU Member State governments must reach political agreement whether to implement the COP Decision as a single EU instrument for all 27 EU member states; or decide that there will be 27 national legal instruments implementing the DSI tax in each EU member state.
In all, it is likely that the COP-16 Decision will over time influence and shape a sizeable proportion of the 100+ ABS laws currently in existence, 39 of which already cover DSI.
8. Will the United States and U.S. companies be affected by the DSI Tax?
While the United States is not a party to the CBD, the Convention has near-universal participation. Hence it is almost impossible for U.S. companies not to be impacted. There could be a number of hooks that would pull U.S. companies into the DSI tax, such as: (1) using DSI from any of the 196 parties to the CBD, (2) conducting R&D outside the U.S., (3) patent filings outside the U.S., or (4) commercialization outside the U.S.. While there will not likely be a payment obligation in the U.S. itself, experience with the Nagoya Protocol on benefit-sharing from physical biological materials has proven that U.S. companies are not “safe” from these access and benefit-sharing regimes.
IV. Implementation and Enforcement of DSI Tax
9. How will the COP-16 Decision on DSI be implemented into national law?
The COP-16 decision will be implemented in accordance with the 196 legal systems of the CBD Parties. Similar to the Nagoya Protocol, there will be countries that require the payment of the DSI tax, and countries that do not require the payment of the tax. However, all Parties to the CBD will be expected to verify compliance with the payment of DSI the tax in other Parties to the CBD, even if they have chosen not to require the DSI tax themselves.
10. How long will it take for the use of DSI to be taxed under national law?
The negotiators want the DSI payment system to be fully operational by 2028.
11. How will compliance with the DSI Tax be enforced?
There will be at least three avenues of enforcement:
First, countries that implement the DSI tax will enforce compliance in their jurisdiction. For instance, Brazil already requires payments from the utilization of DSI under its national ABS law. In 2022, it was reported that violations had resulted in “fines, confiscation of samples and products, suspension of product sales, closure of establishments, suspension or cancellation of registrations, patents, licenses or authorizations, prohibition of contracting with the public administration and restriction of tax incentives.”
Second, in the European Union, the Directive on Corporate Sustainability Due Diligence (“CS3D”), requires companies to ensure compliance with national laws implementing the Nagoya Protocol and the CBD, including their subsidiaries and business partners. This due diligence extends to compliance with the DSI Tax in any of the 196 Parties that decides to implement the COP16 Decision. The CS3D will apply from 2027 to large companies with significant turnover in the EU, even if they are headquartered in the United States.[1] Non-compliant companies could face fines up to at least 5% of their net worldwide turnover and potential legal action from NGOs and civil society groups for "negligent failure" to meet obligations.
Third and finally, under a new international WIPO treaty on obligatory disclosures, companies will likely be required to disclose if their patent filing “is based on” DSI from genetic resources. Patents are already used to enforce ABS laws that apply to physical biological materials, and this will likely be extended to DSI. For instance, India has already rejected a patent relating to a vaccine manufacturing process due to non-compliance with its national ABS law. Obligatory patent disclosures will also allow authorities to more forcefully enforce compliance with CS3D obligations; and it will allow NGOs to more easily identify targets for litigation.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Food, Drugs, and Devices practice.
[1] The CS3D’s application to companies will be phased in between 2027 and 2029. It will first apply from 2027 to the largest companies. The thresholds for 2027 are, for EU Companies, 5,000 employees and 1.5 billion global turnover, and for non-EU companies 1.5 billion turnover in the EU (no employee threshold). From 2028 the thresholds are, for EU companies, 3,000 employees and a net global turnover of EUR 900 million, and for non-EU companies a 900 million net turnover in the EU (no employee threshold). For 2029, the thresholds are, for EU companies, 1,000 employees and a net global turnover of EUR 450 million, and for non-EU companies a 450 million net turnover in the EU (no employee threshold).
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