Soon a new global tax on products developed from “digital information” from biological materials? 5 key takeaways for companies from recent UN negotiations

Photo: View from the business delegation to the negotiations in Montreal, of which Covington were part.

On August 16^th, 2024, in Montreal, Canada, parties to the Convention on Biological Diversity ("CBD") agreed on the draft text ("Draft decision") for the operationalization of the Global multilateral mechanism for benefit-sharing from the use of digital sequence information ("DSI") on genetic resources ("MLM"), which may be adopted at the 16th meeting of the Conference of the Parties ("COP-16") in October 2024.

Once the MLM is operational, companies which use DSI in their product development will be expected to share benefits (both monetary and non-monetary) to a global fund. As we previously reported, the revenue from the MLM, initially expected to reach 15 billion USD per year, is intended for biodiversity preservation. This extraordinarily ambitious figure was once again confirmed in Montreal. This explains the wave of diplomatic support and eagerness to have the MLM operational after COP16. However, as lawyers we are very concerned that the rushed negotiations will result in an even more fragmented landscape of national ABS laws and diverging requirements.

In this blog post, we highlight five key takeaways from the negotiations and summarize the main features of the four MLM options that companies should be aware of.

Business sectors in scope

"Users" of "DSI" will be in scope of the new MLM. The negotiations began in 2016, and for eight years, the negotiators have consistently refused to define "DSI" due to the technical complexity of such task. Some countries even consider a definition unnecessary, as the broader the better. The Draft decision currently lists seven sectors that the negotiators consider "highly reliant on" the use of DSI and thus in scope. The evidence for selecting these sectors is a highly questionable research report that has been heavily criticized by companies and trade associations:

• Pharmaceuticals, e.g., pharmaceuticals manufacturing, biopharmaceutics, life science research;
• Nutraceuticals, e.g., food and health supplements;
• Cosmetics, e.g., development and production of new cosmetics, production of existing cosmetics using synthetic production means;
• Plant and animal breeding and agricultural biotechnology industries, e.g., plant breeding and crop modification research, genetic modification of livestock, support activities for plant production and veterinary pharmaceuticals, crop protection products, animal breeding, plant breeding and improving food safety;
• Industrial biotechnology;
• Laboratory equipment associated with the sequencing and use of DSI, including reagents and supplies; and
• Information, scientific and technical services related to DSI, e.g., software and artificial intelligence used to characterize and analyse or store big data associated with DSI, as well as industrial sequencing or characterizing of DSI as a third-party producer for other industries, such as pharmaceuticals, cosmetics and agriculture.

The EU made a proposal that if companies can demonstrate that they do not "highly rely on the use of DSI", they could be excluded from the MLM. However, there was strong opposition to this language, and it may not make the final text.

Tax-like payments to the MLM

The Draft decision currently contains four options requiring companies to pay to the MLM:

• Option A. Users of DSI should pay X% of the [profits][revenue][turnover] generated by products and services placed on the market that have benefited from the use of digital sequence information on genetic resources in their development.
• Option B. Users of DSI in sectors that are highly reliant on the use of DSI in their commercial activities should contribute to the global fund X% of their [profits][revenue][turnover][sales].
• Option C. A contribution to the global fund of 1% of the retail value of all products and services that have been developed or created using DSI.
• Option D. Users of DSI that actively use DSI should contribute a portion of their [revenue][profit] to the global fund.

The negotiators aim to create a payer base as broad as possible and make payments easy to collect. Hence, Options A, B and D resemble a corporate income tax, whereas Option C is closer to a sales tax. It was our impression that Options C and D are very unlikely to survive, with Option B most likely to be the final choice, possibly in a modified form. We noted that even the UK expressed a preference for Option B, if the language would be tweaked.

A positive development in Montreal was the inclusion of language stating that users will receive "receipts" once they make their annual contributions to the MLM. Such receipts could serve as "certificates of compliance" before national authorities, that "indicate compliance with the multilateral mechanism, provided that the used sequences have been published in a public database with the approval of the national authorities of the country of origin of the genetic resource from which the digital sequence information is derived."

Non-monetary benefit-sharing obligations for companies

There was consensus among negotiators that all user of DSI should make non-monetary contributions, but only users who "generate money" from the use of DSI should be obliged to pay to the fund. This distinction was put in place to protect non-profit research entities, e.g., databases and academic institutions.

Notably, the options for non-monetary contributions currently contain language suggesting that obligatory tech-transfers could be considered. This proposal faced strong pushback from developed countries, with Canada stating that they are "not in any position to do forced expropriation from right holders." Other forms of non-monetary benefit-sharing include, e.g., capacity building and development, participatory and community-based research, knowledge-sharing, technical and scientifical cooperation.

Relationship with other international ABS mechanism and national ABS laws already regulating the use of DSI

With respect to other ABS mechanisms that may also apply to the use of DSI (High seas treaty, WHO Pandemic treaty, Plant treaty), negotiators agree that there should be "cooperation and support" between the international mechanisms. However, negotiators appear to consider that real collaboration between multiple UN agencies is never going to happen. As a result, real coordination and coherence between different ABS mechanisms is largely utopian. As a result, users of DSI will have to make several monetary contributions, if the DSI they are using is regulated by different international mechanism simultaneously. As Covington Partner Bart Van Vooren explained in his presentation during a side event at the Montreal negotiations, creating such a "Hybrid system" of overlapping obligations, will be extremely difficult to navigate for companies.

Implementation andEnforcement

International law cannot create binding obligations for "users of DSI", so the MLM will be implemented through the national laws of the 196 countries that are parties to the CBD. Some countries may choose to adapt their existing ABS laws under the Nagoya Protocol, others may adopt tax(-like) measures, while yet others are likely to outright decline to implement the MLM (e.g., Japan). The United States attended the negotiations in Montreal even though it is not a party to the CBD, and stated expressly that "the U.S. cannot commit to mandate US users to contribute to the mechanism."

In short, it has become clear that the MLM will co-exist with national ABS laws. This means that there will be multiple, co-existing legal sources for ABS obligations that could apply to the same (activity on) physical genetic resource, or (genetic, proteomic, metabolomic…) information derived from it. A user wishing to conduct R&D on genetic resources will have to determine which ABS regime(s) to comply with.

In the European Union, the ABS laws under the Nagoya Protocol are enforced through a Regulation in force since 2014. This year, the Corporate Sustainability Due Diligence Directive ("CS3D") has been added on top. The CS3D expressly applies to compliance with the Biodiversity Convention and national implementing legislation (as well as the Nagoya Protocol). As a result: compliance with the (globally diverse) implementation of the MLM on DSI will be enforced in the EU. The CS3D will apply to EU and non-EU companies with a turnover in the EU in excess of 450 million EUR. We will do a separate blog on CS3D and enforcement of ABS laws in the EU, so watch this space.

For any questions, do reach out to Bart Van Vooren who leads Covington's unique practice on Access and Benefit-Sharing from Biodiversity.

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