Internet services in exchange for user data: Facebook’s potential VAT sales tax bill in Italy of USD 925 million

Francesco Cardone

LED Taxand, Milan

fcardone@led-taxand.it

Introduction

Facebook’s parent company Meta has been requested by the Italian tax authorities to pay EUR 870 million (USD 925 million) in unpaid VAT sales tax from 2015 to 2021. Based on information provided by an Italian newspaper, the Italian tax authorities seem to be arguing that Facebook membership is granted upon a consideration in kind, consisting in the company’s right to use customers’ personal data, therefore they are subject to VAT.

The investigation was opened against Meta Platforms Ireland at the request of the European Public Prosecutor's Office and is currently being managed by prosecutors in Milan and the Italian tax authorities[i].

Prior decisions

The issue was already addressed in 2018 by the EU VAT Committee, whose opinion was requested by the German authorities. In particular, the EU VAT Committee’s Working Paper No 958, dated 30 October 2018, analysed whether the supply of internet services without a monetary consideration by an internet provider in exchange for the right to use the customers’ data, and the users’ granting to the internet provider of the permission to use that data, qualify as transactions subject to VAT.

Firstly, the EU VAT Committee analysed whether the provision of personal data by a customer constitutes a taxable transaction subject to VAT. The Committee highlighted that the customer, by providing personal data, does not have the intention to carry out an activity consisting in the production or distribution of goods or the supply of services and does not deploy resources in order to provide such data. In addition, customers do not derive income on a continuous basis from the transfer of personal data. Therefore, the Committee concluded that the granting of permission to use personal data relates to the management of the customer’s private property and merely constitutes the price to be paid for the use of internet services. As a result, it was concluded that the provision of personal data does not constitute an economic activity and thus, is not a taxable supply of services.

Secondly, the EU VAT Committee analysed whether the supply of services by an internet provider without a monetary consideration, but in exchange for the right to use the customers’ data, constitutes a taxable transaction subject to VAT. Although the data in exchange for the service has economic value, this is not sufficient to conclude that the services are supplied for consideration. Indeed, the Court of Justice of the European Union (CJEU) ruled that: ‘a provision of services is therefore taxable only if there is a direct link between the service provided and the consideration received […]. It follows that a supply of services is effected for consideration within the meaning of Article 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient’ (CJEU judgment of 3 March 1994, Tolsma, C-16/93).

Conclusion

Based on the CJEU principles indicated above, the Committee concluded there would not be a direct link between the provision of internet services and the consideration received in the form of the customer’s data. The main arguments supporting this conclusion were the following: internet companies provide their services to customers irrespective of the amount and quality of the data provided by the users; users are not obliged to periodically provide a certain amount of data to keep receiving the service; and the activity of the internet service provider is taxed for VAT purposes at the time when they sell the data of the users. Absent such a direct link, the supply of services by an internet provider without a monetary consideration, but in exchange for the right to use the customers’ data, would not constitute a taxable transaction subject to VAT.

Finally, in case a direct link is nevertheless found, the transaction would be subject to VAT and the taxable basis would be equal to the amount that the internet service provider is prepared to spend for receiving customers’ data. In the Committee’s opinion, such amount would be equal to the cost borne by the internet service provider to offer the service to the customer without a monetary consideration.

Despite big tech companies having repeatedly come under the spotlight of tax authorities in many countries, this seems to be the first case where the VAT treatment of the provision of internet services in exchange for user data is being challenged. The investigation is extremely relevant since its outcome could impact other multinationals and other countries in Europe could potentially follow the same path as the Italian tax authorities.