Italy assesses VAT on free services

The Milan Prosecutor’s Office and the Italian VAT authorities are investigating Meta, the parent entity of Facebook, with respect to its failure to account for output VAT on the free services it provides to Italian users in exchange for users personal data. The assessment is thought to be in the region of EUR 870 million covering the periods 2015 to 2021.   

The Milan Prosecutor’s Office argues that the data that users provide in exchange for using the Facebook platform constitutes consideration for the free service supplied, and thus that consideration should be subject to VAT.

It has become increasingly obvious in the last number of years that social media platforms obtain a huge financial gain from their ability to perform profiling on their users’ personal data, which they use to sell to third parties in order to perform personalised advertising.

This profiling is usually undertaken with little to no knowledge, or genuine consent by the end users. In fact, in January 2023, in separate proceedings, the Irish Data Protection Commission (DPC) announced a fine of € 390 million against Meta due to its lack of GDPR compliant processing of its users’ personal data to provide personalised advertising on Facebook and Instagram.

Consequently, the view of the Milan Prosecutor’s Office is that in exchange for signing up and using the social media platform, Italian users pay with their personal data, which can then be used by Meta for advertising purposes. The Milan Prosecutor’s Office appear to be deem this as akin to a barter-type scenario whereby two parties exchange goods/services to each other, while there is no (full) monetary compensation.

It is important to note that there is no legal definition of consideration in the EU VAT Directive. Nevertheless, there is established legal precedent which indicates that there should be a link between the supply and the consideration, because the supplier expects something in return for the supply.

Accordingly, the Milan Prosecutor’s Office has taken the view that services provided by Meta to Italian end users (i.e. the supply), in exchange for the end users’ personal data (i.e. the consideration) should be subject to Italian VAT because it is a barter of different goods/services, all of which have a value.

It is yet to be seen whether Meta will accept the results of the investigation and pay the requested amount, or appeal same.

Regardless, the approach taken by the Milan Public Prosecutor’s Office against Meta in terms of the VAT they believe is due, is likely to have momentous consequences for any company that monetises personal data of individuals in exchange for free services or goods.

There is also the question mark as to where the consumption of the user data is taking place by Meta. Generally, the place of supply would be where the consumption takes place. Consequently, it may not be the correct approach to apply Italian output VAT where Meta actually consumes the user data outside of Italy.

Should you feel the above may impact your business and you would like to discuss the matter in further detail with any of our VAT consultants, please click here.