The Italian Public Prosecutor's Office claims that Meta, the parent company of Facebook and Instagram, should pay nearly 887 million euros in VAT for the period between 2015 and 2021. It is still uncertain whether the Italian court will take up the case, but the issue has already drawn significant attention, even beyond Italy. Madeleine Merkx, Professor of Indirect Taxes at Erasmus School of Law, explains in De Volkskrant: "It could have potentially enormous consequences, also in the Netherlands."
Merkx elaborates: "A company pays VAT when goods or services are provided for a fee. It does not matter whether a profit is made." Users of online platforms like Facebook and Instagram use the services of these platforms for free. So what is the problem with Meta, according to the Italian Public Prosecutor's Office?
The problem: Paying with personal data
Users of large online platforms like Facebook and Instagram do not pay money to use the services these platforms offer. However, when people want to use Facebook, for example, they must consent to the platform to use their personal data, such as for advertising purposes. According to the Italian public prosecutor, users enter a commercial contract with Meta when signing up. In exchange for access to Facebook or Instagram, users are obligated to give Meta access to their personal information. Meta then sells this personal information. According to the Italian public prosecutor, VAT should be paid on the data provided by users.
Merkx explains that this raises the question of whether Meta is providing a service to users of its platforms, such as Facebook and Instagram. "These users do not pay with money, but consent to their data being used. Whether VAT should be paid depends on whether there is compensation, in this case in kind, for a service provided - like a barter trade. This is the case when the user agrees to allow Meta to use their data in exchange for Meta's services. Whether that is the case depends on the specific circumstances, but one could argue that this is true in certain situations."
Barter trade
Merkx compares the Meta case to a European lawsuit. In the European case, waste collectors charged lower prices for their services because they resold old metals they found in the waste. This is an example of barter trade. However, the waste collectors did not pay VAT on this. The court ruled that this should change. "Trading with personal data is a similar type of barter trade," says Merkx. When comparing this case with Meta's case, it is possible that Meta may have to pay VAT on its services in exchange for access to personal data.
Hidden revenue
If it is determined that Meta is providing a service to its users in exchange for their data, the value of this in-kind compensation must be determined. Meta would then owe VAT on that value. "This could have significant consequences because it involves many users," says Merkx. According to the Italian Public Prosecutor's Office, Meta failed to report around 4 billion euros in revenue from 2015 to 2021, which the prosecutor claims is taxable. Based on this investigation, the Italian Public Prosecutor calculates the VAT owed at 887.6 million euros. Merkx explains in De Volkskrant: "This could also apply to the years since 2021, in all EU member states, and possibly for other platforms. This could potentially be quite a big case."
Meta's VAT battle
When asked how Merkx assesses Meta's chances if a lawsuit does occur, she replies: "In my opinion, it is not a foregone conclusion. To classify something as a taxable service under VAT, there must be a legal relationship, an agreement under which services are exchanged. A judge will have to determine if that exists." Previous research by Merkx and Frederik Boulogne shows that the legal relationship is precisely where much debate lies. The question of whether free services in exchange for personal data qualify as a taxable performance goes to the core of the digital business model. It should be noted that the value of data is highly dependent on the circumstances, and users are often not explicitly aware of the exchange they are entering into. Still, there is legal support for the argument that it is not the data itself but the right to collect and use it that constitutes the compensation.
The outcome of this potential case could also have far-reaching consequences for other digital platforms. However, as Merkx points out, it is ultimately up to the judge to determine whether a taxable service is involved. One thing is clear: it will not be an easy case.
