Italy’s Tax Authorities Target ‘Free’ Online Services for VAT

Over the last few months, Italian headlines have been dominated by news on tax investigations targeting major tech companies over their “free” digital services.

The Italian tax authorities conducted a tax audit against social media platform X, mirroring an earlier audit against Meta Platforms Inc., and concluded that tech companies failed to collect and remit value-added tax on such transactions.

The question at the heart of these cases is: When users register on a platform “free of charge” but must provide personal data to complete the registration, does this constitute a transaction subject to VAT?

The tax authorities’ position is that user’s registration isn’t truly free because granting access to the platform in exchange for personal data is a barter transaction that triggers VAT obligations.

Italy’s stance matters for global tech. Italy’s approach, if upheld, could set a precedent for other countries. This would increase compliance risks and costs for global tech companies and could also increase the fragmentation of international tax rules, as other jurisdictions (especially within the EU) may follow suit.

The potential for a domino effect of national VAT claims and litigation raises significant concerns for digital businesses operating globally.

When is a barter transaction relevant for VAT purposes? The main source for the Italian position is the interpretation of the EU VAT Directive, which generally requires that a supply of goods or services is considered relevant for VAT purposes only if provided “for consideration.”

The situation becomes complex when non-monetary consideration is involved. In some cases, even if no money changes hands, a service might still be considered paid if it’s part of a broader exchange involving other economic benefits.

Consistent with the approach of the VAT Directive, article 11 of the Italian VAT law explicitly states that supply of goods and services in exchange of other goods or services is subject to VAT, provided the necessary requirements are met.

The key test, established by the Court of Justice of the European Union, is the existence of a clear and direct link between what is offered (the service provided) and what is received in return (the consideration).

In essence, if there’s a legal agreement between the parties involving a mutual exchange—where the consideration (goods or services in a barter transaction) truly reflects the value of the service—the transaction is seen as taxable. This link exists when a legal relationship binds the supplier and the recipient, thus involving a mutual exchange in which the consideration corresponds to the real value of the service provided.

The court in addition states that it is necessary to determine also the value of the goods or services provided in exchange and it should be possible to express such value in monetary terms.

Barter transactions—where payment is made in kind rather than in cash—are deemed monetary transactions, subject to VAT, provided that it is possible to demonstrate that the link between the transactions is contractual and reciprocal and that the value of the consideration can be expressed in monetary terms.

The core of the controversy and practical challenges. The main point of the current Italian investigations is whether the provision of personal data by users constitutes the consideration of a supply of services—that is, access to digital platforms. The Italian authorities argue that it does, so the transaction should be qualified as a barter.

However, the Italian tax authorities’ approach raises difficult questions:

• Can a direct link between user registration and the exploitation of personal data be proven?
• Is there a real, quantifiable benefit to the user that matches the value of the data provided?
• If there is no demonstrable link or the value of the data is not determinable, can VAT be applied at all?

The Italian tax authorities have recently requested an opinion of the European Commission’s VAT Committee to clarify how barter transactions should be qualified for VAT purposes. The tax authorities asked:

• For guidance on whether such transactions can be treated as tied by a legal relationship pursuant to Article 80 of the EU VAT Directive, allowing VAT to be levied on the basis of open market value.
• About alternative methods for determining the taxable amount when open market value or cost-based approaches are not reliable nor not immediately applicable, such as in case of self-produced goods or intellectual work services.
• Whether an EU country can use standard parameters to estimate general costs when actual values deviate significantly from published price lists or standard fees.

In response, the VAT Committee clarified the key aspects of the applicable legal framework for VAT on barter transactions. The committee emphasized that the application of the open market value under Article 80 of the VAT Directive constitutes an exception that is only justified where there is a specific and demonstrable link between the parties and a genuine risk of tax evasion or avoidance. The mere existence of a barter transaction isn’t sufficient to trigger the application of Article 80.

The committee acknowledged the practical difficulties that may arise when attempting to apply the cost-based method for determining the taxable amount in certain situations.

The VAT Committee had in fact already responded to an earlier question on the taxability of a transaction when internet services are provided in exchange for user data, submitted by Germany in 2018.

In answering the question, the VAT Committee reached the same conclusions as the German delegation, including that such transactions aren’t taxable as no direct link can be established between the service provided to a specific customer and the user data received from that customer.

What’s Next

Italy’s VAT audits against major tech companies confirm the focus of tax authorities on digital service businesses. It’s too soon to determine whether this marks the start of broader tax discussion or remains simply a national deviation.

What is certain, though, is that the digitalization of the economy continues to raise fundamental questions in the field of income taxes as well as in VAT and other consumption taxes. Digital businesses should constantly review their business models and assess their compliance within an evolving and not always geographically consistent legislative framework.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stefano Giuliano is a partner and a member of the tax practice in the CMS Rome office.

Marco Federici is a senior associate and tax adviser in the CMS Rome office.

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