Taxable barter-like transactions involving IT user data?

Italy has requested guidance on how to treat, for VAT purposes, IT services provided by social media platforms when the users grant permission to use their personal data. The question is if this scenario can create a taxable barter transaction. Currently, Italy has initiated proceedings against platform operators like Meta, LinkedIn, and X. The tax authorities have subjected the companies’ “free internet services” to VAT, and have assessed about EUR 1 billion in VAT.

In 2018 the VAT Committee discussed whether users who receive free IT services while allowing platforms to record and use their personal and usage data provide an economic benefit to those platforms. The Committee also discussed whether a direct link exists between the IT services and the consent to data use, and how to determine any taxable amount. The Committee concluded that an individual’s act of allowing data use does not constitute an economic activity and therefore no VAT results from it. The Committee further held that a platform’s free provision of IT services in exchange for permission to use personal data is not taxable so long as the platform offers the same conditions to all users regardless of the quantity or quality of data they provide, because that uniformity prevents establishing the necessary “direct link” between the service provided and the consideration received.

Italy’s current question focuses on that second point and asks whether evolving business models can create situations in which platforms differentiate functionality based on users’ data permissions, thereby establishing a direct link that would make the transaction subject to VAT.

Building on this, the VAT Committee has developed further criteria for evaluating these business models in its working paper (No. 1118).

The Commission has categorised three models:

1. Identical service scope regardless of data shared: 

When a platform offers “free” access with no changes to settings, and all users receive the same functionality while the platform uses their data, the Commission viewed this as generally not taxable because authorities cannot establish a direct link between each user’s data and their service level. In this scenario, the user always receives the same service, regardless of the amount of data sharing.

2. Variable service scope depending on data shared: 

When users actively restrict data permissions and the platform correspondingly reduces features or access, the Commission acknowledged that a direct link may exist between the data the user allows and the functionality the user receives. This scenario could be taxable, but authorities would need to assess the facts case-by-case and address complex valuation issues. Quantifying the economic value of the data exchanged for functionality remains difficult.

3. Paid subscription vs. free, data-based use: 

If a user pays for a (platform) service, this is a taxable transaction. The question is whether using the same platform without paying money, but with consent to process personal data (IT service in exchange for data), is also a taxable transaction. The subscription fee could be used as a reference for the taxable value. However, the VAT Committee pointed out that what the subscription fee actually covers must be confirmed. 

If the fee is paid to avoid personalised advertising, then without a monetary payment, there is probably no taxable exchange. If the scope of the “free version” depends on the data provided or on how intensively a user uses the platform, it is difficult to value each person’s data per month, regardless of the amount of data provided. Again, a case-by-case assessment is needed (see above). The same applies to “freemium” models, where only limited services are available in the basic version for free. When a paid subscription is taken out, additional features are unlocked, which makes the comparison with the basic version difficult.

Companies will have to review their business models with the help of this non-binding guidance from the VAT Committee. Even where there is no black or white but various “shades of grey”, case-by-case evaluations are required which will involve a lot of work.

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In 1987, Brigitte Jakoby started collaborating with her husband Eugen Jakoby, also a German chartered accountant and German certified tax advisor. Since 1996, she has been a senior partner at Jakoby Dr. Baumhof.