Italy: Are Social Networks Really Free?

Anyone who has attempted to subscribe to a social media platform – for cases other than premium subscriptions – would say that such subscription was free: no shopping cart to fill-in, no method of payment, no confirmation upon check-out.

Just a bit of box ticking on links to lengthy privacy policies nobody really takes the time to read, and that's it.

However, it is no mystery that social media platforms themselves are, in their essence, huge recipients of our personal data, to the extent that their core business consists not so much in the service they provide, as in the profiling of their users aimed at reselling such information to third-party advertisers for targeted marketing purposes.

This poses a question: are social networks free, as people tend to believe? And if they are not, what are the consequences?

This question is dealt with by two opposing theories, on which national and international legal and tax authorities have been and are still wondering.

The first theory basically follows the common perception: social media are free as no payment is demanded by platforms for subscribing to their services.

The second theory, instead, focuses on the discrepancy between the apparent unworthiness of the personal data provided by the user and the value at which the same date are sold to third parties. Indeed, if almost all funding of these platforms descends from the sale of personal data, it is very hard to argue that they do not bear any value when provided by the user.

In this second perspective, which has been particularly successful in recent case law, personal data become to all effects an asset of determined value that, just like money, the user offers to the platform in exchange for access to its services.

In this context, in its judgment of 29 March 2021, No. 2631, the Italian Council of State noted that "the capitalisation of personal data, which in the present case takes place unknowingly [...], is the result of the intervention of companies through the provision of the data - and the profiling of the user - for commercial purposes".

The same principle, although not expressly mentioned in the related decision, served as a background to the notorious Euro 390 million sanction imposed by the Irish Data Protection Authority on Meta – owner of, among other things, Facebook, Instagram and WhatsApp – on 5 January 2023.

This is precisely the reason why today Meta is currently subject to an investigation of the Milan Public Prosecutor's Office (acting on behalf of the European Public Prosecutor's Office - EPPO), which draws from the above-mentioned theory at takes it to its extreme consequences, going so far as to affirm that the transaction between the user and the platform is a genuine commercial transaction to which value added tax should apply.

In short, the Milan Public Prosecutor's Office alleges that Meta failed to file its VAT statements and pay the VAT applicable to transactions with its users out between 2015 and 2021, for an estimated 870 million Euro.

The Italian Tax Enforcement Authority (GdF) has identified in the exchange of personal data for service upon registration of the user onto the platform a possible trade: in this context, data would represent a non-monetary consideration, an element that identifies an exchange under the law, i.e. a supply of services carried out in exchange for another supply of services.

This exchange of services constitutes the factual element triggering the obligation to apply VAT to the transaction at stake.

Here is the peculiarity of Meta's case: the GdF does not seem to mind the fact that Meta's services are allegedly provided for free, qualifying the trade of data for service as an exchange. In other words, the access to the social media platform would represent the price paid by Meta to its users to acquire their personal data.

This interpretation appears to be in line with the Answer no. 31/2023 of the Italian Revenue Agency, according to which "even in the absence of a monetary consideration, within the meaning of Article 3(3) of Presidential Decree No. 633 of 1972" some services "may not be considered to be free of charge" as they can be traced back to the "contractual framework of exchange for consideration, governed, for VAT purposes, by Article 11 of the aforementioned Presidential Decree No. 633 of 1972".

If the above principle seems quite tenable at the theoretical level, its translation into practice appears much more problematic.

For instance, it can be questioned whether the criteria to be followed is actually the number of profiles recorded by the platform in a given period, since it is relatively easy to set up fake or duplicate profiles and since the same are worthless from a commercial point of view, as they contain data that cannot be resold or have already been sold.

Moreover, Meta claims that the transactions at stake should not be to VAT and it does so on a very solid argument: the address taken by the VAT Committee of the European Commission in Working Paper No. 958 of 30 October 2018.

In that case, the VAT Committee had ruled out the application of VAT to IT services where they are provided in exchange for the user's personal data, arguing that the mere fact that the user's personal data have an intrinsic economic value would not be sufficient for the IT service to be regarded as rendered for a consideration, which would only be the case if there is a direct link between the service provided by the platform and the consideration received by the user.

Keeping account of the differences between the position taken so far by the VAT Committee of the European Commission and that of the case law, the outcome of the Meta case seems quite uncertain: it remains to be seen whether the recent interpretations of the courts and data protection authorities will find correspondence on the tax side.

From this point of view, it must be noted that quite recently the Italian Council of Ministers, in implementing the so-called "Omnibus Directive", implicitly embraced the theory of personal data as consideration for IT services.

Indeed, the resulting Legislative Decree 26/2023 applies anew to this kind of transaction numerous obligations deriving from the Italian Consumer Code, thus equating it to a purchase contract between a professional and a consumer.

Certainly, the impact of the Meta case will not be limited to Mate, as it bears the possibility of affecting the business of all platforms that currently trade in personal data to monetise their services, being also likely to change the common perception that social networks are "free".

Originally published 08 May 2023.

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