VAT implications of right to access users' personal data by online platform service providers

What you need to know

• The Italian tax authorities are challenging the VAT treatment of contractual arrangements between the users and the online platforms having access to users' personal data/information/intellectual property rights/users' generated content and providing platform services free-of-charge. 

• The tax authorities have argued that these arrangements qualify as barter transactions, on which VAT at the standard rate would apply, in the case such services are supplied within the Italian territory. 

• These tax claims may affect social networks, content providers, video-sharing platforms, e-commerce platforms, potentially leading to higher costs or reduced access for users'. However, there are several arguments against this position, including the legal nature of personal data as fundamental rights and the actual use of the data/contents made by the platform service providers. 

Imagine using your favorite social media platform for free, only to find out that your personal data might be considered a taxable commodity. This is the latest challenge raised by the Italian tax authorities against social networks/platforms, and it could change the way online platforms operate.

The Italian tax authorities have recently challenged the VAT treatment of the free-of-charge platform service supply, which gives to the platform service providers the right to use information and intellectual properties transferred by the users within the platform, upon the users' express consent.

The tax authorities argue that said contractual arrangements constitute a barter transaction that is subject to VAT. Under the barter transaction scheme described above, the taxable base for the platform service supply would consist of the costs incurred by the provider for providing the platform service to the users.

According to this view, by accepting the Terms and Condition of a platform's service provision, the user grants to the platform the right to use their contents/personal data in exchange of the right to access the platform services. From the tax authorities' perspective the contractual purpose of the provision of platform services consists of obtaining access to personal data/information from the users and the users' data are economically valuable. Therefore, the relationship between the platforms and users qualifies as a contract for the exchange of intangible goods, with the platform providing the license on the software and the user providing the platform with the license to use personal data. The above qualification of the contract implies that the VAT rules on barter transactions would apply and the online platforms should pay VAT on the platform service supplied within the Italian territory.

This position could have significant implications for online platforms that operate in Italy and derive advertising revenues from activities consisting in processing and analysing the users' data through a unique algorithm developed by the platform, such as social networks, content providers, and e-commerce platforms (but this might also apply to retailers that make available the customers' personal data to third parties for advertising purposes). It could also affect the users of these platforms, who may face higher costs or reduced access to the services.

However, there are several arguments that could be used to challenge the tax authorities' position, based on the civil law, the EU law and the VAT law as well as the economic logic of the online platforms' business model. Some of these arguments are:

• in the platform's business model usually the user does not bear any kind of obligation towards the platform that may characterise as such from a legal or tax perspective. They do not commit to pay any consideration in cash or in kind in exchange of the supply of the platform service, nor bear an obligation to provide a certain amount of data periodically to remain connected to the service. The users have only the faculty to accept the unilateral commitment by the platform to provide platform services. Therefore, there is no reciprocal and direct link between the platform service supply and the right to access to the users' data, which is required for a VATable supply of services to exist;
• the personal data are fundamental rights that are unalienable, cannot constitute a consideration and cannot be considered as a commodity under the EU law principles. The users do not dispose of their data as it would happen in the context of an economic activity, but only consent to their processing for specific purposes, and can withdraw their consent at any time. Moreover, the data do not have an economic value for the users, so they do not regard the transmission of data as an exchange for a service. The granting of permission to use the individual's personal data falls within the scope of what is intended as strictly private property, fundamental rights, not a commercial transaction;
• the online platforms provide the same service to all users, regardless of the quantity and quality of the data they provide. As the platform services are offered essentially under the same conditions to all users of the platform, irrespective of the quantity and quality of the personal data provided, there is no direct link between the platform services and the level of access to personal data/intellectual property of the users. Therefore, the data are not a counter-value or a price for the platform service, but rather a means to enhance the service;
• the platforms service providers do not charge VAT on the services they provide to the users as they are free-of-charge, but on the services they provide to the advertisers, who pay for advertising campaigns to be served on the service providers platforms and targeted to user audiences. The platforms' main source of revenue is the advertising market, not the data market (which in legal terms is not a market, as the data licensing is not a commercial relationship). Therefore, the platforms are correctly subject to VAT on their economic activity, whereas imposing VAT on the platform services would result in illegitimate taxation in absence of a VATable transaction.

These arguments could be used to defend the VAT treatment of the platforms' service supplies and to challenge the tax authorities' claims. However, the VAT implications of accessing personal data in platform service provision are still uncertain and evolving, and may vary depending on the specific facts and circumstances of each case.

Therefore, online platforms should take a sharp eye on the contractual arrangements with the users, monitor the developments in this area and seek professional advice to prevent or manage any tax inquiries or disputes.

Other author: Bianca Bagnoli, Senior Associate