Clifford Chance

The Prosecution Service of Milan's unprecedented allegations on VAT may have relevant repercussions on free IT services when users provide their own data.

The Prosecution Service of Milan has wrapped up the investigation commenced by the tax police in 2023 and ended with allegations of tax evasion amounting to €887.6 million, also resulting in two senior individuals employed by Meta Platforms Ireland Limited being charged with failure to file the company's VAT tax returns with the Italian Tax Authority.

The underlying allegation of the Tax Police and Prosecution office is that, notwithstanding Facebook, Instagram and WhatsApp platforms are, in principle, available for free, their customers provide Meta with their own personal data "in consideration", used for commercial purposes: consequently, Meta's social networking services are in reality not free and VAT should have been charged by the company on the economic value of customers' data, it being the consideration for a barter transaction.

This innovative theory may lead to several new tax and criminal proceedings against Tech Companies, in Italy and abroad, though it seems to be highly debatable and contentious from a legal standpoint.

THE "META CASE"

In 2023 the European Public Prosecutor's Office (EPPO) started an investigation to assess as to whether Meta should have paid VAT on customers' data, which are considered valuable assets under Italian administrative case law. The EPPO handed over the investigation to the Prosecution Service of Milan, which is currently in charge of the criminal proceedings.

Meta strongly opposed these unprecedented allegations, which seem not to be consistent with EU law. In fact, according to a 2018 opinion rendered by the European Commission's VAT Committee responding to a question raised by Germany, when a customer uses "IT services offered by a taxable person without a monetary consideration" the "provision of data by that individual does not constitute an economic activity and therefore is not a taxable supply of services".

Given that the Prosecution Service's theory on Meta is totally unprecedented and capable of triggering the same consequence across Europe, the Italian Tax Authority formally sent a request for an opinion to the VAT Committee in order to understand how the VAT rules and regulations should be interpreted with reference to the "Meta Case".

As the VAT Committee's opinion on the Italian question has not been released yet, many scholars believed the criminal proceedings would reach a standstill. Nevertheless, the Prosecution Service of Milan did not await the VAT Committee's opinion and, conversely, decided to wrap up the investigation with a view to a potential trial phase. In the meantime, according to the news agency "Reuters", "the EPPO is awaiting the outcome of the Italian case before it decides whether to pursue similar action in other European Union states, a source with knowledge of the matter had said".

POTENTIAL IMPLICATIONS OF THE "META CASE" AND ITS LEGAL HURDLES

The "Meta case" might trigger a "domino effect" both in Italy and abroad, reshaping the interpretation of VAT rules and regulations. In spite of the above, we believe that the Prosecution Service of Milan's thesis is debatable on multiple grounds, on grounds of both tax and criminal law.

As to tax, according to the 2018 VAT Committee's opinion, personal data are not exchanged for consideration as IT companies provide their services in the same way, irrespective of the amount of personal data provided by the users or the quality of such data (which could also be fake). For this reason, there is "no direct link between the provision of IT services without a monetary consideration and the consideration received".

Moreover, according to the VAT Committee, Tech Companies' business is not merely focused on gathering data: since they subsequently sell data to third parties and these latter transactions are subject to VAT, "from an economic point of view, it also makes sense not considering the provision of IT services without a monetary consideration to be a taxable transaction".

On the other hand, should the theory be sustained, the question arises as to what other apparently "free" services might be caught, since any benefit obtained without consideration, such as search service, audio and video streaming, social interaction, etc., implies a degree of user interaction that the provider is going to monetise one way or another.

From a criminal law standpoint, the Prosecution Service's theory challenges the foreseeability principle, which has repeatedly been acknowledged by the European Court of Human Rights: a person could be convicted only if she/he foresaw that her/his conduct might match the description of the offences set forth under criminal law. As the Prosecution Service's interpretation of VAT rules and regulations is unprecedented, tax offences do not seem applicable to the "Meta case".

Since the final outcome on the “Meta case” could have a potential negative impact on the EU digital economy, market players should consider the potential adverse consequences that the Tax Police and the Prosecution Service’s innovative thesis could trigger on their business. We highly recommend that Tech Companies conduct a thorough risk assessment of the tax and criminal law implications related to the potential new VAT allegations concerning free IT services. It is also advisable to consult legal advisors to explore possible defensive strategy and remedies. Furthermore, it is important that Tech Companies strengthen their compliance framework in order to readily face the new challenges the Tax Police and the Prosecution Service could pose.