Users’ personal data is arguably the most valuable commodity for social media companies, allowing them to target customers with online advertising.
But when these companies exchange access to their platforms for users’ data – such as age, location and preferences – the question arises as to whether these exchanges are free supplies of services or barter transactions subject to EU and UK VAT.
The Italian tax authority is reportedly seeing these as barter transactions and charging Meta (the legal entity behind Facebook, Instagram and WhatsApp) €870m in undercharged VAT dating from 2015 to 2021. The assessment is currently suspended pending a non-binding opinion by the European Union VAT Committee.
However, since social media companies have been in existence for about 20 years, why go after them now? Valentina Sloane of Monckton Chambers in the UK, a leading King’s Counsel in the field of indirect taxes and litigator in prominent VAT cases, says there are three reasons why it is arising now.
There seems to be a thirst to increase the tax take from the international, billion-dollar turnover companies
‘EU member states are generally looking to increase their tax space, and VAT is extending its reach,’ explains Sloane. ‘There also seems to be some sort of thirst at present to increase the tax take from the big, international, billion-dollar turnover companies. But the most important factor is the closely linked developments in the competition sphere.’
Game-changer
There is one ongoing competition case in particular, in the UK, which could prove to be a game-changer for VAT: the collective action against Facebook for allegedly abusing its dominant position.
The claimants argue that there is a barter transaction between Facebook and its users where users give over data, which are, according to this reasoning, undervalued. The central argument is that users should be paid by Facebook for the collection of their data, on top of being granted access to the social media platform. Facebook’s parent company Meta has said it will vigorously defend the claim.
Facebook is likely to argue there is simply a condition to signing up
‘Let’s fast-forward a year or two and suppose that the UK’s Competition Appeal Tribunal finds there is a barter transaction and then ascribes a value to the supplies,’ says Sloane.
‘This will possibly have very strong implications for VAT, which would be due on the ascribed value of the supplies made by a taxable person such as Facebook. ‘I don’t think many people have picked up on the importance of this case yet,’ she says.
Facebook is expected to address this issue during the competition case and is likely to argue that there is not a supply for consideration, but simply a condition to signing up.
Sloane adds: ‘Also, in looking at something on a website that gives rise to valuable data – either on an aggregated or individual level – how is that different from me being in my shop and noticing that people coming into the shop are of a certain demographic and spending more time looking at green jumpers than blue jumpers? Or how is it different from observing in a supermarket that people standing at the till are more likely to buy the chocolate bars?
‘Those are all ways to collect data, but they are not barter transactions. Every business collects data, but the mere collection of data doesn’t mean there is a supply for VAT purposes.’
Ramifications
Nonetheless, the UK tax authority, HMRC, is likely to be attentively awaiting the outcome of the competition proceedings. ‘If the court finds that there is a barter transaction that can be valued,’ says Sloane, ‘it would be quite difficult for HMRC to ignore this [from a VAT standpoint].’
Barter transactions have the potential to be an issue beyond the social media sector
The recommendation from Sloane to all social media companies (big or not) is first and foremost to review their terms and conditions. Anything indicating that there is a barter, such as ‘you have the right to X only if you provide us with Y’, points in the direction of VAT-able supplies.
One thing is also clear: barter transactions involving the acquisition and disposal of users’ data have the potential to be an issue beyond the social media sector.
‘Take testing kits, for example,’ says Sloane. ‘You might have a model where a supplier sells a DNA kit for £100, but the real value for them is not in the £100, but in getting the customer’s data and selling it to health and insurance companies. The problem for the VAT world is in understanding where the value-add is and whether there are barter transactions and taxable supplies.’
