The advertising-supported digital business model is a common strategy used by many companies. The core principle of this model is providing users with a free service, such as search results or social media networking, while generating revenue through advertising. Advertisers pay the company to display ads, and the company employs data and algorithms to personalise ads to individual users based on their interests, demographics, and behaviours. The success of the ad-supported model depends on the ability of the company to attract a large user base and generate significant advertising revenue.
While users do not pay any money for the services offered, they usually agree to share certain personal data with the service provider. This raises the question of whether the service provider should charge value-added tax (VAT) on “free” online services since these services are not genuinely free, and the service provider receives non-monetary remuneration from the user in the form of personal or location data.
Is personal data a form of consideration for services?
In the European Union, VAT applies to supplies of goods and services performed by a taxable person for consideration. The consideration can take the form of monetary or non-monetary remuneration, such as personal data. A supply is carried out for consideration if there is a direct link between the service provided and the remuneration received. A direct link assumes a reciprocal performance based on a mutual agreement. In other words, if no consideration is paid, services will not be provided.
Regarding “free” online services, one may argue that no direct link exists, as consumers receive the same service regardless of the amount or quality of data provided. Users who choose not to share personal information on social media platforms or who refrain from uploading pictures will have the same access to online services as those who share data extensively.
In a case concerning legal aid, where discounts were granted based on the recipient’s available income, the Court of Justice of the European Union (CJEU) concluded that there was no direct link between the legal aid provided and the partial remuneration paid by the recipient. This was because the amount paid by the recipient was determined by their income rather than the scope of the service provided, such as the number of hours worked by the lawyers on the case. This situation could be seen as analogous to “free” online services, where the consideration in the form of personal data does not depend on the actual usage of the service. Users who share a lot of personal information may use the same features of social media platforms as users who do not post any pictures or share very little data.
However, it can also be argued that it is not the individual set of data that constitutes the consideration but rather the right to use the data. If the consideration for an online service is the right to use personal data, the actual value and content of the provided data become irrelevant. Therefore, whether a user generates substantial data or none at all is not pertinent to determining the existence of a direct link between the service provided and the consideration given. In conclusion, there are valid arguments to support the view that personal data constitutes consideration for online services. This implies that “free” online services are actually taxable supplies.
How much would you be willing to pay for an online service?
When personal data is exchanged for an online service, this is known as a barter transaction. From a VAT perspective, a barter deal comprises two distinct supplies: (1) a supply of personal data from the user to the service provider; and (2) a supply of online services from the service provider to the user, which is paid for using the right to use personal data. The former is generally not taxable as private individuals are not required to collect VAT. However, the latter is taxable, and the service provider must determine the amount on which VAT is to be charged.
According to the CJEU’s case law, in barter transactions that do not involve any monetary payments, the value of the consideration received for the supply of online services is equivalent to the payment that the user would have expected to make if the consideration for the goods or services were in money. However, this method poses practical difficulties since it is the service provider who must account for VAT. If the user’s assigned value were the deciding factor, the service provider would have to consult with the user on the value to determine the VAT owed.
Potential VAT obligations for users?
The E.U. VAT law uses the term “taxable person” to refer to businesses that may have VAT obligations. A taxable person is anyone who independently carries out any economic activity. The E.U. VAT law explicitly states that the exploitation of intangible property to generate income on a continuing basis is considered an economic activity. If private individuals continuously use their personal data to access “free” online services, they may be considered to be carrying out an economic activity. In other words, the use of “free” online services may confer upon the users of online services the status of taxable person and may expose them to VAT compliance obligations.
Such an interpretation could significantly increase the number of taxable persons, as every smartphone user who downloads and uses a “free” application could be seen as a taxable person. Additionally, tax administrations could be overwhelmed by the number of individuals subject to VAT, particularly in E.U. member states with a low threshold for small business exemptions or in those that have not implemented such simplification measures.
However, it can be argued that personal data is not exploited to “obtain income therefrom on a continuing basis” (as required by the E.U. VAT law) but for private purposes. If a user’s objective was to generate income, selling their data would be a simpler option than trading it for access to online services. Moreover, users would not offer their data publicly. Hence, allowing service providers to access personal data should not be regarded as an economic activity exposing users to VAT obligations.
Based on the literal interpretation of the E.U. VAT law, one can find some arguments that providing online services in exchange for the exploitation of personal data constitutes a taxable supply. This is also supported by the fact that VAT is a general consumption tax and the use of social media platforms and search engines is a consumption activity. However, it is essential to consider that a fundamental principle of a sound tax system is administrative feasibility. This means that tax laws and regulations must be enforced and administered with minimal inconvenience to taxpayers. From this perspective, collecting tax on services that users receive for no monetary consideration would be overly burdensome for service providers, recipients, and tax administrations due to the many practical issues it would create.