Italy vs. X (Twitter): EUR 12.5M VAT Dispute & Its EU-Wide Impact

The tax audit of the social network  X, formerly known as Twitter, for non-payment of VAT was closed last April, and includes the period between 2016 and 2022. In January this year, following the tax audit, the Italian Tax Authority sent a formal letter to X explaining its findings and seeking a payment of EUR 12.5 million.

Although the amount X owes seems insignificant, considering the company generated USD 3.4 billion in revenue in 2023, the Italian Tax Authority's conclusion and findings could have broader implications, not just for X but also for all social platforms operating throughout the EU.

Implications of the Tax Authority Conclusions

According to the conclusion of the Tax Authority, users registering to X and similar social networks, such as Meta's Facebook and Instagram, are taxable transactions that include exchanging a membership account in return for a user's personal data.

Therefore, this case concerns not only the due VAT but also imposing a broader view of the applicable VAT rules, which ultimately significantly impacts the business models of almost all social networks. Although X has until April to respond to the Tax Authority's claims, some indications are that the company will not communicate with it but will wait for its final decision on the subject matter. 

If X does not respond to its claims, the Tax Authority can withdraw its conclusions or initiate court proceedings, which could last up to ten years.

However, if the Tax Authority does not quit its claims and broader interpretations of applicable VAT rules, it is expected that X will appeal against such an interpretation, which could also lead to years of court proceedings, before finally being settled.

Conclusion

The Italian Tax Authority and the government are redefining or interpreting VAT rules and regulations, primarily targeting the largest digital companies. However, winning this legal battle with X could change the EU's applicability rules and how social networks are treated under the EU VAT harmonized system.

Nevertheless, tech companies will not go down without a fight. Therefore, what started as a tax audit due to unpaid VAT has the potential to transform into one of the most significant court disputes.

Source: Reuters