Online advertising and social media
An ad-supported digital business model is a common strategy used by many companies. The basic principle of this model is to provide a free service to users, such as search results or a social media network, while generating revenue through advertising. Advertisers pay the company to display ads, and the company uses data and algorithms to personalize ads for individual users based on their interests, demographics, and behavior. The success of the advertising-supported model depends on the company’s ability to attract a large customer base and generate significant advertising revenue.
Although users do not pay for the services offered, they usually agree to share certain personal data with the service provider. This raises the question of whether a service provider should charge value added tax (VAT) on “free” online services, since these services are not truly free and the service provider receives non-monetary compensation from the user in person or in kind. Location data.
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Is personal data a form of service review?
In the European Union, VAT applies to the supply of goods and services made for consideration by a taxable person. Compensation can be in the form of monetary or non-monetary compensation, such as personal data. Delivery is made for consideration if there is a direct link between the service rendered and the consideration received. A direct link implies mutual performance based on mutual agreement. In other words, if the compensation is not paid, the service will not be provided.
Regarding “free” online services, it can be said that there is no direct link because users receive the same service regardless of the quantity and quality of data provided. Users who choose not to share personal information on social media platforms or who refrain from uploading images will have the same access to online services as those who share data widely.
In a legal aid case where rebates were based on the recipient’s disposable 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 compensation paid by the recipient. This was because the amount paid by the recipient was determined by their income and not by the scope of services provided, such as the number of hours the attorneys worked on the case. This situation can be considered analogous to “free” online services, where the consideration as personal data does not depend on the actual use of the service. Users who share a lot of personal information can use the same features of social media platforms as users who do not post images or share very little data.
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However, it can also be argued that it is not the individual data set that constitutes the consideration, but rather the right to use the data. If the consideration of an online service is the right to use personal data, the actual value and content of the data provided becomes irrelevant. Thus, whether the user produces substantial data or not at all is not relevant to establish the existence of a direct link between the service provided and the considered opinion. In conclusion, there are valid arguments to support the view that personal data constitutes a consideration of online services. This implies that “free” online services are actually taxable supplies.
How much are you going to pay for an online service?
When personal data is exchanged over an online service, it is known as a barter transaction. From a VAT perspective, a barter transaction involves two distinct supplies: (1) the supply of personal data from the consumer to the service provider; and (2) the provision of online services by the service provider to the user, which is paid for by the right to use the personal data. The former is usually not taxable because private individuals are not required to collect VAT. However, the latter is taxable and the service provider must determine the amount of VAT to be charged.
According to the case law of the CJEU, in barter transactions that do not involve monetary payments, the value of the money received for the provision of online services is equal to the payment that the consumer would expect if the goods or services were paid for in money. However, this method creates practical difficulties, as the service provider must collect VAT. If the value attributed to the customer was the deciding factor, the service provider would have to consult the customer about the value in order to determine the VAT owed.
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Potential VAT liabilities for consumers?
EU VAT law uses the term “taxable person” to refer to businesses that may have VAT obligations. A taxable person is a person who independently carries out any economic activity. EU VAT law explicitly states that the exploitation of intangible assets for continuous income is considered an economic activity. If individuals consistently use their personal data to access “free” online services, they may be considered an economic activity. In other words, the use of “free” online services may give users of online services the status of a taxable person and reduce 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 can be considered a taxable person. In addition, the tax administration can be overwhelmed by the number of individuals subject to VAT, especially in EU member states with low thresholds for small business exemptions, or in countries that have not implemented simplification measures.
However, it can be said that personal data is not exploited “on a continuous basis to generate income” (as required by EU VAT law), but for private purposes. If the user’s goal was to generate revenue, selling their data would be an easier option than to access online services. Moreover, users will not offer their data publicly. Therefore, giving service providers access to personal data should not be considered as an economic activity that exposes consumers to VAT obligations.
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conclusion
Based on a literal interpretation of EU VAT law, some arguments can be made that the supply of online services in exchange for the exploitation of personal data constitutes a taxable supply. This is also confirmed 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 necessary to take into account that the fundamental principle of a sound tax system is administrative expediency. This means that tax laws and regulations must be enforced and administered with minimal inconvenience to taxpayers. From this perspective, collecting taxes on services that consumers receive without monetary compensation would be too burdensome for service providers, recipients, and tax administrations due to many practical problems.
