Freeconomics VAT

Department of Law
Spring Term 2020
Master Programme in International Tax Law and EU Tax Law
Master’s Thesis 15 ECTS
Freeconomics in the light of EU VAT
Directive
Are free digital services supplied in exchange for personal data
VAT taxable?
Author: Alessandro Sampaoli
Supervisor: Katia Cejie
i
Abstract
The digital economy is growing exponentially. Companies such as Facebook and
Instagram base their business model on supplying services completely free of charge to
billions of users. This model of business is called “Freeconomics”.
These companies generate huge profits from the exploitation of personal data provided
by Users. The peculiarity of this way of doing business, although this may seem absurd,
is that the company's profit is directly proportional to the number of non-paying users.
Such situations have given rise to discussions regarding the powerlessness of the tax
system of states to levy tax on such profits. Regarding the indirect taxation, the question
is even more difficult if one considers free digital services and personal data.
Unfortunately, this flow of “digital” consumption remains completely out of a VAT
assessment.
Exclude a priori those transactions from being assessed for VAT purposes only because
it could be arduous to assess the consumption would result in a violation of the principle
of neutrality. Accordingly, issues related to the distortion of competition could also
arise.
The author of this thesis examines the assumption that between the Companies and the
Users take place a reciprocal exchange of benefits in kind characterized by a
synallagmatic relationship (quid pro quo) in the form of barter.
The results of the analysis indicate that the transactions characterized by the supply of
free digital services to Users in exchange for personal data  as described in the
Business Reference Model  actually fall within the scope of Article 2 (1)(c) of the EU
VAT Directive and therefore must be subject to indirect taxation.
ii
Table of Contents
Abstract .............................................................................................................................................. ii
List of Abbreviations........................................................................................................................ iv
1. Introduction................................................................................................................................... 1
1.1 Background ............................................................................................................................... 1
1.2 Aim ............................................................................................................................................ 3
1.3 Delimitations ............................................................................................................................ 3
1.4 Method and Material ................................................................................................................ 6
1.5 Outline ....................................................................................................................................... 9
2. Freeconomics and User Relationships ..................................................................................... 11
2.1 Freeconomics .......................................................................................................................... 11
2.2 Business reference model and user relationships .................................................................. 13
2.3 Identifying personal data ........................................................................................................ 17
3. Are supplies of free digital services VAT taxable? .................................................................. 20
3.1 Introduction............................................................................................................................. 20
3.2 Identifying the free supply of digital services in the light of the VAT Directive ..................... 22
3.3 Personal data as consideration paid in kind in a context of digital bartering ........................ 24
3.3.1. Introduction ..................................................................................................................... 24
3.3.2. Digital services as quid pro quo for an advantage provided to OSP by users .................. 26
3.3.3. Consideration in kind: quantification in monetary terms or economic value, two sides
of the same coin? ....................................................................................................................... 33
3.4 Reciprocal performance based on a legal relationship - last but not least! ............................ 39
4. Conclusion .................................................................................................................................... 48
5. Bibliography ................................................................................................................................ 53
iii
List of Abbreviations
AG – Advocate General
BRM – Business Reference Model
B2C – Business to Consumer
B2B – Business to Business
ECJ – European Court Of Justice / Court of Justice of the European Union
EU – The European Union
IBFD – International Bureau of Fiscal Documentation
MS - Member State
OECD – Organization for Economic Cooperation and Development
OSP – Online Server Provider (internet-based companies)
TFEU – The Treaty on the Functioning of the European Union
VAT – Value Added Tax
VATD – Vat Directive
iv
1. Introduction
1.1 Background
The digital economy is growing exponentially. Growth is fueled by the continuous
creation of new digital services that until recently were completely unimaginable to
conceive. Companies such as Facebook, Instagram and Yahoo!Mail base their business
model on supplying services completely free of charge to billions of users. This model
of business is called “Freeconomics”.1
The Freeconomics represents a new business model that essentially consists on
supplying products or services free of charge with the purpose of increasing the demand
for other products or services. Thus, a User can use services made available by
companies without paying anything. The supplier companies, on the other hand, –
instead of asking for a payment – made the use of those services subject to a mandatory
registration of a personal account. This action implies that the User must also accept the
provider's agreement and grant to the latter the “right of use” on his personal data for
commercial purposes.
The peculiarity of this way of doing business is that the company's profit is directly
proportional to the number of non-paying users. To get an idea of the profit margins that
this business model can generate in connection with the digital economy, it is enough to
look at the total turnover of the 25 giants of the Software and Web sector which in 2018
reached the threshold of 850 billion Euros globally.2
The large volume of profits that these companies generate have also given rise to
discussions regarding the powerlessness of the tax system of states to levy tax on such
profits. Possible solutions regarding direct taxation, such as a web-tax, are already being
1
The term “Freeconomic” is formed from the words free + economics and was created in recent years to describe the offering
of products or services free of charge (more details in section 2.1 below). However, the term took on a more concrete meaning
following the book written by Chris Anderson and titled "Free: The Future of a Radical Price" edited by First Edition [2009].
2
Eleonora Micheli, 'Google e gli altri giganti del web pagano solo 64 milioni di tasse in Italia' 2019 IL Sole 24 Ore
<https://www.ilsole24ore.com/art/per-giganti-web-italia-tasse-solo-64-milioni-ACfwrk1> accessed 18 February 2020.
1
formalized.3 Regarding the indirect taxation, instead, just small interventions have
involved the online sales sector and the web-portals that act as intermediaries. 4
Unfortunately, as regards indirect taxation on digital services, it is very hard to evaluate
and subsequently tax consumption. This is even more difficult if one considers free
digital services and personal data.
It can be assumed that between the Companies and the Users take place a reciprocal
exchange of services characterized by a synallagmatic relationship (quid pro quo) in the
form of barter. The right to use of digital services is supplied in exchange for a
consideration paid in kind in the form of personal data. Companies generate huge profits
from the exploitation of personal data provided by Users. This flow of services and
personal data currently remains completely out of a VAT assessment.
Establishing a value for a consideration paid in the form of personal data can actually
be very arduous even if this does not mean that it is not possible. Exclude a priori those
transactions from being assessed for VAT purposes only because it is hard to quantify
the consumption would result in a violation of the principle of neutrality. Accordingly,
issues related to the distortion of competition could also arise.
It could be argued that these barter in form of exchange of services should be
considered as taxable transactions falling within the scope of VAT according to the
Article 2 (1)(c) of VAT Directive. Conversely, that the supply of services could not fall
within the VAT scope and it would also be very difficult, and maybe impossible, to
prove that the supply of services is “effected for consideration”. On this question S.
Pfeiffer argues that due to the lack of any monetary payment, the supplier of the
electronic service has to pay VAT which factually is not borne by the final consumer
because at the time of consumption, no actual income is used. On the one hand, if it is
considered that ―…something should be subject to VAT when it is consumed – such as
3
Many of the governments in Europe are moving to stem the tax issues related to the activities of large digital companies. By
way of example, France has approved in 2019 a digital services tax (3%) which will be levied on sales generated in France by
multinational companies like Facebook and Google. Even Italy, in 2020, has approved - as part of its 2020 draft budget - a 3%
web tax on internet transactions.
4
See the new e-commerce VAT package for “supply of goods” which comes into force on 1 January 2021 in the EU.
2
the use of ―free‖ electronic services – VAT should apply even if no actual income is
used."5
The author of this paper believes that these relationships between provider and user
should be carefully analyzed. In fact, it can be argued that these operations can already
be addressed by means the current VAT legislation. In this regard, a question should be
asked:
Are free digital services supplied in exchange for personal data VAT taxable?
1.2 Aim
This thesis is aimed at to demonstrate that the current VAT legislation is sufficiently
elastic to cover those transactions characterized by free digital services supplied to
Users in exchange for the “right to use” of personal data. Hence, the author of this study
aims to demonstrate that those transactions fall within the scope of Article 2 (1)(c) of
the EU VAT Directive6 and therefore must be subject to indirect taxation.
1.3 Delimitations
The VAT treatment of free digital services supplied to private users by internet-based
companies is dealt with in this thesis. The analysis is conducted only from the
perspective of EU VAT legislation which is based mainly on Directives and
implementing Regulations. 7 For this reason any "domestic VAT legislation" in force in
the individual Member States will be disregarded.
5
S. Pfeiffer, VAT on ―Free‖ Electronic Services? [2016], IBFD, International VAT Monitor, Volume 27, No 3
<https://www.ibfd.org/IBFD-Products/Journal-Articles/International-VATMonitor/collections/ivm/html/ivm_2016_03_e2_3.html> accessed 10 May 2020.
6
According to Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
7
VAT Directive (2006/112/EC), Council Directive (EU) 2018/1910 of 4 December 2018 amending Directive 2006/112/EC as
regards the harmonisation and simplification of certain rules in the value added tax system for the taxation of trade between
Member States, Commission Implementing Regulation (EU) 2018/1012 of 17 July 2018 imposing a provisional anti-dumping
duty on imports of electric bicycles originating in the People's Republic of China and amending Implementing Regulation (EU)
2018/671, Council Regulation (EU) 2018/1909 of 4 December 2018 amending Regulation (EU) No 904/2010 as regards the
exchange of information for the purpose of monitoring the correct application of call-off stock arrangements.
3
With regard to the supplying of digital services covered by this thesis, it must be
taken into consideration that the characterizing elements of the transactions may be
subject to continuous transformations and it is often very arduous to identify a business
model on which an analysis may be performed for VAT purposes. Thus, some
limitations are necessary.
For the purposes of this analysis, the choice has been made to focus solely on to
those supplying of free digital services where:
 a mandatory registration procedure is required by the Provider, and;
 the Users must grant the “right of use” on his personal data for commercial
purposes in order to use the digital services.8
Thus, only the reciprocal exchange of services in the form of barter are dealt with in this
study, i.e. the right-of-use of digital services are supplied in exchange for the right-ofuse of personal data. This choice is justified by the fact that the relationship where a
registration is mandatory are more interesting for the VAT purposes. Prima facie these
transactions represent those situations that mainly generate issues in relation to indirect
taxation. In fact, they usually involve the biggest internet-based companies such as
Facebook, Instagram or Yahoo!Mail which provide free services to billions of users
and may be considered the protagonists of new tax policies currently under discussion
by European governments. Furthermore, the tax relevance of the link arising between a
Provider and Users is easier to demonstrate if a mandatory registration takes place. To
better identify the relationship between these companies and their Users, an info-graphic
of the Business Reference Model is showed in section 2.2.
For the reasons mentioned above, it follows that the use of free digital services where
no registration is required are excluded from this analysis. It should be noted that these
situations could hardly be defined for the VAT purposes as the use of those services,
their purposes as well as the identification of the status of the recipients are almost
impossible to ascertain. An example could be a free news website like Metro
8
See more about the Business reference model in section 2.2 below.
4
(https://metro.co.uk/) where any person can read the amount of news he prefers at any
time and for any purpose.
Lastly, even the services defined as "try before buy" fall outside the scope of this
thesis. These services concern transactions where a limited version of a service is
supplied free of charge while the premium version is available for a fee.9 In these
circumstances the transactions are well defined from a VAT point of view as the
services are provided by a taxable person (company) at a defined price and, on the other
side, the User (customer) pays that price. Due to these characteristics, no issues arise in
relation to whether the transaction should be taxed or not.
It must be stressed that a taxable transaction under VAT Directive is subject to the
assessment of certain requirements. In order to lay down whether a transaction is
taxable for VAT purposes, the supply must be provided by a taxable person acting as
such (subjective scope), take place within the territory of one of the Member States
(territorial scope), and finally be effected for consideration (objective scope).10
According to the first requirement, i.e. the subjective scope, the status of at least of
one the actors taking part in a transaction must be that of a taxable person. The
transactions examined in this thesis involve three different types of actors and can take
place in the form of B2B or B2C:
1. Provider (as taxable person) >>> User (as taxable person);
2. Provider (as taxable person) >>> User (as non-taxable person);
3. Provider (as non-taxable person) >>> User (as taxable person);
4. Provider (as non-taxable person) >>> User (as non-taxable person).
Based on what stated at the beginning of this section 1.3, for the purposes of this
study only the transactions mentioned in point no. 2 will be regarded. On one hand, a
9
The turnover of these companies is mainly based on the sale of a service such as software. The turnover is therefore not
dependent on the exploitation of personal data for advertising purposes.
10
Ad van Doesum, H W M van Kesteren and Gert-Jan van Norden, Fundamentals of EU VAT law (Kluwer Law International,
2016), para 1.13.
5
VAT-registered Company (taxable person) provides its digital services, on the other
hand, a private User (non-taxable person) fills out a registration form in order to use
those digital services for the sole personal purpose.
Regarding the second requirement, i.e. the territorial scope, the supplies of services
must take place within the territory of one of the Member States. It must be highlighted
that according to the Article 58 of the EU VAT Directive, in case of digital services
supplied to non-taxable person (private user), the place of supply is established where
the latter is established or has his residence.11 Thus, only those digital services supplied
to Users who have their residence (or permanent address) in one of the EU Member
States will be taken in to consideration. With regard to the Providers, it is considered
irrelevant for the purpose of this study limiting the analysis only to companies with
head-office in Europe for the reasons just mentioned. By virtue of this, this analysis
covers all those companies that provide digital services in the manner indicated above,
regardless of the place of establishment and the legal form.
The third requirement, i.e. the objective scope, which states that the supply must be
effected for consideration, represents the core aspect of this analysis in order to
demonstrates whether the supplying of free digital services must be subject to indirect
taxation.
Finally, the arguments concerning “deductions”, “exemptions” and the calculation of
the “taxable amount” in connection to the concept of “subjective value” are beyond the
scope of this study and therefore are left out of this thesis.
1.4 Method and Material
As the purpose of this study is to demonstrate whether the current VAT legislation is
sufficiently elastic to address the issues related to the taxability of free digital services,
the analysis relies mainly on the legal dogmatic method as the core method. More
11
See Article 58 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax OJ L 347
of 11 December 2006.
6
precisely, it has been applied a traditional approach “limiting the investigations, de lege
lata, only to a taxation point of view”.12 By the writer‟s side the dogmatic legal method
represents the most appropriate approach in the context of this study as it consists in
proceeding first by understanding the main concepts of current VAT legislation which
makes possible a subsequent deductive reasoning oriented to the analysis of the case in
question. That approach is carried out through the analysis of Directives, Regulations
and Case-Law from the ECJ.
However, this analysis also covers situations, albeit marginally, where VAT
legislation is unable to provide clarifications and there are still no Court's Case Law
dealing with similar cases. This refers to section 3.3.2 where – addressing the question
whether the consideration paid in the form of personal data is capable of being
expressed in monetary terms – no definition was available and it was not even possible
to carry out an interpretation by analogy with other ECJ‟s judgments. To overcome this
interpretation vacuum, it has been necessary orienting the analysis towards a more
dynamic interpretation, called exploratory analysis.13 This method differs from the
dogmatic method since the latter is oriented towards a purely scholarly analysis of the
law texts (as law in books) while the exploratory analysis represents a more dynamic
analysis which aims to focus on the way the law is read in the course of text
interpretation (as law in action).14 The exploratory legal research method is appropriate
in those contexts where is necessary ascertain whether “existing theories and concepts
can be applied to the subject matter”.15 Thus, this method mainly concerns the
collection of information and variables related to the topic with the aim of concretizing
hypothesis.16
12
C. Trenta, Rethinking EU VAT for P2P Distribution (Kluwer Law International, 2015), para. 1.03
Ibid.
14
J. Jemielniak, P. Miklaszewicz, Interpretation of Law in the Global World: From Particularism to a Universal Approach
(Springer-Verlag Berlin and Heidelberg GmbH Co. K, 2014), para. 1.3.
15
C. Trenta, Rethinking EU VAT for P2P Distribution (Kluwer Law International, 2015), para. 1.03
16
Ibid.
13
7
The conclusions highlighted in each section as well as the thesis conclusions are
drawn and supported by inductive and deductive legal reasoning.17 Therefore, it has
been analyzed the jurisprudence stemming from several ECJ rulings in order to
extrapolate the ratio decidendi of each one. The legal principles derived forms the basis
for a general legal reasoning pattern that subsequently is applied to the specific case.
Given the particularity of the topic, the reference sources only concern the so-called
"Secondary EU legislation" and therefore include Directives, Regulations and CaseLaw of the ECJ. In particular, the cornerstone principles of EU VAT derive from the
Council Directive 2006/112 / EC (VAT). 18 With regard to analysis of the “digital
supplies”, the sources consulted concern Regulation (EU) No 282/2011 and Regulation
(EU) No 1042/2013.19
However, the ECJ‟s Case Law played a key role in forming the reasoning
underpinning this analysis.
The VAT Directive unfortunately does not provide
exhaustive elements to interpret when a supply of services must be regarded as
“effected for consideration”20 and therefore subject to VAT taxation. Therefore, the
Case-Law of the European Court of Justice represented the main source for interpreting
the EU VAT legislation and developing a logical-deductive reasoning for the solution of
the case analyzed in this thesis. Besides the well-known cases like Coöperatieve (C154/80), Apple and Pear (case C-102/86), NYC (case 230/87), Tolsma (C-16/93), Town
& County (Case C-498/99) and Orfey (C-549/11), two cases in particular have provided
valuable help in resolving the question analysed in this thesis: the Empire Stores case
(C-33/93) and the Bertelsmann case (C-380/99).21 All the cases taken into consideration
17
Peter Nash Swisher, Teaching Legal Reasoning in Law School: The University of Richmond Experience, (1981), Volume 74,
University of Richmond - Law Library Journal,
<https://pdfs.semanticscholar.org/291b/6a40382fbc6d9bcb412fd088ef0cb8dc25ea.pdf> accessed 20 May 2020.
18
Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax OJ L 347 of 11 December
2006.
19
See Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for
Directive 2006/112/EC on the common system of value added tax (consolidated version) and Council Implementing Regulation
(EU) No 1042/2013 of 7 October 2013 amending Implementing Regulation (EU) No 282/2011 as regards the place of supply of
services.
20
According to Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
21
See case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994] and case C-380/99 Bertelsmann AG
mot Finanzamt Wiedenbrück [2001].
8
in this thesis have been found by using databases such as "InfoCuria" 22 and "IBFD Tax
Research Platform".23
The opinions of the Advocate General (AG) are also taken into consideration for this
analysis. In particular, the opinions of the AG Van Gerven in case C-33/93 and AG
Kokott in case C-36/16 are considered relevant. The opinion of the AG, even if not
binding for the ECJ and often not coinciding with the decisions of the latter, are still a
valid aid for “shedding light upon areas where further explanations to the reasoning
from the ECJ is needed”.24 Therefore, it has been considered legitimate to take into
consideration those two opinions indicated above in developing this analysis.
Finally, tax law literature and doctrine have also represented an important source.
Especially authors such as B. Terra, J. Kajus, C. Trenta and P. Rendahl. The analysis
carried out by P. Rendahl in the book “Cross-border Consumption Taxation of Digital
Supplies“, represented a valuable aid regarding the interpretation of the ECJ rulings
mentioned above.
1.5 Outline
The thesis is divided into two main parts. Following the Introduction, the first part
(Chapter 2) represents a preliminary overview oriented towards the presentation of the
aspects necessary for the understanding of the analysis conducted in the second part of
the thesis. In the first section is explained the meaning of the “Freeconomics business
model”. The second section is dedicated to laying down the general characteristics of
the transactions analyzed in this study. They are described and represented graphically
in order to facilitate the identification of the actors involved and the dynamics of the
relationships between them. In the last section are identified the “personal data” in order
to highlight what it is that the Users provide in exchange for the digital services
received.
22
The InfoCuria is a database which “contains all the publicly available information concerning the cases brought before the
Court of Justice, the General Court and the Civil Service Tribunal.” Link to database <http://curia.europa.eu/juris>.
23
Link to IBFD Tax Research Platform <https://research.ibfd.org/>.
24
P. Rendahl, Cross-Border Consumption Taxation of Digital Supplies (Doctoral Series, IBFD, 2009), para. 2.4.2.
9
The second part (chapter 3) represents the core of the thesis which is to lay down
whether the free digital services provided by the internet-based companies should be
subject to VAT according to the Article 2 (1) (c) VATD. In order to examine this
matter, the structure of the analysis follows the “direct link test" which concerns the
assessment of 4 different requirements developed on the jurisprudential principles
derived from the ECJ‟s Case Law. Thus, the first section (3.2) it is oriented to ascertain
whether the digital services in question represent actually transactions that fall in the
scope of VAT Directive. Subsequently (sections 3.3.2) the analysis continues with the
aim of ascertaining the existence of a direct link between the service provided by the
OSP and the consideration paid in kind by the Users. The third requirement analyzed
(section 3.3.3) concerns the evaluation whether that consideration paid in kind is
capable of being expressed in monetary terms. Finally, the last section (3.4) covers the
third and fourth requirement which regard the ascertainment of a legal relationship and
a reciprocal performance between the parties involved in the transaction.
10
2. Freeconomics and User Relationships
2.1 Freeconomics
The term Freeconomics identifies a new business model widely used by digital
companies and which is gaining increasing success. It is not a theoretical business
model and it must not be confused with the free economy, that is, that conception of a
moneyless economy.25
Freeconomics describes a business concept based on supplying of certain goods or
services free of charge with the aim, in the long term, of increasing sales of other
products at full price. Although the word "free" may be misleading, the strategy behind
"Freeconomics" is aimed solely of maximizing corporate profits. Regarding this
business strategy, the journalist and editor of Wired magazine, Chris Anderson,
highlighted in his book entitled "Free: The Future of a Radical Price" the thesis
according to which “making money around Free will be the future of business”.26
Although the maximum development of the Freeconomics is taking place in parallel
with the increasing of the digital sector, in reality – albeit with a different name – it
describes a marketing strategy already in use at the beginning of the last century. This
business model was born in the early twentieth century thanks to a marketing strategy
implemented by Mr. Gillet. He had invented the first interchangeable blade razor.
Essentially, his strategy was to give away the razor for free in order to generate a
growing demand for blades. As the number of razors distributed free of charge
increased, the sales of its blades also increased exponentially. 27
The business model invented by Gillette is based on the practice of "cross-subsidy" 28
which consists in subsidizing the costs incurred for the products or services provided
25
C. Anderson, Free: The Future of a Radical Price (Hyperion, 2009).
Ibid.
27
Ibid.
28
See J.J. Laffont, J. Tirole, Competition in Telecommunications (MIT Press Ltd, 2001) and N. Daidj, Developing Strategic
Business Models and Competitive Advantage in the Digital Sector (IGI Global, 2014).
26
11
free of charge (or at very low cost) through the sale of full price products or services. A
classic example is the “take two and pay one”.
The business model created by Gillette is still used today. With the advent of the
digital economy, however, it has been improved and evolved into the Freeconomics
model. In fact, it should be noted that the era of digitalization and virtualization is
characterized by very low marginal costs of production.29 This allows companies to
have a very high operating margin regarding the provision of free services.
The Freeconomics model, therefore, is no longer essentially based on the classic
practice of "cross-subsidy”, i.e. supporting the costs of free products through the sale of
full price products. The purpose of Freeconomics is instead to generate among the
potential users a maximum diffusion of needs connected to a specific product or service.
Sometimes it takes place even without an apparent connection between what is given
free of charge and what is sold. For instance, it could be a free web magazine of
culinary recipes created in order to attract Users towards the purchase of certain food
products. Another example is supplying a mobile phone for free in order to sell
subscription services, or provide a video-game for free with the subsequent purpose of
sell ancillary services without which its use would be limited.30
To get an idea of the profit margins that this business model can generate in
connection with the digital economy, it is necessary to look at the total turnover of the
25 giants of the Software and Web sector which in 2018 reached the threshold of 850
billion Euros globally.31
In conclusion, it can be said that the Freeconomics model describes that practice of
free supplying of services (or goods) capable of increasing the sale of other products or
29
OECD (2018), “Digitalisation, business models and value creation‖, in Tax Challenges Arising from
Digitalisation – Interim Report 2018: Inclusive Framework on BEPS, OECD Publishing, Paris. <https://www.oecdilibrary.org/docserver/9789264293083-4en.pdf?expires=1591614943&id=id&accname=guest&checksum=CE04F4369D7E0DB1902140205B9D3E62> accessed 10
May 2020.
30
Opinion of the author of this thesis.
31
Eleonora Micheli, 'Google e gli altri giganti del web pagano solo 64 milioni di tasse in Italia' 2019 IL Sole 24 Ore
<https://www.ilsole24ore.com/art/per-giganti-web-italia-tasse-solo-64-milioni-ACfwrk1> accessed 18 February 2020.
12
services at full price. Company profit grows as the providing of products or services
free of charge increases.
2.2 Business reference model and user relationships
In the previous section it was explained that Freeconomics represents a new business
model that is essentially based on supplying products or services free of charge in order
of increasing the demand for other products or services.
Given the wide variety of free digital services available in every type of sector – even
very different from each other (social networks, instant messaging, email, VoIP, digital
newspaper, telephone applications) – this study has provided a “business reference
model” for the purpose of categorizing all these services and therefore allows a targeted
analysis.
The transactions analyzed in this thesis involve two types of actors: on the one hand a
Company (taxable person) that provides its digital services only through the internet or
other telematic channels, on the other hand, an User who can be both a private user
(non-taxable person) or a company. It is recalled that this thesis deals only with the
transactions between the Companies providing free digital services and the private
Users which register an account (B2C). Therefore, transactions where providers and
recipients are both taxable persons (B2B) will not be addressed.
To simplify matters, the term "OSP", which stands for Online Service Provider, has
been used to indicate internet-based companies providing digital services, whatever
their legal entity (parent or subsidiary) and the digital service supplied (email, app,
social networks, etc.), while the term "User" stands for a non-taxable recipient which
use those services.
Trying to simplify the various sub-categories of Freeconomics, by the writer‟s side,
they could be categorised in 3 simple business models. The table below schematically
shows these 3 business models as well as their characteristics.
13
Model A
Model B
Model C
YES
NO
YES
YES
NO
YES
Basically all content
is free
+
Some even provide
pro version
(more features)
Basically all content
is free
+
Available
pro version
(more features)
Free version is limited
+
Pro version (unlimited)
Type of service
supplied by the
provider
Connect with other
people, share and publish
contents, send a receive
emails, freeware software,
etc.
Online Newspaper,
etc.
Software (basic features)
Counter-performance
required to the user
Be subjected to
advertisements,
concession to the OSP to
use (in whole or in part)
the own data provided
with the registration and
during use of the services
Be subjected to
advertisements
Purchase pro-version only
in case of service upgrade
Corporate profit
Mainly by selling targeted
advertising services
+
Reselling client lists
Mainly by selling
advertising services
Mainly from the sale of
the software, license, etc.
Examples
Facebook, Instagram,
Linkedin, Youtube,
Yahoo! Mail, etc.
The Guardian (daily
newspapers), etc.
Adobe acrobat pdf, etc.
object of analysis of this thesis
Mandatory
Registration
Need to provide
personal data upon
registration
Service cost
Table 1.1 32
The common feature of those 3 models showed above is the provision of free digital
services. Diversification mainly involved two factors:
1) a mandatory preliminary registration in order to access to the services;
2) the right to use all services in full regardless of purchasing of additional payment
services.
32
Made on the basis of the analysis carried out by the author of this thesis.
14
The Business Reference Model (BRM) taken into consideration for this study regards
only the “Model A”. Thereafter, in the next chapters, this "model A" will simply be
referred to as "business model” or “BRM”. The choice of “Model A” as reference
model is justified by the fact that it is – by the writer‟s side – the one in which the
services performed by both counterparties can be more easily identified for the purpose
of an analysis of indirect taxation. Besides, the business model analyzed here includes
those situations that involve companies such as Facebook and Instagram, and which are
mainly generating problems related to taxation. These companies, in fact, are offering
continuously free services to billions of users, apparently without counter-performance.
On the other hand, they are collecting a theoretically infinite number of personal data
capable of being used to generate corporate profits.
One of the main characteristics of this business model is that Users are aware of
granting the “right of use” of their personal data for targeted advertising purposes. This
is done on a voluntary basis by means of a registration form. In the other two models, B
and C, the relationship between Users and OSP – again in the writer's opinion – is less
adapted to be analyzed from the point of view of indirect taxation. In model B, the user
has full free and unconditional access to all the content supplied by the OSP without
registration and without a direct providing of personal data. In practice, each user
accesses the service at his own discretion.33
In model C there is a mandatory registration by the User in order to be able to use the
basic version of a service, e.g. a software. In this case, the company's purposes is to sell
the software and related services. The personal data provided by the Users are not used
(at least apparently) for processing targeted advertisements. In model C, the user tests a
product and, if it meets his needs, he has the possibility to purchase the full version. The
transactions are therefore well defined and do not give rise to controversial in terms of
indirect taxation.34
33
34
See section 1.3.
See section 1.3.
15
In model A, the User can use all the services made available by the OSP even if he
must necessarily register a personal account and accept the provider's agreement.
Without registration and without acceptance of the agreement the services cannot be
used. Among the personal information required during registration there may be the
name, email, address, telephone number, etc. (see point 1 in the info-graphic below).
An OSP, taking again Facebook or Instagram as example, generates its profits from
selling targeted advertisements that will be displayed to Users themselves (see point 2 in
the info-graphic below). Targeted means that advertisements can be specifically
customized for a specific group of users based on their age, geographic location,
personal preferences, etc. In Facebook, a paid advertiser can choose the geographical
area, age, gender and interests of the recipients of its advertising. This model of
advertising has a “method of execution” as well as “economic returns” different from
advertisements in the classical sense where the recipients are a group of indistinct
people. The advertisements found on the subway or on a television program could be
used as examples.
It is therefore clear that targeted advertising has greater efficiency and therefore also
a much higher return on investment. To make this advertising method effective and
efficient, the OSP must have a constant increase of personal data. This is the reason why
the OSP contractually reserves the right of processing and using the personal data
supplied by users. A higher number of users leads to a higher sample of data to be used
which in turn leads to a higher number of paying advertisers and therefore to an higher
turnover. In special cases, other OSP may also focus a part of their business on the sale
of this data to third-party marketing companies (data broker). The ultimate aim of using
the data, however, is always to create targeted ads.
The relationship between OSP and Users as well as between OSP and its paying
advertisers can be summarized in the following info-graphic model:
16
BUSINESS REFERENCE MODEL35
Scheme 1.1
It can be concluded, although this may seem absurd, that the OSP's profit is directly
proportional to the number of non-paying users. A concept of economic model totally
unthinkable at the end of the last century.
2.3 Identifying personal data
Before analyzing the relationships between OSP and Users for the purposes of VAT
taxability, it is necessary to identify the personal data, i.e. understand what it is that the
Users provides in exchange for the services received.
With regard to personal data, there is no precise definition or other references in the
VAT directive that could lead to a unanimous definition at European level. Thus, in
order to assess whether this flow of personal data can be considered “effected of
35
Graphical representation of the BRM made on the basis of the analysis carried out by the author of this thesis.
17
consideration” and thus subject to VAT for the purposes of Article 2 (1)(c) VATD, it is
first necessary to define it.
As in the case of digital services supplied by OSP – which “by means” of the VAT
directive and Regulation n. 282/2011 – they have a "univocal" legal definition in all
Member States, even in the case of personal data it is necessary to look for a definition
that could have an unanimous interpretation. Hence, it can be argued that the various
possible definitions present in the national laws of the individual Member States cannot
be considered appropriate for the formation of a common definition of personal data.
Paying attention in the official web channel of the European Union we read the
following definition:
―Personal data is any information that relates to an identified or identifiable
living individual. Different pieces of information, which collected together
can lead to the identification of a particular person, also constitute personal
data.‖ 36
Examples include the name and surname, home address, personal email address such
as [email protected], identification card number, location data (for
example the location data function on a mobile phone), Internet Protocol (IP) address,
the advertising identifier a phone, data held by a hospital or doctor, which could be a
symbol that uniquely identifies a person. It is then specified that
―Personal data that has been rendered anonymous in such a way that
the individual is not or no longer identifiable is no longer considered
personal data. For data to be truly anonymised, the anonymisation
must be irreversible‖. 37
A further definition, rather similar, but of greater legal value, as present in a
European Regulation, is that found in art. 4 of Regulation (EU) 2016/679 (GDPR), the
so-called General Data Protection Regulation (GDPR). This characteristic gives this
definition a formal and uniform meaning in all Member States. The law states that
personal data:
“means any information relating to an identified or identifiable natural
person (‗data subject‘); an identifiable natural person is one who can
36
European Commission website, 'What is personal data?' <https://ec.europa.eu/info/law/law-topic/dataprotection/reform/what-personal-data_en> accessed 4 May 2020.
37
Ibid.
18
be identified, directly or indirectly, in particular by reference to an
identifier such as a name, an identification number, location data, an
online identifier or to one or more factors specific to the physical,
physiological, genetic, mental, economic, cultural or social identity of
that natural person;‖. 38
Based on the definitions above, it could be notes that the characterizing aspect is that
the information received from an OSP must necessarily refer to a natural person
(individual). This natural person must be identified or, alternatively, it is sufficient that
it is indirectly identifiable through other factors such as location data or related to
physical, physiological, genetic, mental, economic, cultural or social identity. To cease
to be considered personal data, those data must be made permanently anonymous by the
OSP and the individual no longer identifiable.
It is therefore deduced that in addition to the more obvious data such as name, email,
telephone number, Internet Protocol (IP), also more general information such as
location data, personal tastes and interests, etc. must be considered personal data. Thus,
the type of data provided by the Users to the OSP as expressed in the business model,
undoubtedly fall into the category of Personal Data. Moreover, even in the event that the
registration form does not explicitly request for the insertion of the real name and
surname but instead a username and email, this is sufficient to equally define that flow
of data provided to the OSP as Personal data.
38
Article 4 of Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of
natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive
95/46/EC (General Data Protection Regulation).
19
3. Are supplies of free digital services VAT taxable?
3.1 Introduction
In the previous chapters the dynamics between OSP and Users have been
highlighted. On the one hand there is the OSP that provides a free digital service
(hereinafter only "digital service") to an User, on the other hand the latter fills in a
registration form accepting that his personal data will be used for advertising purposes.
Thus, what takes place between the two parties is a reciprocal exchange of services
characterized by a synallagmatic relationship (quid pro quo) in the form of barter.
Article 2(1)(c) of the VAT Directive 2006/112/EC (hereafter "VATD" or “VAT
Directive”) states that a supply of services supplied by a taxable person acting as such is
subject to VAT "only" if the service is provided for consideration within the territory of
a Member State39. Base on a literal interpretation of that provision, it is clear that the
fundamental requirements concern (i) the presence of a supply of service, (ii)
necessarily effected for consideration (objective requirement), (iii) which must be
provided by a taxable person acting as such (subjective requirement), (iv) and the
transaction must obviously take place within a member state (territorial requirement). It
must therefore be deduced that if the supplier does not receive "any consideration for
the supply of goods or services, there is no transaction for consideration and therefore
there is no taxable transaction". 40
With regard to the subjective and territoriality requirements, it has already been
specified in the introductory chapter that this study is based only on transactions
between a provider as taxable person (i.e. the OSP) and a recipient as non-taxable
person (i.e. the Users). Moreover, the latter must be considered to be resident within the
European Union for the purposes of the "place of supply". Additionally, there is no even
need to verify the OSP‟s status as taxable person or the existence of an “economy
39
Article 2 par.1(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
40
Opinion of Mr Advocate General Van Gerven in case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise,
para. 13.
20
activity” since these two requirements are already considered to be determined and,
thus, placed as the basis for the analysis. See section1.3 concerning “Delimitations”.
Other than the above, the VAT Directive does not provide further apodictic elements
that can help to interpret clearly when a supply of services must be regarded as “supply
effected for consideration” and therefore falls within the scope of VAT. A valid support
can only be found in the case-law of the European Court of Justice (hereafter “ECJ”).
Over the years the Court has clarified that there must be a direct link between the
service supplied and the consideration paid so that a supply of service (or goods) can be
considered effected for consideration41. It should also be stressed that VAT "is based on
the quid pro quo principle" 42. In addition, according to the ECJ, the nature of the
services supplied and the consideration received must be easily ascertainable 43.
Moreover, the consideration must have a subjective value 44
45
and must be capable of
being expressed in monetary terms.46
Another requirement to be fulfilled is the presence of a "legal relationship” between
the service provider and the beneficiary. On the basis of this relationship, a reciprocal
exchange of performances must take place, i.e. ‖the remuneration received by the
provider of the service constituting the value actually given in return for the service
supplied to the recipient”.47
41
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12, case C-102/86 Apple and Pear Development Council v Commissioners of Customs and Excise [1988],
para. 12, case Hotel Scandic Gåsabäck AB v Riksskatteverket [2005], para. 22, case Commissioners for Her Majesty‘s Revenue
and Customs v Loyalty Management UK Ltd (C-53/09) and Baxi Group Ltd (C-55/09), para.51 and case C-285/10 Campsa
Estaciones de Servicio SA v Administración del Estado [2011], para.25.
42
G. Beretta, VAT and the Sharing Economy (World Tax Journal, IBFD, 2018), para 4.3.
43
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12 and case C-102/86 Apple and Pear Development Council v Commissioners of Customs and Excise [1988],
para. 14-15.
44
See case C-412/03 Hotel Scandic Gåsabäck AB v Riksskatteverket [2005], para. 21, case C-33/93, Empire Stores Ltd v
Commissioners of Customs and Excise [1994], para.13, case 230/87 Naturally Yours Cosmetics Limited v Commissioners of
Customs and Excise [1988], para. 16 and case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen
"Coöperatieve Aardappelenbewaarplaats GA" [1981], para. 13.
45
This “subjective value” requirement is strictly connected to the calculation of the taxable amount and is therefore left out of
this thesis which is only aimed at verifying the taxability of free digital services.
46
Case 230/87 Naturally Yours Cosmetics Limited [1988], para. 16 ansd Case C-33/93 Empire Stores Ltd [1994], para. 17
47
See case C-16/93 R. J. Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994], para.14 and C-174/14 Saudaçor
[2015], para. 32.
21
Through the joint analysis of all these jurisprudential principles, four parameters (or
criteria) arose aimed at verifying the taxability of transactions pursuant to Article 2(1)
VATD48. These 4 criteria took the form of a verification test called "DIRECT LINK
TEST" or "by consideration" criterion49. The 4 criteria concern the following:
1. the existence of a supply of service (or goods) for VATD purposes;
2. a consideration direct linked the services supplied (functional synallagma);
3. a legal relationship;
4. a reciprocal performance between the parties. 50
By applying the "direct link test" criterion to the business model in question, it
follows that the analysis must first of all seek to establish whether the supply of digital
services fall within those services covered by the VAT legislation. Subsequently, it must
be ascertained whether the personal data actually represent a “consideration” paid in
kind in order to get the right to use of those digital services supplied by the OSP and,
thereby, establish whether there is a direct link between the supply of the digital
services and the personal data. Finally, attention will be paid to establishing whether
there is a legal relationship and a mutual performance between the OSP and the User. In
the event that these assessments lead to an affirmative result, the free digital services
supplied by the OSP will fall within the VAT legislation and must therefore be subject
to VAT taxation.
3.2 Identifying the free supply of digital services in the light of the VAT
Directive
Regarding the free digital services provided by the OSP, there is no direct and precise
reference in the VAT directive. Article 24 paragraph 1, in fact, indicates only
generically that the "supply of services shall mean any transaction which does not
constitute a supply of goods"51, while paragraph 2 refers to "telecommunications
48
Article 2 par.1 of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
49
Ad van Doesum, H W M van Kesteren and Gert-Jan van Norden, Fundamentals of EU VAT law (Kluwer Law International,
2016), para 6.6.3.
50
See case C-16/93 R.J. Tolsma contro Inspecteur der Omzetbelasting Leeuwarden [1994], para. 14.
51
Article 24 par.1 of Council Directive 2006/112/EC of 28 November 2006 on the common system of
22
services" such as those services "relating to transmission , emission or reception of
signals, words, images and sounds or information of any nature by wire, radio, optical
or other electromagnetic system ".52
Although through a wider interpretation those digital services covered by the
business model could fall within the Article 24 of VATD, it is only with the
Implementing Regulation (EU) No 282/201153 (hereinafter "Reg. 282/2011") that a
clarification of the meaning of digital services is provided. In Reg. 282/2011, in fact, a
clear distinction is provided between the “Telecommunications services” (already
explained in article 24 of VAT D) and the “Electronically supplied” (article 7 of Reg.
282/2011)54. In Article 6a, in the second paragraph of Article 7 and especially in the
related ANNEX I of the Reg. 282/2011, different "examples" of services included in the
above categories are also listed in detail.55
A literal interpretation of these articles led to argue that services supplied by OSP can
mainly constitute Electronically supplied (and only marginally Telecommunications
services) since they are essentially delivered over the internet or an electronic network,
automated, involve minimal human intervention and are impossible to ensure in the
absence of information technology.
Below are some practical examples showed.
value added tax OJ L 347 of 11 December 2006.
52
See Article 24 par.2 of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006 and Council Implementing Regulation (EU) No 282/2011 of 15 March 2011
laying down implementing measures for Directive 2006/112/EC on the common system of value added tax.
53
Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for Directive
2006/112/EC on the common system of value added tax (consolidated version).
54
Article 6b of Reg. 282/2011 relating to "Broadcasting services" is deliberately omitted because in the case of radio or
television programs the specific regulation specifies that "they are broadcast simultaneously". On the other hand, the streaming
services offered via the internet that could be included in the business model only concern on-demand services and therefore
not covered by that provision.
55
For a detailed analysis of the list of all the services included in the VAT legislation, the reader is invited to read article 24
VATD and articles 6a, 7 and ANNEX I of Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying
down implementing measures for Directive 2006/112/EC on the common system of value added tax
23
Practical examples of services
covered by VAT provisions
VAT provisions
Art. 24.2 VAT D “Telecommunications services”
Art. 6a.1 (a) of Reg. 282/2011
"access to the internet, including the World Wide
Web"
Supply of free internet. The user must necessarily
register an account to access and use the service.
The user will be able to surf the internet.
| TUBI |
It is a free streaming service supported by
advertisements. TUBI offers to users thousand of
older TV shows and movies completely free of
charge. Each user must necessarily register an
account to access to the service.
***
| FACEBOOK or INSTAGRAM |
Art. 7 of Reg. 282/2011
ANNEX I (1)(2)(3)(4)(5) of Reg. 282/2011
Free social network.
***
| YAHOO! MAIL |
It is an email service provider that offers different
email plans. One of the plans includes a
completely free email service for personal use.
Each user must register an account to be able to
access and manage own mailbox.
3.3 Personal data as consideration paid in kind in a context of digital
bartering
3.3.1. Introduction
In the previous section, the existence of the first "direct link test" criterion has been
ascertained. The services offered by the OSP fall within the services provided for by the
VAT legislation.
This section deals with the analysis of the barter transaction between OSP and User
from the point of view of the second criterion, i.e. verifying the existence of a direct link
24
between supply of services and consideration. Applied to the present case this means
assess whether personal data is the value actually given in return for the digital services
supplied by OSP.
It is worth mentioning that by virtue of the agreement in place between the OSP and
the User, the latter must transfer his personal data and consent to their use for
commercial purposes in order to access to digital services.
As already explained in the previous chapters, what is established is a reciprocal
exchange of benefits in kind (quid pro quo) where the right to use certain digital
services is supplied exclusively in exchange for the right to use personal data.
Regardless of the nature of what has been supplied, each party will believe that what has
been received has a greater value than that transferred, otherwise the transaction could
not take place. However, it must now be assessed whether this consideration is
considered to be such also pursuant to Article 2 (1) (c) of the VAT Directive56, which is
recalled as a necessary condition for the transaction in question to be subject to VAT
taxation.
It should be noted, previously, that no distinction can be made between consideration
in money and consideration in kind. The ECJ noted, in fact, referring to cases
Goldsmiths (C-330/95), Orfey (C-549/11) and Serebryannay vek (C-283/12), that barter
agreements, under which the consideration is in kind, and transactions for which the
consideration is in money are, “economically and commercially speaking, two identical
situations”57. It can therefore be inferred that whether a supply of service is
remunerated, in turn, through a consideration in the form of another supply of service,
such a consideration in kind must be treated in the same way as a consideration in
money for the purposes of the VAT Directive.
56
Article 2 par.1 of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
57
See case C-330/95 Goldsmiths (Jewellers) Ltd v Commissioners of Customs & Excise [1997], para. 23 to 25, case C-549/11
Direktor na Direktsia «Obzhalvane i upravlenie na izpalnenieto» — grad Burgas pri Tsentralno upravlenie na Natsionalnata
agentsia za prihodite v Orfey Balgaria EOOD [2012], para. 35 and case C-283/12 Serebryannay vek EOOD v Direktor na
Direktsia «Obzhalvane i upravlenie na izpalnenieto» – Varna pri Tsentralno upravlenie na Natsionalna agentsia za prihodite
[2013], para.39.
25
With regard to second criterion, the Court's jurisprudence identifies further "sub"
conditions to be verified in order to establish whether a supply of services is effected for
consideration pursuant to Article 2 (1) (c) VATD:
 there must be a direct link between the service provided by the OSP and the
consideration paid by the user;58
 the consideration in kind must be capable of being expressed in monetary
terms;59
 the consideration must have a subjective value60 inasmuch as the taxable amount
is the consideration actually received and not a value assessed according to
objective criteria.61
3.3.2. Digital services as quid pro quo for an advantage provided to OSP by
users
For the purpose of verifying the presence of a synallagmatic relationship between
services and consideration, it is necessary to take into account the ECJ's legal reasoning
in the Empire Stores judgment (C-33/93)62 as well as the opinion expressed by
Advocate General Van Gerven.
By the writer‟s side, the Empire Stores case deals with a situation in many respects
similar to the business model. The ratio decidendi of the ECJ ruling can therefore help
to form the basis of reasoning in order to deal with the analysis of the case covered by
this thesis.
The facts in detail:
58
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12, case C-102/86 Apple and Pear Development Council v Commissioners of Customs and Excise [1988],
para. 11, case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 11 and 12, and
case C-16/93 R.J. Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994], para 13.
59
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12, case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 16
and case C-380/99 Bertelsmann AG v Finanzamt Wiedenbrück [2001], para. 17.
60
This “subjective value” requirement is strictly connected to the calculation of the taxable amount and is therefore left out of
this thesis which is only aimed at verifying the taxability of free digital services.
61
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12, case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para.
16, and See case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.16.
62
See case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994].
26
The Empire Stores Ltd is a mail order company which carries on a business of
supplying retail goods. The customers can place orders for those goods which are
displayed in company's mail order catalogue. The company searches prospective
customers by advertising into the public in magazines and elsewhere and sending
leaflets by direct mail. The prospective customers are invited to apply for a mail
order catalogue.
The business model for acquiring new customers is based on "promotional
schemes". The strategy in place provides a "self-introduction" scheme and a
"introduce-a-friend"
scheme.
The
self-introduction
scheme
generates
approximately the 90% of new customers.
The self-introduction scheme consists in a ―free gift‖ supplied to the new
customer after he/she has made a first payment for catalogue goods. The
application requires that the prospective customer fills in a form with certain
personal details (name, address, if the applicant has been at that address for less
than three years, etc.). The introduce-a-friend scheme has the same purpose but
involves a third prospective purchaser. Hence, where an existing customer
introduces a new customer by providing his/her personal information, a ―free
gift‖ is supplied by the company to the existing customer when the new purchaser
makes a first payment for catalogue goods.
Following an application, the Empire Stores proceeds to carry out investigations
about the prospective customers. In addition, certain further details were also
required during part of the period covered by the company's assessments, such as
in what capacity the accommodation was occupied and whether the customer had
previous experience of mail order shopping. If the investigations curried out were
satisfied, the prospective customer is accepted and the company sends to him/her
the current catalogue and other necessary documents.
The information stored on company's databases was much comprehensive. By
means of this information the company was able to make ascertainments
regarding the creditworthiness of the prospective customer and evaluate how
commercially attractive that position was for doing business with he/her on a
credit basis.
When new customer places her first order and makes the payment the Empire
27
stores delivers to him/her both the catalogue goods and the ―free gift‖ without
additional costs. Based on the same scheme, if third prospective purchaser is
accepted by the Company and places a first order and the payment is made, the
Company, in respect of that order, supplies the ―free gift‖ to the existing customer
without extra charge.
The Commissioners of Customs and Excise raised assessments of value added tax
in respect of the supply of the ―free gifts‖. The assessment concerns the
consideration given in exchange of the supply of the "free gift" which must be
assess as separate from the consideration given in respect of the new customer‘s
catalogue goods. That consideration consists of the new customer‘s personal
details supplied by the new customer (self-introduction scheme), or the existing
customer (introduce-a-friend scheme), and that the value is the normal retail
value of the ―free gift‖, estimated to be the cost price plus 50%.
The Company replies that the only consideration is the monetary payment made
by the new customer to the Company in respect of the first supply of catalogue
goods and that payment refers to both catalogue goods and ―free gifts‖.63
A preliminary ruling on the following questions was requested to the ECJ:
―For the purposes of Article 11(A)(1)(a) of the Sixth Council Directive on the
harmonization of the laws of the Member States relating to turnover taxes
(Directive 77/388/EEC of 17 may 1977), where a supplier of goods ordered by
mail order from a catalogue (‗catalogue goods‘) operates schemes, full details of
which appear in the decision annexed, under which, in summary:
(i)
when a potential customer supplies satisfactory information about herself (in
particular as to credit-worthiness), the supplier undertakes to supply to that
person without extra charge, if and when she is approved and either orders
catalogue goods or, as the case may be, orders catalogue goods and duly
makes a payment for them, an article chosen by her from a range of goods
offered by the supplier which may or may not also be available from his
catalogue; and
(ii)
when an existing customer finds and introduces to the supplier a new
63
B. Terra and J. Kajus, A Guide to the European VAT Directives [Online] Amsterdam IBFD. Available from
http://online.2.ibfd.org/evd/ [Accessed 4th May 2020], para. 7.3.1.4.2.
28
potential customer who supplies satisfactory information about herself (in
particular credit-worthiness), the supplier undertakes to supply to that
existing customer without extra charge, if and when the person introduced is
approved and either orders catalogue goods or, as the case may be, orders
catalogue goods and duly makes a payment for them, an article chosen by
the existing customer from a range of goods offered by the supplier which
may or may not also be available from his catalogue, and the article not so
available (‗non-catalogue goods‘) supplied as aforesaid are not otherwise
the subject of supplies by the supplier and do not have a normal sale price
attached to them, in relation to each scheme:
1. Is the supply of non-catalogue goods made for a consideration separate from
the sum of money payable to the supplier for the catalogue goods ordered from
him?
2. If the answer to 1. is ‗yes‘, how is the taxable amount to be determined?
Is the taxable amount:
(i)
the purchase price paid by the supplier for the goods; or
(ii)
the price at which the supplier would sell the goods if the goods were
also offered in his catalogue (calculated consistently with the
supplier‘s pricing procedures); or
(iii)
some other and if so what amount?‖.64
In paragraph 13 of the ruling, the ECJ highlights that in the promotional schemes
used by Empire Stores "the supply of the article without extra charge is made in
consideration of the introduction of a potential customer and not in return for the
purchase by that customer of goods offered in Empire Stores' sales catalogue".65
An important aspect worthy of note is that the Court bases that deduction on the fact
that the supply of the "free gift" is not related to future purchases. The Court explains
that the confirmation of that finding derives from the way in which the “article free of
charge” is supplied. The “free gift” is not supplied each time an order is placed and, in
reference to the 'introduce-a-friend' scheme, the supply takes place only in favour of the
64
65
See case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.7.
Ibid, para. 13.
29
person who introduced the third prospective purchaser, whilst the latter does not receive
any "free gift" despite making a purchase.66
The Court's reasoning continues by highlighting that "the finding is not invalidated
by the fact that the article is supplied only if the new customer is approved by Empire
Stores and places and pays for an order." The Court also resumes what the Advocate
General Van Gerven observed in paragraph 15 of his Opinion 67. The AG states that
although the supply of the "free gift" is dependent on additional conditions it does not
affect its characteristic of consideration for the services received by Empire Stores.
Regarding the 'introduce-a-friend' scheme those additional conditions must be satisfied
by the third prospective purchaser and not by the customer who receives the "free
gift".68
The Court concludes that between the supply of the article free of charge and the
introduction of a prospective customer there is a direct link, “since if the service is not
provided no article is due from or supplied without extra charge by Empire Stores”.69
It should be noted that the Court has come to the same conclusions as outlined by the
AG Van Gerven. Also the AG stated that, both in the promotional schemes, the
presentation and provision of the personal information regarding the prospective
customer represent a sine qua non condition for the supply of the “free gift”.70
This concept was reiterated by the ECJ in 2001, regarding Bertelsmann AG v.
Finanzamt Wiedenbrück (C-380/99) case.71
Bertelsmann is a controlling company of a group of companies carrying on
business as book and record clubs. As a business model they give bonuses in
66
See case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.14.
Opinion of Mr Advocate General Van Gerven in case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise,
para. 15.
68
See case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.15.
69
Ibid, para. 16.
70
Opinion of Mr Advocate General Van Gerven in case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise,
para. 17.
71
case C-380/99 Bertelsmann AG mot Finanzamt Wiedenbrück [2001].
67
30
kind (such as books, records and bicycles) to existing club members in return
for the introduction of new members. These articles given as bonus are bought
from third-party suppliers and the costs of their delivering are attributed to the
introducing members72.
The matter referred to the ECJ essentially concerns two questions. The first refers to
establishing the presence of a direct link between the bonus supplied in exchange of a
consideration “paid” in the form of service consisting in the introduction of new
customers and, consequently, the VAT liability of that transaction. The second concerns
the taxable amount and above all to establish whether the delivery costs of the "free
article" should be included in the taxable amount.
Pay attention on the aspect of the criteria of the “direct link” for the VAT-liability
purposes it could be noted that also in this case, where a barter transaction took place,
the ECJ follows the same reasoning as in case Empire Stores and concludes that "there
is a direct link between the supply of the bonuses in kind and the introduction of new
customers".73
The general concept that the existence of direct link is based on the “quid pro quo
principle” can therefore be derived from the ratio of the Empire Stores and Bertelsmann
judgments. A consideration must necessarily correspond to a given supply of a service,
and vice versa.
The characterizing factors of those two cases described above have many similarities
with the business model analyzed in this thesis. In the case of Empire Stores, as in
Bertelsmann, there is a supply of goods in exchange for services consisting of the
introduction of new customers. What is carried out is therefore a transaction in the form
of barter. Nonetheless, those judgments stated that a supply of services may represent a
consideration in form of a "payment in kind" for a supply of goods provided that a
direct link between those two supplies exist. Hence, referring to the business model
72
B. Terra and J. Kajus, A Guide to the European VAT Directives [Online] Amsterdam IBFD. Available from
http://online.2.ibfd.org/evd/ [Accessed 4th May 2020], para. 7.3.1.4.4.
73
See case C-380/99 Bertelsmann AG mot Finanzamt Wiedenbrück [2001], para. 18.
31
object of this thesis, where services are given in retunr for other services, it should be
also noted what Terra and Kajus explain, that is: "The same is true if a supply of
services is performed in exchange for another supply of services, as long as the same
conditions are satisfied".74
Furthermore, in the rulings mentioned above, it should be noted that the
“consideration in kind” is composed of personal data such as name, telephone, address,
status of the occupant of the property, creditworthiness, preferences, etc. In Empire
Stores and Bertelsmann the prospective customers provide the company with such
personal information about themselves or about a third prospective customer. With
reference to these personal data, it has been seen that their direct link with the supply of
goods as well as their liability to VAT have been ascertained. Since those data have the
same nature and content as data covered by the business model, it must therefore be
implicitly assumed that even the personal data provided by Users to OSP can be
considered as "consideration in kind" of a transaction in the form of barter. Thus, they
may be VAT-taxable if all the conditions indicated by the Court occur, inter alia the
criterion of direct link and quantification in monetary terms.
Another important characteristic connected to the existence of the link between the
two supplies in kind, and which can be found both in the cases described above as well
as in the business model, is represented by the presence of a "quid pro quo" transaction.
It is factual that in order to receive what is offered by the OSP, the Users must
necessarily send their own personal data and agree to their exploitation for commercial
purposes by the OSP. Without these two actions the access to digital services is not
allowed. On the other hand, the OSP must supply the right of free use of all digital
services, otherwise users would not register at all or at least the number of users would
be significantly lower. The Court and the AG actually referred to these supply of
personal data defining it as a sine qua non condition75. In Empire Stores and
74
B. Terra and J. Kajus, Introduction to European VAT, Global Topics (Online version, Last Reviewed: 1 January 2020, IBFD,
2019), <http://online.2.ibfd.org/evd/> accessed 18 March 2020, para. 13.2.1.
75
Opinion of Mr Advocate General Van Gerven in case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise,
para. 17.
32
Bertelsmann cases, this method of mutual exchange of benefits is accomplished through
a registration form sent by post, which allows the prospective customer to acquire a
right to receive a gift or bonus at no extra charge. In the business model covered by this
thesis, this occurs in the same way, albeit in a more modern way. Here too, in fact, the
transaction is characterized by the request for a mandatory registration through an
online form without which the access to services is not allowed. In all these situations,
the request for personal data is a propaedeutic activity for the company in order to
provide free of charge goods or services.
In conclusion, on the basis of the above arguments, it can be inferred that the barter
transaction shown in the business model, in which a supply of services is conditional
upon a consideration paid in kind in form of personal data, is actually characterized by a
synallagmatic relationship. Accordingly, it complies with the direct link requirement
being it perfectly in line with the rationes decidendi expressed in the Empire Stores and
Bertelsmann judgments.
3.3.3. Consideration in kind: quantification in monetary terms or economic
value, two sides of the same coin?
After establishing the existence of a direct link between the supply of free digital
services and the consideration paid in kind in the form of personal data, it is necessary
to proceed to ascertain the presence of the rest of requirements identified by the ECJ in
order to consider a supply effected for consideration within the meaning of Article
2(1)(c) VATD.76 To be considered as such, in addition to the "direct link" requirement
seen in the previous chapter, the following additional requirements must also exist:
 the consideration must be capable of being expressed in monetary terms;77
 the consideration must have a subjective value78 and not a value estimated
according to objective criteria.79
76
Article 2 par.1(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
77
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12, case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 16
and case C-380/99 Bertelsmann AG v Finanzamt Wiedenbrück [2001], para. 17.
33
The existence of the requirement "capable of being express in money" is a wellestablished concept in the ECJ's jurisprudence starting from the Coöperatieve
Aardappelenbewaarplaats judgment of 1981.80 In fact, numerous ECJ rulings have
reiterated this concept81. In that sentence it was also highlighted that the consideration
must be identifiable and ascertainable otherwise there cannot be that direct link with the
supply of services82. It is easy to be deduced, actually, that if a consideration is
unascertainable and is not even monetarily quantifiable it will then be difficult to
establish what to include in the taxable amount within the meaning of VATD.
Quantifying a consideration in monetary terms in situations where the barter
transaction involving goods is undoubtedly easier than the barter, as in the case covered
by this thesis, where two services are exchanged.
The goods exchanged or sold in the chain of transactions can come from a previous
purchase or from a production or transformation process. Thus, in the event of problems
related to the assessment of the tax base, the ECJ judgments have shown over time that
in such circumstances the purchase or production costs can be taken into consideration.
In this regard, taking again into consideration the Empire Stores case, in paragraph 17
the Court states that "since the services provided to Empire Stores are remunerated by
the supply of goods the value of the services can unquestionably be expressed in
monetary terms".83 Then in paragraph 19 the court specifies also that “Where that value
is not a sum of money agreed between the parties, it must, in order to be subjective, be
78
This requirement is strictly connected to the calculation of the taxable amount and therefore its in-depth analysis is left out of
this thesis which is aimed solely at verifying the taxability of free digital services.
79
See case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 16, and See case
C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.16.
80
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981].
81
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12, case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 16
and case C-380/99 Bertelsmann AG v Finanzamt Wiedenbrück [2001], para. 17.
82
La sentenza Coöperatieve Aardappelenbewaarplaats (C-154/80) va analizzata insieme alla sentenza Apple and Pear (C102/86). IN Coöperatieve Aardappelenbewaarplaats era caratterizzata da una situazione dove era facile stabilire I servizi
forniti dalla Cooperativa ai suoi membri mentre era difficile accertare il corrispettivo. Conversely, nel caso Apple and Pear il
corrispettivo era accertabile e mentre ad essere di difficile identificazione erano I servizi forniti. Questa situazione aveva
condotto a considerare assente il link tra supply of services e consideration. See case C-154/80 Staatssecretaris van Financiën v
den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats GA" [1981] and case C-102/86 Apple and Pear
Development Council v Commissioners of Customs and Excise [1988].
83
case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para 17.
34
the value which the recipient of the services constituting the consideration for the
supply of goods attributes to the services which he is seeking to obtain and must
correspond to the amount which he is prepared to spend for that purpose. Where, as
here, the supply of goods is involved, that value can only be the price which the supplier
has paid for the article which he is supplying without extra charge in consideration of
the services in question”.84
By focusing on the business model covered by this thesis, the services provided by
the OSP is a right to use about certain digital services. Their use by users is paid in kind
through the granting of rights on their personal data. Establishing a monetary value for
consideration in the form of a personal data can be very arduous but this does not mean
that it is not possible. Besides, exclude a priori these transactions from being assessed
for VAT purposes only because it is difficult to quantify the consumption would result
in a violation of the principle of neutrality and issues related to the distortion of
competition could arise.
But is it therefore possible to quantify in monetary terms the consideration paid in the
form of personal data?
In general, the ECJ has never provided a precise clarification on the monetary
valuation criterion. In fact, the jurisprudence seems to be rather incomplete especially in
cases involving barter transactions. Therefore, the answer to the question posed can only
be based on the analysis of the intrinsic meaning of the concept of "amount assessed in
money". The analysis must therefore start from those jurisprudential concepts already
considered consolidated and repeatedly confirmed by the ECJ, namely, that the
consideration must be able of being expressed in money and that it must have a
subjective value. In other words, the value actually received and not a value estimated
according to objective criteria.
84
Ibid, para 19.
35
Giving a monetary value to a good or service means to estimate the value of that
good or service. This operation necessarily involves the economic sphere. This should
not be seen as something extraneous to tax law as taxation is by its very nature closely
related to the economy. It is no coincidence that direct taxes are calculated on profits
and indirect taxes on consumption.
From an economic point of view, the estimate of a value can be obtained through:
 "Market value" which is the price or amount that someone is willing to pay
in the market for a good or service. That value is based on supply and demand;
 "Economic value" which is be the maximum price that someone is willing
to pay for a good or service therefore it also measures the benefit derived from a
good or service to an individual or a company.85
The Economic value therefore represents the "maximum price that someone is
willing to pay for a good or service". It is not surprising that this definition corresponds
precisely to what ECJ stated in its judgments regarding the concept of "subjective
value" of the consideration.86 Referring again to the Empire Stores case, in fact, in
paragraph 19 the Court explains that “in order to be subjective, be the value which the
recipient of the services ... attributes to the services which he is seeking to obtain and
must correspond to the amount which he is prepared to spend for that purpose”.87 As
can be seen, both of the definitions mentioned above define the value of a good or
service as that amount (or price) that a person is willing to pay (prepared to spend) to
obtain that good or service. The concept of monetary value expressed by the ECJ
corresponds to the concept of Economic value expressed in economics. It could be
argued that the concept of "Economic value" was in fact a reference source for the
Court in defining its ratio decidendi.
85
INVESTOPEDIA, 'Economic Value vs. Market Value: What's the Difference?' (Aug 27, 2019)
<https://www.investopedia.com/ask/answers/061615/what-difference-between-economic-value-and-market-value.asp>
accessed 6 May 2020.
86
See case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 16, case C-33/93,
Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.18 and case C-380/99, Bertelsmann AG v Finanzamt
Wiedenbrück [2001], para.22.
87
case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para 19.
36
It can thus be deduced that in order to find the value in monetary terms of a good or
service, it is necessary to find its "Economic value". Consequently, to verify whether the
consideration in kind in the form of a personal data can be valued in monetary terms, it
is necessary to verify whether it can be valued economically.
Furthermore, there is another factor that confirms the validity of using of the
Economic value. By an economic point of view, it has already been explained that the
estimate of a value can be obtained by means of the Economic value or the Market
value. Thus, the ECJ states also that the value of the consideration “is not a sum of
money agreed between the parties"88. This definition mirrors that of "Market value".
The Market value, in fact, is not an amount agreed between the parties but a value
actually based on supply and demand. It represents the price or amount that someone is
willing to pay in the market”. Following the reasoning adopted so far, this makes it
possible to exclude the use of the "Market value" as a basis for analysis of the
consideration in kind in form a digital services.
Based on the above reasoning, the question posed at the beginning of the chapter
should be modified. The right question to ask will therefore be: Can a consideration in
the form of digital data be economically assessed?
In the economic sphere, the economic assessment of digital services and so-called
"big data" has already been taking place for a long time. In fact, digital information (big
data) is used as production factors in business processes to generate profit, they are
indicated in the financial statements and even marketed. For instance, in an interesting
article the D&V Accounting Services explains that "when RadioShack applied for
bankruptcy protection in 2015, its intangibles and customer data were valued at $ 26.2
million".89
88
See case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 16, case C-33/93,
Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.18 and case C-380/99, Bertelsmann AG v Finanzamt
Wiedenbrück [2001], para.22.
89
D&V Accounting Services, 'BigData Technology: A Crucial Intangible Asset to Boost Business Value' (19 Apr 2016)
<https://www.dvphilippines.com/blog/big-data-a-crucial-intangible-asset-to-boost-business-value> accessed 4 May 2020.
37
The databases are also subject to economic evaluation. Professor Visconti explains
that “databases are increasingly found as an information source for economic and
financial planning (business planning) and in this context the information (data) take
the rank of a real asset (intangible asset with intrinsic value), which can be the object of
sale, license or sharing, manifesting an economic enhancement that is also relevant at a
paradigmatic level, in the context of comparable transactions”. According to Visconti,
the economic evaluation of the databases can take place using the best known methods
of estimating the value of the intangibles, obviously suitably adapted to the case in
point, such as the Cost Approach, Income Approach or Market Approach methods.90
The Organisation for Economic Co-operation and Development (OECD) in its
Interim Synthesis Report entitled “Data-driven Innovation for Growth and Well-being”
indicates Big Data as assets, and writes:” In 2010, the OECD launched a horizontal
project on New Sources of Growth: Knowledge-Based Capital (KBC). The outcomes of
the first phase (KBC1) provide evidence of the impact on growth, and the associated
policy implications, of knowledge-based capital (KBC) comprising a range of assets
including intellectual property (e.g. patents, trademarks, copyrights, trade secrets,
designs); ii) digital information (e.g. data and analytics); and iii) economic
competencies (e.g. organisational capital)‖.91
Another example is represented by the “know-how”. It that has evolved in the
economic sector passing from being a pure theoretical concept to being an “intangible
asset” economically quantifiable whose evaluation takes place both with empirical or
analytical methods notwithstanding it is nothing but information 92. The Regulation
2790/1999 defines it as ―…a package of non-patented practical information, resulting
90
R. Moro Visconti, 'La valutazione economica dei database (banche dati)' [April 2017], Il diritto industriale, Cattolica
Università - Copyright Wolters Kluwer Italia s.r.l.. <http://www.morovisconti.com/wp/wpcontent/uploads/2018/07/valutazione-database-2017.pdf>, May 9, 2020.
91
OECD, “Data-driven Innovation for Growth and Well-being". Interim Synthesis Report, 2014.
92
Roberto Moro Visconti, 'La valutazione economica del know-how' [March 2018], Il diritto industriale, Studi e Materiali,
Quaderni Trimestrali, Ipsoa. <http://www.morovisconti.com/wp/wp-content/uploads/2018/07/valutazione-economica-knowhow.pdf>, May 2, 2020.
38
from experience and testing by the supplier”93. Big data are also undergoing the same
evolutionary path (in the economic sense) as happened for the "know-how".
Finally, to expose an even more direct example on the marketability of personal data,
it can be referred to the presence of many companies called "data brokers" that collect
and sell to other companies huge quantities of databases with personal data for
commercial purposes. In an article by Deloitte it is explained that these companies “are
working hard to cash in on the market for personal data”. Moreover, they explain that
two large aggregator companies like Rapleaf and Acxiom “hold information on as many
as 500 million consumers globally”.94
In light of the foregoing, the question of whether the consideration in the form of a
personal data can be evaluated economically, it is possible to answer in the affirmative.
Thus, it is possible to argue by logical deduction that the consideration in form of
personal data may be expressed in monetary term. In the next section it will be dealt
with the last two requirements identified by the ECJ for the purposes of subjecting the
consideration to VAT taxation, i.e. the legal relationship and reciprocal performance.
3.4 Reciprocal performance based on a legal relationship - last but not
least!
In addition to requirements reviewed so far, the “direct link test” involves two further
examinations. This concern the existence of a legal relationship between the provider
and the recipient pursuant to which there is reciprocal performance. Only if these
requirements are met it is possible to argue that a direct link exists.95
The ratio decidendi behind the concepts of “legal relationship” and “reciprocal
performance” were extrapolated for the first time from the case Tolsma (C-16/93). In
93
COMMISSION REGULATION (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty
to categories of vertical agreements and concerted practices
94
W. D. Eggers, R.Hamill, A. Ali, 'Data as the new currency. Government‘s role in facilitating the exchange.' (Deloitte
Insights, 2020)
<https://www2.deloitte.com/us/en/insights/deloitte-review/issue-13/data-as-the-new-currency.html> accessed 4 May 2020.
95
C. Trenta, Rethinking EU VAT for P2P Distribution (Kluwer Law International, 2015), para. 8.02.
39
paragraphs 13 and 14 the Court underpinned the principle that between the provider
(OSP) and the recipient (User) there must be a legal relationship “pursuant to which
there is reciprocal performance, the remuneration received by the provider of the
service constituting the value actually given in return for the service supplied to the
recipient”96. Subsequently, other sentences confirmed that ratio97, making those two
criteria become part of the integrated requirements of the “direct link test” aimed at
verifying whether a supply of services is made for consideration and thereby taxable
within the meaning of Article 2 (1) (c) of the VAT D.98
The facts in the Tolsma case are briefly mentioned here below.
Mr. Tolsma played a musical instrument on the public highway. He invited
passers-by to leave donation in a tin without being able to claim any
remuneration by right. There was no obligation whatever on passers-by to give
him donations, whose amount they determined themselves. In respect of that
activity, Mr Tolsma was assessed to output tax on his takings.He appealed
since he believed that his takings were outside the scope of VAT. 99
In its judgment, the Court highlighted that the revenues consisting of donations given
by passers-by cannot be considered as consideration for a service rendered to the latter.
Since passers-by pay an offering on a voluntary basis and the amount is decided at their
sole discretion, consequently there can be no agreement between the parties.
Finally, it is explained that there is no necessary correlation between the musical
performance and the consequent oblations as passers-by do not commission the
musician to play for them. Moreover, the offering in the form of money, if it is given, is
paid for reasons of a subjective nature and not depending on the performance. Passers96
See case C-16/93 R.J. Tolsma contro Inspecteur der Omzetbelasting Leeuwarden [1994], para. 13 and 14.
See, inter alia, case C-172/96 Commissioners of Customs & Excise v First National Bank of Chicago [2008], para. 26, case
C-498/99 Town & County Factors Ltd v Commissioners of Customs & Excise [2002], para. 13, C-174/14 Saudaçor –
Sociedade Gestora de Recursos e Equipamentos da Saúde dos Açores SA v Fazenda Pública [2015], para. 32, case C-432/15
Odvolací finanční ředitelství v Pavlína Baštová [2016], para. 28 and case C-36/16 Minister Finansów v Posnania Investment
SA [2017], para. 31.
98
Article 2 (1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
99
B. Terra and J. Kajus, Introduction to European VAT, Global Topics (Online version, Last Reviewed: 1 January 2020, IBFD,
2019), <http://online.2.ibfd.org/evd/> accessed 18 March 2020, para 8.4.5.
97
40
by were not actually obliged to pay any money. They could decide to donate money
without listening or listening without giving any money. From the player's point of
view, he also had no obligation towards passers-by, being able to stop playing at his
choice
100
. In short, there was no agreement between the player and the passers-by
involving reciprocal duties and benefits in that transaction.101
As previously mentioned, it must be noted that the requirements present in Tolsma
case must be analyzed in conjunction with the other requirements stated in Coöperatieve
Aardappelenbewaarplaats case which together forming part of the “direct link test”.
Thus, in order to verify the compliance of a transaction with the requirements expressed
in the “direct link test”, (i)there must be an agreement, i.e. a legal relationship, between
the provider and the recipient and, at the same time, (ii)there must also be a direct
nexus, precisely a synallagmatic relationship, between the supply and the consideration
object of that agreement.102
This ”double” approach is clearly evident also in the case Český Rozhlas (C-11/15).
The Český Rozhlas is a company created by statute. The company's activity consists of
providing public broadcasting of radio programmes which is funded by a compulsory
statutory fee paid by owners or possessors of a radio receiver. The referring court asks
whether that public broadcasting activities would constitute a supply of services
effected „for consideration‟ but exempted from VAT or, instead, they would not
constitute a taxable transaction falling within the scope of VAT directive. In that
occasion, the Court ruled that not only is there no direct link "between the radio fee and
the public broadcasting service" but the payment of that compulsory statutory fee "does
not form part of a legal relationship involving a reciprocal exchange of services but
rather is the performance of an obligation imposed by law".103
100
See case C-16/93 R.J. Tolsma contro Inspecteur der Omzetbelasting Leeuwarden [1994], para. 16 and 17.
C. Trenta, Rethinking EU VAT for P2P Distribution (Kluwer Law International, 2015), para. 8.02.
102
In the opinion of the author of this thesis.
103
case C-11/15 Odvolací finanční ředitelství v Český rozhlas [2016], para. 35.
101
41
With regard to the jurisprudential principle expressed in Tolsma case at paragraphs
13 and 14, in which it is stated that ―remuneration received by the provider of the
service constituting the value actually given in return for the service supplied to the
recipient‖, the Court has not provided clarifications that allow reaching an exhaustive
interpretation. For the purposes of this thesis, therefore, we have chosen to analyze this
concept on the basis of a literal and logical interpretation.
The meaning of that ”...the value actually given in return for…‖, by the writer‟s side,
clearly expresses that concept of synallagmatic connection between the remuneration
received and the service supplied, which is nothing but the essence of the “direct link”
requirement as expressed in the Coöperatieve Aardappelenbewaarplaats case, as well
as in subsequent judgments104. Consequently, since the ratio of the Tolsma judgment
represents the direct evolution of the ratio developed by Court in the Coöperatieve
Aardappelenbewaarplaats case, it can be assumed that the meaning to be attributed to
”...the value actually given in return for…‖ in Tolsma is the same as that attributed to
the direct link requirement in Coöperatieve Aardappelenbewaarplaats. They express the
same legal concept. This interpretation, by the way, is could be confirmed by the fact
that it does not present interpretative contrasts or discrepancies regarding the joint
application of those requirements as intended in the “direct link test”.
Subsequently, in case Town & County (C-498/99 ), there has been an interpretative
evolution of the criteria of „legal relationship‟ by the ECJ. The ruling did provide more
clarification regarding ”how legally binding should the agreement” in order not to
compromise the direct link.
Town & County is a representative member of a group of companies, one of
which organised a weekly game competition with several prizes to be won. The
prizes consisted of money, goods or services. The competitors participate in the
game by filling an entry form and a payment of an entry fees. According to the
104
See case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen "Coöperatieve Aardappelenbewaarplaats
GA" [1981], para. 12, case C-102/86 Apple and Pear Development Council v Commissioners of Customs and Excise [1988],
para. 11, case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 11 and 12, and
case C-16/93 R.J. Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994], para 13.
42
competitions rules printed on the entry forms, the competitors agree that the
obligations created for the organiser are 'binding in honour only'.
The Commissioners decided that Town & County was liable for VAT on the full
amount of the entry fees received. Town & County appealed against that
decision. The VAT and Duties Tribunal referred the case to the ECJ for a
preliminary ruling two question on the interpretation of Articles 2(1), 6(1) and
11A(1) of the Sixth Directive.
The VAT and Duties Tribunal referred to the ECJ for a preliminary ruling two
questions on the interpretation of Articles 2(1), 6(1) and 11A(1) of the Sixth
Directive.
The first question concerned whether a transaction which is agreed by the
parties thereto to be ‗binding in honour only‘ (and therefore unenforceable
under domestic law by legal proceedings) capable of being a taxable
transaction for the VAT purposes. The second question concerned
clarifications regarding the composition of the taxable amount whether the
first question had been answered affirmative.105
The Town & County defends itself by asserting that no legal relationship exists
between the parties, since the contractual clause prescribes the organiser‟s obligations
were binding in ”honour only” and therefore the obligations are not enforceable.106
In context like a game competition with prize, the Court observes that a reciprocal
performance within the meaning of the Tolsma judgment arises between the organiser of
the competition and the competitors. In paragraph 20, the Court highlights a direct
nexus between the remuneration and the services provided, and explains that "the
remuneration received by the organiser in the form of entry fees constituting the value
actually given in return for the service he supplies to the competitors".107
105
See case Case C-498/99 Town & County Factors Ltd v Commissioners of Customs and Excise [2002].
Ibid, para. 19.
107
Ibid, para. 20.
106
43
Then, however, the Court shifts its analysis to the possible legal consequences that
would occur in the event that the meaning of "legal relationship" would concern only
those agreements where the obligations can be enforceable. The Court notes that by
making the existence of a legal relationship conditional on a prerequisite of
enforceability would compromise the effectiveness of the VAT Directive, because:
 the differences between the various legal systems of the Member States
could lead to that transactions (falling within that directive) could vary from one
Member State to another;
 risks of chicanery could arise since a taxable person could easily avoid
paying VAT by means of contractual clauses such as ”binding in honour
only”.108
Based on this reasoning, the Court states that a legal relationship in the Tolsma sense
can exist because an agreement between the parties aiming to make obligations not
enforceable constitutes itself the very expression of a legal relationship.109
The Court concludes by replying to the first question that "...a supply of services
which is effected for consideration but is not based on enforceable obligations,
because it has been agreed that the provider is bound in honour only to provide
the services, constitutes a transaction subject to VAT"110. Thus, the agreement
between the provider and recipient does not necessarily have to be binding in order to
consider the link between them as direct.
In the end, it is worth reporting what was expressed by the Advocate General Kokott
in his opinion concerning the Posnania Investment SA case (Case C-36/16). His
interpretative point of view regarding the meaning of "legal relationship" and
“reciprocity” is of particular interest since he stressed that they must be ―…construed
very widely. It can depend neither on the validity in civil law nor on the basis in civil or
public law nor on the reciprocity of that basis. The sole decisive factor is whether the
108
See case Case C-498/99 Town & County Factors Ltd v Commissioners of Customs and Excise [2002], para. 21 and 22.
Ibid, para. 23.
110
Ibid, para. 24.
109
44
recipient expends assets on a consumable benefit which is bestowed on him by a taxable
person”.111
It can thus be inferred that two requirements are necessary for verifying the existence
of a direct link between the provider and the recipient. They concern: (i) the presence
of an agreement (legal relationship), which is characterized by the consensus and
awareness of both parties involved, and (ii) an causal relationship definable as an
exchange of reciprocal performances arising on the basis of that agreement. However,
the legal relationship between the parties does not necessarily have to be binding in
order to consider the nexus between them as direct.
The analysis will now focus on applying these case-law principles on the business
model object of this thesis in order to assess the existence of ”legal relationship” and
”reciprocal performance” requerements between the OSP and the User. The relationship
between User and OSP highlighted in the business model is established through the
following two actions:
 filling in a registration form by entering personal data such as name, email,
telephone number, address, etc;
 acceptance of specific conditions regarding the use of digital services.
In order to have a practical example, the agreement that Facebook submits to its
Users will be take in consideration. Hereinafter, it have been summarized some of the
clauses of that agreement:
 the user grants Facebbok a non-exclusive, however transferable license, which
can be granted as a sub-license, valid all over the world, and concerns texts,
photos, videos, etc. This license ends with the closure of the account. There are
exceptions regarding shared material;
 Facebook undertakes not to sell the personal data to third parties;
 Tthe User undertakes to respect certain rules of use;
111
Opinion of Advocate General Kokott, Case C-36/16 Posnania Investment, para. 19
45
 Facebook has the right to unilaterally close an account both for "just cause" in
the event of a contractual offense by the user (publication of prohibited content,
etc.) but also if the company considers the user as the source of risks to society
itself.
 Facebook does not give guarantees and excludes certain responsibilities;
 both the User and Facebook have the "right of withdrawal" at any time without
notice (i.e. recessum ad nutum).112
These clauses correspond to those more relevant conditions which are also found in
others OSP‟s agreements and which, therefore, by the writer‟s side, can be used as a
basis for the analysis of all the activities expressed in the business model covered by
this thesis.
Looking those clauses, it can be easily seen that the agreement established between
OSP and User does not present all the characteristics of a typical contract as required by
civil law. As in the Town & County case, here too the agreement does not present
elements that could suggest that it is based on enforceable obligations.113
However, as already seen in Town & County, the agreement that the user accepts
during registration contains clauses aimed at excluding liability, claims and legal actions
in favor of the OSP. Returning to the Court's decision in the Town & County case, the
ECJ in this regard stated that a legal relationship in the Tolsma sense can exist “because
an agreement between the parties aiming to make obligations not enforceable
constitutes itself the very expression of a legal relationship”.114 Moreover, by the
writer‟s side, there is also an additional element capable of proving the existence of a
legal relationship. Agreements used by OSP like Facebook, usually include clauses of
"right of withdrawal". Since the ”withdrawal” always refers to an agreement (regardless
whether binding or not), hence, in order to withdraw, the parties must have previously
entered into an agreement.
112
R. Cosio, 'Facebook e Social. Natura del contratto tra utente e social' (Ricerche giuridiche,Vol. 6 – Num. 1, e-ISSN 22816100, June 2017)pp. 135- 146.
113
Here, it refers to contractual obligations of a civil or commercial nature and not to non-contractual obligations or other
obligations deriving from criminal offences.
114
See case Case C-498/99 Town & County Factors Ltd v Commissioners of Customs and Excise [2002], para. 23.
46
The requirement of legal realtionship and mutual performance can be further
demonstrated by examining once again the facts in the Tolsma case. By comparing it
with the business model, it is noted that the latter presents a situation in fact opposite to
that highlighted in the Tolsma case.
In Tolsma, in fact, the counterpart (passers-by) was free to use the service (listen to
music) without having to give anything in return or, on the basis of a subjective
assessment, could choose the amount of the donations to offer. The player, on the other
hand, offered services (playing music) without demanding anything in return from
passers-by and was free to stop playing at his choice. Conversely, in the business model
there is a mandatory registration, as well as a subsequent approval by the OSP, thanks to
which can start a consensual exchange of mutual benefits between the parties. The right
to use of personal data is given in exchange for the right to use of digital services. The
decision to grant or not the right of exploitation personal data is not a subjective choice
for the User as it happens in Tolsma where, instead, the musician played regardless of
the payment of an offering.
It can therefore be concluded by asserting that the transaction described in the
business model
is characterized by the presence of the "legal relationship" and
"reciprocal performace" requirements as developed in the "direct link test" by the ECJ.
47
4. Conclusion
This thesis is aimed at to demonstrate that free digital services supplied in exchange
for personal data are VAT taxable pursuant to Article 2 (1)(c) of VATD.115
It has been assumed that between the internet-base Companies and the Users take
place a reciprocal exchange of services characterized by a synallagmatic relationship
(quid pro quo) in the form of barter. Namely, the right to use digital services are
supplied in return for a consideration paid in kind in form of personal data.
This characteristic made this situation particularly difficult to be evaluated for the
VAT purposes. In fact, other than Article 2(1)(c) VATD, the VAT Directive does not
provide further apodictic elements that can help to interpret clearly when a supply of
services must be effected “for consideration” and therefore falls within the scope of
VAT. A valid support could only be found in the case-law of the European Court of
Justice.
In order to cover this regulatory vacuum, the Court had developed a “direct link test”
by means of a joint analysis of different jurisprudential principles,. The reason behind
that criteria was to unequivocally ascertain the taxability of transactions pursuant to
Article 2(1) VATD.116
By applying the criterion in relation to the business model in question, it followed
that the analysis had to first of all seek to (i) establish whether the supply of digital
services fall within those services provided by the VAT legislation. Subsequently, it
had to be ascertained (ii) whether the personal data actually represent a consideration
paid in kind in order to get the right to use of those digital services supplied by the OSP
and, thereby, establish (iii) whether there is a direct link between the supply of the
115
See Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
116
Article 2 par.1 of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax OJ L 347 of 11 December 2006.
48
digital services and the personal data. Finally, attention had be paid to establishing (iv)
whether there is a legal relationship and a mutual performance between the OSP and the
User.
Initially it was ascertained that services supplied by OSP can mainly constitute
Electronically supplied (and only marginally Telecommunications services) since they
are essentially delivered over the internet or an electronic network, automated, involve
minimal human intervention and are impossible to ensure in the absence of information
technology.
Subsequently it was highlighted that a supply of services may represent a
consideration in form of a "payment in kind" for a supply of other services provided that
a direct link between those two supplies existed. On that basis the analysis focused on
ascertaining the existence of the link between the two supplies in kind.
It was argued that the direct link requirements expressed in the Empire Stores and
Bartelsmann cases could be found also in the business model. In Empire Stores and
Bertelsmann cases, this method of mutual exchange of benefits was accomplished
through a registration form sent by post, which allowed the prospective customer to
acquire a right to receive a gift or bonus at no extra charge. In the business model
covered by this thesis, this occurred in the same way, albeit in a more modern way.
Here too, in fact, the transaction was characterized by the request for a mandatory
registration through an online form without which the access to services was not
allowed. In all these situations, the request for personal data was a propaedeutic activity
for the company in order to provide free of charge goods or services. On the basis of
such arguments it has been inferred that the barter transaction shown in the business
model, in which a supply of services is conditional upon a consideration paid in kind in
form of personal data, was actually characterized by a synallagmatic relationship.
Accordingly, it complied with the direct link requirement.
Quantifying the consideration in monetary terms represents the second requirement
that had to be ascertained. In general, the ECJ had never provided a precise clarification
49
on the monetary valuation criterion. It was therefore argued that giving a monetary
value to a good or service means to estimate the value of that good or service. This
operation necessarily involved the economic sphere. Thus, it had to be noted that the
Economic value means the "maximum price that someone is willing to pay for a good or
service". This definition corresponded precisely to what ECJ stated in its judgments
regarding the concept of "subjective value" of the consideration.117
Through a subsequent comparison of the rationes decidendi of the ECJ‟s judgments
with the definition of Economic value, it could be ascertained that both definitions
defined the value of a good or service as that amount (or price) that a person is willing
to pay (prepared to spend) to obtain that good or service. The concept of monetary value
expressed by the ECJ corresponded therefore to the concept of Economic value
expressed in economics. It could thus be deduced that in order to find the value in
monetary terms of a service, it was necessary to find its "Economic value".
Consequently, to verify whether the consideration in kind in the form of a personal data
can be valued in monetary terms, it wass necessary to verify whether it could be valued
economically.
Thus, it has been demonstrated by means of several practical examples that the
economic assessment of digital services and so-called "big data" has already been taking
place for a long time. In fact, digital information (big data) was used as production
factors in business processes to generate profit, they are indicated in the financial
statements and even marketed. Therefore, it could be argued the consideration in the
form of a personal data could be evaluated economically. In turn, it wass also possible
to argue by logical deduction that the consideration in form of personal data could be
expressed in monetary term.
Finally, it was proceeded to verify the presence of the last two requirements
necessary for verifying the existence of a direct link between the provider and the
117
See case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise [1988], para. 16, case C33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994], para.18 and case C-380/99, Bertelsmann AG v
Finanzamt Wiedenbrück [2001], para.22.
50
recipient. They concerned: (i) the presence of an agreement (legal relationship), which
is characterized by the consensus and awareness of both parties involved, and (ii) an
causal relationship definable as an exchange of reciprocal performances arising on the
basis of that agreement. However, the legal relationship between the parties does not
necessarily have to be binding in order to consider the nexus between them as direct.
The analysis was therefore focused on applying case-law principles on the business
model object of this thesis in order to assess the existence those requerements between
the OSP and the User.
In Town & County case, the agreement the user accepts during registration contains
clauses aimed at excluding liability, claims and legal actions in favor of the OSP.
Referring to the Court's decision in the Town & County case, the ECJ in this regard
stated that a legal relationship in the Tolsma sense can exist “because an agreement
between the parties aiming to make obligations not enforceable constitutes itself the
very expression of a legal relationship”.118 Moreover, by the writer‟s side, there was
also an additional element capable of proving the existence of a legal relationship.
Agreements used by OSP like Facebook, usually include clauses of "right of
withdrawal". Since the ”withdrawal” always refers to an agreement (regardless whether
binding or not), hence, in order to withdraw, the parties must have previously entered
into an agreement. It could be argued that the transaction described in the business
model was characterized by the presence of the "legal relationship" and "reciprocal
performace" requirements.
The analysis applied to the business model have demonstrated the presence of all the
requirements as expressed in the "direct link test" devoleped by the ECJ. The most
controversial aspect was to ascertain whether the consideration in kind was capable of
being expresse in monetary term. By means of a joint analysis of different
jurisprudential principles it was possible to demonstrate that the digital personal data
118
See case Case C-498/99 Town & County Factors Ltd v Commissioners of Customs and Excise [2002], para. 23.
51
used as consideration in kind can absolutely be subject to an economic estimate and thus
quantifiable in monetary terms.
It can therefore be concluded by asserting that the transactions characterized by the
supply of free digital services to Users in exchange for personal data  as described in
the Business Reference Model above  fall within the scope of Article 2 (1)(c) of EU
VAT Directive and therefore must be subject to indirect taxation.
Establishing a monetary value for a consideration paid in the form of a personal data
can actually be very arduous but this does not mean that it is not possible. Exclude a
priori these transactions from being assessed for VAT purposes only because it is
difficult to quantify the consumption would result in a violation of the principle of
neutrality and issues related to the distortion of competition could arise.
52
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Table of Cases
Case C-154/80 Staatssecretaris van Financiën v den kooperativa föreningen
"Coöperatieve Aardappelenbewaarplaats GA" [1981].
Case C-102/86 Apple and Pear Development Council v Commissioners of Customs and
Excise [1988].
57
Case 230/87 Naturally Yours Cosmetics Limited v Commissioners of Customs and
Excise [1988].
Case C-16/93 R.J. Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994].
Case C-33/93, Empire Stores Ltd v Commissioners of Customs and Excise [1994].
Case Goldsmiths (Jewellers) Ltd v Commissioners of Customs & Excise [1997].
Case C-380/99 Bertelsmann AG mot Finanzamt Wiedenbrück [2001].
Case C-498/99 Town & County Factors Ltd v Commissioners of Customs and Excise
[2002].
Case C-412/03 Hotel Scandic Gåsabäck AB v Riksskatteverket [2005].
Case C-172/96 Commissioners of Customs & Excise v First National Bank of Chicago
[2008]
Case C-246/08 Commission v Finland.
Case Commissioners for Her Majesty‟s Revenue and Customs v Loyalty Management
UK Ltd (C-53/09) and Baxi Group Ltd (C-55/09).
Case C-285/10 Campsa Estaciones de Servicio SA v Administración del Estado [2011].
Case C-549/11 Orfey [2012].
Case C-174/14 Saudaçor – Sociedade Gestora de Recursos e Equipamentos da Saúde
dos Açores SA v Fazenda Pública [2015].
58
Case C-11/15 Odvolací finanční ředitelství v Český rozhlas [2016].
Case C-432/15 Odvolací finanční ředitelství v Pavlína Baštová [2016]
Case C-36/16 Minister Finansów v Posnania Investment SA [2017]
Opinion of Advocate General
Opinion of Advocate General Kokott in case C-36/16, Minister Finansów v Posnania
Investment SA.
Opinion of Advocate General Van Gerven in case C-33/93, Empire Stores Ltd v
Commissioners of Customs and Excise.
59