Italy extends big tech tax probe to Musk's X social network

By Emilio Parodi

MILAN (Reuters) - Italy is claiming 12.5 million euros ($13 million) from Elon Musk's social network X following a tax probe running parallel to one into Meta, four sources with direct knowledge of the matter said, the latest move in a potential test case for the tech sector in Europe.

While the value-added tax claim is a trifling sum for X, a company that generated $3.4 billion in revenue in 2023, the case is significant as it hinges on the way social networks provide access to their services.

Italian tax authorities argue that user registrations with X, and Meta platforms such as Facebook and Instagram, could be seen as taxable transactions as they imply the exchange of a membership account in return for a user's personal data.

If a judicial review upholds this interpretation, it would entail a change in the business model of the tech industry, extended to the 27-nation European Union since VAT is a harmonised EU tax.

X did not immediately respond to a request for comment.

The issue is particularly sensitive as U.S. President Donald Trump has raised the issue of imposing tariffs on imports from countries such as Italy that levy digital service taxes on U.S. tech companies.

Musk also has a good working relationship with Italian Prime Minister Giorgia Meloni and is keen to expand his Starlink communications business in the country. 

Italy extended its domestic tax on digital services to small and medium-sized enterprises (SMEs) in November to try to overcome U.S. objections that the levy is discriminatory.

TAX AUDIT

Milan's Guardia di Finanza (GDF) police closed a tax audit last April challenging X over non-payment of 12.5 million euros in VAT for the years 2016 to 2022, the four sources told Reuters. Musk completed his takeover of the formerly-named Twitter platform in October 2022.

In January, Italy's Revenue Agency sent X a formal list of its own observations related only to the 2016 tax year, for which any action expires this year, fully endorsing the conclusions of the GDF investigation, the sources added.

As has happened in previous such cases, Milan prosecutors opened a criminal investigation into X similar to one into Meta which completed an initial stage in December.

The sources said that both Meta and X have until late March or early April to respond to the tax authority's observations, after which they will either accept its view and pay an agreed sum or initiate a fully-fledged judicial tax dispute.

Italy has actively pursued tech companies over tax. Google last week agreed to pay 326 million euros to settle a tax claim relating to the period between 2015 and 2019.

Two of the sources, however, said that X and Meta were no longer interacting with the authorities because the case was not simply about agreeing a settlement figure but accepting a broader approach that would change the way business is done and how it is taxed.

The two companies are awaiting a final decision by the Revenue Agency, they said.

Italy's Revenue Agency, which reports directly to the Economy Ministry, will have two options if no agreement is reached: either drop its interpretation or initiate a full-blown judicial tax review.

This latter procedure involves three different levels of judgment and in Italy has an average duration of about 10 years. That brings risks for the state, which could wait a decade and be left only with a handful of cash, and for companies, because from year to year the possible bill would rise if they lose.  ($1 = 0.9551 euros)

(Reporting by Emilio Parodi, editing by Keith Weir and Emelia Sithole-Matarise)