Italy is seeking 12.5 million euros ($13 million) from Elon Musk's social network X as part of a tax investigation, according to four sources familiar with the matter. This move is seen as a significant development that could set a precedent for the tech industry in Europe.
Despite the relatively small amount for X, a company that raked in $3.4 billion in revenue in 2023, the case is crucial due to its implications on how social networks offer their services.
Italian tax authorities argue that user registrations on X, Facebook, and Instagram could be considered taxable transactions, involving the exchange of personal data for a membership account.
If a judicial review supports this interpretation, it might lead to changes in the tech industry's business models, affecting the 27-nation European Union since VAT is a standardized EU tax.
X has not yet responded to requests for comment on this issue.
The situation is sensitive, especially given the threat of tariffs on countries like Italy imposing digital service taxes on U.S. tech firms. Musk also maintains a good relationship with Italian Prime Minister Giorgia Meloni through his Starlink communications business.
Italy introduced a tax on digital services for small and medium-sized enterprises in November to address U.S. concerns about discrimination.
Last April, Milan's Guardia di Finanza (GDF) police concluded a tax audit challenging X for not paying 12.5 million euros in VAT from 2016 to 2022, sources informed Reuters. Musk took over the formerly-named Twitter platform in October 2022.
In January, Italy's Revenue Agency forwarded X its observations related to the 2016 tax year, endorsing the GDF investigation findings, sources added.
In similar cases, Milan prosecutors are probing X and Meta, which reached an initial stage in December.
Both X and Meta have until late March or early April to respond to tax authority observations. They can agree and pay or start a judicial tax dispute.
Italy has been actively pursuing tech giants for tax compliance. Google recently paid 326 million euros to settle a tax claim from 2015 to 2019.
However, sources suggest that X and Meta are not engaging further because the case goes beyond settlements, touching on structural business and taxation changes.
The Revenue Agency might drop its interpretation or launch a full-scale judicial tax review if no agreement is reached, a process in Italy that could last around 10 years.
This timeline poses risks for the state and companies involved, as potential liabilities increase annually if a ruling is against them. ($1 = 0.9551 euros)