Italy Demands €12.5M from X in Digital Service Tax Dispute

Italy has initiated tax proceedings against Elon Musk's X, claiming €12.5 million ($13 million) in unpaid value-added tax (VAT), according to sources with direct knowledge.

The claim stems from a parallel investigation into Meta, which raises concerns about the potential impact on the tech sector in Europe. Italian authorities argue that user registrations on X and Meta platforms constitute taxable transactions, implying an exchange of membership accounts for personal data.

If upheld, this interpretation would demand a significant shift in the tech industry's business model, with implications across the 27-member European Union due to VAT's harmonized nature.

The issue is heightened by U.S. President Donald Trump's threats to impose tariffs on countries like Italy that levy digital service taxes on American tech companies. However, Musk has fostered a positive relationship with Italian Prime Minister Giorgia Meloni and aims to expand his Starlink operations in the country.

In April 2022, Milan's Guardia di Finanza concluded an audit challenging X's non-payment of VAT from 2016 to 2022. In January, Italy's Revenue Agency endorsed the findings and formally presented its observations to X, limited to the 2016 tax year.

As in similar cases, Milan prosecutors have opened a criminal investigation into X, following the precedent set by Meta's ongoing inquiry. Both companies have until late March or early April to respond to the tax authority's observations and either accept the terms or initiate a judicial tax dispute.

Italy has proactively pursued tax enforcement against tech firms. Google recently settled a claim for €326 million covering the period from 2015 to 2019.

However, sources suggest that X and Meta are reluctant to engage with authorities, as the dispute involves not only settling a figure but also accepting a broader approach that would transform their business practices and tax liability. Both companies await a final decision from the Revenue Agency.

If no agreement is reached, the Revenue Agency may drop its interpretation or initiate a protracted judicial tax review that could span over a decade. This poses risks for both the state, which may receive a reduced settlement, and the companies, whose potential liability would accumulate over time.