Update 2012: Italy won't demand back taxes from Vatican

It has been charged for years that the tax exemptions given to Church-run businesses violate European Union Commissioner for Competition laws. However, after intense pressure from the Vatican and the Government of Italy, whose then PM Berlusconi needed Church support, the EU backed off. Two investigations by European Union Commissioner for Competition were shelved and nothing has been heard so far of a third which was launched in 2010. [1] However, if the Commission rules against Italy, the EU could order the country to demand that the Church reimburse the government for the unpaid taxes.

The levies in question are the property taxes formerly known as ICI, now IMU. In 2004, the high court declared that the commercial activities of institutions like the Church could be taxed. However, the next year, facing a tight election, the Berlusconi government overturned this. The Prodi government that came in as the result of the narrow victory essentially confirmed this. It clarified that the tax exemption applied to properties not “exclusively” commercial. This left a loophole which could be exploited by tucking a small shrine in the corner of a commercial property in order to get free of property tax.

The loophole has remained, even in the series of emergency measures was introduced in the second half of 2011 to try to calm world markets and rein in Italy’s debt. Neither Berlusconi nor his successor, Monti, made any moves to tax Church enterprises. When the interim Prime Minister Monti was asked directly if his government would reconsider the tax-exempt status of the church in future austerity measures, he demurred, saying that the matter was still before the EC. [2] However, when a prominent Cardinal suddenly decided that tax evasion was a sin, this prompted speculation of an agreement to pre-empt the threat of action by Brussels against the Italian government. [3] And, indeed, a short time later, with the EC verdict pending, Monti announced that the Vatican would pay property tax on its businesses, after all, though he did not say how much. In view of this, he expected the EC to relent on demands that tax payments be backdated. [4]  

Finally, under scrutiny from the EU watchdogs, in February 2012, the government amended Italy’s property tax law to end the Church’s privileges. However, in October the Council of State, Italy’s highest ranking court for administrative litigation, rejecting the tax decree. Monti is still promising -- somehow -- to end the Italian Catholic Church's historic tax exemption from 2013. [5] But don't hold your breath on that.

Vatican tax exemptions at Italy’s expense

The country’s loss in potential revenues is huge: the real estate agency, Gruppo RE, which has managed Vatican property for more than 30 years estimates that a fifth of publicly owned properties in Italy are directly or indirectly controlled by the Church. [6]  And this is seen by some as a conservative estimate: the respected El Pais puts it at between 20 and 30%, including 115,000 houses, 36,000 parish buildings, 9,000 schools, and 4,000 hospitals and health centres. [7] According to the Italian Radical Party, of about 50,000 buildings around Italy owned by the Vatican at least 30,000 are used for business and commerce and are tax-free. This even includes some police stations in Rome. Through the ICI exemption, the Vatican, the largest landlord in the country, avoids paying about €2 billion a year. [8]

The Vatican also runs a large religious tourism business in Italy. [9] Each year there are 35 million religious tourists in Italy, 30 per cent of them foreigners. They occupy 120,000 Vatican-owned bedrooms, 15 per cent of Italy’s overall capacity. [10] Just as an office complex can become tax exempt through a small chapel, a convent that is run as a hotel can claim the exemption if there are also a few nuns living there.

And it’s not just exemptions from the property taxes. The Vatican also pays no sales tax (VAT) and enjoys a 50 per cent reduction on corporate tax. [11]

The Vatican Tourist Board (called ORP) runs pilgrimages to Rome from across the world. It even has its own airline. It books accomodation and runs tours with a fleet of seven double-decker buses taking visitors around for €18 each. This board pays almost no taxes. [12]

Vatican’s direct profits from Italy

In addition to the tax exemptions, the Church also benefits from direct subsidies which come from all levels of government — municipal, provincial, regional, national — and even from various state agencies. [13]

On top of all this is the “church tax” which is collected by the government. It was devised by a clever cardinal as a default option, with a proportional allocation which favours the the Vatican receives . This compulsory payment 0.8 per cent of each citizen’s taxes goes automatically to the Church if the taxpayer does not specifically state otherwise. [14]

Each year, the Vatican receives €1bn from Italian taxpayers. And because of Article 6 of the 1929 Lateran Treaty, the Vatican State also pays no water bills. The clause that enough water must be “assured to the Vatican” is taken to mean “paid for by Italy”. Thus the Italians subsidise completely the five million cubic metres of water that the Vatican uses each year. [15]

Little wonder that in 2010 the Vatican installed on its tiny territory its one hundredth fountain. [16]
 
 

Notes

1. “Property tax relief for the Church: EU takes Italy to court”, La Repubblica, 25 June 2007, Concordat Watch translation. http://www.concordatwatch.eu/topic-9781.843

“Italian and Vatican pressure overcome by threat to go before the European Court”, La Repubblica, 24 September 2010, Concordat Watch translation. http://www.concordatwatch.eu/topic-9781.843

2. “Italy’s Catholic Church flexible on property tax”, AP, 10 December 2011. http://www.timesleader.com/business/Italys_Catholic_Church_flexible_on_property_tax_12-10-2011.html

3. John Hooper, “Italian cardinal brands tax evasion a sin: Angelo Bagnasco calls for 'serious, relentless' action against tax dodgers, prompting speculation of government accord”, Guardian, 24 January 2012.
http://www.guardian.co.uk/world/2012/jan/24/italian-cardinal-tax-evasion-sin

4. “Italy to End Tax Breaks on Church Enterprises, Monti Says, Bloomberg News, 16 February 2012. http://www.bloomberg.com/news/2012-02-16/italy-to-end-tax-breaks-on-church-enterprises-monti-says.html

“Vatican told to pay taxes as Italy tackles budget crisis”, Independent, 2010-02-17. http://www.independent.co.uk/news/world/europe/vatican-told-to-pay-taxes-as-italy-tackles-budget-crisis-6988938.html

5. “Italy court blocks Church property tax”, AFP, 2012-10-10.
http://www.timesofmalta.com/articles/view/20121009/world/Italy-court-blocks-Church-property-tax.440274

“Italy Catholic Church to pay tax from 2013”, AFP, 2012-10-10.
http://www.vanguardngr.com/2012/10/italy-church-to-pay-property-tax-from-2013/

6. “Italian Catholic Church under pressure to start paying property tax”, Telegraph, 11 December 2011. http://www.telegraph.co.uk/news/worldnews/europe/italy/8949226/Italian-Catholic-Church-under-pressure-to-start-paying-property-tax.html

7. “Bula fiscal para la Iglesia en Italia”, El Pais, 10 December 2011. http://internacional.elpais.com/internacional/2011/12/10/actualidad/1323542892_053286.html

8. “Austerity-hit Italians call for tax on Church real estate”, Agence France-Presse, 9 December 2011. http://news.ph.msn.com/business/article.aspx?cp-documentid=5636742

9. “Indulgences meet tax exemptions: Fly with us to purge your sins”, Concordat Watch. http://www.concordatwatch.eu/topic-18051.843

“Tax crusade marches on the holy hotels”, La Repubblica, 25 October 2007, Concordat Watch translation. http://www.concordatwatch.eu/topic-9781.843

“God’s tourists: 5 billion Euros a year”, La Repubblica, 10 November 2007, Concordat Watch translation. http://www.concordatwatch.eu/topic-9781.843

10. “Austerity-hit Italians call for tax on Church real estate”, Agence France-Presse, 9 December 2011. http://news.ph.msn.com/business/article.aspx?cp-documentid=5636742

11. “Austerity-hit Italians call for tax on Church real estate”, Agence France-Presse, 9 December 2011. http://news.ph.msn.com/business/article.aspx?cp-documentid=5636742

12. “Austerity-hit Italians call for tax on Church real estate”, Agence France-Presse, 9 December 2011. http://news.ph.msn.com/business/article.aspx?cp-documentid=5636742

13. “Oltre sei miliardi di euro: sono i costi pubblici della Chiesa” (“The Church costs the public more than six billion euros”), UAAR, 5 December 2011. http://www.uaar.it/news/2011/12/05/oltre-sei-miliardi-euro-sono-costi-pubblici-della-chiesa/

14. “The Church has a secret tax fund: this is where a billion Euros disappear to”, La Repubblica, 25 October 2007, Concordat Watch translation. http://www.concordatwatch.eu/topic-9781.843

15. Piero Moraro, “For debt-ridden Italy, charity begins at rome”, The Australian, 12 December 2011. http://www.theaustralian.com.au/news/world/for-debt-ridden-italy-charity-begins-at-rome/story-e6frg6ux-1226219326298

16. “Vatican’s 100th fountain dedicated to Saint Joseph”, Rome Reports, 5 July 2010. http://www.romereports.com/palio/vaticans-100th-fountain-dedicated-to-saint-joseph-english-2396.html