Tax investigation could land Pope with €8bn bill

European Commission to investigate exemption allowing the Vatican to avoid paying £2bn a year levy on 100,000 properties

Eight billion euros worth of tax breaks pocketed by the Catholic Church in Italy could be in breach of European law and may have to be repaid, it has emerged.

The development is the latest blow to an institution that has been rocked by an annus horribilis following the global clerical paedophilia scandal that broke earlier this year, and investigations into money laundering.

The European Commission has said that tax relief on 100,000 Italian properties enjoyed by the Holy See since 2005 was under the spotlight, after announcing an "in-depth" investigation.

A spokesperson for Competition Commissioner Joaquin Almunia said the EC suspected the exemption amounted to state aid that was at odds with European Union law.

"These exemptions may distort competition," he said. "Thus far, Italian authorities have not provided sufficient evidence to enable the Commission to conclude that the contested measures are justified by the principles of the Italian tax system".

The crux is whether the EC decides Church-run businesses should really be considered as commercial enterprises and therefore liable to taxation.

The Church was exempted from paying the tax, known as ICI in 2005 by a centre-right government under the then Prime Minister Silvio Berlusconi. The conservative premier is now back in power after re-election in 2008.

When the 2005 rules were introduced, humanist and secularist organisations claimed it was "unfair help" and breached the principle of division between church and state.

The EU initially questioned the ICI exemption in 2005, which resulted in the measure being modified a year later by the then centre-left government of Romano Prodi. The EC twice shelved the case, first in 2008 and again this year. News agency Ansa reported that its decision to reopen the case now was made after the Radical Party filed a complaint with the European Court of Justice.

If Italy is found to have violated EU subsidy laws, it will have to cancel the exemption and seek reimbursement from the church. If that happened, the financial consequences for the Catholic Church would be grave.

Estimates value the Vatican's property tax breaks at €2bn (£1.75bn) a year. No one from the Vatican was available to comment on the EC probe. However, a statement by the Italian foreign ministry said: "The Italian government is convinced that it can demonstrate to the EC in a clear and definitive manner the good reasons that justify the current regulations, which do not violate EU rules on state help in favour of the church."

The church currently avoids paying tax on about 100,000 non-commercial properties including 8,779 schools, 26,300 ecclesiastical structures and 4,714 hospitals and clinics.

In addition to avoiding ICI, the church also benefits by paying only 50 per cent of the IRES business tax on its commercial earnings, thanks to Italian tax laws adopted in the 1950s which granted deductions for charitable organisations.

Italian and EU authorities were already poring over the Vatican's opaque finances. Last month it emerged that Vatican Bank president Ettore Gotti Tedeschi and director-general Paolo Cipriani are being investigated following two transactions that were reported as "suspicious". The announcement by magistrates was seen as the judiciary's way of pressuring the Vatican into being more open about its financial operations. Both men strongly deny the allegations.

More serious investigations are thought to relate to suspicions by magistrates Nello Rossi and Stefano Rocco Fava that other Vatican Bank officials used the institution, known as IOR, and its status as a non-Italian entity, to avoid taxes as well as to launder money.

News of the EC probe on tax breaks will also send a shudder through Vatican financiers, who already fear the effect the paedophilia scandal will have on voluntary donations – the financial life-blood of the church, not to mention the raft of litigation they may face from abuse victims in the coming years.

In Italy, taxpayers can opt to earmark 0.8 per cent of income tax payments to the religions of their choice – in most cases the Catholic Church, which last year benefited to the tune of €900m. The proportion of taxpayers donating this money to the church peaked at 90 per cent in 2004. It fell slightly to 87 per cent in 2008, however, and church authorities fear further slides on the back of this year's dreadful headlines.

The EC has previously investigated how other member states tax former state religions, including probes into subsidies for the Catholic church in Spain and sales tax rules for churches in Belgium. The EC also plans to examine rules giving tax breaks to church institutions and amateur sports clubs by ensuring they maintain non-commercial status.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: In House Counsel - Contracts

Negotiable: Recruitment Genius: This leading supplier of compliance software a...

Recruitment Genius: Associate System Engineer

£24000 - £30000 per annum: Recruitment Genius: The Associate System Engineer r...

Recruitment Genius: Executive Assistant

Negotiable: Recruitment Genius: An Executive Assistant is required to join a l...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Day In a Page

General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?
How Tansy Davies turned 9/11 into her opera 'Between Worlds'

How a composer turned 9/11 into her opera 'Between Worlds'

Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
11 best bedside tables

11 best bedside tables

It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
Italy vs England player ratings: Did Andros Townsend's goal see him beat Harry Kane and Wayne Rooney to top marks?

Italy vs England player ratings

Did Townsend's goal see him beat Kane and Rooney to top marks?
Danny Higginbotham: An underdog's tale of making the most of it

An underdog's tale of making the most of it

Danny Higginbotham on being let go by Manchester United, annoying Gordon Strachan, utilising his talents to the full at Stoke and plunging into the world of analysis
Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

Steve Bunce: Inside Boxing

Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police
No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat