At last – Vatican’s money-grubbing accords under scrutiny in EU

Last month, Romano Prodi, leader of Italy’s centre-left government, asked the Vatican to help it stamp out rampant tax evasion in the country. Prodi asked priests to preach from their pulpits about the immorality of dodging taxes.

The Church duly obliged, and even the Pope himself spoke out on the matter.

Now, it turns out, the Catholic Church may face an investigation into how little tax it is paying itself. Little-known concessions quietly made by some EU member countries have resulted in it paying materially less tax than citizens or companies.

Officials have confirmed that the European Commission (the EU’s equivalent of the Civil Service) has asked the Italian and Spanish governments for information for an investigation into the legality of tax breaks benefiting the Catholic Church. It is thought that they may breach rules ensuring level playing fields for commercial competitors.

Both requests for information followed complaints from unnamed interests in the states in question — the Christian Democrat UDC party suggesting it was the product of “radical Freemason” circles — and both are set to analyse the claim that the tax breaks give the church an unfair advantage over secular commercial entities. Last year, Premier Romano Prodi's government amended the law, saying that only “the activities that are not exclusively commercial” are exempt. The use of the word “exclusively” left a loophole open allowing properties where even minor religious activity goes on to benefit from the break.

On July 19, the Commission asked the Spanish government for information on a scheme which allows the Catholic Church in the country exemptions from the national tax on wealth, an official in the Commission's competition told a German news agency.

The office is currently analysing a response from the Italian government to questions concerning exemptions from the tax on property which the Catholic Church enjoys there. The church reportedly gets a handout of almost €1bn (£678m) from income tax receipts and exemption from the payment of local authority taxes on most of its property. In addition, the church's business activities, including schools, hospitals, clinics and hotels, are understood to pay only half the normal corporation tax. Most estimates have put the cost to the Italian treasury at about €1.3bn a year. In Rome alone, according to La Stampa newspaper, the church owns 18 hospitals, 55 clinics and 250 schools.

Under Italian law, for example, the church is exempt from local taxes on the possession of property and from company taxes levied on the revenues deriving from that property. It also benefits from a 50% reduction on company tax generally, Commission officials said.

But these tax breaks do not apply to commercial property management companies, and could therefore potentially be interpreted as state aid which distorts competition in the property market. “If an organisation has economic activities, it has to follow (EU) competition rules,” a Commission spokesman told journalists.

All this money flowing in to the Vatican’s pockets comes from the taxpayers of Italy and Spain. The exemptions are the result of Concordats – church-state agreements that privilege the Catholic Church – the latest version of which in Italy dates from 1984.

UDC member and former European affairs Minister Rocco Buttiglione called on the Commission not to feed the “suspicions of an anti-Christian European Union”, whose bid to become President of the European Union was blocked when it was suspected he was a Vatican placeman.

The request for information is the first stage in the EC’s procedure on potential breaches of competition law. If the Commission's competition experts decide that there are grounds for concern, a full investigation could then be launched.

A senior Vatican official, Monsignor Karel Kasteel, has agreed, according to a report in The Guardian, that the Church would sit down with the Government and “re-negotiate” the terms of the concordat between the member state and the “Holy See” (which has the status as a sovereign state in its own right) which is actually the political wing of the Vatican. His remarks were later downplayed by a Vatican spokesman as “a personal opinion”.

Giuseppe Betori, head of Italian Conference of Roman Catholic bishops, said: “To those who put into discussion the agreement between the Holy See and Italy, it's worth taking into consideration that this has produced social peace and collaborative benefits to all the Italian people.”

Catholic politicians, too, were quick to jump to the Church’s defence. "This offensive is incredible," said Maurizio Gasparri, of the centre-right National Alliance political party, accusing the EU of siding itself with an "anti-Catholic left" in Europe. "The EU must avoid serious interference, which would be intolerable."

Because the concordat has the status of international treaty it can technically only be changed with the mutual agreement of both Church and State. Concordats accord huge benefits to the Catholic Church, but as international treaties have often escaped the normal democratic process in the country giving the benefits. Under Mr Zapatero, Spain has however simply torn up at least one concordat unilaterally, and there doesn’t seem to be much the Vatican can do if it is clear that a revoker is acting with the democratic will of their country.

If the EC investigation were to rule that the tax breaks were illegal, the government in question would be obliged to end the system, and could be ordered to recover the aid from the church itself, officials said.

Brussels has clashed with the Roman Catholic Church in the past. In 2005 the Commission said Spain was breaking EU law by exempting the Church from value added tax on goods such as candles, pews and land for building churches.

In Britain, Gordon Brown introduced a reduced VAT rate for repairs to “listed places of worship” (but not other listed buildings) and was subsequently told by the EU that it was illegal, following a complaint by the NSS to the European Commission in 2001. The Government circumvented the VAT rules by introducing an administratively very expensive scheme making grants to cover the difference in VAT. Millions of pounds are also refunded to religious bodies each year in gift aid on their collections.

For more information on Concordats see