How the Vatican Takes Stock of the Market IX

IT ALL STARTED in 1962. . . .

The center-left coalition government under Premier Amintore Fanfani wanted at long last to end the preferential tax treatment Italy had been giving stockholders. In 1962, Fanfani established a dividend tax (called cedo-lare). Determined and sincere as he was, however, he tried to provide an exemption for the Vatican. It didn’t work.

For the first part of 1963 the Vatican, like other shareholders, paid tax.

In April 1963 there were elections, and the Fanfani cabinet went down to defeat. It was replaced by Giovanni Leone’s all-Christian Democrat “caretaker” cabinet. Leone’s representatives began quiet talks with the Vatican, and shortly before its ouster in October, the Leone cabinet, in an exchange of diplomatic notes with the State of Vatican City, agreed that the new tax was not to be levied on dividends paid to the Vatican. Minister of Finance Mario Martinelli (Christian Democrat) forthwith sent a circular letter to the tax-collecting agencies, mostly banking institutions, informing them of the exemption that had secretly been granted to the Vatican on the basis of diplomatic negotiations between the two countries.

What followed was perhaps even more incredible. The new finance minister, Roberto Tremelloni (Social Democrat), read the diplomatic notes and the circular letter signed by his predecessor, and with the solid support of the new deputy prime minister, Pietro Nenni (Socialist), and the minister of the treasury, Antonio Giolitti (Socialist), refused to go along with the preferential arrangement. For months thereafter, Prime Minister Aldo Moro (Christian Democrat), sought a compromise; he asked the Vatican to submit a statement of its holdings as a prelude to obtaining an exemption. But Vatican Secretary of State Amleto Cardinal Cicognani refused, asserting that one sovereign government does not tell another about the state of its finances. Premier Moro retaliated by resorting to an old fighter’s trick—holding back and waiting for the clock to run out. It worked—up to a point.

Interest in the Vatican’s stock market practices was aroused by the Italian government’s 1962 decision to levy a dividend tax (cedolare). This cedolare, which the paying office or the bank withholds on behalf of the government, is either 5 percent or 30 percent, depending on whether the stockholder records the securities with the tax office or chooses to remain unknown to the tax officials. The Vatican’s disputed exemption from it brought about the events we outlined at the beginning of this chapter.

After the Moro government toppled in mid-1964, and was succeeded by yet another Moro government, the new minister of the treasury, Giovanni Pieraccini (Socialist), also declined to ratify the Vatican’s exemption. In Italy, 1964 was a year when the business barometer was falling. The Vatican took advantage of this by threatening to dump several hundred million dollars’ worth of shares on the Italian stock market. This, if the Vatican had done it, would have seriously depressed the market and inflicted irreparable wounds on Italy’s already ailing economy.

Adding to Moro’s worries during this period was the resignation of President of the Republic Antonio Segni, for reasons of ill health. A campaign had already begun to have a non-Christian Democrat named to fill the semi- honorary post. (Later, in fact, Giuseppe Saragat, leader of the Social Democrats, got the nod.) By all reasonable standards, this was not the time to risk a tug-of-war with the Vatican over tax matters.

Some kind of deal was obviously made, because the Moro cabinet approved a bill, which was later signed by Tremelloni and Saragat, that ratified the Vatican’s exemption from the dividend tax. Although Socialist Minister Pieraccini refused to countersign the bill, it reached the competent legislative committee and was to go to the parliament for approval. As a bill, it never got there, though the subject did come up from time to time, either in the form of a query by a parliamentarian or a newspaper article.

For several years, the matter lay dormant. Then, early in 1967, it was revived. The Vatican had not been paying any dividend taxes since April 1963. Among other papers, the leftist Rome weekly L’Espresso wanted to know why. L’Espresso, which called the Vatican “the biggest tax evader in postwar Italy,” said that one fifteenth of all the stocks on the exchange were Vatican owned. Other pejorative reports in Italy’s left-wing press claimed that the Vatican’s investments on the Italian exchange were worth between $160 million and $2.4 billion, and that thanks to its questionable immunity from the dividend tax, the Vatican was saving anywhere between $8 million and $120 million (based on a 5 percent tax on the estimated “declared” worths of between $160 million and $2.4 billion) or between $48 million and $720 million (based on a 30 percent tax on said “undeclared” estimated worths). It must be remembered, however, that because the Vatican often uses so-called front companies, some of which do indeed record their securities with the tax office, or make their identity known to tax officials, and because other Vatican-controlled companies do not record their securities with the tax office, both the 5 percent and the 30 percent tax rates are in operation. No one as yet has been able to compile a list showing which companies are the “5 percenters” and which are the “30 percenters,” but whichever classification they fall into, they have not, so far, paid the tax that other companies (and the individual investors) are paying.

[In January 1968, the Italian government extended for another year the cedolare tax exemption enjoyed by the Vatican since 1963. The extension was granted, according to the announcement made by a government spokesman, to discuss a bill pending in the Italian parliament. The spokesman said that if the bill is not approved during 1968, the Vatican will have to pay all unpaid taxes since 1963 when the exemption was granted.]

On the basis of L’Espresso’s estimate, which maintains that the Vatican owns one fifteenth of all the stocks on the Italian exchanges, the total value of the Vatican’s stocks would come to $733 million. Using the 5 percent tax figure, on the one hand, the tax saving comes to $36 million, whereas with the 30 percent tax figure, on the other hand, the tax saving comes to $219 million.

Estimates of that kind, and others in the left-wing press (however exaggerated they appear at first blush), prompted Italy’s Finance Minister, Luigi Preti (a Socialist), to make in March 1967, an unusual public statement on the floor of the Italian Senate—unusual because up to then no government official had ever ventured any specific statistics or figures on the subject of Vatican taxes. Debunking the claim of one particular newspaper, which had asserted the Vatican had saved $64 million on its dividend inflow since the disputed bank circular of 1963, Preti said that the Vatican had earned $5.22 million in Italian stock dividends in 1965. On these earnings, he explained, the Vatican, if it had paid the 30 percent cedolare tax, would have turned in $1.6 million in taxes. Preti also said that the Vatican investment, according to indications, came to probably $104.4 million. From Minister Preti’s figures—which he never documented— it appears that, over the six years since 1963, the Vatican therefore has not paid in a total of $9.6 million in taxes on its security holdings in Italy.

The Vatican’s reaction to Preti’s revelation was twofold. Its press spokesman, Monsignor Fausto Vallainc, declared, “I have been authorized to give a ‘no comment’ answer. But if you want my personal view— which is just that!—the motive for the refusal to comment is obvious. It would not be opportune to air the matter while it is being discussed by members of Parliament.”

Unofficially, other sources in the Vatican said that the figures that had been cited in the anticlerical press were “clearly baseless.” Estimates of the Vatican’s tax savings were “absurd beyond being false,” one spokesman maintained, adding that the actual amount was closer to $160,000. The same man cited the provisions of the Lateran Treaty in which Italy recognized the Vatican as a sovereign independent state and exempted this state from Italian taxation. The Vatican’s unofficial newspaper, L’Osservatore Romano, eschewing its usual ecclesiastical verbiage, said that the amount of money involved was irrelevant, for the money was “holy money, entirely earmarked for charity.”

In July 1968, the question of Vatican taxes flared up once again. The new Leone Cabinet, though formed as a “baby-sitter” kind of government [See Chapter X], astonished everyone shortly before it won the confidence vote of parliament by a squeak. Premier Giovanni Leone, apparently in a gesture of appeasement to the left, a state-ofthe- nation message that the Vatican would have to pay its tax arrears. Leone said that rather than granting a new tax exemption—which was due to expire toward the end of 1968—the government intended to let the exemption drop and not seek parliamentary ratification for a new bloc of exemptions.

Bluntly coming to their defense, Church officials issued a protest through the Holy See press office, implying that the Vatican felt strongly about retaining its tax-exempt status. Monsignor Vallainc, in his capacity as the spokesman, noted that the Vatican contributes heavily to Italy’s income with its investments and tourist attractions. Moreover, he said, several other countries, including the United States, are giving the Roman Catholic Church tax exemptions because of its special nature and work. He reaffirmed the view that taxing the income of the Holy See, besides violating the acts that regulate church-state relations in Italy, would take away money destined for religious and social work projects carried out by priests in Italy and in other parts of the world. The official statement Vallainc read contained this paragraph:

The counterpart of this tax exemption can be seen in theframework of reciprocity, in the wide contribution that the apostolic activity of the Holy See has on tourism, as well as in the advantages Italy derives from the Holy See’s stock investments which contribute to increasing the national income.

Following still another Vatican blast against Premier Leone on the tax issue, Socialist Luigi Preti came back into the squabble by publicly rejecting the reasons listed by the Vatican to continue its tax-free privileges. He said:

It is true that Holy See activities are advantageous for the tourism influx to Italy and that this increases state incomes, but I cannot see why these should serve as reasons for the Vatican to be exempted from taxes. Also I think the Vatican has no grounds in pointing to the treatment it enjoys in other countries where the Holy See is exempt from taxes. The Italian law clearly indicates there are no exemptions for any foreigners having Italian stock holdings. The noble aims thatthe Holy See pursues here and elsewhere in the world arehighly respected in Italy, and by all political parties, but this is no reason for tax-free treatment.

Curiously enough, the 1967 tax squabble did not bring to light the long history of Vatican “tax evasion.” The record between 1929 (when the Lateran Treaty was signed) and 1962 is an interesting one. Let us examine this record, which up to now has been given no public attention.

Without entering into a long analysis, it is sufficient to repeat that the Concordat, the third document of the Lateran Treaty, provided for tax exemptions for “ecclesiastical corporations.” During the nineteen-thirties and the early nineteen-forties, the Mussolini regime gave added assistance to the Vatican treasury by way of special “dispensations.” In October 1936, for instance, Mussolini imposed a 5 percent corporation tax to help underwrite a large loan needed to pay for the war in Abyssinia, and levied in addition, to absorb the interest costs on the war loan, a 3.5 percent tax on every thousand lire’s worth of real estate holdings to run for a twenty-five-year period; Decree 1743 of October 5, 1936, set up this tax schedule, but Article 3 of the decree exempted the Vatican and Vatican companies from paying either of the two levies.

Vatican-owned companies were also exempted from a special duty ordered in October 1937. This required corporations to pay a graduated tax on their capital stock. The tax was originally levied on all corporations, but early in 1938, when the collection program got under way, a special order exempted those owned by the Vatican.

In 1940, Italy instituted a sales tax (I.G.E.). But, in a circular letter dated June 30, 1940, the finance minister freed the Vatican and all churches from paying it. The

I.G.E. tax remains in existence to this day. So does the Vatican’s exemption. Lastly, in October 1942, a law was passed, “in the spirit of our Concordat,” which exempted the Vatican from paying certain then-existing assessments on dividends. To make matters clearer, the finance minister, in a decree dated December 31, 1942, published an official roster that listed every organization that was not eligible for taxation on dividends. Nearly all of the organizations listed were Vatican affiliated.

The roster went unnoticed by the public because of the year-end holidays. It went unnoticed by the press because it was published not in the government’s Gazzetta Ufficiale (Official Gazette), but in an obscure state bulletin called Rivista di Legislazione Fiscale, on page 1,963 of the second volume for 1943, a volume that appeared a considerable time after the beginning of the year.

Attempts to avoid taxes are nothing new in the history of Italy’s stock exchange. The borsa valori has roots that go back to the Republic of Venice, where the first official exchange was set up in 1600. In early Italy, the borsa was often a square or street where all types of trading—in goods and services, in securities, in precious metals and money—were carried on. In the first half of the eighteenth century, the commodities markets were put on a formal basis; then, in the nineteenth century, separate exchanges were set up to handle securities. On February 6, 1808, Eugene de Beauharnais, viceroy of Italy and Napoleon’s stepson, established the first official exchange in Italy, at Milan. Nine other Italian cities— Venice, Trieste, Turin, Rome, Palermo, Naples, Genoa, Florence, and Bologna— now have exchanges; but the one in Milan is still the largest.

By the turn of the century, Italy’s first electric power companies had been formed, as had other public service companies, textile and chemical companies, and some companies devoted to heavy industry. Trading increased and more securities were listed. In 1901, the number of securities traded on the Milan exchange had risen to 102; 54 of these were common stocks. By 1938, 267 securities were traded at Milan; by 1960, 428. In the postwar years, the Milan and other Italian exchanges began to register appreciable volume; today, despite being small by American standards, the volume at the exchanges is heavy compared to what it was in the immediate postwar years. But public participation in trading is comparatively slight.

Few securities are owned by the Italian public. Many are owned by the Vatican itself; and many others by banks and other financial institutions, by insurance companies and pension funds, and by industrial concerns—a number of which are controlled or owned by the Vatican. Italy’s small investors show a decided disinclination to buy common stocks. They prefer fixed-interest-bearing securities, especially those guaranteed by the government. Banks are called upon for heavy support of the securities market. In the last year for which a report is available, banks and institutional investors absorbed 48 percent of the new issues of common stocks and preferred stocks— and although the facts are unclear or fragmentary, a goodly part of this seems to have been done with Vatican capital. The quoted value of all Milan’s securities, which represent more than three quarters of the total shares on all Italy’s ten exchanges, generally stands at about $8.5 billion. In any given year, there is usually a turnover of a little less than 7 percent of the total shares; slightly under 260 million shares are traded, at a market value of slightly under $1 billion.

Another 1962 decision by the Italian government— that to nationalize the electric current industry—also aroused interest in Vatican finances. When the national electric agency, called E.N.E.L., was formed, it was learned that the special credit institute La Centrale, a Vatican-associated agency that specializes in electric power companies, had a portfolio of 8,235 shares (worth $24,801,600) in the Selt Valdarno electric works and 8,417 shares (worth $25,153,600) in the Romana di Elettricita Company; that another Vatican special credit institution, Bastogi, had 10,265 shares (worth $13,838,400) in the Societa Meccanica Elettrica electric company, 6,407 shares (worth $8,441,600) in the Finanziaria Adriatica company, 5,385 shares (worth $12,146,000) in the S.G.E.S. company, 4,013 shares (worth $10,038,400) in Edison, 1,137 shares (worth $4,782,400) in the Elettricita Sarda, and 996 shares (worth $2,659,200) in Selt Valdarno. Payments on these holdings, by way of indemnity installments, are still being made by E.N.E.L. to La Centrale and Bastogi.

As one of the world’s largest shareholders, the Vatican holds securities frequently quoted as being worth $5.6 billion. The sum is probably an understatement, for the Vatican has invested in exchanges throughout the world, and even a conservative estimate of its portfolio tends to show that the figure is in excess of $5.6 billion. According to an appraisal made by London’s Economist a few years ago, the Vatican’s Italian portfolio contains (as L’Espresso had earlier claimed) approximately one fifteenth of the total number of shares quoted on the ten Italian stock exchanges; the value of these shares, said The Economist, was $8.8 billion at the end of 1964. This would put the amount of capital invested by the Vatican in Italian stocks at around $586.6 million. But taking into consideration the current $11 billion value of Italy’s ten exchanges and the fact that many of the stocks owned by the Vatican are held through front companies—banks, special credit institutes, and insurance companies—a more realistic estimate of Vatican penetration into Italy’s stock market would place it between 40 and 50 percent of the total number of shares quoted on all of the Italian stock exchanges. Hence, this would bring the Vatican figure within the $5 billion range.

Improbable as this may seem at first glance, the fiscal truth has been kept hidden by the Vatican itself, by a sympathetic Italian press, and by the corps of foreign reporters in Rome. Deferring to the notoriously thin- skinned Vatican, most correspondents avoid the subject in their dispatches.

How long will the Vatican’s “tax evasion” go on? * The answer depends on the Vatican. Why? Because the pope is the dealer in this strange game of poker between the Vatican and the Italian state. But I think the pope may have overplayed his hand by attempting to bluff the Italian people—and may, before the next round, have to put his cards, and his blue chips, on the table.

* Late in October, as this book was being printed, the Vatican disclosed through its daily newspaper that it had agreed to pay taxes on its Italian stock earnings. Explaining that it did not have immediate necessary funds on hand to meet such a large bill, the Vatican requested permission to pay the tax in installments. The Osservatore Romano, which concealed none of its bitter tone, said that although the 1929 Lateran Pact provided for Vatican tax exemptions, the Holy See nevertheless wanted a statement from the Italian Government as to how much would have to be paid.

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