For years, many Italians, from small-town shopkeepers to well-heeled Milanese businessmen, had a strategy for dealing with the country's notoriously high tariffs: They evade their taxes.
Mr. Prodi has pledged to cut the country's deficit to 2.3% of GDP this year from 4.4% last year. Much will come from smoking out tax cheats. Deputy Finance Minister Vincenzo Visco -- a cigar-chomping tax hawk nicknamed "Dracula" by political opponents, has been named by Mr Prodi to lead the charge..
Italy's tax police, the Guardia di Finanza considers the vehicle-registration database a gold mine,since there are 5,800 people in Italy who declare incomes of less than Ђ5,000 a year, but who drive cars worth more than Ђ100,000 !!!!
Another target is electricity bill registration, where if there are multiple under one name, that's a clue that a landlord is renting out apartments but not declaring the income. Last year, tax police in Genoa closed in on a 90-year-old man who had been renting 65 apartments, but hadn't declared more than Ђ500,000 in rental income over several years.
UNHAPPY RETURNS
In Italian Crackdown,
Tax Cheats Get the Boot
New Tools Help Officials
Find Chronic Evaders;
Ending a 'Vicious Cycle'
By GABRIEL KAHN and LUCA DI LEO
June 28, 2007; Page A1
ROME -- For years, many Italians, from small-town shopkeepers to well-heeled Milanese businessmen, had a strategy for dealing with the country's notoriously high tariffs: They cheated on their taxes.
While many citizens and companies profited from the ruse, they nearly bankrupted the state in the process. Now, the government is waging war on tax evasion -- a national epidemic that has weakened the country's ability to balance its budget, fund new investment and create a stable business climate.
CHEAT SHEET
• The Issue: The widespread problem of tax evasion in Italy is hindering the country's economy.
• The Crackdown: Italy's tax police are scouring records such as car registrations and utility bills to find signs of discrepancies in reported incomes.
• What's at Stake: The government's ability to balance the budget and fund new investments.
The government of Prime Minister Romano Prodi estimates that unpaid taxes, including income from the country's sizable black-market economy, are equal to 27% of Italy's gross domestic product. That's more than the country spends on pensions and health care combined.
Italy's public debt is a staggering 106% of its GDP, and is the third largest national debt pile after Japan and the U.S. The country's sovereign debt rating has faced three downgrades in the past four years.
The result is a smoke-screen society in which people live far better than what their reported income would suggest. Only 0.8% of Italians claim to earn more than €100,000, or about $134,000, a year, yet Italy is the No. 3 market for luxury Swiss watches after the U.S. and Hong Kong.
A weak Italian political system has long worked like a gas pedal for tax evasion, accelerating an already chronic problem. A succession of unstable, spendthrift governments has been unable to cut the country's ballooning debt. Desperate for new revenue, the government has imposed taxes on everything from pornography to bingo games.
The upshot, says Giacomo Vaciago, an economics professor at Milan's Catholic University, is a "vicious cycle: The government hikes taxes, people evade more."
Official statistics offer only hints about who might be stashing funds away. Italian restaurant owners declare an annual average income of just €13,300, or $17,900 -- less than schoolteachers, who are among the worst paid in Europe, according to data from Italy's tax collection agency. Jewelry store owners declare an average of €16,600, less than the yearly rent on a small apartment in Milan.
To raise more revenue, Mr. Prodi has launched a national crackdown on tax dodging, which he said had become so pervasive in Italy as to be "incompatible with democracy." Among the new measures: making it easier for tax authorities to peek into bank accounts; limiting cash transactions for payments of only €1,000 or less; and harsher penalties for businesses that fail to issue receipts to customers.
There's a lot riding on the initiative: Mr. Prodi has pledged to cut the country's deficit to 2.3% of GDP this year from 4.4% last year. More than a quarter of the new funds, or €8 billion, he promises, will come from smoking out tax cheats. To lead the charge, Mr. Prodi has selected Deputy Finance Minister Vincenzo Visco -- a cigar-chomping tax hawk nicknamed "Dracula" by political opponents.
One morning in February, agents from Italy's tax police, the Guardia di Finanza, stormed into an elegant apartment building in central Milan and arrested Alberico Cetti Serbelloni. A businessman descended from Italian nobility, he ran a company that sold access to an online art-catalogue database. Police suspected it was a front for a massive tax-cheating operation.
In the arrest warrant, prosecutors claim that Mr. Cetti Serbelloni ran an intricate, European-wide scheme. He sold licenses to access the database to several dozen companies in and around Milan. Police claim these companies would then resell the licenses to firms in Switzerland controlled by Mr. Cetti Serbelloni. The resale to foreign companies allowed the Milan firms to qualify for a rebate on Italy's 20% value-added tax. With the rebate, the companies significantly slashed their tax burden and would give Mr. Cetti Serbelloni half of the money they effectively pocketed.
The alleged scheme -- which authorities say allowed Mr. Cetti Serbelloni and others to evade some €200 million in taxes -- helped provide the 51-year-old Mr. Cetti Serbelloni with a plush lifestyle, say police. He drove a Ferrari and was building a golf resort in Tuscany.
"We're still finding bogus transactions, even months after his arrest," says Capt. Salvatore La Bella, the tax police officer who led the investigation. After spending three months in jail, Mr. Cetti Serbelloni is now waiting for a judge to rule on whether his case should proceed to trial. His lawyer insists his client ran a legitimate business.
Though the government claims it recouped €12 billion in unpaid taxes last year, not all economists are convinced it can keep up that pace. The Organization for Economic Cooperation and Development warned in May that Italy is unlikely to make its 2007 deficit target because the government is too optimistic about its tax crusade.
Even if it misses some targets, the government hopes to chip away at a widely accepted practice in Italian society. Eluding the tax man is like an inverted civic duty in Italy. From the hairdresser who doesn't issue a receipt to the notary who signs off on a phony real-estate sale, Italian citizens often feel compelled to shield one another from a state they find at once invasive and inefficient.
"There is solidarity among tax evaders," explains Beppe Severgnini, a social commentator and author of "Bella Figura," a book about Italians. "In America, if you cheat on your taxes your neighbors won't talk to you. In Italy, they'll ask you how you did it."
Italy's Guardia di Finanza act as a sort of mobile financial-crimes unit. The 64,000-strong corps, a division of the country's law enforcement, patrol customs at the border, carry out random checks on businesses to see if financial records are in order, and conduct investigations into fraud, tax evasion and securities-law violations.
Several years ago, the tax police launched a campaign to get people to anonymously report tax cheats via a toll-free number. The move was roundly criticized in newspapers as something that tried to turn citizens into spies.
Many celebrities, from tenor Luciano Pavarotti to Olympic gold-medal skier Alberto Tomba, have been caught evading taxes and were forced to pay fines. For more than a decade, billionaire former Prime Minister Silvio Berlusconi, who controls a vast media empire, has been rung up on various charges, such as bribing tax police, false bookkeeping and tax evasion. On some of the charges he was acquitted. On others, lower court convictions were either overturned or the statute of limitations expired. He currently awaits another tax-evasion trial.
Rome's attempts to clamp down on tax evasion are part of a broader ill afflicting Europe. Tax rates on the Continent have swelled over the past half-century as governments struggle to finance a costly social welfare system that many citizens feel is their birthright. According to the OECD, in 2004, the most recent year for which data is available, the average tax burden in the European Union was 41.1% of GDP. Total fiscal pressure in the U.S., by contrast, was 25.5%, and has been decreasing in recent years.
Some historians claim that tax evasion in Italy has ancient origins. From the fall of the Roman Empire to the establishment of modern Italy in 1860, Italy was occupied by Arabs, Austrians, French and Spanish. Among Italians, dodging taxes constituted a sort of social resistance.
After World War II, Italy needed to rebuild its shattered and impoverished nation. As the economy started to take off in the 1950s and '60s, the government turned a blind eye to tax evasion for fear that a crackdown would cripple growth. Mr. Visco, the government's point man on tax evasion, believes there's also a cultural explanation.
"We're individualistic and we like to bend the rules," he said. "We try to get around waiting in lines or paying the bus fare, if we can get away with it."
Mr. Berlusconi recognized voters' frustrations with high taxes -- and glossed over the national habit of evading them. In a speech before the tax police several years ago, he said Italians shouldn't "feel guilty" about cheating if their taxes were too high. While prime minister, Mr. Berlusconi also passed numerous amnesties that allowed tax cheats to avoid penalties by paying a small fine.
Yet in some quarters of the business community, there are signs that a long-held tolerance for tax evasion is waning. The Confindustria, the powerful association of Italy's largest companies, for years resented any effort to crack down on tax evasion, considering it just one more form of government interference.
Confindustria now recognizes that rampant tax evasion is contributing to a widening imbalance within business and society. Those hit hardest are salaried employees of large companies -- Confindustria's largest stakeholders -- because taxes are directly subtracted from their paychecks, so they can't shirk them. Consequently, they are bearing a heavier burden because they pick up the tab for those who don't pay.
This tax disparity can put large companies at a disadvantage: Though Italian businesses offer their workers contracts with generous welfare benefits, it's often difficult for them to compete on salary. Workers might make more if they were self-employed and not paying taxes.
In choosing Mr. Visco, a silver-haired economics professor who also served in past governments, Mr. Prodi knew he had a determined ally. "Either we fix this, or we end up like Argentina," said Mr. Visco, referring to the Latin American country's default on its debts in 2001.
When Mr. Visco last year started looking for unpaid taxes, it was difficult to even know where to begin. Since the Italian economy is mainly made up of small, family-owned businesses, the difference between business and individual taxpayers is hazy. So he decided to go after both.
Among the key problems: Half of Italian companies claim either to be in the red or just break even. Among those that declare a profit, the vast majority declare an income of less than €50,000. "If that's the case, I don't understand why they're in business," snickered Mr. Visco.
One of Mr. Visco's first measures was allowing tax police to close any store for up to six months if it was caught not issuing receipts. Random checks ordered by Mr. Visco showed that shop owners frequently didn't give customers receipts after a purchase, pocketing the money directly instead of counting it as taxable sales. During a check in one small northern town, Trentino San Valentino, tax police found that 35% of cafes and 57% of clothing stores failed to issue receipts.
Owners of small businesses are enraged by Mr. Visco's directive. "We don't deserve this sort of harassment," says Mauro Bussoni, deputy director of the Italian association of small and medium-size companies. The penalty, he says, "is barbaric."
Many small-business associations insist the government is blowing the problem out of proportion. "Once upon a time, maybe, you could be more, let's say, elastic," says Tullio Galli, who heads a food vendors' trade association. "That's over."
At the heart of business owners' complaints is frustration with an unwieldy 591-rule tax code. The system is paper-heavy, requiring even small shopkeepers to retain piles of invoices and bills.
"The other day the tax police came in and wanted me to prove I had paid my garbage tax every month between 2003 and 2006," says Mauro Collucci, owner of a corner eyeglass shop in downtown Rome. "They gave me 15 days to find the receipts." (He says he was able to produce them.)
Government officials admit that the tax code itself is a large part of the problem. With so much paper, information is scattered everywhere, making it relatively easy for a supplier and a buyer to report only a portion of their business officially, while doing the rest off the books. Tax officials have so many receipts to go through that it's easy to lose track.
As a result, some of Mr. Visco's attention is also devoted to uniting different tax-collection databases under one roof. Rossella Orlandi is part of this effort. As one of the tax authority's top investigators in Rome, she spends much of her time hunched over a computer screen, cross-checking data that doesn't seem to add up.
Mr. Visco has tried to beef up the tax authority's computer resources. So Ms. Orlandi now can check people's income declarations against car or home purchases. The findings often set off alarm bells. For example, there are 5,800 people in Italy who declare incomes of less than €5,000 a year, but who drive cars worth more than €100,000.
"The vehicle-registration database is a gold mine," smiles Ms. Orlandi.
Another thing she looks for: Multiple electricity bills registered under one name. That's a clue that a landlord is renting out apartments but not declaring the income. Last year, tax police in Genoa closed in on a 90-year-old man who had been renting 65 apartments, but hadn't declared more than €500,000 in rental income over several years. The tax police spent months secretly interviewing his tenants and combing through bank records. When they finally confronted him with the evidence, "he just shrugged," says Capt. Filippo Capineri.
Even amid the current crackdown, tax police complain they are outgunned. Court cases against tax evaders take years to wind their way through Italy's burdened justice system, giving defendants time to sell assets and move their wealth out of reach of the authorities. Sentences almost never include jail time and tax police have limited ability to freeze assets.
As Luca Cordero di Montezemolo, chairman of Fiat SpA and Confindustria president, describes it: "Italy is a like a boat in which half the people are pulling the oars while the other half are kicking back, enjoying the ride."
Write to Gabriel Kahn at gabriel.kahn@wsj.com and Luca Di Leo at luca.dileo@dowjones.com
The ANNOTICO Reports Can be Viewed (and are Archived) on:
