Vatican, Italy sign tax treaty, promise to share information

In a key move toward greater financial transparency, the Holy See signed an agreement with Italy that includes the full exchange of financial information about Vatican employees, pensioners, foundations and religious institutes that are subject to Italian taxes.

People and entities that reside in Italy were expected to be liable for Italian taxes on any interest or earnings coming from bonds, investments and savings in Vatican institutions, according to a general outline of the agreement.

The new bilateral convention was meant to clarify and simplify rules and procedures concerning taxation obligations and taxpayer information, and it parallels standard agreements between countries on tax matters.

The Vatican announced the agreement Wednesday, the same day representatives of the Holy See signed it in the presence of a delegation representing Italy.

The agreement is part of the Vatican's larger program of establishing greater financial transparency and protocols that are in line with international standards, it said, adding that the convention reflects "the most current international standard concerning the exchange of information" between signatories dealing with tax matters.

The convention, whose text was to be released to the public Thursday, was expected to be somewhat similar to a double taxation treaty, which aims to eliminate having taxpayers be taxed twice -- by their country of residence and the country where they earn their money. But it also was to follow something similar to an information exchange model established by the Organization for Economic Co-operation and Development, which seeks to reduce possibilities for tax evasion.

"The convention, starting from the date it enters into force, will allow for the full compliance, with simplified procedures, of the fiscal obligations relative to the financial activities held by entities that conduct financial activities in the Holy See" by people or entities that are "physical residents of Italy." The agreement will allow for such persons to "regularize" their financial activities, the Vatican statement said.

The Lateran Pacts of 1929, in which the Vatican and the Italian state recognized each other as sovereign nations, established that Vatican salaries would be tax-free and institutions on Vatican property, including "extraterritorial" property outside Vatican City State walls, would be tax-exempt. Those properties include pontifical universities, seminaries and the headquarters of religious orders.

A separate tax agreement between the Vatican and Italy in 2012 established that commercial church-owned businesses in Italy, such as guest houses run by religious institutes, were subject to Italian taxes.

Properties used for purely religious, nonprofit purposes were tax-exempt under the 2012 agreement and will continue to be exempt under the new convention. However, Italy still would have no right to tax any profit-making entities operating inside Vatican City, such as the Vatican Museums and publishing house, according to a source familiar with the convention.

Writing in the Vatican newspaper, L'Osservatore Romano, Archbishop Paul Gallagher, the Vatican's foreign minister, said the convention entails "a simplification of the payment of taxes on the interest coming from financial activity held in the Vatican City State" by people or entities with residency in Italy and subject to Italian taxes. This would be interest earned on investments, bonds and savings in Vatican institutions.

Giuseppe dalla Torre, head of the tribunal of Vatican City State and an Italian legal expert, wrote in the Vatican newspaper that the convention "resolves in good part the heart of relations concerning tax matters by providing for a series of arrangements that succeed in reconciling different interests" such as Italy's interests in fairness and equality when it comes to tax law and the Holy See's interest in protecting its sovereignty and the work and spiritual mission of its different entities.

While respect for state sovereignty is usually straightforward, what complicated matters was that the majority of people who are employed by or receive payments from the Vatican are not Vatican citizens or do not reside inside the tiny 109-acre Vatican City State, but live in Italy.

The accord aims to fulfill "the common goal of ensuring the broadest transparency in the field of financial relations, in line with guidelines evolving from an ever more international setting," dalla Torre wrote.

The convention says that the information exchanged with Italy will begin with the period of Jan. 1, 2009, but any tax liabilities will not be retroactive. Taxes, however, may be due for the 2014 fiscal year; Italians are filing those tax reports this spring.