WSJ: In Italian Crackdown, Tax Cheats Get the Boot
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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."
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