The role of public indirect support for culture in Italy

Marina Cavalieri* Anna Mignosa**

Draft version Please do not quote
Abstract
Public support to the arts and culture has been thoroughly analysed within cultural economics. The analysis
though flourishing from a theoretical point of view, finds several obstacles when looking at the quantification
of this type of support. The problem is even more severe when trying to distinguish between direct and
indirect public support. This analysis intends to analyse the role of indirect support looking at the case of
Italy. In this country public direct support has always played the lion share, the same does not hold true for
indirect support. This work aims investigating the role of indirect support in Italy verifying whether its
relevance depends only on the presence of laws facilitating it or, there are other reasons explaining it.

1. Introduction

This study focuses on the creation of a favourable fiscal environment embodied in tax incentives for
culture within the Italian legislative system, which provides extra funds for culture, i.e. indirect
support, or what Inkei (2001) defines fiscal support of governments to private support to culture.
Tax incentives refer to specific measures often aimed at limited categories of individuals, which
goal is that of modifying the behaviour of these individuals through the use of fiscal mechanisms.
Fiscal relief can be ascribed to all forms of private support to culture (cash donations, sponsorship
in kind, services or equipment).1 Within the various devices of tax policy are those that encourage
the increased consumption of cultural products and services - for example through the application of
preferential VAT rates. Fiscal laws can encourage (or conversely discourage) donations, share
transfers, bequeathing of valuables, creation of foundations, offering free services etc. for cultural
purposes. More in detail, tax incentives take place as:
Tax exemptions, tax deductions and special (lower) rates for art and cultural institutions, for
example, in gift and inheritance tax and corporate income tax.
Tax deductions and tax credits for companies and individuals donating to or investing in the
arts.
Different VAT rate on cultural products.

*
Postdoc - Department of Economics and Quantitative Methods University of Catania - Corso Italia 55, 95129,
mcavali@unict.it
**
Research Assistant - Department of Economics and Quantitative Methods University of Catania, Corso Italia 55,
95129, a.mignosa@unict.it
1
Sometimes there is a feeling in some parts of Europe that these approaches imply that the government is simply
"bribing" taxpayers to giving "protection money" to culture, or that it is courting sponsors.
2. Indirect intervention for culture

The main problem of this type of analysis relates to the accounting for indirect forms of government
support to culture (IFACCA, 2004). Analysis of government expenditures for culture not to mention
comparisons among different countries, are rarely able to account for these types of indirect forms
of arts support, because the data are often unavailable (Feist et al., 1998, O'Hagan 2003). For
instance, an international survey conducted by the Arts Council of Ireland was only able to value
the amount of taxes foregone for Ireland, therefore, estimates for this policy instrument were left
out of the data.
Not taking into consideration indirect expenditures, however, leads to serious
underestimation of some countries intervention. The comparisons of government support to culture
looses reliability as indirect expenditures, in some countries, are at least as large as and in many
cases considerably larger than - direct expenditures. The Arts Council of Ireland (2000; 10)
estimates that including taxes foregone would increase by 50 percent the measure of Irish
government per capita arts expenditure (from 12.36 to 19.22 Irish Pounds). Hemels (2005) suggests
that in the Netherlands indirect support is equal to direct support; though it is not accounted for.
Schuster (2004) suggests that estimates from the US indicate that direct government expenditure on
the arts is 'dwarfed' by indirect government expenditure. The inclusion/exclusion of indirect
expenditure would change completely the ranking of one country as for public support to culture.
It is the case for the US: considering only direct expenditure, the country shows the lower level of
public support whereas the inclusion of indirect expenditure upgrades the country among the
bigger public spender on culture (Heilbrun and Gray, 1999). Porter and Kramer suggest that in the
US in 2001, also because of a generous tax code that allowed companies to deduct a large portion of
their advertising expenses, about $589 million were spent on arts sponsorship. This compares to the
very small budget for the National Endowment for the Arts which was only $104.8 million in 2001,
and $115 million in 2002 (NEA, 2003)
Indirect expenditures raise further when the reduced rate of Value Added Tax (VAT) applied
to cultural products is considered. O'Hagan (2003; 455) argues that VAT concession for the arts in
Europe is not just the major tax concession in Europe, but that it alone is largeboth in absolute
terms and in relation to direct funding to [arts] institutions.
Indirect support needs, first of all, that the government introduces the rules that set the
different forms of tax relief in favour of culture. Hillman (1989) talks of the state as a facilitator
when it sets clear rules that favour indirect intervention. The state, then has a major role in
determining the amount of tax relief allowed, it has an impact on cultural policies implementation
and on the involvement of other sectors in the financing of arts. However, tax expenditures are not
free of costs. If somebody makes a donation he/she will pay only for a part of it, and the
government, i.e. all tax payers, pays the rest. In fact, when the owner of an ancient building receives
tax benefits for its maintenance, a transfer of public money to a private individual takes place
(Benhamou, 1996, 61). Something similar happens in the case of donations. Montias (1995) showed
that the taxpayers of the United States contribute an average $600 to $700 for every $1,000 worth
of bequest. A donation, in sum, is a joint contribution by a private owner and the public .
Nevertheless, tax incentives may appeal to ministries of Culture and the art world because they do
not affect the national budget for culture. Tax incentives even seem to be an easy way to expand
the budget for the funding of the arts (Hemels, 2006), thus, the cultural sector would never be in
favour of their abolishment. Tax incentives for the cultural sector could get more favour in those
countries where there are strict budget ceilings for direct subsidies (e.g. The Netherlands since
1994). When there is this type of budget restriction, the ministries of Culture can only introduce a
new subsidy if they cut another subsidy. This restriction, however, does not apply to tax incentives.

3. Tax relief for cultural goods in Italy

The importance of protecting and enhancing the value of cultural heritage, which should be
considered of a great significance for the entire society, has driven the Italian lawmaker to concede
particular tax relief measures to individuals who are directly responsible for the maintenance,
preservation and restoration of cultural goods as well as to those who indirectly provide the
necessary economic resources. Financial contributions from the latter (mainly, enterprises) in
particular, have seen a significant increase during the last few years. The Italian government has
more and more often required financial support by private individuals in order to face up the lack of
sufficient public resources available for the cultural sector. In return, tax concessions other than the
ordinary have been allowed.
Therefore, from a theoretical point of view, tax relief for cultural goods may be divided into two
broad categories: those addressed to the owners of cultural goods and those concerning third party
contributions.

3.1. Tax benefits for owners of cultural goods

The recognition of tax relief to the owners of goods bearing a historical and artistic interest can be
explained on the basis of their social importance, the consistent amount of expenses necessary to
secure their preservation and the scarce availability of public grants. The existing incentives
concern both direct and indirect taxes.
With reference to direct taxes, law n. 413/1991 (sect. 11, sub-sect. 2) states that the income of real
properties having a historical and artistic interest as defined by law n. 1089/1939 (now replaced by
the Dlgs. n. 42/2004) is determined by applying the minimum among the cadastral evaluation
parameters, set for buildings located in the same census area. These historical-artistic buildings
receive, therefore, a more favourable tax treatment than the others since their yearly income
determination does not depend on their actual cadastral value nor on the rent effectively received.
A second kind of direct tax relief specifically applies to the owners of goods subject to historical
and artistic constraints when affording expenses for their maintenance, preservation and restoration.
Indeed, the new Code for Cultural Goods (Codice dei Beni Culturali, sect. 1 and 30) obliges private
owners of goods belonging to the cultural heritage to guarantee their conservation. Its a duty of the
Ministry for Cultural Goods and Activities (Ministero per i Beni e le Attivit Culturali) to authorize
and, in case of owners negligence, even to impose the necessary preservation and restoration
interventions. Both voluntary and imposed expenses belong to the owner, but the Ministry often
makes a partial contribution (or, in exceptional circumstances, a full contribution). For the part of
these expenses that is paid by the owner (who must be a private individual), sect. 15 of the Italian
Consolidated Income Tax Act (Testo Unico delle Imposte sui Redditi, TUIR) establishes the right
for a 19% tax abatement. To take advantage of this, the following conditions have to be satisfied:
expenses that are not compulsory by law must be certified by the Ministry for Cultural
Goods and Activities;
a change in the target use of the good cannot be made without the authorisation of the
Ministry, while the same law obligations that entitle the State with the pre-emption right on
cultural goods must be fulfilled.
Half of this tax abatement may be added up to the 36% one set by law n. 449/1997 for the
restoration expenses afforded by owners of ordinary residential properties. Consequently, the
maximum percentage of tax abatement may become 45.5% (equal to 36% + 19%/2).
Section 147 of the Consolidated Income Tax Act extends the above mentioned 19% tax abatement
also to non-trading companies. On the contrary, different and more favourable tax incentives are
provided for the restoration and preservation expenses incurred by trading companies. Section 100,
sub-sect. 2 lett. e) of the Consolidated Income Tax Act allows for the full deduction of these
expenses from the taxable enterprise income of the fiscal period during which they are afforded.
The only law prerequisite, with the exception of those already described in case of private
individuals, is that the historical and artistic good must be an investment good (i.e. a property good)
and not a capital one. For the latter category of goods, the ordinary tax treatment for enterprise
income is applied.
Further tax benefits for the owner of cultural goods relate to indirect taxes. The Italian registration
fee provides for a 3% rate (lower than the ordinary 7%), which applies to the transfer of real
properties having a historical, artistic and archaeological interest. As far as the Value Added Tax
(Imposta sul Valore Aggiunto, IVA) is concerned, even though transfers of real properties subject to
historical and artistic constraints are taxed according to the ordinary 20% rate, services typical of
libraries, discos and those related to the visit of museums, galleries, picture-galleries, monuments,
villas, palaces, parks, botanic and zoological gardens are exempted from taxation (sect. 10, D.P.R.
633/1972). Since 2001, law n. 383 has abolished inheritance taxes but has left gift taxes in the
presence of both the following conditions:
the beneficiaries are not closely related to the donor;
the value of each individuals share is higher than 180.759,81.
If this is the case, beneficiaries of real properties having a historical, artistic and archaeological
interest are required to pay the ordinary mortgage and cadastral tax rates and the reduced aforesaid
registration fee for the exceeding part of the value.
With reference to local taxation on real properties (Imposta Comunale sugli Immobili, ICI), the
Italian lawmaker has provided relief similar to those concerning the personal income taxation. Law
n. 75/1993 states that the ICI taxable base is obtained by applying to the specific cadastral income
(assessed by means of the minimum valuation parameter among those set for the buildings located
in the same census area) the specific multipliers provided by the Dlgs. 504/1992. Section 5 of this
law used to limit tax benefits only to the real properties having a historical and artistic interest,
owned by private profit organizations and not by public and private non-profit organizations.
However, the Constitutional Court has delivered a judgment of unconstitutionality against this rule
(Sent. n. 345/2003), putting an end to this unfair discrimination.

3.2 Tax benefits concerning third party cultural contributions: the role of patronage and
sponsorship

Interventions for preserving cultural goods are often financed by third parties, other than the owner
and the State. These may be private individuals and non-trading companies or, mostly, individual
companies and partnerships.
While private individuals (and non-trading companies) can only make use of patronage, trading
companies may also resort to sponsorship. Both these two categories of financial interventions are
part of marketing strategies, though they differ deeply. Patronage comes off through voluntary
contributions (in italian erogazioni liberali) donated by private individuals or enterprises, aimed
to a worthy purpose. Sponsorship must be considered as a non-conventional contract, onerous and
consensual, by means of which the sponsor secures a benefit (money or in kind) to the sponsee
and the latter promotes the formers brand, name and products during a particular initiative, event
and convention that takes place una tantum or recurrently. The boundary line between patronage
and sponsorship, even though legally clear and notable, may become hazy when sponsorship takes a
discrete shape and restricts itself to a simple announcement of the firms name during an event; on
the opposite, in case of patronage, it is possible that mass media and press emphasize the donors
act beyond his will and produce an impact in terms of image even greater than sponsorship. The
difference however persists since the sponsee is obliged, as agreed in the contract, to advertise the
sponsor while the patronages beneficiary does not have such an obligation.
The different legal nature of these two forms of interventions requires a different tax treatment. As a
matter of fact, the contributions made for patronage represent:
for the donating enterprise, an allocation of the operating income and, therefore, not an
operating cost, though the lawmaker allows for their deduction from the taxable income.
for the beneficiary, part of the taxable base if this is a non-trading company.
Vice versa, in case of sponsorship contributions:
the sponsor bears an operating cost which, under certain circumstances, may be deduced by
the taxable income;
the sponsee obtains a compensation (money or in kind) which usually represents a positive
element of the taxable income.

3.2.1 Patronage contributions of enterprises

Section 100 of the Consolidated Income Tax Act makes a distinction between two different types of
contributions for cultural goods:
1) contributions for study and research activities of a noteworthy cultural and artistic value;
2) contributions for cultural projects.
The former are voluntary allotments of money to the State, public organizations, foundations and
associations which are directly involved in study, research and documentation activities. These
contributions are unlimitedly deductible from the taxable income provided that they are spent for
the purchase, maintenance or restoration of goods belonging to the historical and artistic heritage,
for the organization of exhibitions and expositions or for study and research activities. These
contributions should however be allowed only whenever the cultural or artistic initiative has been
previously authorized by the Ministry for Cultural Goods and Activities. The Ministry fixes the
maximum period during which contributions must be spent and supervises their use. If the amount
of money is not fully spent within the expected deadline, it must be entirely transferred to the State.
Voluntary contributions for cultural projects (already provided in sect. 38 of law n. 342/2000 and
now in sect. 100, lett. m of the TUIR) are deductible from the taxable income whenever they
represent allotments of money given to the State, Regions, local authorities, institutions or public
organizations, foundations and associations with the aim of contributing to the performance of their
institutional duties or to the organization of programmes in the cultural sector. Tax deduction does
not imply quantitative limits but it applies solely under the following conditions:
beneficiaries of these allotments must peremptorily be those subjects listed by the D.M.
BB.AA.CC 3 October 2002. Apart from the ones already mentioned, also included are: 1)
private legal persons like owners or managers of museums, galleries, picture-galleries,
archaeological areas or collections of other cultural goods or set of movables subject to
historical and artistic constraints, open to public all-day for at least 5 days per week; 2)
private legal persons who carry out activities addressed to create and promote cultural and
artistic expressions.
within the 31st January of each year, donors and beneficiaries must transmit via web
information on all the contributions respectively made and received during the previous year
(e.g. amount, fiscal codes and personal particulars of both donors and beneficiaries,
contribution aims, etc.);
within the 30th April of each year, beneficiaries must pay to the national revenue the 37% of
the contributions which exceed the maximum overall ceiling established by the Ministry of
Economics together with the Ministry for Cultural Goods and Activities (the 2003 maximum
ceiling was equal to about 139 mil.).
A ministerial memorandum of both the Ministry for Cultural Goods and Activities (Circ. n.
141/2001) and National Revenue Authority (Agenzia delle Entrate, Circ. n. 107/2001) has provided
that contributions should be made using payment systems (i.e. bank and postal current accounts,
postal orders, non-negotiable cheques, etc.) which allow for appropriate controls to be done.
Whenever the beneficiary is the State, contributions should be addressed to the Provincial Offices
of the State Treasury.

3.2.2 Sponsorship contributions of enterprises

The other way in which enterprises may contribute to the preservation of cultural and artistic goods
is by sponsoring public or private activities, as specifically allowed by the Code for Cultural Goods
(section 120). The tax advantage for sponsors derives from the fact that sponsorship expenditures
are usually considered as advertising expenditures rather than entertainment expenses (Ris.
Min. n. 9/204/1992). Indeed, according to the Italian tax legislation, while advertising expenditures
are deductible either fully in the accrual date or in constant share during the same period and the
following four ones (i.e. 1/5), entertainment expenses are deductible, with few exceptions, only in
the measure of one third in constant share during the accrual date and the following four ones (i.e.
1/15).
However, there is still a heated debate on the real nature of sponsorship expenditures, since they
are not expressly defined from a fiscal point of view (sect. 108 of the TUIR). Therefore, from time
to time they have been included in the category of either advertising or entertainment expenditures.
In compliance of some Ministerial resolutions (Ris. Min. n. 9/204/1992 and Ris. Min. n.
148/E/1998) and a recent judgement of the Supreme Court (Corte di Cassazione, sez. V Trib. sent.
n. 7803/2000), what puts sponsorship expenditures in the advertising expenditure category is:
the presence of a contract which regulates the relationships between the sponsor and the
sponsee and provides reciprocal obligations;
the existence of a link between the brand or product promotion activity and the occurrence
of an event which is accessible to the public.
On the opposite, according to the above quoted Ministerial resolution n. 9/204/1992, entertainment
expenses are those sustained by a firm with the aim of giving to the public a positive image of itself
and its activity in terms of flourishing and efficiency. Besides this feature, entertainment expenses
are also free since a specific compensation by the receiver is missing.

3.2.3 Patronage contributions of private individuals and non-trading companies

Private individuals and non-trading companies are also allowed to contribute to the restoration and
preservation of cultural heritage but their voluntary contributions must be restricted to study and
research activities of a noteworthy cultural and artistic value and to organizations of cultural
initiatives such as national or foreign exhibitions of a noteworthy scientific-cultural interest. Such
cultural events must however be previously authorized by the Ministry for Cultural Goods and
Activities.
In compliance with sect. 15 of the Consolidated Income Tax Act, contributions are deductible from
the Italian Personal Income Tax (Imposta sul Reddito delle Persone Fisiche, IRPEF) or, whenever
donors are non-trading companies, from the Corporate Income Tax (Imposta sul Reddito delle
Societ, IRES). In both cases, a 19% deduction of the unlimited amount granted to the same
organization already mentioned for patronage contributions of trading enterprises is allowed. The
only difference is that in-kind contributions, evaluated on the basis of either their specific cost or
their nominal value, are also admitted. The law in force states that patronage contributions of
private individuals and non-trading companies must be regulated by an agreement which, in case of
the donor or the beneficiary being a public authority or organization, should be written and should
attach a project that defines the total costs, the financial sources, the realization period, etc. In case
of non-for-profit private legal persons and individuals, it is necessary a written agreement that gives
evidence of the will to both carry out a cultural initiative and financially contribute to it.

4. An empirical analysis
NB Analysis of data is currently being undertaken.

Conclusion

A specific feature of tax incentives for culture is that they imply a shift of focus from supply
towards demand; more responsibility is given to the public. They can be a tool in favour of
democratisation of culture. In order for this to happen, however, governments should design tax
incentives strategically with the help of experts. The latter would indicate which institutions or
goods qualify as cultural. There are, in fact, problems in defining which sectors could enjoy these
benefits. For instance, as Hemels underlines, in the Netherlands as well as in many other European
countries video art is not considered art for VAT, but exact copies of paintings made in China were
considered art (Hemels, 2006). It is also difficult to define the type of organisation for which tax
exemptions apply. Some countries (e.g. France) provide strict definitions and a clear illustration of
the requisites necessary to apply for tax reductions, but in other cases the situation is less clear and
dispute can rise (Swedish Association for Business and the Arts, 2001). Once clearly defined the
rules and the criteria to apply to get tax reduction, people would choose autonomously which
institution to favour. However, the success of this tool to stimulate private intervention is very much
connected to the tradition to contribute to the cultural sector that characterise a specific society, as
the scarce success of the newly introduced tax incentives introduced in Italy proves. By contrast, the
success of this type of support in countries like the United Kingdom and the Netherlands (and the
United States, first and foremost) simply corresponds to the tradition of private intervention in
favour of the arts that has historically characterised these countries (Cumming and Katz, 1989).
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