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Dolce, Gabbana Tax Hearing Goes On

Judge Antonella Brambilla presided over an eight-hour hearing Wednesday.

MILAN — Judge Antonella Brambilla presided over an eight-hour hearing Wednesday as witnesses called by prosecutors Laura Pedio and Gaetano Ruta took the stand in the ongoing trial of Domenico Dolce and Stefano Gabbana, who are charged with omitted and unfaithful earnings declarations. The defendants have denied the charges.

Of note was the testimony of Marco Tanzi Marrotti, an executive of PricewaterhouseCoopers, the consultancy tapped by Dolce and Gabbana to set a price for their brands in spring 2003. “I was told that the designers were looking at the possibility of publicly listing their company,” said Tanzi Marrotti, explaining that an initial public offering would have required the brands to be “brought back into the group,” and controlled by a company rather than two individuals.

Based on a business plan for the 2004-2007 period, calculations of growing royalties and the company’s latest revenues, the consultancy pegged the value of the Dolce & Gabbana and D&G brands at 360 million euros, or $484.4 million at current exchange.

This amount and the fact that it takes into consideration Italy’s tax rate, standing at about 37.5 percent at the time, took center stage for most of Wednesday’s hearing. Questions from prosecutors and the lawyers for the defendants — who include managing director and board member Cristiana Ruella and Dolce’s brother and board member Alfonso Dolce, both once again present at the hearing — revolved around the consultancy’s choice of Italy’s tax rate in the evaluation of the brand, as well as the expected growth of royalties.

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Mario Ambrosetti, a PricewaterhouseCoopers corporate finance director, remembered that the possibility of setting up a company in Luxembourg emerged at the time, “although it was not a definitive decision.” According to the tax police calculations, which took into account lower tax charges in Luxembourg, the value of the brands was estimated at 1.1 billion euros, or $1.4 billion. Prosecutors underscored that “the value of the brand is inversely proportional to the fiscal weight,” or tax.

The first Dolce & Gabbana employee took the stand on Wednesday. Maria Grazia Bergomi, employed by the firm since 2001 and responsible for the intellectual property of the brands, relocated to Luxembourg in 2005 to work for Gado Sarl, the designers’ holding company in that country, which the tax police consider a legal entity used to avoid higher corporate taxes in Italy. Bergomi, who reported to Ruella, lived in Luxembourg until December 2006, when she returned to Milan. She was the only Dolce & Gabbana employee in that country, and was succeeded by Claudia Bertinetti. In her job, Bergomi was assisted by Alter Domus, a Luxembourg-based agency that helped provide services. Dealing with lawyers, investigators and anticounterfeit experts, Bergomi registered, controlled and “maintained alive” about 1,600 brands for the group in more than 80 countries around the world. The defendants’ lawyers pointed to lengthy and laborious procedures connected to the protection of the brands that a transfer to Luxembourg entailed.

“It took six months to just initiate these procedures in 2004,” said Bergomi.

To further fuel the concept that Gado was not devised as a screen, the defendants’ lawyers produced paperwork including a job description to seek a successor for Bergomi and the latter’s rent contract in Luxembourg.