MILAN — The daylong hearing Wednesday in the ongoing tax trial of Domenico Dolce and Stefano Gabbana was an animated one — with judge Antonella Brambilla at times calling for order to allow witnesses to finish their sentences and prosecutor Gaetano Ruta once pacing away in an effort to hold his temper. Dolce & Gabbana managing director and board member Cristiana Ruella and Dolce’s brother and board member Alfonso Dolce attended the hearing, also showing some impatience by either suppressing smiles at some of the remarks made or shaking their heads.
This story first appeared in the February 21, 2013 issue of WWD. Subscribe Today.
In a preliminary motion, the designers’ lawyer Alberto Simbari, who works with lawyer Massimo Dinoia, asked the court to appoint an expert, highlighting the discrepancies between the declarations made by the different witnesses during the previous hearings, even among members of the same authorities, such as the tax police and the Revenue Agency.
“The only certainty is that there are no certainties: [consultancy] PricewaterhouseCoopers said the Dolce & Gabbana brand was mature in 2004 and expected growth at between 8 and 10 percent; the Revenue Service said it was not mature and expected a 20 percent growth; some said the fiscal weight should be fixed at 35 percent, others that it should be related to the buyer, and there was no accord on the percentage rate of royalties either,” said Simbari, among other examples.
These are all issues related to the investigations that led to both designers being charged with alleged tax evasion related to the 2004 sale of the Dolce & Gabbana and D&G brands to the designers’ Luxembourg-based holding company, Gado Srl. The Italian tax police reportedly consider Gado essentially a legal entity used to avoid higher corporate taxes in Italy.
Based on a business plan for the 2004-07 period, calculations of growing royalties and the company’s latest revenues, PricewaterhouseCoopers pegged the value of the Dolce & Gabbana and D&G brands at 360 million euros, or $484.4 million at current exchange.
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.
“If even the witnesses called by prosecutors have different ideas, how can the court resolve this? An expert can be called upon when it appears issues cannot be resolved,” said Simbari.
Ruta and prosecutor Laura Pedio opposed the motion, together with the lawyer for the Revenue Agency, who said the methods to determine the value of the brand were “not meant to be scientific.” The motion was rejected by the judge.
Luciano Patelli, the accountant for the designers, who have denied the charges, took the stand for almost three hours in the afternoon.
Patelli said he had been charged by Ruella in 2003 to redefine the company and “create the right structure to allow the arrival of outside partners or initiate a public listing.” Patelli had “to identify the company that would be more suitable to buy the brand,” owned at the time by the two designers. “Ruella described the fact that the brand was owned by two physical individuals, who each had a 50 percent stake, as an anomaly. The banks had identified this as a weakness, and I found it credible,” said Patelli, acknowledging the “elements of risks” connected to this, including disagreements between the two designers.
Pressed by Ruta to express whether he had been surprised by the fact that, after completing his job in 2004 and returning to deal with Gado in 2007 upon a change in tax law, the firm had not listed, nor had outside investors materialized, Patelli said he had never been involved in a potential initial public offering. “A date had never been set and I didn’t think three years was a long time,” he explained, remarking that he had worked on the Gucci IPO with his studio. “That took place at least five years after the restructuring. It’s important to be ready when it’s the right moment, but it’s a serious mistake not be ready at the right moment,” he pointed out.
One thorny issue dragged on when Patelli, pressed by prosecutors, reiterated that he had no part in the evaluation of the brand, although he did provide the information that Luxembourg had a 4 percent fiscal tax rate. The tax rate in Italy was at 37.4 percent. “I did not discuss the tax rates to use in the evaluation of the brand,” said Patelli. “I did not gauge the congruity of the price, I just thought it was reassuring that the designers had asked for an evaluation.” He concluded by surmising that a higher value would have enhanced the appeal of the brand for a potential investor.
Responding to a question by Simbari, Patelli said Dolce and Gabbana had never attended meetings between himself and Ruella.
The next hearing is scheduled for March 6 and Ruella and company manager Giuseppe Minoni are to take the stand.