As if things weren’t bumpy enough in 2004 for Tommy Hilfiger Corp., the situation got dicier in September, when the company disclosed that its commission policies were under investigation by the U.S. Attorney’s Office in Manhattan....
As if things weren’t bumpy enough in 2004 for Tommy Hilfiger Corp., the situation got dicier in September, when the company disclosed that its commission policies were under investigation by the U.S. Attorney’s Office in Manhattan.
It’s too early to predict an outcome, or even when the probe will be completed, but analysts said that the company could end up with more than $100 million in tax liability. Should the investigation be expanded or get drawn out, there could also be some risk to the Hilfiger brand, said analysts. Roughly 10 shareholder lawsuits have been filed against the firm.
Already the investigation has led to a nearly $300 million drop in the firm’s market capitalization and proved to be a distraction to top management, in the midst of turning around the business that was a fashion and Wall Street darling in the Nineties, but has seen a slowdown in recent years.
In a November statement, the company said the investigation “is focused on the appropriateness of the commission rate paid by the company’s subsidiaries to Tommy Hilfiger (Eastern Hemisphere) Ltd. as well as other related tax matters, although there can be no assurance that the scope of the investigation will not be expanded.”
These commissions cover such services as product development, sourcing and quality control and are commonplace in the industry.
Usually the fees represent about 5 to 8 percent of the cost of the unit sold by the factory. Legal experts said that inflating the commission could help keep more money in lower-tax jurisdictions and boost the bottom line.
Managing tax exposure is an important part of Hilfiger’s business. As the firm noted in its annual report filed with the Securities and Exchange Commission in June, “The company’s effective tax rate has been and is expected to continue to be a major factor in the determination of the company’s profitability and cash flow.”
Last year, the firm’s tax rate stood at 22.1 percent, much lower than those of competitors like Polo Ralph Lauren, Jones Apparel Group and Liz Claiborne, which have tax rates of 36 to 37 percent.
Former and current executives received grand jury subpoenas, and the company was subpoenaed to produce documents from as far back as 1990.
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