MILAN — Italian fashion is having tax problems — again.

This story first appeared in the March 12, 2008 issue of WWD. Subscribe Today.

Following in the footsteps of Giorgio Armani, Roberto Cavalli, Santo Versace and the late Gianfranco Ferré, Domenico Dolce and Stefano Gabbana are the latest Italian designers to have a brush with the country’s fiscal authorities via their burgeoning fashion empire.

WWD has learned from sources that Dolce & Gabbana is under investigation from Italy’s tax agency for allegedly not declaring earnings of around 260 million euros, or almost $400 million at current exchange, at a satellite company between 2004 and 2006.

According to reports, the group could be liable for more than 125 million euros, or $192 million, in unpaid taxes and fines.

Italian authorities also have opened a criminal investigation into the claims. Milan-based public prosecutor Laura Pedio, who is heading up the criminal case, told WWD on Monday her probe was “at an early phase” and declined to give further details. The crime can carry up to a three-year sentence, although neither Dolce nor Gabbana is believed to have been named so far in the investigation.

The case relates to Luxembourg-based company Gado Sarl, which sits under the group’s parent company, Dolce & Gabbana Luxembourg Sarl, and which owns the Dolce & Gabbana and D&G brands. According to sources, investigators believe Gado, which earns royalties on the brands, is little more than a legal entity, allegedly used to avoid paying higher corporate taxes in Italy.

In a separate inquiry reported in WWD last week, Italian tax authorities are thought to have already ordered Dolce & Gabbana Industria SpA, which operates the group’s production facilities, to pay a fine of 2 million euros, or $3.1 million, for allegedly not declaring sales of inventory to distributors via a subsidiary.

According to Dolce & Gabbana’s annual review published last year, net profits for the 12 months ending March 31 advanced 38 percent to 149 million euros, or $191 million. Consolidated revenues amounted to 1.05 billion euros, or $1.34 billion, up 30 percent. Dollar figures have been converted at average exchange rates for the period to which they refer.

The balance sheet also exhibited wholesale revenues of 1.35 billion euros, or $1.73 billion, a figure that includes sales of Dolce & Gabbana and D&G products generated by the group and by licensees.

A Dolce & Gabbana spokeswoman has declined repeated requests for comment on the investigation. But if designers Dolce and Gabbana are searching for precedents on the possible outcome of this case, they need look no further than their fashion peers.

Cavalli was found guilty of tax evasion in 2006 after trying to put about 5 billion lire’s worth — $3.1 million — of renovations to his luxury Tuscan villa through his fashion company’s books. Although sentenced to 14 months in jail, Cavalli never saw the inside of a cell, after a judge suspended his prison term on the grounds that he wouldn’t recommit the same crime. Italian law allows for a judge’s discretion on sentences of less than two years.

Cavalli still plans to appeal the court’s ruling.

Armani, Ferré, Versace, Girolamo Etro and Krizia’s Mariuccia Mandelli and their business associates were indicted in 1995 on charges of corruption and bribing tax police in return for swift and trouble-free audits.

Armani, Etro and Krizia chairman Aldo Pinto pleaded guilty in 1996 before the trial began to end their cases as soon as possible and save themselves and their businesses from the impact of a long judicial process. Ferré, Versace and Mandelli were found guilty, although a higher court overturned the verdicts on appeal and found the trio to be victims rather than perpetrators of extortion.

Armani confessed to paying a $64,000 bribe to tax police in 1990 to speed up an audit, although he said he was the victim of extortion.

“I told the truth about what happened, and explained why I was forced to pay,” Armani said at the time. “The fashion sector is made up of companies that are part of this country’s industrial reality and therefore it shouldn’t come as a surprise that the fashion houses haven’t been able to escape a phenomenon of doing business in this country that has been diffuse.”

In Italy, where being furbo, or cunning, is held up as a virtue and not a vice, tax evasion is a chronic problem. According to government estimates, unpaid taxes, including income from the country’s black-market economy, are equal to 27 percent of Italy’s gross domestic product.

Former premier Romani Prodi, whose coalition government fell apart in late January, had launched a crackdown and claimed last year to have recovered 12 billion euros, or $18.4 billion, in unpaid taxes since taking office for the second time in 2006.

Prodi, who retired from politics on Monday, also wrote a letter to an Italian newspaper last year, imploring the ruling classes to set an example. In the letter to Corriere Della Sera, Prodi said tax evasion was the main reason why Italy has “both overly high taxes for honest people and a heavy deficit in the state’s balance.”

Since then, a number of high-profile figures, including seven-time motorcycling world champion and Italy’s highest paid athlete Valentino Rossi, have been called to task. Rossi paid about 19 million euros, or $29 million, last month to settle his dispute with authorities — although that figure could rise.

The tax man also went after Salvatore Ferragamo SpA, reportedly to the tune of more than 20 million euros, or $31 million, in unpaid monies related to the group’s Netherlands-based holding company. However, the fashion company was cleared of the charges on appeal in January. Ferragamo proved on appeal that its holding company, Ferragamo International B.V., was a fully consolidated part of the group and not, as fiscal authorities had alleged, little more than legal entity, which the fashion house used to avoid paying higher corporate taxes in Italy.

Despite Dolce & Gabbana’s reluctance to comment on the allegations, the company does not appear to be taking them lightly. Dolce & Gabbana has hired one of the most prestigious law firms in Milan, cofounded by Giulio Tremonti, a two-time former minister of finance under former premier and media mogul Silvio Berlusconi.

Should Berlusconi, who is a friend of the designers, win elections for the third time in 25 years next month, then Tremonti could return to office, which might have a bearing on any legal proceedings.