Backstage at Gucci RTW Fall 2019

MILAN — Kering is taking a big financial hit — 1.25 billion euros — to settle with the Italian Revenue Agency, but analysts don’t expect the luxury group’s shares to suffer as a result.

The investigations of the Italian tax authorities, which focused on the company’s tax payments related to the sales in Italy of Gucci products between 2011 and 2017, identified a tax evasion of 1.4 billion euros. According to the Italian tax authorities, in distributing Gucci products in Italy through a directly operated Switzerland-based company named Luxury Goods International, Kering had intentionally avoided the payment of taxes in Italy.

“I don’t think this news will have a significant impact on the stock market on Friday since the value of the settlement is in line with what was expected,” said Marco Corsiglia, deputy head of research at Intermonte SIM SpA. “At the same time, since this tax probe definitely damaged the image of the company, Kering will stress the fact that in the future it will operate in a more ethical and correct way.”

“We believe that the impact on the share price will be limited as it represents about 2 percent of the market cap and was already well-known by the market,” Melania Grippo, analyst luxury goods at Exane BNP Paribas, said in a statement.

But while Kering is settling the tax litigation with the tax agency, the affair isn’t completely over since a criminal investigation into the matter is ongoing. The two investigations are generally parallel yet separate in Italy and have to be dealt with separately.

“I think Kering’s decision to settle with the Italian tax agency is mainly driven by two reasons: on one hand, the company must have done a cost-effectiveness analysis of the impact of a tax litigation, probably very long and difficult,” said Stefano Grilli, tax partner at Italian law firm Gianni Origoni Grippo Cappelli & Partners. “At the same time, by settling before the kick off of the criminal proceedings, Kering might get a reduced sentence. It’s important to highlight, that the tax litigation and the criminal proceedings are fully independent. Kering might be found not guilty, as it happened with Dolce & Gabbana [after a seven-year trial ended in 2014].”

“I believe this is very much in line with what was expected,” said Luca Solca of Bernstein. “It is a good thing that Kering is putting this behind its shoulders — under several viewpoints: It removes (minor) residual uncertainty on financials and it dispels reasons for investors to be skeptical about Kering’s ESG credentials.”

Following this settlement, one of the biggest with the Italian tax authorities, Kering’s consolidated financial statements related to the year 2019 will be significantly impacted. In particular, the income statement will include an additional tax charge of about 600 million euros and the cash flow statement will feature an outflow of 1.25 billion euros. In 2018, Kering posted revenues of 13.7 billion euros.

Kering is not the first international company to have settled with the Italian tax authorities. In 2016, Apple paid a sum of 318 million euros and the following year Google paid a total of 306 million euros to regularize its fiscal position in the country. In the Italian fashion sector, in 2014, following a voluntary tax disclosure, Patrizio Bertelli and Miuccia Prada reportedly paid 470 million euros and the same year Luxottica’s Leonardo Del Vecchio personally settled up with the Italian Revenue Agency through a payment of 146 million euros. The company itself paid 33 million euros, or $45 million, to Italy’s tax agency at the end of 2013, following a tax audit concerning the year 2007 over alleged irregularities in the use of transfer pricing.

The same year, Giorgio Armani settled a tax dispute with the Italian Revenue Agency over the use of overseas subsidiaries, paying 270 million euros to clear its name and Bulgari settled for 57 million euros in 2014.

“It’s very easy for the fashion industry to activate tax inversion practices since the real value of fashion is not the product but the brand,” Grilli said. “It’s extremely easy to move a brand, which is an intangible asset, to a country with a more favorable fiscal law. For Italian companies it’s really hard to find managers and teams, who are happy to relocate for example from Milan to small Swiss villages and that’s where the problem starts.”

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