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Special Issue
WWD Collections issue 11/17/2014

What is it with the Italians and taxes?

From Sophia Loren and the late Luciano Pavarotti to motorcycle champ Valentino Rossi, Italy’s tax police have, over the years, cast an accusatory net over high-profile personalities that make headlines—perhaps to draw attention to the activities, or because these are easily traceable celebrities, compared to underworld figures who dwell in the shadows.

This story first appeared in the November 17, 2014 issue of WWD. Subscribe Today.

The fashion industry clearly occupies a special place in the hearts of prosecutors. The combination of designers’ celebrity and the fact that they’re often running their own private businesses makes them easy targets. The legal troubles that hit Domenico Dolce and Stefano Gabbana—both ultimately exonerated—were only the latest and most visible of several other fashion houses and designers who felt the tax man come knocking, including Giorgio Armani, Miuccia Prada and her husband Patrizio Bertelli, and the Marzotto and Bulgari families, among others. A fiscal source says that Italy’s tax police have, over the years, “fine-tuned their investigations, understanding more and more the complicated operations and structures set in place abroad. Also, countries including Switzerland started to collaborate and provide information. Once the mechanisms were unraveled, it became easier to zoom in on alleged offenders.”

The cases alleging tax evasion have mainly focused on the legal headquarters of companies that the authorities consider bogus entities used to avoid higher corporate taxes in Italy.

One legal source admits Dolce and Gabbana’s troubles “kind of set a precedent” in terms of scale and prosecutorial ambition. Perhaps they will set a precedent in terms of the outcome, too. Dolce and Gabbana’s fiscal woes wrapped up in October with Italy’s highest court acquitting them of tax evasion, after seven years that included an acquittal from charges of fraud from a judge at the preliminary hearing level in 2011, a reversal at a higher court, new charges of tax evasion and two trials at lower courts.

Prosecutors have been stepping up investigations as the country is weighed down by a debt of more than 2 trillion euros ($2.55 trillion at current exchange), unemployment and a stagnant economy. Settlements with the tax police contribute nicely to the state coffers.

Cases in point: Last year, Armani paid $357.6 million to the Agenzia delle Entrate, the country’s internal revenue service, in a settlement following investigations initiated in 2013 over a number of companies controlled by the designer’s group from 2002 to 2009. Prada and Bertelli paid $643.9 million to the tax office in back taxes when they returned the legal headquarters of their company to Italy last year.

“The state needs money and it has stiffened fiscal regulations, so it’s more likely that companies are not entirely in order,” explains Armando Branchini, deputy chairman of Milan-based consultancy InterCorporate. “Italy’s debt has been growing and the European Parliament has been putting pressure on the country to be compliant again with [EU] parameters. Some ways to do so—for example, cutting public expenditure or the privatization of public assets—are very difficult to carry on.”

Of course, raising taxes is a no-no for politicians eager to keep their posts in Italy’s ever-shaky government, so one solution is to go after alleged tax evaders. To be sure, Italians pay close to half of their salaries to the state. “It’s as if we work from January to June for the state and from July onward for our families,” says Branchini.

In the preface to his book L’evasione fiscale [Tax Evasion], Alessandro Sartoro, a public finance professor at the Milano Bicocca University, notes that Italians are said to believe the country is split between those who end up paying their taxes—employees and retired elderly, who are easily traceable—and the furbi (“the sly ones”), widely identified with the self-employed.

Italians generally think that the state is not strict enough in curbing tax evasion, compared with the U.S., for example, and assume moral corruption of the bourgeoisie and the managerial classes is a fact, claims the book.

Others, meanwhile, think, “After all, we are all somewhat tax evaders, it is inherently a part of our country, of our history and culture and justifiable given Italy’s tax rate—also in light of the limited efficiency of the public administration and the wastes of public expenditure.”

There is a reference in the book to the antique Romans, who would bury their jewels to avoid paying a tax on luxury goods.

“This behavior, as often happens, is a mix of truth, simplification and real ideological falseness,” says Sartoro. “It is true that the evasion in Italy is differentiated among categories, but this has more to do with structural reasons, or how the information is collected, than with the level of sanctions and the number of controls.”

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