Luxury And The Law

12.07.12

Dolce and Gabbana On Trial

The designers join a long tradition of fashion moguls accused of tax evasion, but in a new Italy.

It has become almost redundant to say that an Italian luxury-fashion company is accused of tax evasion. In fact, it would be faster to list the brands that, over the years, have not tangled with the tax authorities. The latest designers to find themselves in the bull’s eye of prosecutors are Domenico Dolce and Stefano Gabbana. Their trial for tax evasion began this month. In the past, most of the accused were either cleared or fined. But this is an Italy that has grown significantly more hostile to tax avoidance.

The Italian designers, known for their aesthetic love affair with Sicily, are accused of selling their Dolce & Gabbana brand to a Luxembourg-based holding company in 2004 for the purpose of avoiding Italian corporate taxes. Prosecutors say the designers owe some $400 million in taxes as a result of that sale. The designers are adamant in declaring their innocence.

They are also especially miffed because a year ago, it seemed that the tax issue had been put to rest when a Milan court cleared the designers of any cheating. But the charges were reinstated by a higher court at the request of prosecutors. Now, if found guilty, the designers could be sentenced to five years in prison.

Neither designer attended the opening day of the trial. But a lawyer representing the duo requested the case be thrown out due to technical irregularities. A ruling is expected next week.

Dolce and Gabbana join a host of other Italian fashion moguls who have had tax troubles. Roberto Cavalli, famous for his animal-print aesthetic and a decadent lifestyle, was accused—and eventually cleared—of putting the $3.2 million cost of renovating his Tuscan villa on the company books. Valentino was fined $39 million for failing to pay Italian taxes after he moved his residence—but not his business—to London.

One of the most famous cases dates back to the mid-1990s when Giorgio Armani, Santo Versace, Gianfranco Ferre, Gerolamo Etro, and Krizia’s Mariuccia Mandelli were all accused of paying off tax inspectors in exchange for more favorable audits. The accused said they were the victims of extortion by tax officials. (Some of the companies involved eventually settled with plea bargains, reportedly “to avoid judicial troubles,” while others that refused the plea-bargain deal ended up being acquitted.)

And in 1986, Aldo Gucci, the 81-year-old patriarch of the Florentine leather company known for its horsebit loafers and bamboo-handled purses, was sentenced by a U.S. court to one year and one day in prison for evading more than $7 million in federal taxes. (His son Paolo helped prosecutors convict him.) Soon after, in 1988, Gucci America—the North America division of the corporation—was forced to pay $20.5 million in back taxes after pleading guilty to tax-evasion conspiracy. (The Gucci tax debacle set the stage for the rise of the highly successful Tom Ford-Domenico de Sole era at the brand. De Sole, an attorney who represented Gucci America during its tax travails, eventually became head of Gucci.)

What is it about Italian fashion brands and taxes? Is there something in the corporate culture that encourages chieftains to treat taxes as optional?

Monti has also cracked down on the country’s shadow economy—one in which cash dominates.

The vast majority of bold-face Italian brands were founded as small, family-run firms that over time ballooned into global colossi. Even as they became international entities, there was often little distinction between the patriarch, the rest of the family and the business itself, particularly in a case such as that of Aldo Gucci, observes Sara Forden, author of The House of Gucci: A Sensational Story of Murder, Madness, Glamour and Greed. In her book, Forden describes Aldo Gucci’s unshakable belief—despite numerous warnings that he should not anger the IRS—that he could have his way with the family company. He could scoff at and skirt its tax obligations with off-shore accounts and other tactics.

It was common practice for these family-owned businesses to create holding companies in places such as Luxembourg or the Netherlands through which company revenue would flow and Italian taxes could be avoided. As brands got bigger and more financially complicated—and sophisticated—this structure led to accounting questions. But so far, no designers have gone to jail—at least not in Italy.

Times are changing in Italy, however. The government, under economist-turned-prime minister Mario Monti, has been hunting down tax scofflaws by their plumage and making a lesson of them. Police have taken to staking out haunts and stopping drivers of Ferraris and Maseratis to check the cars’ registration. The question: are cars registered to companies actually for personal use? And if the cars are registered to individuals, have those people reported assets and paid taxes commensurate with owning autos priced at $200,000 and $300,000?

According to one Bloomberg story, for example, financial police arrested a 44- year-old man near Venice who was driving a Ferrari F40—a Batmobile of a car valued at well over a half million dollars. He was accused of not paying approximately $10.5 million in taxes since 2006.

Monti has also cracked down on the country’s shadow economy—one in which cash dominates. He instituted a 1,000 euro maximum (about $1,300) for cash purchases by both Italians and foreigners in order to better track transactions. During a conversation earlier this year, Stefano Sassi, CEO of Valentino—where a simple leather handbag costs $2,000—lamented the ruling. He noted its chilling effect on many of the brand’s wealthy customers from increasingly lucrative markets such as China and Russia who do not use credit cards.

After significant pressure from businesses, the maximum for foreigners was scrapped, although customers’ identity must be revealed to Italian tax authorities for purchases above 3,600 euro (about $4,700).

And that means the tax police would know exactly who purchased one of those Dolce & Gabbana embroidered-lace gowns and whether the state has gotten its share of the proceeds.