France-Based Luxury Group Announces Settlement with Italy on PE and Transfer Pricing Issues

; posted on
May 14th, 2019

France-based luxury group Kering has reached a settlement with the Italian Revenue Agency concerning its Swiss subsidiary, Luxury Goods International S.A. (LGI), and concluded that the claims raised during the tax audit regard both the existence of a permanent establishment in Italy in the period 2011-2017 with the associated profits, and the transfer prices applied by LGI in the same period with its related party Guccio Gucci S.p.A.

Background

The case involved Kering group's brand Gucci and a scheme that involved the booking of Italian Gucci sales revenue in a Swiss subsidiary, which the Italian tax authority claimed should have been taxed in Italy. The company’s Swiss-based Luxury Goods International (LGI) subsidiary has been under investigation for allegedly avoiding tax on earnings generated elsewhere.

France’s Mediapart and Germany’s Der Spiegel published reports saying that Gucci had evaded taxes that it should have paid in other countries by using its Swiss logistics center, where all of its products pass through, to bill for business actually carried out elsewhere. The reports said that Kering had reached an agreement with officials in the southern region of Ticino, where the logistics center is, that allowed it to pay a corporate tax rate of 8 percent, compared with 31 percent if it had to pay in Italy.

The settlement

The settlement will involve the payment of €897 million in additional taxes, along with further payment for penalties and interest as Kering agreed to a settlement. Thus, Kering would be spared from having to pay interest and sanctions for late tax payments.

The total required payment amounts to €1.25 billion. Based on an initial estimate, this agreement should impact Kering’s consolidated financial statements in 2019 with an additional tax charge of around €600 million in the income statement and an outflow of €1,250 million in the cash flow statement. 

Sources: Kering, Reuters

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