Gucci Tax Scandal Envelops the Company

Kering S.A., a Paris-based French luxury goods group and owner of luxury brand Gucci, agreed to hand over 1.15 billion euros ($1.4 billion) in unpaid taxes to the Italian government in May, according to Bloomberg.

The payout was supposed to conclude a seven-year investigation, lasting from 2011 to 2017, into whether Kering conducted illegal business through a Swiss subsidiary business in order to avoid paying taxes on the Gucci brand in Italy. However, the probe into Kering has uncovered additional potentially fraudulent business practices, which are now being investigated by Guardia di Finanzia, Italy’s law enforcement agency dedicated to the investigation of financial crimes.

Kering is an international conglomerate of luxury and designer fashion brands, including Gucci, Yves Saint Laurent, Boucheron, Balenciaga, and Alexander McQueen. The company, which was originally founded as Établissements Pinault by François Pinault in 1963, was initially designed as a timber trading company. However, as the company grew, Pinault started acquiring luxury retail companies, beginning with the purchase of a 42 percent stake in Gucci in 1999, according to CNN. Recently, the company launched partnerships with other multinational organizations such as Apple in an effort to expand the realm of luxury brands in other industries.

In 2011, Italian tax authorities initiated an audit into Kering’s subsidiary company Gucci for failing to pay taxes to the Italian government. Gucci, which is based in Florence, siphoned revenue from its company to a subsidiary, Luxury Goods International, based in Lugano, Switzerland, in order to avoid paying high Italian taxes on its revenue.

Many large corporations utilize Switzerland in order to conduct business due to its lack of corporate tax laws. According to estimates, Gucci saved over 1.15 billion euros in taxes thanks to its fiscal maneuvering.

Kering has routinely averaged billions of euros in sales for more than the past decade. In addition, it has been widely praised as a leader in ethical, social, and environmental conduct in the high luxury industry. In fact, Kering has been named one of the most sustainable corporations in the world and an industry leader for ethical treatment of workers and the upholding of their rights.

However, the Gucci tax scandal taints the company’s ethical reputation and may make investors uneasy about the company’s future. Additionally, the Italian tax police are investigating dozens of high-ranking executives at Gucci, who may potentially face criminal charges as a result of the scandal.

The Gucci probe by the Italian government highlights a larger effort by the European Union to crack down on corporate corruption due to mounting public pressures from the European sovereign debt crisis. While no individual employees of Gucci have been found guilty yet, the magnitude of this tax scandal may play a vital role in the company’s future and could possibly implicate high-level company employees.