UPDATE: Dolce & Gabbana have now been cleared by Italy’s court in its final ruling on the case (24/10/14).
Fashion is a multi-billion dollar business. The sales, and subsequent profits, that fashion houses make each year are staggering. Yet, the vast amounts of money made are never enough – or so it seems. Back in 2013, after years of speculation, Dolce & Gabbana were charged with tax evasion; now Prada is under investigation and have been for years now. Why is it that, despite the crazily big profits made by these companies, they still won’t pay the correct tax?
It’s not just big fashion houses that avoid tax, or paying the correct amounts more so, but also the mega-rich in general. Tax evasion by the country’s richest costs Britain £35 billion per year. This is a major issue but is often doable for the richest. They want to protect their money and can find legal schemes to do so. There are loopholes in the system, which greatly benefits them but can be hugely disadvantageous to us, the regular people.
Perhaps if I were mega-rich I would do the same or at least understand the motives but at this point in time, it seems unthinkable to me. Think of what Leonardo DiCaprio’s character in The Wolf of Wall Street did: smuggling his money to a Swiss bank meant that he didn’t have to declare his income and pay taxes on it. All was good and well until he got caught. Now of course I’m not meaning to compare Dolce & Gabbana, a brand that I adore, and Prada, another brand that I am fond of, to a clear cut conman but there are some similarities between the two.
The Dolce & Gabbana case dates way back to 2004. The designers, Domenico & Stefano, sold the brand to a holding company based in Luxembourg in a move which the Italian tax authorities thought was to avoid paying tax in Italy, one of Europe’s highest corporate tax regions. (Luxembourg is a lower-tax region). As a result of this, they were both sentenced to 18 months in jail, but really it is unlikely that they will serve any time for the sentence. Now I’m not an expert on Italian law, but what I have gathered from looking online is that sentences less than 3 years are spent outside a prison and instead under house arrest or via community service. However, they received a suspended sentence last year so when they actually have to pay for the crime is unknown. This is on top of the 343 million euro fine they has to pay back in 2012.
But Dolce & Gabbana aren’t the only company who have had to pay out big time. Giorgio Armani was fined 270 million euro earlier this year as a result of an issue surrounding subsidiaries abroad. Also, Prada Holding (the group controlling Prada) paid out between 400 and 420 million euros in voluntary disclosure back in December 2013 to try and settle backdated taxes in Italy. However, the brand have finally acknowledged that they are under investigation for tax evasion, something that they hadn’t done before, and have agreed to move their company back to Italy from the Netherlands and Luxembourg (like Dolce & Gabbana).
So why are the Italian authorities cracking down on fashion brands then? Well it comes down to the fact that despite the fact that most other EU countries are making their way out of the global financial crisis of recent years and are on the mend, the Italian economy is still going downhill and is stuck in a recession. Despite this, luxury is a sector that has continued to do well. It makes sense for the Italian government to try and source money that it is owed from places that can actually pay it back.
But really, why the government is doing what it is doing is self-explanatory really. Quite simply, laws are being broken and they are trying to set things right. Really, the crux of the matter is why are the fashion houses avoiding paying the correct tax? Since being arrested for tax evasion, Dolce & Gabbana, personally, have become billionaires; Giorgio Armani is estimated to be the 4th richest man in Italy; Miuccia Prada has a real-time net worth of $8.5 billion – it is not like they need the money. So why do they do it? It is a matter that I will never understand.
Luxury fashion is an industry where a pair of jeans can sell for $17,500 (the price that Dolce & Gabbana’s bejewelled beauties are rumoured to be retailing for) and a plain white t-shirt for hundreds. So with these astronomical prices, why can’t the designers spare some cash to pay the right tax? It is not like they are short in profits. Mark-ups are rife, meaning that the price to make an item is nowhere near what you pay. This is only logical and anybody running a business who didn’t take a cut for themselves would be living on the streets. However, mark-ups are also massive. Louis Vuitton has a rumoured 45% profit margin on their bags (yes, I know they’re not Italian, it is just an example), Prada reportedly makes their bags in China (cheaper labour costs) but still charges a Made in Italy prices, the majority of designer clothing is retailed at double the wholesale price and then some. Prices in the luxury market have risen between 25 and 50 percent in the last few years and now a dress can cost more than a family car – and that is just ready to wear. As we know, the rich and getting richer and they can afford these prices, oddly enough.
But that doesn’t answer the key question as to why designers are avoiding the correct taxes. I’d say there are three key things to consider in this debate. Is what they are doing unethical? Yes, I’d say so. Regular people, from society’s lowest earners to the humble middle class, have to pay tax on however little their earnings are (as long as they meet the tax threshold), even if that means a large chunk of their income just disappears before they even see it. Why should the highest earners, the top 1% and multi-billion pound/dollar/euro/whatever bloody currency companies avoid this? Is what they are doing greedy? Well, I don’t know the designers personally and what they are doing with their money but from an outsider view it seems slightly like that. And finally, is what they are doing wrong? Definitely yes.