An investigation into Nike’s tax activities in the Netherlands will go forward after a court in the European Union determined that Dutch tax authorities did not act improperly in initiating the probe into the Swoosh. In a decision on Wednesday, a panel for the European Union General Court held that the European Commission “complied with the procedural rules, and neither failed to fulfill its obligation to state reasons nor made manifest errors of assessment,” thereby, shutting down the Beaverton, Oregon-based sportswear behemoth’s attempt to quash the investigation into whether international arms of the company failed to pay millions of euros in taxes.

In a statement provided to Bloomberg on Wednesday, a representative for Nike stated that “Nike is subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands.” The spokesman further asserted, “We believe the European Commission’s investigation is without merit.”

The probe got its start in January 2019 when the European Commission revealed that it had opened “an in-depth investigation to examine whether tax rulings granted by the Netherlands to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules.” In particular, the European Commission – which is the EU agency tasked with proposing legislation, implementing decisions, upholding the EU treaties and managing the day-to-day business of the 27-member bloc – asserted at the time that its formal investigation “concerns the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV,” both of which develop, market and record the sales of Nike and Converse products in Europe, the Middle East and Africa. 

At the heart of the Commission’s probe are five tax rulings issued by Dutch tax authorities between 2006 and 2015, which tax authorities claim spotlight “a method [that Nike’s Netherlands-based subsidiaries] used to calculate the royalties” to be paid to Nike – by way of a subsidiary in Bermuda, which does not maintain a corporate income tax – for their use of Nike intellectual property, including the company’s brand name, famed Swoosh logo, and various other trademark and patent-protected assets. Because those royalties were categorized as business expenses, Nike was able – thanks to the aforementioned tax authority decisions – to pay less tax than other competitors, thereby, giving rise to instances of Nike receiving illegal state aid, according to the Commission.

Early this year, Nike formally challenged the Commission’s preliminary assessment of its tax dealings. In a filing with the Luxembourg-located General Court, counsel for Nike argued in January that the Commission failed to cite “sufficient reasons for finding that the contested measures fulfill all elements of state aid, especially why they should be regarded as selective,” while also unnecessarily escalating the proceedings to a formal investigation when “there were no difficulties to continue the preliminary investigation.”

Not the first time that it has investigated “multinationals’ sweetheart tax deals with EU countries giving them an unfair advantage,” the Commission has taken on a number of big-name companies – from Apple and Amazon to Starbucks and Fiat – in recent years in furtherance of its ability to examine whether tax rulings by EU member states result in state aid – or a reduction of a company’s tax burden that would not otherwise existed but for the ruling. Amazon and Apple have both been successful in appealing the Commission’s findings against them, with the General Court holding in May that the European Commission failed to prove that there was an illegal tax advantage given to Amazon in Luxembourg, where one of its European subsidiaries is based. As such, the court took the 250 million euros ($303 million) tax judgment off of the table.

Before that, Apple challenged the record 13 billion euros ($15.7 billion) tax decision waged against it in connection with tax payments in Ireland, with the General Court finding in July 2020 that Commission had “not succeeded in showing to the requisite legal standard that there was an advantage” at play for Apple, and thus, was wrong to declare that Apple “had been granted a selective economic advantage and, by extension, state aid.” At the time, Bloomberg characterized the court’s decision as “a dramatic setback to Commissioner Margrethe Vestager’s probes of national tax rulings that she says were an illegal subsidy for some large multinational firms.” 

The European Commission has since sought to take the case to the EU’s highest court, filing an appeal to the Court of Justice in September 2020, with Ms. Vestager stating that the Commission “has to continue to use all tools at our disposal to ensure companies pay their fair share of tax.”

The case is Nike European Operations Netherlands et Converse Netherlands v. European Commission, T-648/19.

Early this year, the U.S. Trade Representative (“USTR”) announced that it would indefinitely suspend the Section 301 tariffs on certain luxury goods from France – including handbags and cosmetics – tied to its investigation into the French digital services tax (“DST”), thereby, letting the likes of Hermès and co. off of the hook of the significant implications that were expected to follow such a duty overhaul. But while the U.S. trade body has shielded French companies from this particular type of tax treatment, certain apparel and leather goods, cosmetics, and fragrances from countries like Italy and the United Kingdom are still in the crosshairs of a budding trade war. 

In a statement in late March, the USTR announced the “next steps” in its ongoing Section 301 investigations, which center on various countries’ implementation of taxes on the digital earnings of companies that generate a certain level of revenue. Since American tech giants like Facebook Inc., Google, Amazon, and Apple are among the most heavily-targeted by such relatively new digital tax regimes, the USTR initiated investigations into the national DSTs adopted or under consideration in a number of jurisdictions – beginning in some cases in 2019 and expanding thereafter – in an effort to examine the individual tax initiatives, and determine where they fall in the larger context of international tax and trade laws.

“In January, USTR found that the DSTs adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom … discriminated against U.S. digital companies, were inconsistent with principles of international taxation, and burdened U.S. companies,” the USTR asserted in its statement late last month, noting that it will proceed with the public notice and comment process on possible trade actions “to preserve procedural options before the conclusion of the statutory one-year time period for completing the investigations.” 

Given the types of goods that the USTR proposes levying tariffs on in response to the various national DST programs, fashion is firmly cemented in at the heart the matter. In its proposal for the UK, for example, the USTR recommends adding tariffs of up to 25 percent on fragrances, different types of makeup (including lipstick, nail polish, powder, etc.), skincare products, “women’s or girls’ dresses, knitted or crocheted, of synthetic fibers,” women’s’ and men’s’ overcoats, and different types of footwear, among other things. The U.S. government agency’s proposed tariffs for Italy are even more focused on fashion, with the government proposing tariffs on a wider array of goods – from handbags (which are not on the UK list) and footwear to “women’s or girls’ suit-type jackets and blazers” and “men’s or boys’ track suits.”  

While the proposed tariffs are still subject to a public notice and comment process, they, nonetheless, raise concerns in light of the fact that such trade disputes “have a tremendously damaging impact on businesses’ ability to export to the U.S.,” according to Helen Brocklebank, CEO of UK luxury trade group Walpole, whose members include Alexander McQueen, Burberry, Farfetch, Mulberry, and Net-a-Porter, among others. KPMG’s Amie Ahanchian, Donald Hok, Philippe Stephanny, and Elizabeth Shingler echo this sentiment, stating that the proposed tariffs raise “serious concerns about the possibility of increased trade tensions,” while also standing to “substantially raise the cost of business for many companies,” including those within the fashion sphere.

With this in mind, they noted in a Bloomberg Tax article that “understanding the mitigation opportunities available to importers is essential to prepare for [such] potential retaliatory tariffs.” For instance, they state that “Section 301 duties may be eligible for duty drawback where goods imported into the U.S. are subsequently exported either: (1) as incorporated into products manufactured in the U.S. (i.e., manufacturing drawback); or (2) in the same condition as originally imported (i.e., unused merchandise or same condition drawback).” Since drawback rules enable companies to recover 99 percent of the duties originally paid on the imported merchandise when exported (subject to customs’ requirements), it is “becoming an increasingly popular duty mitigation program because of the substantial savings it offers,” per Ahanchian, Hok, Stephanny, and Shingler. 

Similarly, the First Sale for Export (“FSFE”) duty reduction program could also prove effective if the U.S. importer can prove that “the purported FSFE transaction is a bona fide sale, that the goods are clearly destined for export to the U.S., and that the price paid to the foreign manufacturer by the foreign middleman is at arm’s-length.” Ahanchian, Hok, Stephanny, and Shingler contend that this program has historically “been used among retail and apparel importers who faced steep duties,” it is now becoming more popular in other industries due to the high-tariff environment, and “while the requirements to apply the FSFE principle are stringent and reasonable care must be exercised, U.S. importers have experienced significant savings through the implementation of this strategy.” 

In terms of what will ultimately come of the U.S. tariff threats, that is unclear. “It is believed the Biden Administration aims to ultimately resolve the disputes over DSTs, and other issues of international taxation, through building consensus among the members of the Organization for Economic Co-operation and Development,” per Husch Blackwell LLP’s International Trade Insights blog, which notes that “Secretary of Treasury Janet Yellen also supports engaging in OECD negotiations on the separate issue of minimum corporate taxation.” Meanwhile, U.S. Trade Representative Katherine Tai says that the U.S. “is committed to working with its trading partners to resolve its concerns with digital services taxes” and “remains committed to reaching an international consensus through the OECD process on international tax issues.” However, Tai claims that “until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs.”

Regardless of the outcome, Ahanchian, Hok, Stephanny, and Shingler expect that “it is likely that tariff actions will continue to be part of the political toolbox.”

Brands are currently faced with a number of issues when it comes to taxes and customs, following the conclusion of the Brexit transition period. “Hidden expenditures, [such as those that come] in the form of non-tariff barriers, will prove costly to business,” Baker McKenzie asserts in its “Brexit: Key Implications for the Consumer Goods & Retail Sector” report. Meanwhile, “Non-tariff barriers, such as new compliance paperwork and other administrative requirements, may also cause delays in clearing goods through customs upon entry into the UK and the EU.” 

One such side effect of Brexit and the ways in which it is expected to impact e-commerce (and consumer behavior as a result) is the levying of import taxes on often-unsuspecting UK and non-UK consumers that purchase products online. As the Guardian recently reported, “Since  January 1, [UK residents] buying goods from the EU – and vice versa – have faced import charges,” with the new rules putting “thousands of specialist online businesses at risk as consumers” – i.e., the importing parties – “on both sides of the Channel balk at having to pay the hefty import fees.” 

While “online marketplaces such as Amazon collect the VAT on the retailer’s behalf and the item from Europe can be sent as before,” the Guardian’s Miles Brignall states that “UK consumers who have ordered items direct [from brands] have been hit by the charges” when their orders ring up to more than £135. The unexpected customs fees are prompting consumers to simply reject the goods they ordered, with one UK woman telling the Guardian that she was hit with a £93 customs bill after purchasing £292 worth of bedding from a Berlin-based company. “I wouldn’t have [placed the order] if I had known I would face 30 percent duties on top,” she said. And that appears to be the sentiment among a growing number of people, as the BBC notes that many have taken to “automatically rejecting the goods, refusing to pay the additional surcharges, and leaving couriers to take them away.” 

Add this budding practice to the already-sweeping volume of product returns currently underway (Statista states that some 30 percent of items bought online are returned), and a problematic side effect of such newly-fashioned tax and customs practices comes into view. 

“When goods arrive back at depots [in the UK and/or the EU], there is new customs paperwork to complete,” says Adam Mansell, head of the UK Fashion & Textile Association, who told the BBC that in addition to having to take possession of the goods, themselves, companies are now faced with an “export clearance charge, import charge arrival, import VAT charge and depending on the goods, a rules of origin document as well.”  

As for how companies are coping with an influx of returns and the mass of administrative elements that come with that, some are being proactive; a number of UK-based companies, for instance, have stopped shipping to consumers in the EU, and vice versa, in order to sidestep these issues, at least for now. At the same time, BBC reports that others are simply being left with an excess of returns and costly bills. “Four major UK High Street fashion retailers are stockpiling returns in Belgium, Ireland and Germany,” the publication notes, while “one brand will incur charges of almost £20,000 simply to get its returns back” from customers.  

Against this background, Mansell states that some UK-based companies are considering destroying products instead of attempting to get them back from the EU in order to cut costs. It is “cheaper for retailers to write off the cost of the goods than it is to deal with it all.” The potential result? “Either abandoning or potentially burning them.”

Such a notion is hardly unheard of. As we noted a few years ago, there is more to brands’ quiet-but-notorious destruction of unsold goods than an attempt to ensure that the products do not make their way in unauthorized distribution chains: the potential destruction of products may enable international brands that import goods into the U.S., for instance, to benefit from the “drawback” or the return of certain duties, internal and revenue taxes and certain fees collected upon the importation of products into the U.S., for instance, from France.

In accordance with U.S. Customs and Border Protection compliance guidelines and 19 USC s. 1313, the section of U.S. Code that addressed “drawback and refunds,” if imported merchandise is “unused and exported or destroyed under Customs supervision, 99 percent of the duties, taxes or fees paid on the merchandise by reason of importation may be recovered as drawback.” Given that the average duty rate for the import of a leather handbag, for example, is 16 percent, but can reach a maximum of 60 percent depending on the types of textiles at play, brands that can provide U.S. Customs with evidence that imported products have been exported or destroyed in accordance with the set timetable may be able to claim sizable refunds for unsold products. 

The same is true in Italy (and many other countries), where brands that destroy unsold products can claim tax credits as a result. As the Wall Street Journal revealed in 2018 in connection with Italian menswear brand Stefano Ricci, “At the end of the year, employees gather unsold clothes into dozens of boxes bound for a special facility, where they are incinerated.” Mr. Ricci told the Journal that while the brand “would like to give some of the unsold goods to charity, the tax credit ties the company’s hands.” 

Ultimately, the BBC notes that “retailers in the UK and Europe that trade across the new customs borders are all still adapting to the rules,” as are customs agents and shipping companies. As companies face both tariff and non-tariff impacts, companies are encouraged to “scale up customs team/expertise,” per Baker McKenzie, in order to ensure a firm handle on their supply chains, including “where goods are moved from and to, and what manufacturing takes place,” as well as “the additional duties and financial impact on supply chains” in order to determine how to mitigate issues, which stand to see companies’ faced with goods blocked at borders, tax penalties, and not to be overlooked, unsatisfied customers. 

The U.S. has walked back on plans to levy an import tax on French luxury goods at the last minute. In a statement on Thursday, the Office of the U.S. Trade Representative announced that it “has determined to suspend the tariff action.” The 25 percent tax on $1.3 billion worth of French handbags and cosmetics was announced in July 2020 in response to the introduction of France’s Digital Services Tax, which imposes a tax on the digital earnings of companies that generate a certain level of global and French revenues, including tech giants like Facebook Inc., Google, Amazon, and Apple. 

Slated to go into effect on January 6, the Office of the U.S. Trade Representative (“USTR”) stated on Thursday that it decided to put a stop to the planed tariffs in light of “the ongoing investigation of similar Digital Service Taxes (‘DST’) adopted or under consideration in ten other jurisdictions.” While those investigations “have significantly progressed,” according to the USTR, they “have not yet reached a determination on possible trade actions.” 

In the interim, “A suspension of the tariff action in the France DST investigation will promote a coordinated response in all of the ongoing DST investigations.

As reported by the Wall Street Journal, the government agency said it is not “taking any specific actions for now but would continue to evaluate ‘all available options,’” noting that investigations into similar digital tax practices of the European Union, Austria, Brazil, Czech Republic, Indonesia, Spain and the United Kingdom are underway. 

USTR Robert Lighthizer initially threatened to levy tariffs on as much as $2.4 billion worth of French goods imported into the U.S. in December 2019 in response to the introduction French digital tax law that July. With its 3 percent tax on digital services companies that generate at least 750 million euros ($845 million) in global revenue and have digital sales of 25 million euros ($28 million) in France, Lighthizer argued that the “unreasonable [and] discriminatory” French law “deliberately targets U.S. companies … and burdens U.S. commerce.” As a result, he asserted that the government must “send a clear signal that the United States will take action against digital tax regimes that discriminate or otherwise impose undue burdens on U.S. companies.”

As we noted late last year, the potential tariffs were expected to hit some brands harder than others. Paris-headquartered Louis Vuitton, for instance, was relatively well hedged in the event that the import taxes came into play given that in addition to its French and other European factories, it maintains a growing network of American operations, including a factory in Johnson County, Texas, which opened in 2019, and factories in San Dimas and Irwin, California. These manufacturing outposts have enabled the LVMH Moët Hennessy Louis Vuitton-owned brand to make “approximately half the bags” it has sold in the U.S. over the past 30 years on U.S. soil, the New York Times’ Vanessa Friedman reported in 2019. They would also allow Louis Vuitton to sidestep the bulk of the anticipated tariffs. 

Meanwhile, rivals like conglomerate Kering (which owns Gucci, Balenciaga, Yves Saint Laurent, and Bottega Veneta, among other brands), and Birkin-maker Hermès, on the other hand, do not maintain as expansive manufacturing operations in the U.S., and thus, would have likely been in a more precarious position in connection with their import of luxury goods into the U.S. had the tariffs come into play. And the implications were expected to be “significant,” according to Sheppard Mullin lawyers Reid Whitten and Sarah Ben-Moussa. “While some consumers of these products are able to support the higher prices that may result from additional tariffs, that may not be enough to shield certain industry players from long term revenue losses.” 

Gucci’s parent company Kering has been “under investigation since February 2019 for tax fraud,” the AFP asserted on Wednesday, citing a statement from the French financial prosecutor’s office, and “confirming” an existing report from French news publication Mediapart that regulators are in the midst of probing the Paris-based luxury goods conglomerate over a scheme that allegedly enabled it to avoid $3 billion in taxes between 2010 and 2017, including 180 million euros in France, by declaring business in Switzerland that had been carried out in the less-tax-friendly jurisdictions.

In a statement on Wednesday, Kering – which owns luxury goods brands, including Gucci, Saint Laurent, Balenciaga, Bottega Veneta, and Alexander McQueen, among others – refuted the “totally unfounded allegations of tax fraud,” stating that it “has no knowledge of an inquiry being conducted into its activities, as reported in the article. Should this be the case, the group would cooperate fully with the authorities involved in any potential inquiry with complete transparency and serenity.” 

Fast forward to Thursday, and it turns out that Kering is, in fact, at the center of a tax investigation. In a formal release, the François-Henri Pinault-led group says that following “a press article implicating Kering published on line on December 15, 2020, France’s Parquet National Financier (National Financial Public Prosecutor’s Office) has confirmed having opened a preliminary inquiry concerning Kering in February 2019,” noting that it “had not previously been informed of this inquiry.” 

The group, which “refutes in the strongest possible terms the allegations contained in the press article and forwarded by other media,” further asserts that “the inquiry appears to be linked to” the activities that resulted in the May 2019 settlement it entered into with Italian authorities after allegedly failing to pay $1.6 billion in taxes in Italy between 2011 and 2017 in connection with its marquee Gucci brand. 

The settlement was the highest ever reached between a company and Italian tax authorities, and saw Kering pay $1.01 billion in back taxes, plus interest payments and penalties, as well as  an additional tax charge of $673.51 million in its 2019 financial accounts. It followed from claims that the luxury goods giant had been embroiled in a large-scale scheme to avoid paying taxes in Italy, and in an effort to do so, allegedly relocated about 20 employees from its French or Italian offices to Switzerland “as part of the tax optimization scheme, but alleged that some of them continued to effectively work in Italy.” 

From the outset, both Kering and Gucci “challenged the grounds” of the tax authority’s probe.