Louis Vuitton’s parent company LVMH Moët Hennessy Louis Vuitton is off of the hook in the tax case that saw French officials raid the Paris offices of the world’s largest luxury goods conglomerate in September 2019 in connection with “suspicions” that it was pretending to carry out treasury operations in Belgium – as opposed to its French headquarters – in an effort to lower its tax bill in its home country. On the heels of an oral argument before the Paris Court of Appeal in June, during which LVMH’s counsel asserted that the raid and seizure of internal correspondences ran afoul of the law, a panel for the Appeals court sided with LVMH. 

As first reported by Bloomberg, the Paris appeals court held on September 9 that LVMH Finance Belgique – the conglomerate’s 12-year old, Brussels-located subsidiary, which is tasked with providing financial services, such as managing LVMH’s short-term treasury notes program – “appeared to have enough staff to carry out its treasury activities, rebuffing an argument brought forward by French tax officials” that the group was essentially using the Belgian off-shoot as a mere mailing address.

In addition to finding that French authorities’ 2019 raid on its Paris office – which saw them gain access to more than one million LVMH-related emails – was based on an “unfounded” presumption of fraud, the court further asserted that merely “pointing out that the unit filed no tax returns in France is not enough to warrant raids given that it holds accounts in Belgium, where it is based.” 

Counsel for LVMH previously argued before the Paris Court of Appeal that the documentation that tax authorities presented to the court in order to get a warrant to raid the LVMH headquarters violated French tax-secrecy and privacy rules, particularly in connection “data concerning the head of [LVMH’s] Belgian unit.” More than that, LVMH – which is “one of the largest taxpayers in France” – alleged that its Belgian finance arm is hardly a shell company aimed at enabling the luxury giant to rig the tax system. In fact, counsel for LVMH claimed that the Belgian unit “occupies half a floor in a big tower in Brussels” and employs at least six full-time employees.  

Other Issues in Belgium

Hardly the first time that LVMH has been taken to task over its dealings in Belgium, the group’s chairman Bernard Arnault sought Belgian citizenship in 2012, right around the time that then-president François Hollande announced a plan to impose a 75 percent income tax rate on the nation’s highest earners. Arnault insisted that the move was not aimed at escaping French taxes (including speculation that such citizenship would have allowed his children to avoid paying inheritance taxes in France). He ultimately withdrew the application, but not without facing widespread backlash, including from Hollande. 

Still yet, Arnault settled with Belgian prosecutors in June 2017 in connection with a case opened in 2012. The matter centered on the chairman’s transfer of his entire 31 percent stake in his private family holding company, Groupe Arnault (a sum that French publication Libération reported at the time was worth as much as 6.5 billion euros) to Pilinvest, a private Belgian entity that he maintains, thereby, raising red flags from a tax perspective. In light of the December 2011 transfer and the preferable tax treatment in Belgium, which observes an inheritance tax of only 3 percent compared with 11 percent in France, and no wealth tax, unlike France, Belgian authorities initiated a criminal probe.

Reports stated at the time that Pilinvest was set up in Belgium just as France prepared to introduce a 75 percent supertax, which a spokesman for LVMH contradicted, asserting that Pilinvest was created in Belgium in 1999, had operated as a holding company since then, and “has always respected current legislation and has a tax agreement with Belgian authorities.”

Fast forward five years to June 2017, and the parties managed to settle the matter, albeit “without any prejudicial admission of guilt on [Arnault’s] part,” prosecutors confirmed, without offering any further details.

LVMH owns more than 70 different luxury brands, from fashion houses and beauty brands to wine and spirits companies, and generated $59.1 billion in revenue in 2019, alone. 

What do Chanel bags and Hermès cosmetics have to do with a French global services tax? More than meets the eye. The Trump administration revealed late last week that it will impose a 25 percent tariff on $1.3 billion worth of French handbags, cosmetics, and soaps in response to France’s year-old Digital Services Tax, which imposes a tax on the digital earnings of companies that generate a certain level of global and French revenues. Given that Facebook Inc., Google, Amazon, and Apple are among some of the most heavily-impacted entities, the United Stated government believes the law unfairly targets American tech companies.  

In the wake of the enactment of the French law last year, U.S. Trade Representative (“USTR”) Robert Lighthizer threatened to levy tariffs on as much as $2.4 billion worth of French goods that are imported into the U.S. In a statement in December 2019, Lighthizer pushed back against the law, which puts a 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, stating that “the law deliberately targets U.S. companies,” and as a result, 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.”

That signal, as of last year, was the proposed implementation of tariffs on $2.4 billion-worth of French-made products, including champagne, cosmetics, and luxury goods like Louis Vuitton and Chanel handbags, among other French products. 

While the USTR has not yet “followed through on that tariff threat because France agreed to suspend collection of its digital services tax during negotiations on a multilateral agreement at the Organization for Economic Cooperation and Development,” per Politico, the government is preparing to impose the tariffs – now at a rate of a 25 percent on $1.3 billion worth of products – within the next six months assuming that the negotiations fall through. 

In terms of the new $1.3 billion figure, “U.S. trade officials say that the final retaliation figure announced reflects the value of U.S. digital transactions covered by France’s 3 percent digital services tax, which is estimated to be in the range of $15 billion per year, and the amount of taxes that France is expected to collect from U.S. companies.”

As we noted late last year, the potential tariffs are expected to hit some brands harder than others. Paris-headquartered Louis Vuitton, for instance, is relatively well hedged should the import taxes come 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 last year. They would also allow Louis Vuitton to sidestep the bulk of the anticipated tariffs.

Rivals like Chanel, 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 expansive manufacturing operations in the U.S., and thus, are likely to be in more precarious positions when it comes to importing luxury goods into the U.S. should the tariffs come into play. 

Supply Chain Risks

The impending tariffs are the latest example of the increasingly apparent risks that fashion and luxury brands (and beyond) face in connection with the supply chains behind their multi-billion dollar, globally-reaching operations. The COVID-19 pandemic and the resulting disruptions to companies’ operations – particularly for those that rely significantly on China and Italy-made goods (two countries that were severely impacted by the health crisis) – shed light on the potential need for companies to rethink and likely diversify their manufacturing models if they have not begun to do so already. 

COVID “has already exposed the vulnerabilities of many organizations, especially those who have a high dependence on China to fulfil their need for raw materials or finished products,” according to Deloitte’s COVID-19-specific “Managing supply chain risk and disruption” report, which noted that “some companies are better prepared than others to mitigate the impact [of the crisis]. These companies have … diversified their supply chains from a geographic perspective to reduce the supply-side risks from any one country or region.”

This same rationale applies in non-pandemic situations, as well, such as when the imposition of tariffs threatens a company’s margins (as in the case at hand), or in light of price/currency fluctuations or issues in terms of transportation, which could impact suppliers and thus, brands, themselves. With these scenarios and others in mind, Tim Ryan, the U.S. chairman and senior partner at PwC said in March, said that he sees the “focus” of many Fortune 100 companies, in particular, including those in the retail sector, “being on diversification” as a way to proactively mitigate supply chain risks.

While Louis Vuitton, which maintains the title of the largest luxury goods brand in the world, has been in the midst of doing just that, with its latest domestic factory serving as a vehicle for it to “hedge against the risk of trade disputes between the U.S. and European Union,” for example, as the WSJ put it this fall, other companies would be smart to follow suit, either by way of their own factories or via third-party suppliers to the extent possible. 

Louis Vuitton’s parent company LVMH Moët Hennessy Louis Vuitton is at the center of a tax case stemming from regulators’ “suspicions” that the luxury goods conglomerate “was pretending it carried out treasury operations in Belgium to lower its tax bill.” Bloomberg reported on Wednesday that new information in the ongoing case, which saw tax officials raid the Paris-based offices of LVMH in September 2019, “emerged at a court of appeals hearing on Wednesday in the French capital, where the luxury-goods titan was challenging the raids” and the one million-plus emails that French authorities acquired as a result.

At the center of the case is LVMH Finance Belgique, the conglomerate’s 12-year old, Brussels-located subsidiary, which is tasked with providing financial services, such as managing LVMH’s short-term treasury notes program. According to French tax officials, the workings of the Belgian offshoot very well may have been conducted in France, but have been logged in the company’s books as being performed by LVMH Finance Belgique in Brussels in order to benefit from lower tax rates. 

In a hearing before the Paris Court of Appeal on Wednesday, counsel for LVMH – which owns more than 70 different luxury brands, from fashion houses and beauty brands to wine and spirits companies, and generated $59.1 billion in revenue in 2019, alone – argued that the raid and seizure of internal correspondences ran afoul of the law. To be exact, Jerome Turot, one of the numerous lawyers who appeared in court this week on behalf of LVMH, argued that the documentation that tax authorities presented to the court in order to get a warrant to raid the LVMH headquarters violated French tax-secrecy and privacy rules, particularly in connection “data concerning the head of [LVMH’s] Belgian unit.”

Delphine Michot, another lawyer representing LVMH, argued that in addition to LVMH – which is the largest luxury goods group in the world – being “one of the largest taxpayers in France,” its Belgian finance arm is hardly a shell company aimed at enabling the luxury giant to rig the tax system. With that in mind, she told the court that the Belgian unit is not just an address for LVMH to reference for tax purposes, and instead, “occupies half a floor in a big tower in Brussels” and employs at least six full-time staffers, Bloomberg reported. 

Judge Elisabeth Ienne-Berthelot of the Paris Court of Appeal informed the parties that a ruling on the legality of the raid can be expected in early September. 

As Bloomberg notes, this is hardly the first time that LVMH has been taken to task over its dealings in Belgium. The group’s chairman Bernard Arnault sought Belgian citizenship in 2012, right around the time that then-president François Hollande announced a plan to impose a 75 percent income tax rate on the nation’s highest earners. Arnault, who currently holds the title of the second richest person in the world (behind Amazon founder Jeff Bezos), insisted that the move was not aimed at escaping French taxes (including speculation that such citizenship would have allowed his children to avoid paying inheritance taxes in France). He ultimately withdrew the application, but not without facing widespread backlash, including from Hollande. 

At the same time, French daily newspaper Libération printed a front-page banner headline dedicated to Arnault’s alleged tax dodge, which read, “Get lost, you rich jerk.”

The scope of new Trump administration tariffs on European Union goods has been “ reduced considerably from a $25 billion list floated by Washington this year,” according to Reuters, enabling things like personal luxury goods – from French fashion to Italian leather goods – to avoid a price hike imposed by import duties. As of now, the tariffs will be limited to a respective 10 and 25 percent tax on new airplanes, and agricultural and industrial products coming from the EU.

Apparel is not completely shielded from the new tariffs, though. Falling under the umbrella of “agricultural and industrial products,” which will be subject to a 25 percent tax beginning on October 18, are “wool and cashmere sweaters, pullovers, sweatshirts, [and] waistcoats,” “fine wool suits,” and “women’s nightwear” of UK origin, according to the Office of the U.S. Trade Representative

Unlike the ongoing U.S.-China trade war, which has seen the Trump administration impose $550 billion in tariffs on increasingly consumer-facing products, including apparel, accessories, cellphones, and other electronics, in response to China’s widespread “theft of U.S. intellectual property” by way of forced data transfers and widespread infringement, the U.S.-EU tariffs stem from a 15-year dispute between the U.S. and the 28 member bloc over aircraft subsidies.

The U.S. government has long alleged that Chicago-headquartered aerospace corporation Boeing has lost billions of dollars in revenue because EU states have provided billions of dollars in aid to European aircraft manufacturer Airbus in violation of World Trade Organization (“WTO”)  rules. The Geneva-based intergovernmental organization explicitly prohibits its 164 member states from “distorting international trade” by dealing in subsidies that “have an adverse effect … on  countries’ trade.”

Following from World Trade Organization rulings in August 2010 and in May 2011, which found that Airbus had received improper government subsidies through loans with below market rates from the EU and four of its member States, Germany, France, the UK, and Spain, a 3-arbitrator panel for the WTO determined on October 2 that the U.S. may impose as much as $7.5 billion in tariffs on EU goods annually in an effort “to counteract years of European loans and illegal subsidies to Airbus,” per NPR.

The Office of the U.S. Trade Representative called the $7.5 billion arbitration award “by far the largest in World Trade Organization history,” and one that might be subject to change if the U.S. and the EU come to a settlement before the WTO’s Dispute Settlement Body formally adopts the decision on October 14. However, as noted by the Financial Times, the U.S. and the EU “so far they have not engaged in serious negotiations,” and in fact, “both the US and the EU have blamed each other for the failure to avoid tariffs.”

According to Reuters, “Shares in European luxury goods companies, including British fashion brand Burberry … rose after [it was revealed that] the tariffs will exclude leather goods.” Burberry and other British brands will still be on the hook, however, for certain woolen and cashmere products.

The same goes for Louis Vuitton and Dior’s parent, LVMH, whose stock rebounded after an initial fall in connection with the proposed tariffs in early October. Gucci owner Kering ticked up as much as 1.7 percent, and Hermes by 1.4 percent in European trading on October 3 as the tariff-prone products list was published by the U.S. Trade Representative.

The headline-making investigation of Kering that centered on its marquee Gucci brand may have settled this spring when the Paris-based conglomerate agreed to hand over $1.4 billion in unpaid taxes, but the  since-settled probe is allegedly far from over. According to Bloomberg, on the heels of the Kering settlement, which has been called the highest ever agreed by a company with Italian tax authorities, Italian tax authorities are “broadening their focus to individual managers’ pay during the period in question,” namely, between 2011 and 2017.

Bloomberg revealed on Tuesday that the Guardia di Finanza, the arm of Italy’s national police force that specializes in financial crimes, “notified current and former [Gucci] executives that they were being investigated over salaries they received from companies in Switzerland for work done for Gucci in Milan.” The publication further reports that the executives ensnared in authorities’ ongoing investigations “could owe tens of millions of euros in back taxes.” Kering – which owns Gucci, YSL, Balenciaga, Bottega Veneta, and Alexander McQueen, among other brands – said on Tuesday that there is “nothing new in these allegations.”

The news comes in light of Kering’s confirmation in May that while the company, itself, is out of the equation thanks to the terms of its settlement, Gucci’s current CEO Marco Bizzarri and former CEO Patrizio Di Marco would remain under investigation in the case, “in their capacity as legal representatives of the company.” Bizzarri has since settled with the financial authorities, per Bloomberg.

Kering and Gucci initially made headlines almost two years ago when Italian publication La Stampa reported that Italian tax police visited Gucci’s Milan and Florence offices in early December 2015 in connection with Gucci’s alleged failure to pay national “taxes on profits generated by sales in Italy,” and instead, opted to pay “in another country with a more favorable tax regime.” That other country? Switzerland, the home of Kering subsidiary Luxury Goods International.

The Italian financial authorities’ audit subsequently uncovered that Lugano, Switzerland-based Luxury Goods International “conducted business activities in Italy [that] should have resulted in payment of Italian corporate taxes,” but instead, opted to pay a more preferable tax bill in Switzerland. Kering said in a statement in January 2019 that it “contests” that finding before it ultimately agreed to settle the matter for $1.4 billion dollars.

While Bloomberg notes that “the scandal has cast a pall over Gucci’s blockbuster turnaround” under the watch of Bizzarri and creative director Alessandro Michele, the brand’s bottom line has hardly suffered, with its revenue growth rate coming in just shy of 50 percent for 2017, and its sales topping $8 billion for the first time ever in 2018.

On a larger scale, the Gucci-centric probe is demonstrative of an ongoing effort to crack down on the tax-avoiding ways of Italian luxury brands, as Italian tax authorities have increased their efforts in light of a European sovereign debt crisis that has put pressure on public finances.

The Guardia di Finanza has focused on the use of foreign European subsidiaries through which Italian companies, particularly in the luxury sector, have allegedly masked profits. As a result, a slew of big-name Italian fashion figures became the targets of Italian tax evasion crackdowns over the past several years. Dolce & Gabbana founders Domenico Dolce and Stefano Gabbana, Prada’s chief executive officers Miuccia Prada and Patrizio Bertelli, Giorgio Armani, the Bulgari family, and former Valentino chairman Matteo Marzotto, among others, have all been subject to Italian tax authority scrutiny for allegedly failing to pay up.

As for what is new news, Kering announced on Tuesday that its entire group of luxury brands will become carbon neutral. The comes just weeks after revealing that Gucci will be carbon neutral by the end of September. In a statement, Kering chairman and CEO François-Henri Pinault said, “We all need to step up as businesses and account for the GHG emissions that we generate in total. Kering is committing to becoming completely carbon neutral as a group across all our operations and supply chains.”

“While we focus on avoiding and reducing our GHG emissions to meet our Science-Based Target, we will offset all our remaining emissions and support the conservation of vital forests and biodiversity around the world,” Pinault further stated.