Fiat Chrysler underestimated value of its business by €5.1bn, Italy says
Vehicle maker could face a hefty 'exit' tax bill for its move from Turin
Milan/Paris — Italian tax authorities say Fiat Chrysler underestimated the value of its American business by €5.1bn after its phased acquisition several years ago, presenting the vehicle maker with a potentially hefty bill as it prepares to merge with French rival PSA.
The dispute relates to the company structure created in October 2014 after Fiat’s purchase of the remainder of its Chrysler unit, according to company filings and an October 22 audit report seen by Bloomberg. The purchases stretched over five years and culminated in the full takeover of the once-bankrupt owner of brands such as Dodge, Ram and Jeep.
Fiat Chrysler is now registered in the Netherlands with a tax residence in the UK — not Turin, Fiat’s home for more than a century. The move triggered the so-called exit tax that Italy collects on capital gains realised when companies move assets outside the country, according to the audit report.
Italy had a corporate tax rate of about 27.5% at the time, suggesting the amount at risk for Fiat Chrysler could approach $1.5bn, though negotiations could reduce any levy.
“We strongly disagree with this preliminary report, and we are confident we will successfully make the case for a material reduction in the assessment,” a Fiat Chrysler spokesperson said. “It’s also important to note that any remaining taxable gain assessed would be offset by carry forward tax losses with no material cash outflow or impact on earnings.”
The tax wrangle comes at an inopportune time for Fiat Chrysler, which is deep in negotiations with PSA, owner of the Peugeot, Citroën and Opel brands. The companies said in late October that they were in talks to combine, and Fiat chair John Elkann said last month that they aim to formalise an agreement by year-end. Fiat has also been hit by a lawsuit from US rival General Motors, which has alleged that a union bribery scheme inflicted billions of dollars in damages.
PSA is aware of the tax audit and does not expect it to harm or delay the deal, according to people familiar with the matter who asked not to be named discussing private matters. The French company declined to comment, as did Italy’s Agenzia delle Entrate.
Fiat Chrysler shares fell 1% to €13.24 at 9.02am in Milan on Thursday, giving it a market value of €20.7bn.
In an October 31 regulatory filing, Fiat Chrysler said it was in negotiations over a “material proposed tax adjustment”, saying it was “fully supported by both the facts and applicable tax law and will vigorously defend its position”. Italian authorities found “substantial tax violations” and asserted Fiat Chrysler undervalued assets subject to the exit tax by €5.07bn, according to the audit report.
Italy’s tax authority valued Chrysler at about €12.5bn, while Fiat, after advice from its advisers, declared it worth less than €7.5bn, according to the people. When Fiat Chrysler debuted on the New York Stock Exchange in mid-October 2014, the company — which still owned valuable assets like since spun-off Ferrari and car-part maker Magneti Marelli — had a market value of about €8.3bn.
Negotiations with Italian tax authorities will proceed over a 60-day period, according to Fiat Chrysler’s third-quarter report. A final assessment is due by year-end, it said. If no settlement is reached, the matter could land in court.
“We cannot predict whether any settlement may be reached or if no settlement is reached, the outcome of any litigation,” Fiat Chrysler said in the October 31 filing. “We are unable to reliably evaluate the likelihood that a loss will be incurred or estimate a range of possible loss.”
Fiat agreed to buy the remaining 41.5% of Chrysler for $4.35bn in January 2014, implying an overall valuation of about €6.95bn for the overall US unit.
The tax issue adds a fresh complication for Fiat as it tries to sew up the PSA deal, which would create the world’s fourth-largest carmaker by volume and help both companies shoulder the mammoth costs of developing a new generation of electric cars.
In its lawsuit last month GM alleged Fiat Chrysler bribed union officials to gain competitive advantages and directly implicating former CEO Sergio Marchionne. Corruption allegations dating back several years have already landed car executives and labour leaders in jail. Elkann has called GM’s claims false and defended Marchionne, who died in 2018.
Even without these distractions, vehicle industry mergers are fraught with risk, as clashing cultures and deep-seated rivalries can derail the process at any stage. Chrysler’s marriage to Mercedes-Benz maker Daimler two decades ago ended in failure, while a plan for Fiat to combine with Renault was called off earlier this year over a lack of support from the French company’s Japanese partner, Nissan, as well as the French government.
At the time of the 2014 transactions, Fiat Chrysler said it expected an exit tax to be triggered on capital gains related to assets it planned to transfer outside its permanent Italian operations. However, it said, any resulting gains “may be largely offset by tax losses available to the group”.
The former Chrysler operations, led by Jeep SUVs and Ram trucks, provide the bulk of Fiat Chrysler’s sales and profit.