Daily Management Review

Italian Tax Agency’s High Valuation Of Chrysler To Be Challenged By FCA


Italian Tax Agency’s High Valuation Of Chrysler To Be Challenged By FCA
The claim of the Italian tax authorities that Fiat Chrysler Automobiles underestimated the value of its American business by 5.1 billion euros ($5.6 billion) during the acquisition of Chrysler has been strongly opposed by FCA, the company said recently.
"We are confident we will successfully make the case for a material reduction in the assessment," a FCA spokesperson said on Thursday. The spokesperson also said that "any remaining taxable gain assessed would be offset by carry forward tax losses with no material cash outflow or impact on earnings."
In October 2014, after the former Fiat SpA purchased the final part of its Chrysler unit, there was a restructuring that had taken place and this dispute is related to that restructuring. The entire acquisition process was completed over a period of years with the complete ownership of the once-bankrupt owner of brands such as Dodge, Ram and Jeep being taken over by the Italian auto maker Fiat.
The new entity created by the acquisition was a result of the restructuring and is registered in the Netherlands and it also has a tax residence in the UK instead of its Turin which has been the home city of Fiat for more than a century. According to the audit report, this resulted in a situation that demanded that the Italian tax authority collect a so-called exit tax on capital gains when companies decide to move their assets outside of the country.
At the time that Fiat moved outside of Italy, the prevalent corporate tax rate was about 27.5 percent according to which the potential amount that the FCA could have to pay was around $1.5 billion even though the amount could get significantly reduced through negotiations.  
Following the advice from its advisers Fiat had declared the valuation of Chrysler at the time of the acquisition to be less than 7.5 billion euros ($8.3 billion), while the tax authority of Italy had valued the company at about 12.5 billion euros ($13.8 billion), said multiple reports. A market value of about 8.3 billion euros ($9.2 billion) was given to Fiat Chrysler when it went public at the New York Stock Exchange in mid-October 2014. This is because some valuable assets such since it spun-off Ferrari and supplier Magneti Marelli is still with the company.  
In January 2014, the remaining 41.5 percent of Chrysler for $4.35 billion was bought by Fiat which set an overall valuation of about 6.95 billion euros ($7.7 billion) for the entire U.S. unit.
When the transaction in question had taken place in 2014, FCA had said that it expected the Italian tax authorities to claim an exit tax based on the capital gains made by it because of the plans of the company to shift assets outside of Italy.  Any resulting gains “may be largely offset by tax losses available to the group,” the company had however said.
The former Chrysler operations, led by Jeep SUVs and Ram trucks, provide the bulk of Fiat Chrysler’s sales and profit.