Italy Claims Fiat Undervalued Chrysler by $5.6 Billion

(Bloomberg) -- Italian tax authorities have claimed Fiat Chrysler Automobiles NV underestimated the value of its American business by 5.1 billion euros ($5.6 billion) following its phased acquisition several years ago, presenting the carmaker with a potentially hefty bill as it prepares to merge with French rival PSA Group.

The dispute relates to the company structure created in October 2014 following Fiat SpA’s purchase of the remainder of its Chrysler unit, according to company filings and an Oct. 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 U.K. -- not Turin, Fiat’s home for more than a century. The move triggered the so-called exit tax that Italy collects on capital gains realized 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 $1.5 billion, though negotiations could significantly 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 spokesman said in an email. “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, Citroen and Opel brands. The companies said in late October that they were in talks to combine, and Fiat Chairman John Elkann said last month that they aim to formalize an agreement by year-end. Fiat has also been hit by a lawsuit from U.S. rival General Motors Co., which has alleged that a union-bribery scheme inflicted billions of dollars in damages.

Deal Impact

PSA is aware of the tax audit and doesn’t 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 euros at 9:02 a.m. in Milan on Thursday, giving it a market value of 20.7 billion euros.

In an Oct. 31 regulatory filing, Fiat Chrysler said it’s in negotiations over a “material proposed tax adjustment,” saying it’s “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 5.07 billion euros, according to the audit report seen by Bloomberg.

Italy’s tax authority valued Chrysler at some 12.5 billion euros, while Fiat, following advice from its advisers, declared it to be worth less than 7.5 billion euros, 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 NV and car-part maker Magneti Marelli -- had a market value of about 8.3 billion euros.

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 Oct. 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 $4.35 billion in January 2014, implying an overall valuation of about 6.95 billion euros for the overall U.S. 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 automaker 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 Chief Executive Officer Sergio Marchionne. Corruption allegations dating back several years have already landed car executives and labor leaders in jail. Elkann has called GM’s claims false and defended Marchionne, who died last year.

Industry at Risk

Even without these distractions, auto-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 AG two decades ago ended in failure, while a plan for Fiat to combine with Renault SA was called off earlier this year over a lack of support from the French company’s Japanese partner, Nissan Motor Co., 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.

To contact the reporters on this story: Daniele Lepido in Milan at dlepido1@bloomberg.net;Tommaso Ebhardt in Milan at tebhardt@bloomberg.net;Ania Nussbaum in Paris at anussbaum5@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, ;Heather Smith at hsmith26@bloomberg.net, Craig Trudell

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