Fiat Industrial’s tax move a blow to Italian government

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In a blow to the new Italian government, Fiat Industrial, one of the country's biggest companies, plans to move its tax residency to Britain.

The revelation came in an American regulatory filing. After its merger with majority-owned CNH of the United States, the enlarged company "intends to operate in a manner to be treated as resident of the United Kingdom for tax purposes."

On Wednesday, the day after the regulatory filing appeared, the company labelled the reports that the British move would cost the Italian treasury €500-million ($666.4-million) in taxes "absolutely false." It said it will continue to pay taxes in the countries where it operates.

Still, Italian politicians are worried. Will Fiat Industrial's sister company, Fiat SpA, the automotive giant that controls Chrysler Group LLC, make a similar move?

Fiat Industrial is one of the world's biggest makers of buses (Iveco), farm equipment such as tractors (New Holland, Steyr) and heavy-duty engines (FPT). It was formed by the demerger two years ago of the Fiat group into industrial equipment and cars (Fiat SpA). The latter's Canadian-Italian CEO, Sergio Marchionne, who is also the CEO of Chrysler, is the chairman of Fiat Industrial, which has 67,000 employees and annual sales of more than €25-billion.

Moving the tax headquarters to Britain from Italy has obvious attractions if you are a shareholder. In Italy, the posted corporate tax rate is 31.4 per cent; in Britain it is 23.25 per cent, down from 30 per cent in 2007. Britain, in effect, is becoming a corporate tax haven, much to the annoyance of other European countries whose societies and economies are funded by higher taxes.

Fiat Industrial's decision could not have come as a shock to the Italian government. Mr. Marchionne has been cooling on Italy for some time. The Italian market is shrinking, taxes are far lower elsewhere and both of the Fiat companies have had trouble trimming their labour costs. Fiat SpA is profitless in Italy and Mr. Marchionne has been coy when questioned about the rumours that he intends to move the company's headquarters to Detroit from Turin.

Still, Fiat Industrial's tax move comes at a bad time for Italy, whose recession is the second worst in Europe, after Greece's, and needs every euro of the tax revenue it can get. "It's a decision that should not only worry us, but also stimulate us to create conditions so that companies stay in Italy," said Maurizio Lupi, the transport and infrastructure minister in the new coalition government led by prime minister Enrico Letta.

The problem is that dropping corporate taxes is a mug's game because of competitive tax cutting. Britain is moving with alacrity on that front, in a bid to stem the flow of industries and create jobs in its stalled economy. At the same time, the European Union's efforts to convince countries with extremely low taxes to lift them has been a fruitless endeavour. Ireland, Apple Inc.'s best tax friend, considers its rock-bottom corporate tax rates essential to its recovery and higher rates were not a condition of its international bailout in 2010.

For Italy, the best way to retain companies and attract others has to be economic reform. Italy is one of the few European economies whose unit labour costs have not come down since the start of the financial crisis, in 2008. Compare this to Greece, where most of the 31-per-cent rise in costs between 2001 and 2008 has been reversed. As a result, Greek exports are climbing, not Italy's.

Slow moving Italy might need a "Pearl Harbour" economic moment before it gets into the reform game in a hurry. That moment may come if Fiat SpA, the country's flagship employer, abandons Italy.