Tommy Hilfiger Corp. (TOM) on Wednesday said it was negotiating with U.S. prosecutors to settle an investigation into whether payments between subsidiaries artificially lowered its tax rate.

The clothing designer also said quarterly revenue fell on declining orders in the United States and warned that revenue would fall more than expected in fiscal year 2006.

The company has delayed filing results with the Securities and Exchange Commission (search) for the second and third quarters and the year due to the previously disclosed investigation.

At issue is whether payments among its subsidiaries helped artificially lowered the company's tax rate. The U.S. Attorney in New York is looking into commission rates paid by various subsidiaries to Tommy Hilfiger (Eastern Hemisphere) Ltd., a British Virgin Islands corporation owned by Hong Kong-based Tommy Hilfiger Corp.

The company's own probe led it to question certain Hong Kong tax matters and start talks with Hong Kong tax officials over whether Tommy Hilfiger (Eastern Hemisphere) owed taxes on profits in Hong Kong.

Tommy Hilfiger expects to record net provisions of $30 million to $40 million for possible payments related to the commission issue and other tax matters. The company said it has not determined if it will need to restate any financial statements because of the legal matters.