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Antwerp
By Marc Goldstein
The European Commission (EC), the executive arm of the European Union (EU), has finally given the green light regarding the implementation of the Carat Tax in Belgium, to be known as the Diamond Regime. According to the Antwerp World Diamond Centre (AWDC), under the proposed law, the tax calculation for diamond traders will be based on revenue rather than profit, taking inventory valuations out of the equation. The corporate tax will be levied on a lump sum amount, defined as a percentage of the turnover of the company. Initiated by the AWDC, the law is expected to bring to a full stop most of the tax investigation and litigation between diamond traders and the tax administration that were common practice in the Antwerp Diamond Mile for decades. The AWDC explained that the total cost of goods sold (COGS) is defined as a lump sum of 97.9 percent of the turnover of a diamond-trading company generated by genuine and habitual diamond trade. As a result, the gross margin used for taxation purposes is 2.1 percent of that turnover. Subsequently, expenses and tax deductions may be deducted from that gross margin. However, the net taxable income after deductions cannot be lower than .55 percent of turnover. A slightly higher floor rate of .65 percent will be applicable only during the first year of implementation of the Carat Tax. The tax will be applicable to all registered diamond traders beginning in tax year 2017.
“When you’re applying for a different tax regime, there can be justifications to why you deviate from the general tax system. In the case of the Belgian diamantaires, we concluded that there were. Indeed, even though a specific inspection technique was designed in the 1990s in accordance with the Belgian tax code and used until now by the Belgian administration, it did not solve the valuation and follow-up difficulties. Furthermore, it is our understanding that in view of the figures we were given, the tax level paid by diamantaires will rise for at least three-quarters of them when the Carat Tax will be implemented, which is another reason why we found this special regime not particularly detrimental to the other sectors. To ensure that diamantaires would pay a fair share of tax, the Belgian government has committed to reviewing the situation in five years,” elaborated Yizhou Ren, spokesperson for the EC. Many comments were whispered off-the-record regarding this very sensitive issue. The most eloquent one was made by a manufacturer: “This law is most welcome. I wish this was done 20 years ago, when Antwerp was at its best. But that’s how it is. Hopefully it’s going to help.”
In general, two parameters are used to assess the amount of tax to be paid by a company. There is the operational profit, basically revenue minus costs, and then the global inventory variation from one year to the other. And so far, the game has been for the fiscal authorities to try to figure out what was to be considered costs that could be written off and the real value of inventories consisting of thousands of categories of stones expressed in U.S. dollars. Obviously, the system was extremely complex with authorities frequently seizing goods until the true profit could be assessed. A second issue, which might prove even more sensitive, has always been to find ways of ensuring predictability as much as possible. In today’s global market, the wholesale diamond industry is automatically impacted by any crisis, wherever it takes place. Therefore, any element that alleviates this volatility and increases simplicity, clarity, predictability and stability is welcome. The Carat Tax does exactly that. It enables diamantaires to assess the amount of their expected tax bills long ahead of time and with some confidence, which is undoubtedly a benefit. The flip side of the coin is that the diamond industry as a whole could pay twice as much as it has been paying so far. The Carat Tax will only apply to turnover generated by genuine and habitual diamond trade. Mining companies will have the liberty to choose between the old or the new tax regime. Last but not least, it is expected that diamond companies will be in a much better position to secure financing once the issue of profit is gone. A major diamond trader elaborated, “This is great, because it will encourage diamond companies to repatriate the bulk of their profits, which in turn will put them in a better position when they will need to ask for bank support, credits and other funds.”Article from the Rapaport Magazine - October 2016. To subscribe click here.
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