Carat Tax – UPDATE

The Parliament of Belgium legislated the Carat Tax on Thursday (16 December 2016). It took almost five months for the lawmakers to come to this decision after the European Commission approved the said tax at the end of July this year, noting that diamond companies in the country will continue to pay a fair share of taxes on their business, but at the same time they will cease to face difficulties in assessing their inventories.
Per local media, the tax will be levied annually and is to provide EUR 50 million of revenues to the country’s budget. Even though the vast majority of diamantaires will pay higher taxes than before under this legislation, the new tax regime will greatly improve the predictability and stability in the diamond business, as traders will have a clear idea of tax deductions they are to pay.

Predictability

“At long last, predictability and stability have arrived in the Antwerp diamond industry in the form of the new tax regime for all registered diamond companies. Today, the Belgian Parliament adopted the new regime, enshrined in law by the Belgian Federal Government, which will be applicable to all registered diamond traders as from tax year 2017 (income year 2016),” writes the Antwerp World Diamond Centre (AWDC).
The AWDC believes this will make the diamond business more attractive for banks in terms of financing. In addition, companies will be interested to conduct an independent assessment of their inventories, which in turn will increase the transparency of their transactions, as well as the confidence towards them on the part of banks.
It is expected that the tax law will be mandatory for wholesale companies based in Belgium in terms of their income derived from diamond trade, but excluding their other business activities. Diamond mining companies, which have offices in Belgium, as well as brokerage firms, diamond labs and other service providers do not fall under the Carat Tax.
Some industry observers believe that the Carat Tax enacted by the Belgian Parliament will increase the competitiveness of Antwerp’s diamond hub, enhancing its appeal to diamantaires and attracting additional business.

Three times more tax

Belgium’s wholesale diamond sector can expect to pay more than three times more tax per year under a new fiscal regime, called the carat tax, according to the European Commission (EC).

The new system would grant the Belgian diamond trade a tax system that is distinct from the one adopted by other industries. The European Commission (EC) approved the ‘Carat Tax’ July 29 after a year-long investigation into whether it constituted state aid by favoring certain companies.

Under the existing system, a company’s taxable income depends on profit – which is significantly affected by the value of its diamond stockpiles. The complexity of assigning a value on inventory makes tax assessment a challenging process for the Belgian administration, while litigation between traders and authorities creates legal uncertainty, the commission said.

“According to Belgium’s estimates, the wholesale diamond sector is likely to pay at least $56 million (EUR 50 million) more income tax every year,” the EC said in a statement.

Under the Carat Tax, a trader’s gross profit margin is fixed at 2.1 percent of revenue such that at least 75 percent of wholesale diamond traders would have paid higher taxes than they did under the current rules between 2012 and 2014. The net taxable income after deductions cannot be lower than 0.55 percent of turnover, or 0.65 percent during the first year that the Carat Tax is in force, the Antwerp World Diamond Centre (AWDC) pointed out.

Predictability and stability

Complex annual discussions over control and valuation of stock will no longer occur and fluctuations in inventory will not impact tax, the AWDC said. The regime will also improve predictability and stability, with traders able to monitor their corporate taxes throughout the year. This will make the industry more appealing to banks, this improving companies’ access to finance. It was also provide an incentive to businesses to get an independent valuation of their stock, increasing transparency and credibility towards banks, the AWDC added.

The Belgian Parliament will discuss and likely adopt the law by the year-end and the new rules will be applicable from tax year 2017. The new system will be compulsory for diamond-trading companies registered in Belgium, but applying only to diamond-trading revenue and not to other activities such as services. It will also not be mandatory for miners and their sales offices, but these businesses may opt in. Furthermore, the new law does not apply to brokers, diamond laboratories or other service providers.

Sylvain Goldberg – diamonds and the carat tax

“We need consistency and predictability. We need these things before we can mold our trade into what we know it can be.”