Regime for Convenience-Carat Tax

The Belgium diamond industry has been served the new ‘Carat Tax’ or the ‘Diamond Regime’, as the Belgian Parliament passed the new legislation on corporate tax for the industry. According to AWDC, the corporate tax will now be levied on a lump sum amount, calculated as a percentage of the turnover of the company and not on profits. This new tax is applicable from fiscal 2017 and considers income of the current year.

The AWDC believes the new tax will being about more predictability and stability, giving diamond trading companies the ease of forecasting their total corporate tax due based on their diamond sales. Also, the secondary effect of the tax will strengthen the capital base of diamond trading companies, improving their access to finance.

The Carat Tax Explained
The Carat Tax is a clearcut and predictable fiscal regime that applies to diamond trading companies. The regular corporate tax rate – or income tax rate for natural persons – will be levied on taxable income that is calculated on the basis of a lump sum margin instead of on the actual margin that is realised.

How does it work?

The total Cost of Goods Sold (COGS) is defined as a lump sum of 97.9 per cent 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 per cent of that turnover.

Subsequently, expenses and tax deductions may be deducted from that gross margin. The net taxable income after deductions however cannot be lower than 0.55% of turnover. A slightly higher floor rate of 0.65% will be applicable only during the first year of implementation of the Carat Tax.

The turnover generated by genuine and habitual diamond trade is the sum of all diamonds sold during a given tax period, as reported on the invoices issued by the diamond trading company. This significantly increases the clarity and predictability of the total taxes due.

Like in the current fiscal regime, taxable income from diamond trade implies that at least one director receives remuneration that is no lower than a certain threshold. This threshold varies according to the total turnover of the company and will be specified in the Law.

When and to whom does it apply?
The Carat Tax will be applicable as from fiscal year 2016 (tax year 2017). The regime is compulsory for diamond-trading companies that are registered in Belgium, but its scope is restricted to the turnover generated by genuine and habitual diamond trade. Turnover generated by other activities, such as services provided, are taxed separately as they are not in the scope of the Carat Tax.

The Carat Tax is not compulsory for mining companies and their sales offices. These companies may choose to apply the Carat Tax instead of the normal corporate tax regime.

The Carat Tax does not apply to other companies active in the diamond industry that do not sell diamonds out of an inventory for their own account, such as service providers (brokers, forwarders, diamond laboratories, etc.).

Additional information

The Antwerp World Diamond Centre (AWDC) will provide an in-depth briefing to accounting firms that are active in the diamond industry. They will be the primary resource for additional information.

Q: Role of AWDC in the implementation of Carat Tax
A: AWDC has been lobbying for several years for the introduction of the Carat Tax – a system whereby diamond traders are taxed on the basis of a fixed percentage of their turnover. It will bring the annually recurring discussions about controls and stock valuation to an end.

It is clear that transparency and a sharp focus on compliance are among Antwerp’s most important assets, and this choice has also gradually begun to bear fruit. AWDC’s decision, taken together with the industry more than ten years ago, to opt for transparency made Antwerp the first and only diamond trade center to choose the straight and narrow path. This is highly advantageous for the reasons that follow.

The financial downturn has led banks to focus solely on nearly risk-free ventures and to dispose of their internationally-oriented services. High standards regarding control, compliance and money laundering are increasingly essential and indispensable components of the diamond trade business model. AWDC fosters awareness of and regularly provides practical training concerning these issues.

Furthermore, not only banks, but also rough diamond producers and end consumers demand that diamond traders demonstrate a high level of transparency and assume their social responsibility. We make every effort to assist them in this. It is all about realizing that confidence – whether from the banks or consumers – is the key to stability, growth and prosperity. AWDC is highly proactive in efforts to build confidence in our industry, and in assisting the transition to the Carat Tax regime – an effective confidence-building system.

By providing information sessions on the Carat Tax, assistance to companies in filling out their taxes to comply with the new regulations and regular anti-money laundering seminars, among others, AWDC continues its efforts to bring about transparency and compliance, and will work to confirm the absolute leading role that Antwerp plays in the global diamond industry in that regard.

Q: What are the Pros and Cons of Carat Tax on Antwerp Diamond Industry?
A: The complex and burdensome discussions on the control and valuation of the stock of diamond traders, an annually recurring grievance for many diamond-trading companies will no longer occur as a result of the Carat Tax. Businesses’ stock – the value of which is very complicated to determine, given the nature of the goods they trade in – is entirely taken out of the equation for fiscal purposes; hence, increases and decreases in the value of the inventory are tax neutral. Under the Carat Tax, diamond traders will be able to monitor their total corporate taxes due throughout the year, as these taxes are based solely on the turnover generated by the sale of diamonds. This significantly increases simplicity, predictability, stability and clarity.

The effects of the Carat Tax, however, are not limited to the ease of doing business. It will have compelling secondary effects on the activities of diamond trading companies, in particular on their access to banking services. The capital base of companies will be stronger, increasing their health and appeal to banks. Moreover, the Carat Tax will be an incentive for companies to perform independent valuation of their stocks, which will increase their transparency and credibility towards the banks.

We do not see any significant negatives to the new system. Companies will see their baseline taxes rise to some extent, but gone are the fears of an audit that assigns an arbitrary value to businesses’ stock and brings with it a potentially excessive tax adjustment. Nobody has complained that the tradeoff for consistency, clarity and predictability is too high.

Will it attract more companies to Antwerp for opening an office?
A: It is already attracting more companies to Antwerp. This may not yet be evident from official diamond company registrations, but having a business up and running does not happen overnight.

Do you think that the trade is happy about it?
A: I know the trade is happy about it. We received nothing but positive reactions and support throughout the trade for this development is nearly universal.