Belgium’s diamond trade can expect to pay at least three times more tax per year as a new fiscal regime is set to be passed into law by the end of the year.
Under the proposed ‘Carat Tax,’ the tax calculation for diamond traders will be based on revenue rather than profit, meaning that inventory valuations will be taken out of the equation, the Antwerp World Diamond Centre (AWDC) explained. The EC, which last week approved the new regime after assessing its fairness, concluded that diamond traders will still pay their fair share of tax, while avoiding the tax inspection difficulties related to assessing inventories.
The complexity of assigning a value on inventory under the current system makes tax assessment a challenging process for the Belgian administration, while litigation between traders and authorities creates legal uncertainty, the commission said.
The new Carat Tax will simplify matters but also increase the total tax paid by the sector by at least $56 million (EUR 50 million), or “more than three times the taxes it used to pay under the normal income tax regime,” the EC said. At least 75 percent of diamond traders will pay higher taxes than they did under the current rules, the commission added.
The Carat Tax will be based on a fixed gross profit margin at 2.1 percent of revenue, from which expenses and tax deductions can be made. 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 AWDC explained.
Despite the higher tax charge, the AWDC expects other benefits for the trade beyond simplifying the calculation.
The new regime will improve predictability and stability, with traders able to monitor their corporate taxes throughout the year, the trade body said. It will also make the industry more appealing to banks, thus improving access to finance. The change will also incentivize businesses to get an independent valuation of their stock, increasing transparency and credibility toward banks, the AWDC added.
The new system will be compulsory for diamond wholesale businesses registered in Belgium, but will apply only to revenue from diamond trading and not to other activities such as services. The tax will not apply to mining companies with sales offices in Belgium, nor to brokers, diamond laboratories or other service providers.
The tax still has to be approved by Belgium’s Parliament and is likely to be adopted into law by year-end, while the new rules will be applicable from tax year 2017.
The AWDC is hosting an information session on Friday, August 5, to explain how the Carat Tax will affect businesses.