Taxing the Antwerp Diamond Industry into ProsperityApril 23, 15
The phone went silent. I had just outlined the underlying principles of the new turnover tax contemplated for Antwerp’s diamond sector to an Indian friend in Dubai – it made him speechless. When he finally did speak, he said: “Wow, if what you say is true, then we can come back to Antwerp. There would be no reason whatsoever to be here in Dubai. We’ll be close to my children again.”
For well over three years, a select team of diamond industry officials – duly mandated by the industry’s elected leaders – have been negotiating with the Belgian government’s economic decision makers in the greatest secrecy. Not a word about this process leaked out. The taxation talks were conducted by a “new generation,” and everything was on the table. There were no self-delusions and no propaganda; realism and pragmatism were the guiding principles.
‘Cooked Books’ Reached Boiling Point
The jumping off point for these talks was the realization that if there are 1,700 diamond companies in Belgium, every year the government collects some 1,700 annual reports that are all skillfully (and some less skillfully) “cooked.” They are largely works of fiction. Actually, the number is less: some 500 out of these 1,700 companies have no, or hardly any, business to report to begin with.
It’s not that the diamantaires are dishonest. No, there is a frank recognition that Belgium’s prevailing taxation system itself, the so-called assessment guidelines based on turnover taxation formulas (which were last revised in the 2004 fiscal plans) are not practical. They invite creative accounting. Except for the occasional situation in which the company’s actual annual results and the tax assessment guideline happen to coincide, balancing exercises (through inventory valuations and other ways) distort reality. This situation has, more than anything else, been a contributory factor in the withdrawal of the diamond-financing institutions from Antwerp. Financing, which once was the great attraction of the trading center, has largely moved away, making room for branches of Indian banks.
But the most serious side effect of Belgium’s current taxation system is that it has put every diamantaire in Antwerp in potential legal jeopardy: at any time, anyone can find himself accused of bookkeeping fraud or money laundering just because of efforts to comply with, what can be called, the current “hybrid turnover cum profit-based taxation methods.” Respectable and honest diamantaires – which we believe describes the overwhelming rank-and-file majority in Antwerp – are also faced with the dilemma to stay or leave.
When the government (and that includes the anti-money-laundering authorities) fully understood the intricacies of the ever-growing industry taxation imbroglio, it made a courageous decision. It decided that it wanted to turn the tide and enable Belgium once again to become the world’s center of a flourishing diamond trade. It also decided to create the conditions that would give the industry a chance to do just that.
Government’s Budget Release Triggered Disclosure of New System
The Belgian government’s release of the 2015 budget, which makes references to the accord with the diamond center, prompted the Antwerp World Diamond Centre (AWDC), the Belgian diamond industry’s coordinating body and official representative of the diamond sector, to release a short announcement. In its press release, the AWDC says that it “takes note of the government decision to introduce a tax system calculated on a lump-sum basis. ‘Diamantaires are willing to pay higher taxes in exchange for financial predictability and legal certainty’, says Ari Epstein, CEO of the Antwerp World Diamond Centre.”
Local politics played a role in the timing of the announcement. Belgium’s new center-right government of Prime Minister Charles Michel has announced tough austerity measures, which are said to be necessary to keep the budget deficit down. The new turnover tax system is called the “Carat Tax” and, according to the budget, it is expected to raise some $54 million in its first year – though it most likely will be more. Indeed, in the 2015 fiscal year, the government will collect some two and half times more from the diamond industry than was collected in 2014 – and it is certainly significant from a budgetary perspective.
It must not be ignored that most taxation income in the diamond sector comes from taxes on wages, indirect taxes, etc., and the total sector contribution to the state coffers are estimated in the $150-$200 million range. The carat tax refers only to the income of the companies. The message is that the diamond sector plays its part in enabling the government to meet its budget obligations.
Nevertheless, various parliamentarians are asking some pertinent questions “about the legitimacy and effectiveness of the measure,” according to Belgium’s De Morgen newspaper. They take issue with the governmental view that “a favorable tax regime for diamond represents a corrective measure.” It is, in fact, more than corrective. It has become a matter of industry survival...
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