The New Emirate on the Schelde
June 08, 06 by Chaim Even-Zohar
“Conjuring images of pristine sandy beaches adorned by lone palm trees, the offshore economy has been attracting attention recently. Offshore captivates our imagination with its contradictory promises: it is the last frontier, the last remaining truly exotic feature of the age of global capital. This is the domain of the ‘permanent tourists,’ a nomadic tribe of tax exiles floating between foreign lands, never truly reaching home, never needing or wishing to moor in the heavily regulated and taxed ‘dry land,’” wrote Ronen Palan, a University of Sussex professor of International Relations.
To the Belgian diamond industry, whether rightly or wrongly, this represents the image of Dubai and its “fatal attraction,” which became self-evident when, in 2005, the transit trade of rough and polished diamonds through the emirate surpassed $10 billion. Those are $10 billion that “rightfully” belonged to the “dry land” otherwise known as Belgium.
In theory, there is an amazingly simple way to solve Antwerp’s problem. It has to “out-Dubai” Dubai and create an emirate paradise on the Schelde River. It may not be able to match Dubai’s splendid weather, but such an entity could supply almost everything else, and more.
And, by George! They have done it! Belgium’s Prime Minister Guy Verhofstadt has risen to the challenge and has basically reached the conclusion that Belgium was never meant to become another Holland. Some 50 years ago, Holland over-regulated the diamond business, and Belgium made a formal promise to facilitate a friendly business environment that included a high degree of fiscal flexibility and toleration. Within the framework of the law, they have found accommodation, and although the days of Don Pedro are over, Guy Verhofstadt has shown that the promise of Belgium is still there.
While arguably has one of the world’s strictest regimes, in terms of anti-money laundering and anti-terrorist compliance regulations Antwerp; the government has found an almost ingenious way to facilitate a huge tax amnesty allowing “hidden capital” to come back into the business.
Tax Amnesty
In a stroke of genius, the government has done this in a very sensible, even logical way. For the past ten years or so, Belgium’s diamond industry has been paying taxes based on an assessment formula, like they have done in Israel for decades, where gross profits are presumed to be a few percentage points (around 3 percent) of turnover. The focus on turnover rather than actual profits has made the valuation of inventory an immaterial exercise. This was exactly why the assessment system came about, because of governments’ inability to effectively audit the value of inventories at the end of a tax year. So any undeclared or unrecorded profits, in theory, would reside in one’s inventory. It makes perfect sense to periodically enable diamantaires to revalue their inventory and so declare their hidden capital and strengthen their company’s visible capital base.
The banks love it because suddenly the company’s balance sheets will actually reflect the equity that the banks knew existed anyway. De Beers and other suppliers will love it because it eliminates the need for creative accounting in creative presentations. And the government of Belgium loves it because the government stands to get a one-time windfall when this new capital is taxed on a one-time basis at 3 percent [paragraph 52 of annex 2 of the agreement concluded states that the tax rate will be set later, but it is expected to be not more than 3 percent].
The beauty of the arrangement is its simplicity. You cannot declare new stock (i.e. a different carat volume than has been recorded already) but rather the value of that inventory. The Belgian government, in the relevant protocol, says very clearly that it is only concerned with a stock valuation and not an adjustment of the stock quantity. The stock quantity is known as a result of the strict physical goods control by sworn experts upon the import and export of diamonds from outside the EU, the whole procedure of the Kimberley Certificates for rough diamonds, and the annual declaration of the stock by all registered diamond traders to the Federal Public Service Economy Department.
The government further noted that with respect to the various modalities, decisions still have to be made – but it is clear that it will be a once-only and exceptional value adjustment on the next balance sheet date after the implementation of the relevant legal provision. The details will be worked out by the minister of finance.
But one tax amnesty doesn’t create a tax paradise. For that, much more is needed. And much more is exactly what the Belgian government is determined to give the Belgium community. The “out-Dubai Dubai” exercise requires the establishment of a free trade zone through which legitimate transit business can be conducted. Not just for diamonds but also for jewelry. Dozens of paragraphs in the agreement are devoted to the technicalities of such a free trade zone at the Zaventem airport at Brussels, which is very similar to the facilities used by diamantaires in Geneva or Dubai.
The Belgian government has actually committed itself to establish these facilities (with the assistance of the customs authorities of course) by the end of the year. This is brilliant, but still not good enough yet. The diamond industry still pays taxes, while in Dubai and other tax havens one may enjoy 50-year exemptions. And for those who worry about that period, please be assured that there is also an option for a one-time extension for another 50 years. It is probably politically and legally untenable to further decrease the Belgium tax burden, which is truly comparable to the actual burden in Israel and India.
By establishing a free trade zone, the Belgian government is belatedly following an international trend, well accepted and founded in law. The government is basically creating a special-purpose juridical enclave that is distinguished from other economic activity by allowing certain “withdrawals” of regulations and tax laws, which apply to the main stream of the (“onshore”) economy. This will attract investments and business activity that otherwise would escape Belgium. Botswana, South Africa, India, Dubai, Switzerland, and Namibia are only a few of the diamond countries that have either already established – or are in the process of establishing – diamond free trade zones.
Repatriation of Foreign Earnings
The free trade zone move, in a way, is long overdue. It enables the exports from Antwerp to problematic places (such as Vietnam, Taiwan, etc.) by simply exporting from Antwerp to the Brussels free trade zone. But the government doesn’t stop just with “free trade zones.” Something needs to be done on a permanent basis to ensure the continued flourishing of the “Emirate on the Schelde.”
Therefore, another brilliant concept was introduced: one can repatriate dividends made in related (tax-haven) companies back to Belgium without the need for payment of an additional tax. No, this is not without limit. There is a ratio of one to five for declared Belgian domestic profits and dividends brought in from overseas. So for each $10 million of declared profits, you can bring in $50 million from other sources. This is also not without limitations. It is my understanding that there must be double-taxation agreements between Belgium and the country from which the dividends originate. In fact, also here the precise modalities still have to be worked out, but they are brilliant.
Whatever the tax rate in Belgium is, or will be, the tax-free repatriation of dividends will, in practice, enlarge the capital base in Belgium while, de facto, enable the leveraging of the overall tax rate to a sufficient, affordable, and competitive level. This means that even thinking about moving to Dubai won’t be worthwhile anymore. True, the objective is to bring capital into one’s business. Withdrawal for “own use” requires a 19 percent tax – and there were already some diamantaires complaining about this. They are wrong – to take out money, there is really no need to bring it in…
Now Watch Israel and India
The “emiratization” of Antwerp will certainly create “headaches” for other countries, including Israel. Though the Israeli industry has endeavored to attract Antwerp (and other) diamantaires to settle in Israel, the situation has now been reversed by one simple signature on one protocol with two annexes. For most Israeli companies, Dubai, for obvious political reasons, was never an option. Now they will have the “Emirate on the Schelde” to compete with Geneva, Hong Kong, and other business-friendly environments.
It is clear that Belgium’s government has thought out its proposals at very great length. It is aware of the problematic transfer pricing issues that have arisen in the diamond industry, including discrepancies between invoice values and Kimberley values on rough diamonds. At the same time, the government has clearly resisted the efforts to remove the “value notation” from the Kimberley Certificates. This is not, it says, internationally tenable. The government is thus not giving the diamond industry all it has asked for – but that was probably never expected. Nevertheless, even around Kimberley Certificates the government has found solutions, making it clear that on an individual basis, each valuation problem will be solved in a fair and reasonable manner.
If there is a discrepancy between declared and actual value, the government is only interested in getting the tax due on the actual amount. That makes sense, and God only knows how they will actually implement this, but I trust they will find a way.
It is my understanding that nothing actually conflicts with any of the international agreements to which Belgium is party, and the protocols do not compromise on anti-money laundering or anti-terrorist financing compliance programs. There will be no leniency, no flexibility, no negotiations, and no compromise on any amount that is linked to criminal activity. The agreements make that unequivocally clear.
However, in the same breath, the government has recognized that the industry has problems implementing some of the requirements of the anti-money laundering industry compliance programs. Here too the solution is outright brilliant. Everything that has been promulgated so far has now received the status of being a draft. They will now be adjusted to reflect trade customs, and then after realistic and tested rules are being made, a draft Royal Decree will be submitted for signature to the king. The consultation with industry that should have taken place before 2004 is now actually starting. This is better late than never – and not one day too early.
Many details will still have to be worked out, but if all of this is implemented, 2006 may well go into history as the “rebirth or rejuvenation” of the Belgian diamond sector. The new HRD Managing Director Freddy Hannard is a lucky man: just a few weeks on the job and he is getting a new future almost as a “sign on” bonus. The real unsung hero is still his predecessor Peter Meeus, who started the process together with the Task Force, which brought the process to a conclusion working with Henk Mahieu of Belgium’s Ministry of Foreign Affairs as Chairman, as well as the prime minister’s advisor Brice DeRuyver.
Government Needed a Solution
There is one other aspect worth dwelling upon. The diamond industry is not just vital to the Belgian economy; it is also of great significance to Belgium in its economic and fiscal relationship with the European Commission. A potential decline in diamond exports would impact reaching the thresholds and meeting the conditions of Belgium’s European obligations. The synergy was complete: both the Belgian diamond industry and its government had no choice but to find a solution to address the threat to the industry. The overriding joint (albeit different in various aspects) interests between industry and government also will assure the continued commitment and support to bring it all to realization. With the benefit of hindsight: bringing in the government to straighten out the HRD governance structure and to develop the other measures was brilliant – something I had never expected. HRD Chairman Jackie Roth also needs to be complimented – he has surprised many observers, including this writer, as his astute resiliency (“Hanging in there in difficult days”) has paid off – in the very best interest of the Belgian diamond industry.
One can only smile and complain that the off-shore center-in-the-making isn’t perfect…. The government hasn’t done anything about the weather but, otherwise, they have created a potential “Emirate on the Schelde.”
Have a Nice Weekend.