Tax Amnesty: Veni, Vidi, Vici
December 21, 06Belgian diamantaires revalued (upwards) their diamond inventories this week by at least $2.5 to $3 billion. They paid an additional tax of some $100 to $130 million before leaving town for the season’s holidays or for Indian weddings. This “tax amnesty” (or “one-time inventory revaluation,” which is the industry’s preferred term and is technically correct) was agreed upon by both the government and industry this past summer. However, the unprecedented and rapid implementation of this measure, with a minimum of public debate, press coverage, or “noise” is quite unique in Belgium’s legislative history.
In fact, it is a remarkable example of first-rate government-industry relations. In a very real way, though, this legislation has deeply reflected a governmental need: The “results” of the tax amnesty were already firmly budgeted for the 2006 fiscal year that ends next week.
According to the budget, the “special fiscal measures” of the Belgian diamantaires would deliver an additional €136.8 million ($180.7 million) to the state treasury in 2006 and a leftover amount of €15 million in 2007. Prime Minister Guy Verhofstadt needed these funds to balance his budget and avoid an increase in public debt. It seems that the prime minister hasn’t reached the target – but we haven’t seen the final figure yet.
If the law could speak for itself, it would apply the terse remark from Julius Caesar’s speech in the Roman Senate (in 47 B.C.), which describes his victory over Pharnaces II of Pointus in the Battle of Zela: “I came, I saw, I conquered.”
The concept of “inventory revaluation” was introduced and agreed upon in the May 2006 talks between the Diamond High Council (HRD) and the Belgian government. During these talks, it was stressed that there were “discrepancies” (the word used to describe value differentials) in the balance sheets of many diamond companies. These “discrepancies” were the result of accounting practices that were applied in the diamond sector between the Second World War and 1995, when there was an implementation of so-called ‘special control’ methods under the tax plan. Since that date, the stock valuation has had no more influence on the minimum taxable result, which is presently based on an assessment formula tied to turnovers.
The HRD proposed a once-only stock-valuation modification in order to adjust the assets, which had been in inventory for many years, to a correct market level. Not only would valuation adjustment improve solvency and “finance ability,” but it would also strongly improve balance-sheet solvency. In addition, it would improve the normal and transparent finance ability of stocks and flows of trade. The proposal was brilliant (and long overdue), and the government accepted it. However, there were initial concerns about whether public opinion would support it – and whether the two houses of parliament (a Chamber of Representatives and a Senate) would support it – and whether the proposal could be implemented swiftly, as the government had clearly needed the expected fiscal windfall.
The proposal didn’t look very promising. The draft law was introduced in Brussels’ lower house of parliament only in the third week of October. The committee entrusted with debating and reporting its findings completed its work in the second week of November.
The upper house decided not to hold its own hearings and accepted the lower house’s version of the law, which was passed on November 26, 2006. The legislators were aware of the consequences of not approving the measure: it would impact the budget deficit. As the law would only take effect, if and when, signed by King Albert and published in the Official Gazette (“Belgisch Staatsblad”), time became of the essence. This happened on December 5, 2006, just as time was running out.
What did the law say? Diamantaires had less than two weeks (in fact, only eight working days) to revalue the total amounts of carats they had in stock at any time during the 2005 calendar year. They had to then report that figure no later than December 18, 2006, and pay the additional tax no later than December 20, 2006. Though diamantaires “knew what was coming” and could prepare themselves, the legal window for implementation was extremely limited.
The “amnesty,” which came into effect on December 5, 2006, was over and done with within ten working days. Those diamantaires with companies or interests in the Belgian diamond industry, including foreign diamantaires having a local Antwerp office, who read about the law for the first time, felt that they had missed the boat.
The need for the government to get money quickly enabled the simplification of procedures. One had to fill out a form, submit it to the Ministry of Economic Affairs, and attach a check. Companies paid 4.5 percent of the additional value of inventory, while individuals faced a 16.5 percent payment (though virtually all diamantaires operate through companies rather than individual “natural persons”). The law did, however, put restrictions on the uses of these extra funds.
The balance sheets of companies, beginning in 2006, must show a separate category of an “unavailable reserve,” which must reflect the additional amount in full. Failure to do so will subject the diamantaire to an additional 25 percent tax. Also, any withdrawal from that reserve in 2008, 2009, and 2010 will also trigger this additional tax. Between 2011 and 2012, that “penalty” goes down to 15 percent. From 2013 through to 2017, it will be reduced to 10 percent. After 2017, the money can be freely used.
This tax amnesty must be viewed in an overall Belgian context. This is not a special measure just for the diamond industry. Two years ago, in 2004, there was a general amnesty that applied to all taxpayers. The 16.5 percent penalty was then also applied to individuals declaring additional assets, though this didn’t include business inventories. The 4.5 percent rate, however, was considerably below the general amnesty rate. In order to avoid comparisons with the general amnesty, the term “revaluation” was used. The government stressed, in its explanatory note to parliament, that this decision would help the strengthening of balance sheets and ease the diamond community’s access to banking credit. However, parliament wasn’t convinced. In the so-called “Advice nota” that accompanies each law, it was clearly stated that the law involves a specific limited tax-amnesty on favorable terms for just one economic sector.
In one public comment, the editor of a fiscal magazine for (in an online column on www.trends.be) considered the measure as “discrimination” against other taxpayers and questions whether it isn’t contrary to the nation’s constitution. The writer (Jan Van Dyck, editor-in-chief of “Fiscoloog”) then drew the conclusion that “this is probably the reason the law was enacted and implemented at the speed of an express train. In this way, the measure will be forgotten before the public at large will have a possibility to become aware of the amnesty.” The writer suggested the measures would not pass “scrutiny under daylight.”
We cannot judge whether that was a gross exaggeration or whether there might be some truth to that assessment. It may also not be relevant. What is relevant is that the diamantaires have shown faith and trust in government by immediately complying. When the general amnesty was announced, only a few thousand people in Belgium availed themselves of the opportunity (less than 2,000 people in 2004) – and the bureaucracy that dealt with the requests took four months or more to inform the taxpayer that his or her request was granted. In the general nationwide amnesty, the normal tax due needed to be paid – and on top of this, a penalty in the 6 to 9 percent range applied.
On the other hand, in the general amnesty, the taxpayer could immediately put the newly declared assets to any use he or she chose, without restrictions. At the same time, in the diamond sector, the monies were effectively frozen to 2017. This makes comparisons quite difficult – and probably unfair.
The inventory revaluation was part and parcel of a series of initiatives agreed upon between the industry and government. By having met the government’s expectations on the revenue side, the diamond industry has clearly complied with its side of the agreement. It is now up to the government to implement the additional measures (such as the free trade zone at the Brussels airport, to mention one measure). The amnesty has clearly made the Antwerp diamond industry more robust financially and has made the industry more transparent. One might argue that this is only “on paper,” that the now-declared value was always a part of the inventory, and therefore the situation hasn’t changed between yesterday and today. That reflects both a narrow and a short-sighted view. In fact, the amnesty gives an opportunity to have complete, accurate, and fully transparent books of accounts in 2006 – and provides an incentive to continue with this transparency in the years to come.
That is something so valuable that it is worth “paying for” and the Belgian industry has demonstrated its willingness to do so. They deserve to be complimented for their swift action and, we hope, the Belgian government will remember this in the years to come.
Have a nice weekend – and happy holidays.