The diamond industry is so competitive, that everyone is clamoring for an advantage, no matter how big or small. This race to improve has some fantastic aspects to it, such as a large investment of research & development in technology and even price analysis. One diamond manufacturer, when asked what is keeping him awake at night once told me, “How to improve yield by 3 percent on my 2-3 round goods.” A small technological improvement means an edge from more cost-efficient production.

The drive to improve competitiveness extends from individual companies to entire centers. Members of the Dubai Diamond Exchange are exempt from paying income tax for 50 years. In India, banks are required to set aside a percentage of their business credit to support exports – including diamond exports.

In Antwerp, this did not go unnoticed; especially in light of a certain flight of business to other countries that have a more favorable tax regime. Companies in Belgium are subject to a 33.99-percent tax on profit. With competing diamond centers such as Dubai or Hong Kong (where the corporate tax rate is 16.5 percent) biting at its heels, the concern is understood.

Imagine the following scenario: an Antwerp-headquartered diamond firm, with manufacturing in Mumbai where it enjoys competitive financing on exports, a Dubai sales office that services the Gulf region and a Hong Kong sales office that manages manufacturing in China and regional sales. Why would such a company want to bring its profits to Belgium and be taxed 34 percent if it can leave the profits in Dubai and Hong Kong and benefit from the advantageous taxation?

This situation drives Antwerp-based companies of this kind to keep their profitability in Belgium as low as possible.

The issue was further exasperated a few years ago following a long series of police raids on diamond firms and the subsequent hold up in business. These raids and the follow up investigations, negotiations and court cases are dragging out excruciatingly, resulting in a further burden on doing business, making other centers (including Israel) seem much more attractive.

It is precisely this flight of business that worries the heads of Antwerp’s diamond industry, leading to a series of initiatives to improve the center’s competitiveness. One such initiative aims to fight the flight of money – and business – to other centers. Referred to as the Diamond Carat Tax, the initiative suggests that instead of paying a high corporate tax, diamond companies will pay some sort of turnover tax.

The idea, which is not new to the diamond industry – it’s used in Israel and been fought for in India for several years – suggests that diamond businesses pay taxes based on the volume of their business – regardless of if they are making a profit or not. The goal is that Antwerp will remain the diamond firms’ center of activity, removing the need (or at least the urge) to transfer profits elsewhere.

According to the Antwerp World Diamond Centre (AWDC), the current tax regime is unpredictable because of constant changes in local laws, national legislation and new regulation – another reason to support a clear, transparent and predictable new tax regime.

In a way, companies in Belgium are already faced with the downside of a turnover tax – an income tax that is levied even when a company is posting a loss. According to the AWDC, there is a taxation plan that involves a special control methodology, developed between the diamond sector and the Ministry of Finance, which began in 1996.

It implies that a company actively engaged in the diamond trade is taxed on actual profits, but that these may not be lower than a fixed percentage of sales. In other words, there is a certain level of tax that is set even if a company is losing money or if its profit margin is below a certain level. It is set on an individual bases that even further sends tax prediction into a loop.

Based on one assessment, Belgium is losing an estimated €50 million in taxes annually because of profits that are not brought into the country. Based on a 33.99 percent profit tax, some €147 million in profits are held outside the country according to this assessment.

Currently no one is taking the risk of tossing numbers into the debate over the proposed Carat Tax. However, all sides understand that Belgium’s revenue from the diamond industry should not decline.

This is the basis for enlisting local politicians to carry the idea forward. Among the supporters is Minister of Finance Koen Geens (CD&V). He “instructed his team to investigate how and if such a carat tax is viable and how it could be implemented,” according to reports, despite the diamond industry not being popular in the country. Many view the industry negatively and the local press is often busy in what is viewed as a constant smear campaign against the diamond industry.

However, providing Belgium with 5 percent of its exports, and 15 percent of its exports outside of the EU, no sane political leader wants to see the industry shrinking or sinking. Geens needs to submit the law to the European Commission before it can be legislated in Belgium. However, the first hurdle it must pass is a local political one.

On May 25, voters will go to what is dubbed in Antwerp, “the mother of all elections,” with candidates running for Flemish (regional), Belgian (federal) and European offices. The country’s economic issues are high on the agenda.

Ahead of the elections, on May 5, the AWDC organized the Diamond Election Debate at Antwerp's Beurs voor Diamanthandel. Candidates from leading parties spoke and answered questions about business and their views of the diamond industry. Representatives of Open VLD, CD & V and N-VA parties voiced a surprise consensus support for the carat tax. Even David Geerts, representing Sp.a, the socialist party that made their opposition to the tax an election issue, joined the yay sayers. The sole objection came from Meyrem Almaci of the Groen (Green) party who stated she favors a reduction in labor costs and the development of an initiative to improve the image of the sector, such as a Fair Trade Diamond label.

In addition to what looks like favorable political support, a carat tax also works in tandem with De Beers’ IFRS demand from Sightholders. One of the issues associated with IFRS, and which currently raises objections to the demand, is that profits of a subsidiary are not recognized under IFRS unless transferred to the parent company. A reduction in tax on profit makes the issue less painful.

The EC is still a major obstacle as the carat tax may be viewed as a sector favoring policy, something that goes against the grain of EC laws and principles that tend to reject preferred economic treatment to certain sectors. A ray of light is provided by the approval of the tonnage tax.

Under this tax system, profits resulting from ocean-shipping may be taxed on a flat-rate basis on the tonnage of the ships that generate the profits. The EC keeps a close tab on this tax and does not hesitate to intervene if it does not approve of how it is levied. Recently, it criticized Spain and France for the way they applied the tonnage tax, and I doubt the diamond industry would like to see the EC monitoring it too closely.

It’s a long way before all the essential details of the carat tax are fully worked out and an even longer journey before it is passed into law. However, this important effort must go on, as even the veteran heart of the diamond industry must constantly re-invent itself to remain relevant in a relentlessly changing world.

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