Belgium’s Diamond Tax—Illegal Government Aid?

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By Linda A. Thompson

Belgian lawmakers in the country’s socialist opposition party (s.pa) are preparing to request that the European Commission take a fresh look at a special tax regime for Belgian diamond traders, which they say may be unduly benefiting the industry.

Diamond traders are required to pay the country’s standard 33.99 percent corporate income tax on 2.1 percent of their turnover rather than on their profits. However, the lawmakers argue that the carat tax or “diamond regime” should be considered illegal government aid—or state aid, in contravention of European Rules—since it allows Belgian diamond traders to fix their gross profit margin is fixed at 2.1 percent of their turnover.

In 2015, the current center-right government asked competition officials to examine whether the regime they intended to introduce violated European Union state aid rules.

In a July 2016 decision (SA.42007), the commission approved the regime and Belgium committed to reassessing the level of the applicable gross profit margin percentage at least every five years. The regime was then introduced in 2017.

A spokesperson for the commission declined to comment.

Disconnect With Economic Reality

But, Peter Vanvelthoven, an sp.a lawmaker, told Bloomberg Tax June 13 that the commission’s 2016 decision was based on figures that no longer reflect the economic reality in the Belgian diamond world.

He pointed out that the commission found that a limited number of traders would benefit from a special regime that set the gross profit margin at 2.1 percent in its 2016 decision, while 75 percent of traders would face higher tax bills under the new regime.

Those figures and percentages—based on a bench-marking study commissioned by the Belgian government and produced by Deloitte—looked at the profits realized by small, medium-size and large traders between 2012 and 2014.

However, the Belgian socialists’ own calculations, using the 2016 annual accounts filed by diamond traders with the National Bank of Belgium, show 80 percent of local diamond traders realized a gross profit margin that exceeded 2.1 percent in that year.

“Hence our conclusion that if the European Commission were to look at these figures and contrast them with the normal tax regime, they could not but arrive at the conclusion that this constitutes illegal state aid,” he said.

Vanvelthoven said his party will also ask Kathleen Van Brempt, vice-chair of the Socialists & Democrats group in the European Parliament, to interrogate EU’s competition commissioner Margrethe Vestager on the matter.

Increased Taxes

Diamond traders in Antwerp, one of the world’s leading diamond-trading centers, welcomed the new regime introduction in 2017 because it remedied tax inspection difficulties related to verifying the valuation and follow-up of individual stones in the inventories of wholesale traders. This frequently resulted in lengthy and costly disputes between tax authorities and the traders.

Now though, there may be indications of higher tax bills.

“The diamond tax regime has resulted in substantial increase of tax collection from the Belgian diamond industry since its implementation, effectively resulting in a larger contribution to the Treasury in comparison to the old regime it replaces,” Anna Pomerantseva, management assistant at the Antwerp-based Diamond Trading N.V. told Bloomberg Tax in a June 13 email.

Margaux Donckier, a spokesperson for the Antwerp World Diamond Centre, said the new regime had already passed muster with the European Commission by way of its 2016 decision.

Further, Donckier noted Belgium’s constitutional court also found the 2.1 percent gross profit margin to be “fitting because it relied on reasonable grounds, namely industry averages” in a May 17 decision (59/2018). She also pointed out that the figure was based on a group of diamond dealers registered with the Federal Public Service Economy that accounts for 83 percent of the local industry’s total turnover, or 22.3 billion out of 26.6 billion euros.

The chance of the European Commission investigating the matter is “very unlikely” given all the preliminary investigations that have already been carried out. “We’re fully confident about this given all the precedents,” she told Bloomberg tax June 13.

“It seems that now that traders are not being taxed based on their net profits but on their gross profit margin, they are reporting higher profits,” said Bloom Law firm lawyer Denis-Emmanuel Philippe. In that sense, the diamond regime appears to be a boon to the entire sector, he said.

“These 2016 annual accounts appear to indicate that all these diamond traders are benefiting from the carat tax because they are only being taxed based on 2.1 percent of their turnover when they are actually booking much higher profits than that,” Philippe said, adding that the next step wasn’t necessarily a full state aid investigation. “There is a chance that the Commission may say: ‘This is a little strange. Maybe we should increase the threshold a little,’” he said, referring to the 2.1 percent threshold for turnover.

To contact the reporter on this story: Linda A. Thompson in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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