The Carat Tax Explained
The Carat Tax is a clear-cut and predictable fiscal regime that applies to diamond trading companies. The regular corporate tax rate – or income tax rate for natural persons – will be levied on taxable income that is calculated on the basis of a lump sum margin instead of on the actual margin that is realized.
Thanks to the carat tax, the annually recurring complex discussions about monitoring tracking and valuation of diamond companies' stock will come to an end. Additionally, diamond companies will gain improved access to financing, as the carat tax enhances their financial health and credibility with banks.
How does the Carat Tax work?
The total Cost of Goods Sold (COGS) is defined as a lump sum of 97.9% of the turnover of a diamond trading company generated by genuine and habitual diamond trade. As a result, the gross margin used for taxation purposes is 2.1% of that turnover. Subsequently, expenses and tax deductions may be deducted from that gross margin. The net taxable income after deductions however cannot be lower than 0.55% of turnover. A slightly higher floor rate of 0.65% will be applicable only during the first year of implementation of the Carat Tax.
The turnover generated by genuine and habitual diamond trade is the sum of all diamonds sold during a given tax period, as reported on the invoices issued by the diamond trading company. This significantly increases the clarity and predictability of the total taxes due. Like in the current fiscal regime, taxable income from diamond trade implies that at least one director receives remuneration that is no lower than a certain threshold.
When and to whom does the Carat Tax apply?
The Carat Tax will be applicable as from fiscal year 2016 (tax year 2017). The regime is compulsory for diamond-trading companies that are registered in Belgium, but its scope is restricted to the turnover generated by genuine and habitual diamond trade. Turnover generated by other activities, such as services provided, are taxed separately as they are not in the scope of the Carat Tax. The Carat Tax is not compulsory for:
- Mining companies and their sales offices. These companies may choose to apply the Carat Tax instead of the normal corporate tax regime.
- Other companies active in the diamond industry that do not sell diamonds out of an inventory for their own account, such as service providers (brokers, forwarders, diamond laboratories, etc.).
What are the benefits of the Carat Tax?
The complex and burdensome discussions on the control and valuation of the stock of diamond traders, an annually recurring grievance for many diamond-trading companies, will no longer occur as a result of the Carat Tax. The stock is entirely taken out of the equation for fiscal purposes, hence increases and decreases in the value of the inventory are tax neutral. Under the Carat Tax, diamond-traders will be able to monitor their total corporate taxes due throughout the year, as these taxes are based solely on the turnover generated by the sale of diamonds. This significantly increases simplicity, predictability, stability and clarity. The effects of the Carat Tax, however, are not limited to the ease of doing business.