Diamond Transfer Pricing and the Tax Rate in Dubai

A follow-up to my previous post courtesy of Amnesty International:

Within the diamond supply chain, however, smuggling is not the only means by which actors such as traders and companies can unjustly enrich themselves at the expense of diamond-producing countries. A central issue is the way diamonds are valued and the phenomenon of transfer pricing. This is particularly evident in diamond trading centres operating in low tax or no tax jurisdictions….Dubai has come in for particular criticism because of the significant difference in the value of its rough diamond imports and exports (as shown in the table on page 59) and the fact that it does not tax diamond traders.243 Diamond traders in Dubai benefit from various free trade zones, including the DMCC and the Dubai Airport Free Zone Area (or DAFZA). As such, a company could export a diamond at a low value from a developing country; the diamond could then enter Dubai where the importing company marks-up the price and exports it to a related company in another trading or cutting / polishing centre. No tax is payable in the free trade zones in Dubai, so the company in Dubai makes a substantial non-taxable profit.

I sort of stumbled onto this when trying to understand the last from the European Union on their State Aid inquiries:

Under the new Diamond Regime, a trader's gross profit margin is fixed at 2.1% of its turnover.

The Belgian trader affiliate likely incurs operating expenses near 1.5% of sales (turnover) so its operating profits are a mere 0.6% of sales. The intercompany flows are likely as follows. A gold mine in Africa sells its rough diamonds to an affiliate in the UAE which converts these into polished diamonds. The UAE affiliate then sells the polished diamonds to the Belgian trader affiliate. Amnesty International is suggesting very little profit stays in Africa with most of the profits accruing to the UAE affiliate. Now if the UAE affiliate had a 55% tax rate – this would be awful tax planning. But the reality is that the UAE is a tax haven for the diamond sector.