South Korea’s Landmark Tax Reform: Bolstering the Diamond Market

Antwerp, Belgium – February 2019 – In a significant development for the global diamond industry, the World Federation of Diamond Bourses (WFDB) has lauded the pivotal efforts of the Korea Diamond Exchange (KDE) following the South Korean government’s decision to abolish a long-standing, prohibitive tax on imported polished diamonds. This landmark reform, which saw the elimination of a 26% Individual Consumption Tax (ICT) in December, marks a new era for one of Asia’s most dynamic luxury markets and is poised to inject substantial vitality into South Korea’s burgeoning diamond sector. WFDB President Ernie Blom, along with Korea Diamond Exchange Chairman Nam Chang-Soo, expressed profound optimism about the far-reaching positive implications of this progressive change.

A Historic Shift: Dismantling Decades of Taxation

For over four decades, since its inception in 1976, the 26% Individual Consumption Tax on imported polished diamonds stood as a significant barrier to growth and competitiveness within the South Korean jewelry industry. This substantial levy not only inflated prices for consumers but also inadvertently fueled an underground market, hindering transparency and legitimate trade. Its abolition represents a monumental victory, culminating from five years of dedicated dialogue, strategic advocacy, and intensive collaboration spearheaded by the Korea Diamond Exchange.

According to Nam Chang-Soo, Chairman of the Korea Diamond Exchange, the removal of this burdensome tax ushers in a streamlined and significantly more favorable tax regime. South Korean diamond importers will now operate under a simplified structure comprising a 5% import tax and a 10% Value Added Tax (VAT). This revised framework is expected to dramatically reduce the cost burden on businesses and consumers alike, making diamonds more accessible and strengthening the integrity of the market. The clarity and simplicity of this new system are vital for fostering a robust and competitive industry.

The Driving Force Behind Change: Korea Diamond Exchange’s Unwavering Persistence

The journey to this pivotal tax reform was neither swift nor easy. It required relentless dedication and strategic persuasion from the Korea Diamond Exchange, actively supported by the World Federation of Diamond Bourses. For five arduous years, the KDE engaged in intricate negotiations and presented compelling arguments to government officials, meticulously outlining how the high tax rate stifled economic potential, discouraged foreign investment, and failed to achieve its intended revenue goals. Nam Chang-Soo’s leadership during this period was instrumental, guiding the exchange through complex policy discussions and consistently advocating for a more equitable and growth-oriented tax environment.

The KDE’s strategy focused on demonstrating that a simplified, lower tax regime would not only stimulate legitimate sales but also expand the tax base through increased volumes of official imports. By formalizing transactions and curbing illicit trade, the government stood to gain more revenue in the long run, while simultaneously bolstering a vital sector of the economy. This foresight and persistence ultimately convinced policymakers of the tangible benefits of reform, setting a precedent for industry advocacy in other regions grappling with similar tax challenges.

Anticipated Economic Boom: A Multi-faceted Impact on the South Korean Market

The abolition of the Individual Consumption Tax is projected to trigger a wave of positive economic impacts, permeating various segments of South Korea’s luxury and retail sectors. The anticipated effects range from enhanced consumer affordability to a significant boost in industry competitiveness, promising a period of substantial growth and innovation.

Boosting Consumer Confidence and Affordability

One of the most immediate and tangible benefits of the tax reduction will be a noticeable decrease in the retail price of diamond jewelry. This newfound affordability is expected to make diamonds accessible to a broader demographic of South Korean consumers, encouraging greater discretionary spending on luxury items. Lower prices will not only stimulate demand for existing products but also allow retailers to offer a wider variety of diamond jewelry at more competitive price points. Moreover, buying through official channels will become more appealing, enhancing consumer trust and transparency in the market, as previously hidden costs and unofficial avenues diminish.

Revitalizing the Domestic Jewelry Industry

Nam Chang-Soo articulated a strong belief that the simplified tax structure would have a “very positive effect on diamond jewelry sales in South Korea,” predicting a “big increase in sales of polished diamonds and of diamond jewelry.” Currently, annual sales of polished diamonds in South Korea stand at approximately $2.5 billion, while diamond jewelry sales are in the order of $5 billion per year. The tax reform is expected to significantly amplify these figures. The domestic jewelry industry, previously constrained by the high ICT, will now enjoy enhanced growth potential and improved global competitiveness. This environment fosters innovation, encourages investment in local manufacturing and design, and creates new employment opportunities across the entire value chain, from cutters and polishers to designers and retailers. It also aligns South Korea’s diamond market more closely with international standards, making it easier for local businesses to compete on a global scale.

Attracting Foreign Investment and Expertise

The removal of the restrictive tax makes South Korea an exponentially more attractive destination for international diamond manufacturers, dealers, and jewelers. The promise of a transparent and favorable tax environment opens the door for foreign entities to establish a foothold in this robust market, bringing with them international best practices, diverse product offerings, and potentially new technologies. This influx of foreign investment and expertise will not only enrich the local market with greater choice and quality but also foster knowledge transfer and collaborations that can elevate the entire South Korean diamond industry to new heights. The competitive landscape will drive excellence and consumer satisfaction.

Formalizing the Market and Increasing Tax Revenue

Paradoxically, lower tax rates often lead to higher overall tax revenues due to increased compliance and a larger volume of legitimate transactions. Chairman Nam Chang-Soo expressed confidence that this amendment “will lead to increased tax revenue from higher official imports of diamonds and will curb underground business.” By reducing the incentive for illicit trade, the government can effectively formalize the market, ensuring that transactions are transparent and properly documented. This not only strengthens the rule of law but also provides a more accurate picture of market activity, enabling better economic forecasting and policy development. The expanded tax base, fueled by legitimate growth, is a win-win for both the industry and the state treasury.

Projecting Market Growth: Numbers Speak Volumes

The existing $2.5 billion in polished diamond sales and $5 billion in diamond jewelry sales are just the baseline for what is expected to be a substantial upward trend. With increased affordability and greater market access, industry experts anticipate a significant percentage increase in both categories. This growth will not only be reflected in higher sales figures but also in increased consumption of loose diamonds, signaling a deeper engagement with the product across various consumer segments. The revitalization of the jewelry industry, coupled with competitive pricing for finished diamond and precious stone-set jewelry, is expected to solidify South Korea’s position as a vibrant and expanding market within the global luxury sector.

South Korea’s Global Market Aspirations

South Korea, recognized as the world’s eighth-largest economy, boasts a sophisticated consumer base with a growing appetite for luxury goods. This tax reform aligns perfectly with the nation’s broader economic strategy to foster international trade, attract foreign investment, and strengthen its position on the global stage. By creating a more open and competitive diamond market, South Korea is not only serving its domestic industry but also signaling its readiness to become a more significant player in the international diamond trade. This move enhances its appeal as a luxury hub and encourages further economic integration with global markets.

A Blueprint for Global Diamond Trade: WFDB’s Vision

WFDB President Ernie Blom emphatically stated, “It is always encouraging to see governments abolishing taxes, which only serve to restrict sales and to make tax regimes simple and logical.” He lauded the KDE and Chairman Nam Chang-Soo for their “hard work and persistence,” emphasizing that the “South Korean people love diamonds,” and this change will “expand sales and encourage foreign companies to become involved.” Blom’s message extends beyond South Korea, serving as a powerful call to action for other diamond bourses worldwide that operate under high taxation. He encouraged them to “approach their respective governments to work to bring down tax rates,” advocating for similar reforms that promote transparency, stimulate legitimate trade, and ultimately benefit both consumers and the industry at large.

The WFDB’s stance underscores a broader philosophy: that simplified, equitable tax regimes are essential for the health and sustainable growth of the global diamond pipeline. By reducing barriers to trade and fostering a more competitive environment, countries can unlock significant economic potential, ensuring that diamonds continue to captivate consumers and contribute positively to national economies worldwide.

Conclusion: A Bright Future for South Korea’s Diamond Industry

The abolition of South Korea’s 26% Individual Consumption Tax on diamonds is a monumental achievement, reflecting years of dedicated effort and a progressive vision for economic growth. This tax reform, championed by the Korea Diamond Exchange and praised by the WFDB, is set to significantly revitalize the nation’s diamond market. By enhancing affordability for consumers, boosting the competitiveness of the domestic jewelry industry, attracting international investment, and formalizing trade, South Korea is poised for an era of unprecedented growth in its diamond sector. This success story serves as an inspiring blueprint for other nations, demonstrating that strategic tax simplification can unlock immense potential, leading to increased prosperity and a more vibrant global diamond trade.