Contents - AL-Tax

5.1 Summary of Key Facts 77colors, color, clarity and other factors. Elements other than the physical attributes ofthe polished stone also enter into the determination of its price, including (a) wherethe transaction takes place (Africa, Europe, the CIS, the United States or elsewhere),(b) the locale where title passes, (c) the method of payment, and (d) the credit riskposed by the contemplated transaction.In short, genuinely arm’s length prices for fairly closely comparable rough andpolished stones may vary significantly across transactions that take place concurrently.5.1.5 Functional Analysis of FP, IS and USSThe operations of FP, IS and USS collectively, (the “Group”), span the purchaseof rough diamonds, the development of designs used by independent cutters andpolishers in transforming rough stones into polished diamonds, the assumption ofcosts and risks associated with the transformation of rough to polished stones, thecreation of brand names and the wholesale distribution of polished stones.FP has been a sightholder for a number of years, and it is the only sightholder inthe Group. This status entitles (and obligates) FP to purchase pre-sorted parcels ofrough stones from the DTC ten times per annum. It is permitted to view the stonesat the DTC’s sights in London. Each parcel is valued at approximately $25–$35million. The DTC requires payment with cash in advance; FP finances its purchasesof rough through a combination of credit facilities and equity capital. All of thestones that FP procures from the DTC are sold to IS, and the latter cannot returnunsold stones. Hence, FP bears limited market risk.Broadly speaking, IS is in the business of procuring rough stones from FP andthird parties, having a portion of the rough cut and polished by third party cutters,and reselling rough and polished stones to USS and third party dealers, wholesalersand retailers. (More particularly, as previously noted, IS sells proprietary polishedstones exclusively to USS, rough stones exclusively to third parties and genericpolished stones to both USS and third parties.) The performance of these broadfunctions, in turn, entails:1. Assessing the rough to determine which individual stones should be sold in roughor polished form, and marking the subset of rough stones destined to be sold aspolished diamonds;2. Arranging for the cutting and polishing of stones by third party manufacturers inIsrael and elsewhere;3. Sorting polished stones by color, quality and size;4. Maintaining stocks;5. Performing complex logistical functions related to the shipment, stocking,importation and exportation of rough and polished diamonds; and,6. Marketing and selling stocks of rough and polished stones to USS and thirdparties.