COSATU/NUM SUBMISSION ON THE DIAMONDS EXPORT LEVY BILL

Presented to the Portfolio Committees on Finance and Minerals and Energy 2 November 2006

1. INTRODUCTION

1.1 CONTEXTUAL ISSUES


COSATU and NUM welcome the opportunity to participate in the hearings on the Diamonds Export Levy Bill (hereafter referred to as "the Bill"), the underlying objective of which is to promote local beneficiation by ensuring access to rough diamonds by the local polishing and cutting industry.

We have long called for active State-led intervention to drive the process of developing local value adding sectors in order to shift the emphasis away from reliance on the exportation of raw minerals to finished goods. While this is relevant generally across all industries it is particularly vital to the long-term sustainability of the mining sector, which has seen massive job shedding and essentially involves the exploitation of depleting/finite natural resources.

Accordingly, some of the socio-economic benefits of beneficiation include:

 

·         Increased Government revenue from the export of value-added commodities;

 

·         Economic diversification, reducing dependence on primary minerals exports and consequently vulnerability to commodity price fluctuations;

 

·         Reduction of transfer pricing linked to shipping of raw minerals overseas by multinational companies mining in South Africa, a practice which reduces both export earnings and taxes as a result of lower profit margins.

 

·         Reduction of monopoly profits of large mineral traders who are contracted to big mining houses often at an international level. This would allow the country to reap more of the benefits locally including through widening access of smaller local traders and manufacturers.

 

·         Increased local demand for mineral products, since minerals in raw form are generally less suitable for broader consumption than finished products.

 

·         Reducing the monopoly stranglehold that large industry players (such as De Beers) have over world diamond trade and consequently their ability to control pricing through stockpiling of rough stones and limiting the amount sold.


On this basis we broadly support the objectives of the Bill.

Further, as reflected in our previous submissions, we note that this Bill constitutes only part of what should be a longer-term comprehensive beneficiation policy. There were earlier indications that the Department of Minerals and Energy (DME) intended to introduce a comprehensive beneficiation bill for the mining industry. While the current Bill is an important advance in promoting local beneficiation, it still constitutes a piecemeal approach that falls short of objectives to increase local capacity to produce finished consumer and       industrial goods.

For example, downstream processing of rough diamonds to finished consumer goods commonly relates to linkages to precious metals such as gold and platinum within the context jewellery making, and therefore should ideally be considered within the context of a holistic package of reforms.

Accordingly, we reiterate call for the DME to prioritise the introduction of a comprehensive mineral beneficiation bill to be made available through a broad public consultative process.

Not surprisingly we have yet again been met with opposition from the mining industry and conservative voices in the course of implementing reforms in the mining industry. On the whole the industry has been reluctant to accept the introduction of any recent pieces of transformatory legislation that initially began with the 2002 Mineral and Petroleum Resources Development Act.

Within this context criticisms have been levelled at the Bill stating that it imposes a tax on the and together with the implementation of a new proposed state royalty would amount to double taxation. We strongly disagree with these criticisms. Firstly, the levy under the current bill is not intended to generate revenue but rather to encourage the supply of rough diamonds to local beneficiators. Secondly, the proposed state royalty is not in reality a tax but a resource rent, which is intended to compensate the nation for the loss of

its non-renewable natural resources once it is extracted by a mining company.

1.2 CONCERNS ABOUT THE PROCESS

The time allocated for written comments on this Bill was extremely short, in fact less than a month.2 This is made even more stringent considering that both the departmental and parliamentary consultation processes have been combined into a single process, with indications that Parliament (or at very least the National Assembly) intends to pass the bill in the current session. Naturally this has implications for the quality of inputs from stakeholders.

Further, we reiterate our concern that Parliament has not as yet passed legislation empowering it to amend money bill legislation, as required in terms of section 77 of the Constitution. Consequently it may only pass or reject the bill in its entirety but not make amendments and therefore is reliant on the Minister of Finance to table an amended bill in Parliament subsequent to the hearings.

2. COMMENTS ON THE SUBSTANCE OF THE BILL

The main emphasis of the Bill is to amend the 1986 Diamonds Act by introducing a 5 percent levy on the export of rough diamonds in order to promote local access to rough diamonds for the purposes of beneficiation. This amendment takes forward previous amendments made to the Diamonds Act in 2005 through the Diamonds Amendment Act 29 of 2005 and the Diamonds Second Amendment 30 of 2005, in respect of which we made detailed submissions3.

For constitutional reasons the levy could not be implemented through the 2005 amendments as taxes and levies have to be processed as money bills that must be tabled by the Minister of Finance, as opposed to the Minister who normally be responsible for to the relevant line function department, in this case being the Minister of Minerals and Energy. This highlights the fact that current bill is in fact supplementary to the 2005 amendments and should therefore be in keeping with objectives and spirit of that process. This underlies our approach to the Bill.

2.1 DEFINITION OF A "ROUGH DIAMOND"

The definition of a "rough diamond" under clause 1 excludes "synthetic" diamonds, effectively excluding these diamonds from the proposed levy.

We have serious concerns about the adverse implications that the production of synthetic diamonds have for the trade in natural diamonds, especially with regards to facilitating illegal dealing in natural diamonds. In the context of this Bill it has the potential to facilitate avoidance of the levy by misrepresenting

natural diamonds as synthetic. Facilitating this process is the ability of producers to coat a natural diamond with or "grow" a synthetic diamond onto it.

This highlights the need to regulate the activities of synthetic diamonds to prevent evasion of the levy and other corrupt practices. These should include introducing additional reporting and monitoring requirements applicable to synthetic diamond producers.

2.2 RELIEF MEASURES

2.2.1 Import Credit

Part III of the Bill provides for various relief measures, with clause 5 setting out provisions applicable to "import credits". Here it is proposed that a producer is entitled to receive import credits for any rough diamonds imported into the country, which may then be offset against export levies applicable against rough diamonds produced locally and exported.

Notwithstanding that the intention of this clause is for the export levy to be applied only against net exports, we are concerned about the implications of this provision and are calling for its deletion.

This provision creates the risk that a producer may exploit this measure by merely stockpiling imported rough diamonds purely for the purpose of claiming import credits. No provision is made stipulating a minimum period that the producer has to retain the imported diamonds before being able to claim the relief measure or even requiring these to be offered to local beneficiators. Further, nothing prevents the producer later exporting the diamonds that were originally imported, AFTER having claimed the import credit. This is a highly probable situation considering that currently there is high degree of mobility of rough diamonds in the course of trade between diamond producers and sight holders.

We note that the Bill attempts to introduce a check by determining the total import credits in relation to the value of the imported rough diamonds. In order to prevent producers overstating the value of the imported diamonds provision the Diamond and Precious Metals Regulator may be consulted by the Commissioner for the South African Revenue Services in determining the "arms length price" of the diamonds. However, this provision emphasises the OVERALL value of the imported diamonds as opposed to their number, size and grade/class. These are all factors which have direct implications for promoting access by the local beneficiation industry since the cutting of certain types of diamonds may be more labour intensive or would require a different level of skill as compared to others.

On the whole this provision has the potential to run counter to the main objectives of the levy, which is to promote local beneficiation (and therefore employment). Accordingly we are calling for its deletion.

2.2.2 Ministerial Exemption at Diamond Exchange and Export Centre

Clause 7(1) of the Bill empowers the Minister of Minerals and Energy to exempt a producer from the levy if that producer's activities are considered to be "supportive of local beneficiation of the local diamonds" or if the rough diamond sales do not exceed R10 million per year.

We have serious concerns about the potential for abuse of this provision. Firstly, no provision is made for objective standards or criteria for determining what constitutes being supportive of local beneficiation and so as a result of vagueness may be open to subjective interpretation. What consideration would be given to such factors as the number and quality of jobs created or the size of the producer etc. To illustrate our concern a literal interpretation of this provision may allow the worlds largest diamond producer, De Beers, to qualify for this exemption by merely providing a single learnership in diamond cutting and polishing.

Further, we are of the view that exemptions for producers whose rough diamond sales do not exceed R10 million opens the door to abuses through the use of transfer pricing.

We are accordingly calling for the deletion of this clause so that the levy may be applied to all exported rough diamonds.

2.2.3 General Comments on the Relief Measures

The original 1986 Diamonds Act entailed a 15 percent levy, which was very rarely applied as a result of exemptions that were easily granted. The consequence was the failure of the Diamonds Act to fulfil its objective of ensuring that local beneficiators had an adequate supply of rough diamonds. It was to remedy this problem that the 2005 amendments sought to apply the levy to ALL exported rough diamonds, at the same time reducing the impact by lowering the amount of the levy. However, the current Bill once again creates unnecessary loopholes especially with the relief measures identified under clauses 5 and 7, as discussed above. On the whole this contradicts the very aims of the reforms initiated in 2005.

2.3 RETURNS AND ASSESSMENT PERIODS

Clause 10 states that every producer is required to submit returns to the Commissioner for South African Revenue Service (SARS) and pay export levies twice a year.

While we support the administration of the levy by the Commissioner, there needs to be a more defined role for the DME. Ultimately the imposition of the levy is to promote local beneficiators' access to rough diamonds as opposed to generating revenue. Provision should therefore be made for copies of the returns to be submitted to the DME, which should in turn be required to publicly report on the implementation of this legislation and the 2005 amendments relevant trends such as the total levies paid, proportion of locally beneficiated diamonds in relation to the number of rough diamonds that continue to be exported, and the role played by the various industry players

3. CONCLUSION

In conclusion we reiterate our support for the Bill with the qualifications regarding the concerns outlined above. We are calling on both committees to ensure that the Bill is not passed by significantly watering down the objectives of the 2005 amendments of the Diamond Act. If the sustainable development of local value-adding industries is to be encouraged this needs to be actively driven by the State. This as opposed to being left to market forces and industry players, who despite (and more likely because of) their monopoly hold over the trade in diamonds have effectively blocked the development of local beneficiating industries.