DIAMOND
EXPORT LEVY BILL, 2006
Portfolio Committee on Finance and Portfolio
Committee on Minerals and Energy
National Treasury’s
Preliminary Responses to Public Representations
I. BACKGROUND
1. Objectives Restated
The Diamond Export
Levy Bill’s main objective is to grow the local beneficiation diamond
industry. The proposed 5 per cent levy
is intended to act as a deterrent against the export of rough diamonds so that
the local industry has a meaningful opportunity to purchase rough diamonds
(i.e. an effective right of first refusal).
It is important
to note that the purpose of the Levy is not to raise revenue. The Diamond Industry (like all companies) is
already subject to the 29 per cent rate in terms of the Income Tax. Further revenue will result from the Royalty
Bill (currently out for public comment) which imposes a 5 per cent resource
rent tax on rough diamonds (on a gross ad
valorem basis). No reason exists to
impose yet another charge. In fact, if
the proposed levy does yield substantial revenue, a strong argument can be made
that something is remiss because rough diamonds are continuing to be exported
unabated.
2. Replacement
Levy
The proposed
export levy is not new. The proposed
levy replaces the current 15 per cent levy, the latter of which has been in
existence since 1986. The new 5 per cent
rate has been set so as to act as a deterrent for exports while at the same
time not encouraging smuggling.
3.
Overall Regulatory Paradigm
The proposed
Diamond Export Levy Bill should not be viewed in isolation. The proposal is the last leg of a completely
overhauled regulatory paradigm. The
newly amended Diamonds Act entails the following regulatory structures—
A. Each
diamond producer must offer up to 10 per cent of its “run-of-mine” rough
diamond production to the newly established State Diamond Trader (“SDT”) for
purposes of supporting the local beneficiation industry through the on-sale of
those diamonds to local cutters and dealers.
B. Section
59 agreements will cease to exist. One
agreement (with De Beers) provided exemption from the former levy and the
requirement to put rough diamonds intended for export through a formal bidding
process on a bourse.
C. All
rough diamonds intended for export must undergo a formal bidding process
(tendering) at a Diamond Exchange and Export Centre (section 48A of the
Diamonds Act) (“DEEC”), thereby securing a “right of first refusal” for the
local industry. Up to two centres are
envisioned at present.
One important
aspect of the Diamond Export Levy is its relationship to the State Diamond
Trader. Without the Levy, the purchase
of diamonds from the State Diamond Trader by local cutters could easily result
in leakage with local cutters simply purchasing diamonds for re-export.
4. South African Cutting Capacity
At present,
South African cutting operations depend on the
type of diamonds involved. South African
cutters mainly cut high value diamonds (often referred to as Categories 1 & 2). However, little cutting occurs in respect of
industrial diamonds – approximately 42 550 in carats and 0,3% in value.
The question at hand is how much and how fast
can local cutting capacity be increased.
The State Diamond Trader will have the authority to purchase up to 10
per cent of run-of-mine production for local cutting (potentially 1,678 million
in carats and 1,082 million in value).
In the short run, the Diamond Export Levy will most probably act solely
as a backstop to this increased level of South African production caused by the
State Diamond Trader. The combined
impact of both the State Diamond Trader and the Diamond Export Levy must be
carefully considered. The objective is
to ensure that local cutting capacity steadily increases without causing local
market saturation that undermines diamond values, the latter of which would trigger
job losses in local production.
II. CONSULTATION
PROCESS
The Bill’s drafting was prepared through broad consultation
involving private industry and inter-Governmental co-operation (i.e., National
Treasury, the Department of Minerals and Energy, the State Diamond Board, the
South African Police Service (“SAPS”) and the South African Revenue Service
(“SARS”). All of the key diamond
producers, dealers and cutters were part of this consultation.
For purposes of formal comment, NT
placed the draft Bill as well as a draft Explanatory Memorandum (“EM”) on the
Bill on the Treasury website on
At the hearings, various
commentators made submissions on the Bill. These commentators include:
|
MDCA |
Master Diamond Cutters Association |
|
DCSA |
Diamond Council of |
|
SADPO |
South African Diamond Producers
Organisation |
|
COSATU/NUM |
COSATU & The National |
|
Trans Hex |
Trans Hex Group Limited |
|
De Beers |
De Beers Group Limited |
III. DETAILED
RESPONSES
1. List
of Topics
a.
Definitions: Section 1
b.
Rates: Section 3
c.
Relief
Measures as a Group (Sections 5 through 7)
d.
Import
Credit: Section 5
e.
Ministerial
Exemption in terms of the Diamonds Act:
Section 6
f.
Ministerial
exemption at the Diamond Exchange and Export Centre: Section 7
g.
Administration
2. Questions
and Answers
a. Definitions: Section 1
Q1. Should the definition of “producer” be amended to include South African
sister companies that are under the control of a foreign parent? (De Beers)
Yes. The
current definition of producer is intended to reflect the economic reality of
group operations, which often separate mining activities and sale activities
into different companies. It was always
intended that group structures be covered by the Bill. However, technical issues may prevent the
application of this intent. Therefore,
the definition of producer may have to be amended to capture local sister
companies controlled by a foreign parent.
Q2. Does the exclusion of synthetic diamonds from the definition of “rough
diamond” create evasion opportunities for exporters (i.e., exporting natural
diamonds mislabelled as synthetic for purposes of evading the levy)?
(COSATU/NUM)
Perhaps. The levy only applies to natural diamonds
because only these diamonds represent the economic loss of a limited,
irreplaceable resource. Synthetic
diamonds are not subject to the levy because they are readily
reproducible. The Diamonds Act similarly
ignores synthetics diamonds as an object of regulation.
What must be considered are the avoidance
aspects of synthetic diamonds versus the potential to create jobs through this
local manufacturing activity.
Admittedly, as the question suggests, distinguishing real diamonds from
synthetic diamonds is becoming increasingly difficult, especially in respect of
natural diamonds enhanced by the synthetic process. If action is to be taken in this regard,
regulatory oversight will be required for synthetic diamonds in addition to the
proposed extension of the levy.
b. Rates: Section 3
Q1. Will the 5 per cent levy encourage smuggling? (MDCA)
No. Through broad consultation, NT and DME have
determined that the 5 per cent levy rate is high enough to encourage local
beneficiation and low enough to discourage smuggling. Anecdotal evidence suggests that the actual
cost of smuggling probably ranges between 2,5%-to-3,5%. Whether a legitimate diamond holder would
smuggle diamonds solely to evade the levy for a 1,5%-to-2,5% spread is questionable.
c. Relief Measures as a Group (Sections 5
through 7)
Q1. Will the exemptions under section 6 and 7 of the Bill apply on a
temporary or long-term basis?
It depends on the situation. The duration of the exemption is an issue for
Ministerial discretion. For instance,
the DME Minister may exempt from the levy a specific diamond consignment or a
producer’s exported rough diamonds for 12 months. This timing issue will be clarified in
regulations.
Q2. Should both the credit and exemption relief measures be allowed to apply
contemporaneously? (De Beers)
Probably not.
Simultaneous credits and exemptions can give rise to
double-dipping. For instance, if an
imported rough diamond generates credits and is later exempt when exported in
rough form, net credits will result without any beneficiation of diamonds. On the other hand, some sympathy exists if
imported diamonds are locally cut, followed by an exempt export of rough
diamonds after application of section 6 or 7.
At issue is how to distinguish between the two, especially given the
difficulty of tracing diamonds,
Q3. Should producers that comply with the Mining Charter be exempt from the
imposition of the levy? (Trans Hex)
No. The
fulfilment of Mining Charter requirements have nothing to do with the objective
of the Bill – local diamond beneficiation.
Government has always taken the position that no tax-related incentives
should be available for simply meeting Charter requirements.
Q4. Should rough diamonds won or recovered from a marginal mine be eligible
for exemption under this section? (De Beers, SADPO)
No. The
proposed Royalty Bill already provides relief for marginal mine producers. The
concern of this Bill, unlike the Royalty Bill, is not to raise revenue but to
encourage beneficiation. The need to
encourage local beneficiation exists regardless of whether the diamond is from
a highly profitable mine or a marginal mine.
Q5. Should rough diamonds that are economically not cuttable in
No. The
ability of local cutters to beneficiate diamonds is at the heart of the debate.
The goal is increase local cutting via the export levy and other means. The automatic omission of rough diamonds from
the levy under this line of argument would essentially result in the concession
of the local industry to foreign control.
Q6. Do the relief measures run counter to the objective of local
beneficiation? (COSATU/NUM)
No. The
levy is only part of the equation. All
levy relief measures are preserved by the tight controls both in this Bill and
by the recently amended Diamonds Act (i.e., with the establishment of an SDT,
the requirement that all exported diamonds must be offered at the DEEC, and the
cessation of section 59 agreements).
In terms of the import credit, the goal is to encourage
the import of rough diamonds so local cutters have access to foreign
diamonds. The other exemptions are
conditional. For instance, producers
obtaining export exemption under section 6 must demonstrate that they promote
local beneficiation through other means.
d. Import credit: Section 5
Q1. Should the credit be limited to imported rough diamonds that are
economically cuttable by South Africans in order to prevent artificial import
credits? (COSATU/NUM)
No. All
foreign diamonds should be encouraged for import, thereby promoting rough
diamond availability for local cutters.
Of concern is whether non-cuttable diamonds will be overvalued (for
excess credits). However, this problem
can be contained by the use of government valuations upon import.
Q2. Should the credit apply to all exporters of rough diamonds (SDT,
dealers, cutters) rather than just producers? (DCSA)
Yes. The
credit should serve as a natural incentive to import rough diamonds. Moreover,
the importation of rough diamonds creates import/export parity by neutralising
the loss of an exported rough diamond. The extension of this rule to cutters and
dealers should not create any added anti-avoidance concerns.
Q3. Does the credit create the risk that a producer may exploit this measure
by merely stockpiling imported rough diamonds purely for the purpose of
claiming import credits? (COSATU/NUM)
No. Stockpiling rough diamonds makes little
economic sense merely to avoid the levy given the economic opportunity costs of
letting diamonds sit idle. The days of
stockpiling by De Beers to maintain control over the market are no longer at
hand due to their change in the business model.
Moreover, the suspected scheme would merely result in deferral of the
levy with the stockpiled diamonds ultimately being subject to the levy upon
delayed export.
Q4. Should
the import credit take into account more than just value (such as carats, grade
and size)? (COSATU/NUM)
Levies (and
other Governmental charges) are always based on value (gross, net, etc…). The Diamond Export Levy itself is based
solely on value, making it difficult to effective base the credit offset on
some other form of criteria.
Q5.
Should the State Diamond Trader be eligible for import credits when
acquiring diamonds from abroad? (DCSA)
A strong argument can be made that the State
Diamond Trader should be eligible for import credits if the credit is extended
to other non-producers. However, the use
of import credits to export South African diamonds may raise questions of
fairness from producers.
e. Ministerial exemption in
terms of the Diamonds Act: Section 6
Q1. Should producers be allowed to temporarily export rough diamonds for
purposes of exhibition or display without being subject to both the imposition
of the levy or the DEEC? (De Beers)
Yes.
While some anti-avoidance concerns may be of concern, the Bill will be
changed to allow for the temporary export of diamonds under strict
conditions. Presumably, temporary
exports should be limited to a 6-month period.
The allowable purposes for export will also have to be strictly
controlled. For instance, export solely
for display, exhibition or examination should be acceptable; whereas, export
for foreign beneficiation should not. A
close question exists in the case of diamonds exported solely for an isolated
cutting procedure necessary to complete the beneficiation process locally.
Q2. Should this exemption apply to all exporters of rough diamonds (SDT,
dealers, cutters) rather than just producers? (DCSA)
Probably not.
The underlying regulatory exemption (under section 74 of the Diamonds
Act) was only intended for producers in unique situations. A possible extension could be extended for
dealers and cutters if the proposed exemption covers temporary exports.
f. Ministerial Exemption
for Diamonds Offered at the Diamond Exchange and Export Centre: Section 7
Q1. Should producers that offer 100% of their production at the DEEC be
exempt from the levy? (Trans Hex)
Unclear.
The Diamonds Act already requires that all rough diamonds intended for
export be subject to the bidding processes of the DEEC. At issue is whether something more should be
required. For instance, if the local
cutting market is otherwise saturated, presumably an offering at the DEEC
should suffice as long as diamonds are offered in a meaningful way. Query whether small scale diamonds can afford
the 5% levy in any event?
Q2. Should this exemption apply to all exporters of rough diamonds (SDT,
dealers, cutters) rather than just producers? (DCSA)
Probably not.
Too many avoidance concerns exist if this exemption were extended. For instance, producers could find that local
dealers acquiring diamonds at the DEEC are simply doing so for export. On the other hand, some sympathy may exist
for local cutters who beneficiate the bulk of their diamonds, but who seek to
export a small portion of rough diamonds for better profit yields.
g. Administration
Q1. Do the relevant rules as laid down by the Commissioner in terms of the
Tax Acts apply mutatis mutandis (as the case should be) to the time periods and
procedures in relation to assessments, objections and appeals, and other
administrative matters contemplated in this Bill? (SADPO)
Yes. The
Bill explicitly relies on the bulk of the well-established administrative rules
of the Income Tax Act. This reliance is
consistent with other revenue measures, such as the Skills Development Levy.
Q2. Does
a producer have a right to object with a government diamond valuator in respect
of diamond value? (SADPO)
The Bill currently fails to include a right of
objection if both the producer and the government diamond valuator disagree
about diamond values. This omission will
be remedied in the next version of the Bill.
Diamond producers should have a right to court access in respect of this
key issue.
Q3. What
is the meaning of market value in respect of diamonds? For instance, will international values be
taken into account? (SADPO)
The definition of value will have to be an
issue that is clarified in regulation to the extent possible. While valuation is always a subjective issue,
some fundamental principles can be outlined as starting points. Presumably, consideration of international
value would be one of those starting points.
Q4. Should Department of Minerals and Energy report to Parliament on the
subsequent impact of this Bill and the recent amendments to the Diamonds Act
are having on the local beneficiation industry? (COSATU/NUM)
Yes. As
a general matter, all legislation must be measured in respect of ongoing
success. Subsequent monitoring in
respect of this Bill is especially important in order to ensure that Bill does
not have unintended consequences in respect of producers.
ANNEXURE
THE
LEVY BILL’S ABRIDGED EXPLANATORY MEMORANDUM
Tax rate and base
The export levy of 5 per cent replaces
the current 15 per cent export levy as provided for in the Diamonds Act, 1986. The 5 per cent levy applies to all rough
(natural unpolished) diamonds that are exported. Synthetic (man-made) diamonds
are exempted from this tax (as with all Diamond Act regulation). The levy amount will be equal to 5 per cent of the value of a rough
diamond exported – (i) as specified on a return
described in Section 61 of the Diamonds Act, 1986 or (ii) as assessed
by the Diamond and
Precious Metals Regulator described in section 65 of
the Diamonds Act, 1986.
Relief measures
The Bill contains relief measures that may
offset the 5 per cent levy in full or in part. These relief measures are designed so as to
eliminate the weaknesses of similar measures that were previously contained in
Diamonds Act while minimising any potential distortions and / or unintended
negative consequences of the export levy.
Only producers (or dealers that forms part of
the same economic group as a producer) may utilise the relief measures. Independent dealers and cutters will not be
able to access the relief measures.
Import credit
Ministerial exemption in terms of the Diamonds Act
The Minister of
Minerals and Energy has the power to exempt a producer from the requirement to
offer its rough diamonds intended for export at the Diamond Exchange and Export
Centre. The granting of this exemption
by the Minister of Minerals and Energy will be accompanied by an automatic
exemption from the 5 per cent export levy.
An objective set of criteria for granting the exemption will be spelled
out in regulations.
Ministerial exemption at the Diamond Exchange and
Export Centre
The Minister of
Minerals and Energy may also exempt a producer from the 5 per cent export levy
if:
(1) A
producer’s activities are supportive of local diamond beneficiation; or
(2) the
producer has an annual turnover of less than R10 million,
and the producer
has offered the rough diamonds for sale at the Diamond Exchange and Export
Centre but there are no local buyers.
However, the diamonds must subsequently be sold for an amount at least
equal to the reserve price at which those diamonds were offered at the
Centre. These conditions preserve “the
right of first refusal” by local cutters before export.
Administration
The Bill
provides for two sets of levy payers – producers (diamond miners, including a
dealer that forms part of the same group) and non-producers (dealers, cutters
and polishers). Producers must register with the South African
Revenue Service and pay their export levies twice per year (every 6 months) and
non-producers must pay the full levy when exporting rough diamonds. Producer-level registration is critical
because most diamond smuggling stems from record defects at the local
producer-level. It should be noted that
the definition of producer (contained in section 1 of the Bill) extends to
company group operations, which often separate mining from sales.