Diamond Export Levy Bill [B22-2007]: hearings

FINANCE AND MINERALS AND ENERGY PORTFOLIO COMMITTEES
3 November 2006
DIAMOND EXPORT LEVY BILL: HEARINGS

Chairperson: Mr N Nene (ANC)

Documents handed out:
Submission by De Beers
Submission by Diamond Council of South Africa
Submission by South African Diamond Producers Organisation
Submission by Trans Hex Group
Submission by National Union of Mineworkers & Confederation of South African Trade Unions
Draft Diamond Export Levy Bill as at 11 October 2006

SUMMARY
De Beers said that to ensure that the exemption and import credit mechanisms were not applied in respect of the same diamond, it was proposed that producers should only qualify for an import credit where the imported diamond was sold to a local beneficiator. Section 64 served a valuable purpose and should be retained. It should be amended however to provide that such a temporary consignment would not constitute an “export”

The Diamond Council of South Africa said that the import credit system should be available to all exporters in order to encourage them to import diamonds for local beneficiation. This relief measure should be extended to persons holding diamond dealer licences, diamond beneficiation licences and the State Diamond Trader. The Council said it was unfortunate that the Diamond Export Levy Bill and the Mineral and Petroleum Resources Royalty Bill had been published at the same time. They also found it difficult to understand the fact that despite offering their goods for local beneficiation at the Diamond Exchange and Export Centre, they still had to pay a 5% export levy.

The South African Diamond Producers Organisation suggested that the time periods in clauses 13, 14, 15, and 16 be put in line with the time periods laid down for assessments by the Commissioner as provided for in the Income Tax Act. Also, the rules concerning the time periods within which an objection has to be raised and then considered by the Commissioner must be added. In clause 19, the process for administering and dividing responsibility lost sight of the fair market value of any rough diamond. There was no indication whether this would be the value determined by the Regulator or the State Diamond Trader.

The TransHex Group said that the Government’s objective was to increase the level of unpolished diamonds that remained in the country. It was debatable whether there was such a need, given the levels of supply currently available. An unintended consequence of the levy would be that the producer would end up bearing the cost of the levy as an added cost. Instead of a levy, economic incentives to stimulate the cutting industry should be considered.

The National Union of Mineworkers and the Confederation of South African Trade Unions said that the Bill was only part of a longer-term beneficiation policy. They called on the Department of Minerals and Energy to introduce a comprehensive Mineral Beneficiation Bill. They called for the deletion of the provisions that related to the import credit. The provisions created the risk of producers stockpiling imported rough diamonds to claim import credits. They had concerns that there would be abuse of the ministerial exemption in clause 7(1) that exempted those whose activities were considered to be “supportive of local beneficiation” or if the rough diamond sales did not exceed R10 million.

MINUTES
Submission by De Beers
Mr Barend Petersen, Executive Director, said that De Beers had an integrated approach to grow South Africa’s diamond jewellery industry. They were putting South Africa on the map through its clients and they were committed to skills development.

With regards to the Bill, he said that to ensure that the levy applied on a ‘net export’ basis, the Bill provided that a producer could qualify for an exemption or a credit, but not both. This prevented different measures from applying to different parts of a producer’s production. The Minister should have maximum flexibility to apply relief measures in order to best promote local beneficiation (LB) and therefore this restriction should be removed.

To ensure that the exemption and import credit mechanisms were not applied in respect of the same diamond, it was proposed that producers should only qualify for an import credit where the imported diamond was sold to a local beneficiator. The onus would be on the producer to demonstrate this.

The Bill also repealed section 64 of the Diamonds Amendment Act (DAA). Section 64 provided for the deferment of export duty for a period not exceeding sic months in circumstances where the export was temporary. Mr Petersen submitted that the section served a valuable purpose and should be retained. Section 64 should be amended however to provide that such a temporary consignment would not constitute an “export” for the purposes of section 48A of the DAA (that requires all unpolished diamonds intended for export to be offered to the Diamond Exchange and Export Centre (DEEC)).

Discussion
Mr I Davidson (DA) commented that this was one of the worst submission ever put before the Committee. De Beers just came for a marketing exercise. They had made no comments on sections 6 and 7 which affected them the most or even a comment on the large change in the existing system.

Mr Y Bhamjee (ANC) said that there was a perception that the diamond industry was closed and secretive. How open were their dealings and what commitments did they have for social responsibility because they had benefited a lot during apartheid?

Mr Petersen replied that everything they did was overseen by the Diamond Board so they were very open in their dealings. They also had substantial social responsibility programmes with over 160 programmes country-wide and they had spent R1.5 billion in diverting funds to historically disadvantaged individuals.

Adv H Schmidt (DA) said that this was a very uncertain period in the industry and therefore a lot of flexibility was built into the Bill. What was their comment on this?

Mr Petersen replied that certainty was very important and the ideal situation would be to include the criteria into the Bill itself. Failing that, including them in the Regulations would be fine.

Submission by the Diamond Council of South Africa (DCSA)
Mr Brian Gutkin said that the fiscus had wisely import credit relief measure where producers were entitled to receive credit for importing rough diamonds. These were offset against the export levy imposed. However, this system should be available to all exporters in order to encourage them to import diamonds for LB. this relief measure should be extended to persons holding diamond dealer licences, persons holding diamond beneficiation licences and the State Diamond Trader (SDT).

All these people would have to export certain rough diamonds at some stage so it would promote LB if they were encouraged to import them as well. The availability of an import credit would be sufficient enticement for any exporter to actively source replacement diamonds in local markets for LB in order to neutralise the impact of the export levy. In a perfect world, the import credits would equal the export credits, the net effect of which would be that South Africa’s total production would be beneficiated in South Africa. In order to prevent abuse of the system by licence holders, the same checks and balances that applied to producers could be implemented.

The industry supported section 6 and acknowledged the flexibility available to the Minister of Minerals and Energy under section 74 of the DAA. The Minister should be entitled to this flexibility with regards to all licence holders and not be restricted only to producers. The same vigorous process would apply to any other licence holder committed to beneficiation. The same would apply to Ministerial exemption in section 7, that is, it should apply to all licence holders.

Section 64 was being repealed because it fell under “deferment of export duty.” It should never have fallen under “export of diamonds” as it did not comply with the meaning of the word “export.” Instead, it dealt with circumstances under which diamonds were temporarily consigned from South Africa’s borders for specific purposes, none of which had anything to do with the sale of diamonds. Section 64 should be amended.

If the Treasury accepted their submission that section 64 did not deal with exports, it followed that it did not fall within the ambit of section 48A. Therefore, such goods would not need to be offered for sale at the DEEC. Section 64 had always been dealt with under robust supervision of the Diamond Board so sufficient checks and balances could be readily put in place to prevent abuse.

The DCSA recommended that the licensee provide the Regulator with a bank guarantee to cover their obligations under this section. The same procedure recommended under sections 5, 6 and 7 were also recommended here. The onus of establishing a transparent and verifiable audit trail rested with the licensee concerned.

It was unfortunate that the Diamond Export Levy Bill and the Mineral and Petroleum Resources Royalty Bill had been published at the same time. They also found it difficult to understand the fact that despite offering their goods for LB at the DEEC they still had to pay a 5% export levy.

Discussion
Mr B Mnguni (ANC) asked the Treasury why other stakeholders were excluded from the exemptions. Would it not be onerous on small producers and cutter and other dealers to comply with the checks and balances imposed to prevent abuse of the system by licence holders?

Mr Gutkin replied that the requirements were onerous but if the producers wanted relief there had to be a rigorous process. It was necessary to have those checks and balances in place.
Mr C Morden, a Chief Director of Tax Policy at the Treasury, said that the point raised by the DCSA was an unintended consequence. They would seriously consider extending the exemption beyond producers.

Mr E Liptek a Chief Director of Tax Policy at Treasury, asked why the SDT should be exempt. Its job was to supply the local market only.

Mr Gutkin replied that the SDT would receive 1.4 million carats in diamonds in a year. Given its small capacity it would not be able to process all of them. What was it going to do with the rest?

Submission by the South African Diamond Producers Organisation (SADPO)
Mr Mattie Lotter, the SADPO Chairman, said that clause 2(2) was problematic in that in the end, producers may be faced with two different values: one determined by the Regulator and an international value.

Similar provisions with regards to “marginal mines” in clause 7 were found in the Royalty Bill. This exemption should be extended to marginal mines and the definition of marginal mines as per the Royalty Bill should be included in section 1.

Clause 8(1) actually catered for producers that became producers within 45 days after the Act came into operation. It needed to be amended to provide for two categories of producers: those who had already been producers at the time of the coming into operation of this Act [which would be given a 45 day period after the coming into operation of this Act to register as producers] and those who had become producers after the coming into operation of this Act [which would be given a 45 day period after the coming into operation of this Act to register as producers].

They suggested that the time periods in clauses 13, 14, 15, and 16 be put in line with the time periods laid down for assessments by the Commissioner as provided for in the Income Tax Act. Also, the rules concerning the time periods within which an objection has to be raised and then considered by the Commissioner must be added. With clauses 17 and 18, the rules laid down in the VAT and Income Tax legislation for time periods and procedures should be included as well.

In clause 19, the process for administering and dividing responsibility lost sight of the fair market value of any rough diamond. There was no indication whether this would be the value determined by the Regulator or the SDT; whether this would take into account the accepted principle of an international value; whether the producer had the right of objection to this fair market value; whether the producer had any input insofar as what the fair market value was and what guidelines would be followed in determining what a fair market value was for purposes of verification.

Although the co-operation between these entities may be necessary to administer the Act, they created difficulties vis-à-vis the secrecy clause as this meant that the Minister on Minerals and Energy could access information gathered by the Commissioner. Careful consideration should be given to the extent to which this information could be divulged or made accessible.

Clause 22 had to be amended to provide for a producer to be granted a period within which, after coming into operation of this Act, they may apply for the necessary exemption in terms of clauses 5, 6, or 7 and that, upon proof of such application, that producer would be exempt from the provisions of this Bill until a formal determination had been made by the Minister. This would be a fair and equitable situation in that a producer would not be burdened by the levy and would not have to apply for an exemption and then be exempt from the Bill’s provisions only after the application had been approved.

Discussion
Mr K Moloto (ANC) asked what the current practice was in the valuation of diamonds.

Mr Lotter said that before 1999, all diamonds were sold on the open market to local dealers. Since then the system operated on a tender basis where local dealers had some assistance from international buyers but they were now subject to international market prices and pressures.

Submission by the Trans Hex Group (THG)
Mr Llewellyn Delport, Managing Director, said that in the 2006 financial year, 161 000 carats were produced in South Africa by THG and sold for $148.15 million. Their marketing strategy was through sealed envelope tender sales. This was monitored by the South African Diamond Board. He said that 100% of their production was offered locally and all revenue from exports was repatriated into the country.

The Government’s objective was to increase the level of unpolished diamonds that remained in the country. It was debatable whether there was such a need given the levels of supply currently available through DTC sites, Trans Hex, Diamdel and other small-scale producers. Additional supply was already legislated for through the producers’ obligation to supply the SDT.

An unintended consequence of the levy would be that the producer would end up bearing the cots of the levy as an added cost. Instead of a levy, economic incentives to stimulate the cutting industry should be considered. An exemption for the producers would remove the subsidising element of the levy and maintain supply levels to the industry. THG believed in the concept of “right of first refusal” and requested that producers that offered 100% of their production be exempt from the levy. The criteria for exemption should encompass the level of a producer’s compliance with the Mining Charter.

The export levy was based on export values and came directly off the “bottom line.” They constructed a model that showed that if the provisions of the Levy Bill were imposed, seven of THG’s operations would have a negative income and five of them would have a negative cash flow. Net income before tax would be down 28%, net cash flow down by 16% and there would be a significant impact on their operations and social development projects.

Discussion
Mr Davidson said that the scenario they painted was provided for in section 7, that is, they were exempted from the 5% levy if the producer fulfilled the two conditions.

Mr Delport said that THG believed that they should be exempt but situations could arise where they may not qualify for the exemption. That is, there were no guarantees that THG would be exempt.

Mr Mnguni added that if they sold 100% of their product locally, there would be nothing left to export, so the 5% levy would not apply to them.

Mr Delport said that they offered all of their diamonds for sale locally but not all of them were bought as international sellers determined the price.

Submission by National Union of Mineworkers (NUM) and COSATU
Mr Jeff Magida from NUM said that some of the socio-economic benefits of beneficiation increased Government revenue from the export of value-added commodities and economic diversification which reduced dependence on primary mineral exports. Also, it increased local demand for mineral products since raw materials in raw form were generally less suitable for broader consumption than finished ones.

The Bill was only part of a longer-term beneficiation policy. Downstream processing of rough diamonds to finished consumer goods related to linkages to precious metals such as gold and platinum and therefore should be considered in the context of a holistic package of reforms. They called on the Department of Minerals and Energy (DME) to introduce a comprehensive Mineral Beneficiation Bill.

Once again, they noticed strong opposition from the mining industry. For example, some said that the Bill imposed a tax on them and together with the new state royalty, amounted to double taxation. NUM disagreed with this as the levy was not meant to generate revenue and the royalties were a ‘resource rent” to compensate the nation for the loss of its non-renewable resources.

The time allocated for written comments was extremely short. They were also concerned that Parliament had not yet passed legislation allowing it to amend Money Bills and so was entirely reliant on the Minister of Finance to table a Bill.

With regards to specific provisions in the levy Bill, Ms Prakashnee Govender (COSATU legal coordinator) said that the definition of “rough diamond” excluded synthetic diamonds from the levy. This opened up a loophole where someone trying to avoid paying the levy could claim the diamonds were synthetic. Thus, there was a 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.

They called for the deletion of the provisions that related to the import credit. The provisions created the risk of producers stockpiling imported rough diamonds to claim import credits. There was no minimum period that the producer had to retain the imported diamonds before being able to claim the relief.

In order to prevent producers from overstating the value of imported diamonds, the Diamond and Precious Metals Regulator may be consulted by the Commissioner in determining the “arms length price.” However, this emphasised the overall value of the imported stones as opposed to their number, size and grade. These are factors that had direct implications for promoting access to the LB industry since the cutting of certain types of diamonds may be more labour intensive as compared to others.

They had concerns that the Ministerial exemption in clause 7(1) that exempted those whose activities were considered to be “supportive of LB” or if the rough diamond sales did not exceed R10 million would be abused. There was no provision for objective standards for determining what constituted being “supportive of LB” and what consideration would be given to factors such as the number and quality of jobs or the size of the producer. Also, the R10 million limit opened the door for transfer pricing. Clause 10 stated that every producer was required to submit returns to the Revenue Service and pay the levy twice a year. In this instance the role of the DME had to be clearly defined.

They called on the Committees to ensure that the Bill was passed without watering down the objectives of the 2005 amendments to the Diamond Act.

Discussion
Mr Moloto asked how transfer pricing could be abused.

Ms Govender replied that transfer pricing applied in many areas and industries. It involved under-valuing goods just before exporting them to reduce the taxes applicable. This legislation made it possible to do this.



The meeting was adjourned.