Diamond Export Levy Draft Bill [B22-2007]: briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE; MINERALS AND ENERGY PORTFOLIO COMMITTEE: JOINT MEETING
16 May 2007
DIAMOND EXPORT LEVY DRAFT BILL: BRIEFING

Chairperson: Mr N Nene (ANC)

Documents handed out:
Diamond Export Levy Bill: Briefing by National Treasury
Diamond Export Levy (Administration) Draft Bill, 2007
Diamond Export Levy Draft Bill, 2008
Draft Diamond Export Levy Bill, 2006
Diamond Export Levy Draft Bill: Explanatory Memorandum 11 October 2006
Diamond Export Levy Draft Bill: Explanatory Memorandum 14 May 2007

SUMMARY
National Treasury briefed both the Finance Portfolio Committee and the Minerals and Energy Portfolio Committee on the latest draft of the Diamond Export Levy Bill. The main objective of this Bill was not to raise revenue in the form of levies but rather, it was to develop local diamond beneficiation by discouraging the export of all unpolished diamonds and encouraging a sufficient local supply of unpolished diamonds. The Committee will hold a public hearing on the Bill on 5 June 2007.

Some Committee members believed that it was not economically viable for local cutters and polishers to cut and polish diamonds and sell them internationally as other countries could do so more cheaply because their labour costs were much lower, such as India. They also wondered if the local market could absorb all these diamonds. Many members were concerned that the Bill was complicated and wondered if there was an alternative route to achieving its objectives.

MINUTES
The National Treasury team briefed both the Finance Portfolio Committee and the Minerals and Energy Portfolio Committee on the Diamond Export Levy Bill. The team of National Treasury consisted of Mr Keith Engel (Chief Director: Tax Policy), Mr Cecil Marden (Chief Director: Tax Policy) and Mr Will Bautista (Deputy Director: Tax Policy).

Mr Keith Engel indicated that the purpose of the Diamond Export Levy Bill is to discourage the export of all unpolished diamonds, not to raise revenue. Local diamond beneficiation, which is the cutting and polishing of diamonds, needed to be developed. Diamonds are a non-renewable resource and the state and community needs maximum benefit from the loss of this natural resource. The local cutting/ polishing industry is very small and skills need to be built around this industry. There are currently three South African schools where cutting/ polishing skills are taught. These schools produce about 300 skilled cutters per year. Some of these trained cutters are foreigners who would leave the country.

The Diamond Export Levy Bill was tailored to accommodate different producers within the South African market. The Bill identifies three categories of producers: large (De Beers), medium (Trans Hex, PetraDiamond) and small (formal diamond diggers, framers). Large companies are obliged to sell 40% of their diamonds locally and medium producers need to sell 15% locally.

A 5% levy applies to all exports of unpolished diamonds. The 5% levy replaces the previous 15%. The reduction to 5% is viewed as sufficiently high to discourage wholesale exports while sufficiently low so as to unduly encourage smuggling.

Relief measures are applicable for large producers if they sell 40% of their diamonds locally. Medium producers need to sell 15% of their diamonds locally in order to qualify for relief.

Discussion
Mr C Kekana (ANC) commented that training for cutting diamonds needed to be included within the mainstream educational institutions. Given high unemployment levels, the youth should be able to choose diamond cutting as a career. Compared to India, South Africa needed to train more than the current 300 diamond cutters.

Adv H Schmidt (DA) indicated that diamond cutting in India is a lot more economically viable than in South Africa. The cost of labour for cutting diamonds in India is about 8 dollars versus 40 dollars per carat cut in South Africa. He wanted to know if the obligations of large and medium diamond producers to sell locally, in conjunction with training 300 cutters per year, was aimed at developing the local industry.

Mr I Davidson (DA) asked what would happen if the local industry could not absorb the 40% and 15% diamonds of both large and medium companies. If the local market cannot absorb these percentages of diamonds then the companies producing them would still be penalised.

Mr Davidson added that India currently cuts and polishes diamonds a lot cheaper than in South Africa. Imported cut diamonds will be cheaper than locally cut diamonds because of high South African labour costs. Mr Davidson indicated that tampering with markets might have unintended consequences. He asked how one could get around this problem.

Mr Y Bhamjee (ANC) said that creativity is needed to deal with the diamond industry which is very closed. His impression was that there might still be a lot of things that National Treasury is not aware of.

Mr S Marais (DA) said that the regulations were very complicated and that it would be very difficult for new entrants to enter the diamond cutting industry. Larger companies like De Beers might still be able to manipulate and dominate the diamond market. He raised his reservations about the ability of this Bill to assist new entrants to enter this industry.

Mr J Combrink (DA) asked who would police the Diamond Export Levy Bill and if SARS was ready to do policing. He also asked if someone can be a producer, a buyer and a polisher at the same time within the diamond industry. He mentioned that in Limpopo there is a school who could train up to a 1000 cutters but they only train about 300 because they do not have diamonds to enable students to learn how to cut and polish diamonds.

Mr K Maloto (ANC) asked if there is a major price difference between polished and unpolished diamonds exported from South Africa.

Mr Cecil Morden (Chief Director: Economic Tax Analysis, National Treasury) responded that most of these questions are directed at the Department of Minerals and Energy and the Regulator. He said that he would pass on these concerns and questions.

Mr Morden said that he agreed with the Portfolio Committee regarding education for diamond cutters and that skills training need to be encouraged.

Mr Engel agreed that access to diamonds was required in order for schools to train cutters. Schools did not currently have access to diamonds. The State Diamond Trader could potentially play a role in this regard. He was aware that there is a debate about whether diamonds can be economically cut within SA.

Mr Morden said that one needed to understand that there had been an export levy in place for many years in this country and mechanisms had been put in place to provide relief from that levy. The levy combined with exemption mechanisms partly helped to create a supply of local diamonds to the site holders. National Treasury was using the lessons from the past to fine-tune the Bill in order to improve the local supply of diamonds. They had reached a reasonable compromise through consultation with stakeholders. The Diamond Export Levy Bill should not have unintended consequences and it should not put a burden on the industry which it could not bear.

Mr Engel said that extensive consultation had taken place and they had tried to reach a reasonable compromise. With regards to regulation, it was necessary for government in some areas to influence the diamond market. A diamond beneficiator needed to be stand-alone. You could not be a buyer and a seller within this industry. It was difficult to get into the industry because of the high level of trust required from employers. Beneficiators tended to operate as family businesses.

Mr Engel continued that National Treasury was working with SARS to set up mechanisms to police levies. They envisage a dual structure for policing. The Regulator and SARS needed to work together in order to make sure policing happens in practice.

Mr Engel noted that the effective starting date for the bill would be when the administration to implement it, is operational.

During the second round of questions Mr Marais asked how large producers can affect the market. He wanted to see cost and price comparisons of unpolished and polished diamonds within South Africa versus other African countries and the rest of the world. This would enable one to determine what the effect of the 5% levy would be on the market.

Mr G Morgan (DA) asked if it is economically viable for SA cutters and polishers to cut and polish diamonds and sell them internationally. He also asked how it is foreseen that currently economically unviable cutting of small diamonds will be dealt with in future. He wondered why there is a State Diamond Trader (SDT) and a Diamond Export and Exchange Centre (DEEC) if it seemed as if DEEC will be able to do the work.

Ms N Mathibela (ANC) asked under what circumstances can the Minister deem it necessary to trigger revenue-raising mechanisms within this Act. She noted that the presentation referred to there being non compliance in terms of payment of the levy for 20 years. She asked if the SARS tax amnesty has been extended to include this sector.

Mr Davidson said that the Bill was complicated. He suggested that it might be easier to offer diamonds through a Diamond Exchange to the local market. At what value would the State Diamond Trader be feeding diamonds into the market to small businesses? Access to diamonds needed to be developed for small businesses.

Mr S Asiya (ANC) indicated that the current Bill was complicated. He asked how can the Committee play an oversight role if the information is very complicated. He suggested that proper processes needed to be followed for taking this bill forward.

Mr Bhamjee said that the Bill is very cryptic and asked for a response on its cryptic nature by National Treasury.

Mr Morden (National Treasury) replied that the fundamental difference between the bill presented last year and the current one is that there had been uncertainty regarding the discretionary aspect of the exemption. Within the new bill, much of the discretionary aspects had been done away. The nature of the exemptions, especially with regards to small and medium businesses, had been fine-tuned and some of them had been included in this bill.

Mr Morden said that in the Explanatory Memorandum, they have tried not to complicate the Bill. The main objective is to supply greater access to diamonds by the local industry. In response to Mr Marais, he said that the large producers would not be able to control the market to the extent that Mr Marais was worried about.

Mr Morden said that cost comparisons could be done. Diamond prices should be the same in different countries. If a levy is imposed, the diamonds would be more expensive.

In response to the question whether the State Diamond Trader would buy and sell the diamonds, Mr Morden indicated that it is covered by a different act and that he could not respond to that.

Responding to the question of the circumstances under which the Minister of Finance would decide that it is appropriate to raise revenue, Mr Morden indicated that this flexibility has been included. The future Regulator will be funded on budget. Mr Morden suggested that the money that is raised should fund the Regulator.

Mr Engel replied to the questions related to a free market that it should be remembered that historically De Beers had had a monopoly on the free market. If one has an historic advantage, it is easier to succeed. New entrants might need financing but they also have to overcome their historical disadvantage. The Bill is complex but not unduly so. A simplified bill would create economic distortions and therefore they had tried to balance both simplicity and complexity within this Bill.

The Chairperson noted that the Portfolio Committee was awaiting responses from stakeholders who had commented on the previous draft of the Bill. A hearing would be held on 5 June 2007. Meeting adjourned.