(DRAFT) EXPLANATORY MEMORANDUM FOR THE DIAMOND EXPORT LEVY BILL, 2007
Section 73(2) of the Constitution
requires that only the Minister of Finance may introduce money bills. Thus,
this Bill is required for purposes of giving effect to money related provisions
of the Diamonds Act, 1986 (as amended).
A.
Principal legislation - the Diamonds
Act, 1986 (Act No. 56 of 1986)
The
beneficiation of local non-renewable, mineral resources has always been an
important policy objective of Government's drive to grow the economy and foster local employment. Through the Diamonds Act,
1986, Government
utilised the principle of deterrence to promote local
beneficiation by focusing on polishing and cutting. Unpolished diamonds
exported from
However, under the Diamonds Act, 1986,
persons could easily escape the 15 per cent export levy through levy exemptions
that were too open ended and lacking in transparency (including "section
59 agreements"). Moreover, no legal provision or administration was made
to ensure that rough diamonds purchased under these agreements were actually
locally cut and polished. Consequently, nothing prevented a local cutter/polisher
from on-selling or exporting all of its purchased unpolished diamonds.
B. Recent changes - the Diamond Export Levy Bill, 2007
Consistent with Government's current practice, the Diamond Export Levy Bill's
main objective is to support the local beneficiation of rough diamonds.
Internationally, certain unpolished diamond rich countries have also created
legislation that promotes diamond polishing and cutting industries in their
respective countries. Invariably, the aim of this legislation is to create jobs
locally through the development of a diamond beneficiation industry.
In support of local beneficiation, the Bill proposes a 5 per cent levy (in lieu
of the current 15 per cent levy provided for in the Diamonds Act, 1986) on the
export of unpolished diamonds. Government believes that this rate is high
enough to contribute towards local beneficiation, but is low enough so as not
to unduly encourage smuggling.
Government's
Local Beneficiation Strategy
Government's strategy
to promote local diamond beneficiation is four-fold:
·
Firstly, to
ensure that local cutters/polishers receive a constant and sustainable supply
of unpolished diamonds, the 2005 Diamond Amendment Acts ((Diamonds Amendment
Act, 2005 (Act No. 29 of 2005) and Diamonds Second Amendment Act, 2005 (Act No.
30 of 2005)) created a State Diamond Trader. Specifically, local producers will
be required to sell a certain percentage of their unpolished diamond production
to the State Diamond Trader. The level of sales will be set by the Minister of
Minerals and Energy. Once purchased, the State Diamond Trader will on-sell these diamonds to local cutters/polishers.
·
Secondly, for purposes of greater control and administrative
efficiency, the 2005 Diamonds Amendment Acts limit the access points for export.
Unpolished diamonds may only be exported through a Government administered
Diamond Exchange and Export Centre
("DEEC"). Local diamond houses will no longer be allowed as sites for
export sales.
·
Thirdly, the
Bill attempts to enhance the effectiveness of the regulatory levy. While
exemptions will remain, the exemptions will only be allowed to the extent
sufficient measures exist to ensure that local cutters/polishers receive a
sufficient and sustainable supply of unpolished diamonds.
DIAMOND EXPORT LEVY BILL: TERMS: BASIC LEVY REGIME (PART II)
Charging provision: Clause 2
Subclause 1
The levy applies to all exported
unpolished diamonds regardless of their source (ie, domestic and imported - see
the definition of "unpolished diamond"» or their manner of export
(ie, legal or illegal). Unpolished diamonds include any natural unpolished or
enhanced diamonds but not synthetic diamonds (ie. man made diamonds). The levy
does not apply to polished diamonds because the goal is to ensure that
unpolished diamonds are beneficiated via polishing before export.
Section 69 of the Diamonds Act, "Release of unpolished diamonds for export envisages a
regulatory process for the export release of unpolished diamonds. Only
when this regulatory release occurs can unpolished diamonds exit the country
via Customs through a bill of entry for export. However, only the actual exit
(ie. the bill of entry for export) acts as the trigger of the 5% levy.
Subclause 2
The levy applies to the
"value" (ie., not volume of carats) of exported
unpolished diamonds. This value is the value at which the diamond is released
in terms of section 69 of the Diamonds Act. Moreover, as a local transfer
pricing measure Gust as for imports), the Regulator may contest an exporter's
specified unpolished diamond values, thereby preventing the use of
under-inflated values in order to reduce the amount of levy payable.
Subclause 3
Any levy or penalty payable in terms of this Act must be
paid into the National Revenue Fund. None of the funds will be legislatively
earmarked for special purposes.
Rates:
Clause 3
The levy rate will be imposed at 5 per cent (as
opposed to the previous 15 per cent rate required by the original Diamonds
Act). The 5 per cent levy rate has been determined through broad consultation
involving private industry and inter-Government co-operation. The 5 per cent
rate is viewed as sufficiently high to discourage unpolished diamond exports
while sufficiently low enough to deter smuggling (experience indicates that the
cost of smuggling ranges between 2,5 per cent to 5 per cent).
RELIEF
MEASU RES (PARTS III & IV)
Although the goal of the levy is to
deter unpolished exports by imposing a 5 per cent charge, it is widely recognised that local stakeholders at this stage are simply
insufficient in size to polish and cut all diamonds produced. Therefore, the
forced local sale of all unpolished diamonds produced in
The relief
measures come in a variety of forms. One set of measures IS aimed at imported
unpolished diamonds and unpolished diamonds purchased from exempt producers and
diamond beneficiators (Part III). The other set of
measures is aimed at producers and diamond beneficiators
(Part IV).
GENERAL
RELIEF MEASURES (PART III)
Import credit: Clause 4
Subclause 1
Any person registered with the South
African Revenue Service ("SARS") in respect of this Bill is entitled
to receive credits for imported unpolished diamonds. These credits can be used
to offset (in full or in part) that person's export duties that are otherwise
payable. This credit system bolsters South Africa's "diamond hub"
potential by ensuring that the levy applies only to net exports (or net
outflows) of unpolished diamonds from South Africa. Credits apply only when an
imported unpolished diamond is officially released by a registering officer
(i.e. the Regulator) pursuant to section 69B of the Diamonds Act.
Subclause 2
Like the export levy, the credit is based on value (not
volume) of carats. The credit equals the 5 per cent levy rate multiplied by the
value at which the diamond was released in terms of section 69B of the Diamonds
Act. Moreover, as a local transfer pricing measure Oust as for exports), the
Regulator may contest an importer's specified unpolished diamond values,
thereby preventing the use of over-inflated values in order to claim unjustifiable
excess credits.
Example. Facts. Dealer
imports R600 000 of unpolished diamonds from other parts of
Result. Dealer receives R20 000 of
import credits (5% of R400 000) for the released diamonds during the assessment
period. These credits of R20 000 reduce the levy of R24 000 down to R4 000. The
remaining imported diamonds will generate credits in later assessment periods
when those diamonds are released via section 69B.
Subclause 3
The credits arising during an assessment period will
offset the levy owing (ie. paid or payable) during that same period.
Subclause 4
All excess credits (ie. credits that
exceed the levy paid or payable during an assessment period) will be
effectively carried forward to (ie. re-arise in) the following assessment
periods as long as that excess lasts (or the taxpayer remains in existence).
Subclause 5
On balance, and as a matching principle, all exported
diamonds that are exempt from the 5 per cent levy (under clauses 4 and 5)
should not be entitled upon their re-import to a credit. Granting a credit
under these circumstances would invariably lead to taxpayers engaging in
"round-tripping" schemes for purposes of exponentially duplicating
credits/exemptions to undermine the levy.
Subclause 6
In accordance with the same principles of subclause
5, a producer or diamond beneficiator may not
simultaneously benefit from an import credit and the relief measures
contemplated in Part IV (ie., the producer and beneficiator relief measures). This denial of import
credits is again required as a rough justice matching principle. This same principle fully
applies to credits that initially arise from prior periods.
Example. Facts. In Assessment Period
1, Producer imports unpolished diamonds that generate R400 000 of excess
credits. Producer is not entitled to any Part IV exemptions during Assessment
Period 1, but becomes eligible for Part IV exemptions in Assessment Period 2.
Result. The R400 000 of excess credits
for Assessment Period 1 are lost in Assessment Period 2 because Producer
becomes eligible for Part IV exemptions in Assessment Period 2.
Relief for
temporary imports: Clause 5
Section 64 of the Diamonds Act allows persons to temporarily export unpolished
diamonds solely for exhibition, display or expert opinion. This Bill similarly
exempts these diamonds from the 5 per cent levy when exported under the cover
of a temporary exemption certificate granted in terms of section 64 of the
Diamonds Act. These temporary exports are exempt from the levy under the theory
that eventual permanent export of those diamonds will trigger the levy (if the
diamonds remain unpolished). The section 64 temporary procedure will be
enforced solely by the Regulator and violations of the temporary procedure
trigger a fine that includes the 5 per cent levy that should have been
otherwise imposed (see section 64(4) of the Diamonds Act).
Relief for
election purposes: Clause 6
Clause 8 of the Diamond Export Levy (Administration) Bill ("Administration
Bill") allows producers and diamond beneficiators
to make an election that is premised on their expectation of exemption under
Part IV. Exemption under Part IV allows producers and diamond beneficiators to export diamonds free from the levy. The
election procedure allows local purchases to receive a similar exemption if (i) the purchaser acquires the diamond from an electing
purchaser or diamond beneficiator during the
assessment period in which the election applies, (ii) the purchase occurs at
the DEEC, (iii) the bill of entry for export is delivered within 10 business
days after purchase, and (iv) the purchaser provides a copy of the seller's
election with the bill of entry for export.
Without this election procedure,
producers and diamond beneficiators with a Part IV
exemption would only be free from the levy in respect of directly exported
diamonds. Consequently, no motivation to sell unpolished diamonds locally would
exist, thereby undermining
It should be noted that if a producer or diamond beneficiator
makes an election and the terms of exemption are ultimately not satisfied, all
additional charges will fall on the electing producer or beneficiator
and purchasers from these electing persons will remain free of the levy as long
as they satisfy the requirements of clause 6.
PRODUCER
AND BENEFICIA TOR RELIEF MEASURES (PART IV)
The central players in local diamond
beneficiation are producers and diamond beneficiators.
This Bill recognises that producers extracting
Exemption for large producers: Clause
7
Subclause 1
As a general rule, in terms of section 48A of the
Diamonds Act, all unpolished diamonds intended for export must undergo a
tendering process at a DEEC. This tendering process effectively provides South
African diamond stakeholders with a "right of first refusal" in
respect of locally produced diamonds. Nonetheless, in the case of very large
producers, the Minister of Minerals and Energy may by way of regulation waive
the tender process requirement in respect of a producer's unpolished diamonds
intended for export. This waiver ensures that the DEEC tendering process is not
overwhelmed by unmanageable volumes of unpolished diamonds offered by large
producers.
On a similar vein, clause 7 provides a producer with a complete levy exemption
under similar conditions. More specifically, the levy exemption for large
producers requires: (i) the anticipated granting of
an exemption from the DEEC tendering requirements of the section 48A of the
Diamonds Act by the Minister of Minerals and Energy pursuant to regulations
under section 74 of that Act, (ii) 40 per cent of that producer's total gross
sales within the aggregate of the 6-month assessment period and the prior
period consist of sales to local beneficiators and
(iii) that producer's total gross sales within the aggregate of both periods
does not exceed R 3 billion. The 40 per cent requirement effectively fulfils
the producer's obligation to promote local beneficiation with the excess being
freely allowed for export.
Example. Facts. Producer utilises a financial calendar year. Producer expects to
sell R8 billion of unpolished diamonds over the course of 2008 with R4 billion
of those sales to be made to locally licensed diamond beneficiators.
The Minister of Minerals and Energy issues a section 48A waiver certificate to
the producer for 2008 based on the belief that these assumptions will be
correct. Producer subsequently sells R5 billion of unpolished diamonds during
the first half of 2008 and another R4 billion during the second half of 2008.
In terms of sales to local beneficiators, the amounts
sold are R3 billion and R2.2 billion for the first and second half of 2008,
respectively.
Result. Diamond exports during the second half of 2008 are eligible for clause
7 exemption. The section 48A waiver certificate covers the entire 6-month
period. In addition, over 2008, more than 40 per cent of unpolished sales were
to local beneficiators (R5.2 billion out of R9
billion) and total sales exceeded R3 billion. The clause 7 exemption may also
cover the first half of 2008 depending on the nature of the unpolished diamond
sales arising during the second half of 2007.
Subclause 2
While the 40 per cent local sales requirement for levy
exemption provides a strong incentive for producers to facilitate local
beneficiation, the "all-or-nothing" nature of the 40 per cent
threshold can be overly harsh in certain circumstances. For instance, the
producer may reach only 39% due to the unexpected loss of a regular local
purchaser. This 1 per cent failure could be costly, triggering a 5 per cent
levy on the 61 per cent remainder (if all exported). The harshness of the
shortfall may even lead to uneven bargaining power with certain local beneficiators.
To alleviate the above harsh impact of small shortfalls in respect of the 40
per cent threshold, subclause (2) provides for relief
in terms of a "5 per cent window." Under this window, the exemption
will continue to apply if the producer fails the 40 per cent threshold by a
margin of no more than 5 percentage points (i.e. local sales to beneficiators must amount to at least 35 per cent).
However, fairness dictates that the "5 per cent window" relief
measure come with a price (see subclause (3)).
Subclause 3
Subclause 3 comes into playas the corresponding price of
failing the 40 per cent local beneficiator sales
requirement when that failure falls within the "5 per cent window" of
subclause 2. Subclause 3
effectively imposes a reduced levy on all exports. This levy equals the
percentage shortfall multiplied by the total value of exports (less imports).
Thus, if the producer reaches a 39 per cent threshold for local sales, the
diamond export levy equals 1 per cent (in lieu of the standard 5 per cent)
multiplied by an amount equal to 69 per cent of the total sales value of its
exports for the assessment period.
Exemption for medium producers: Clause 8
Subclause 1
The levy exemption for medium producer exports of
unpolished diamonds operates similarly to the exemption for large producers
with two key exceptions. Firstly, medium producers do not receive any DEEC
tendering waiver from section 48A - all regulatory requirements imposed by the
Department of Minister of Minerals and Energy remain fully in place. The only
relief available is in respect of the levy.
Second, the 40 per cent threshold is reduced to 15 per cent. Stated more
precisely, the levy exemption for medium producers requires that: (i) 15 per cent of that producer's total gross sales within
the aggregate of the 6-month assessment period and the prior period consist of
sales to local beneficiators and (ii) that producer's
total gross sales within the aggregate of both periods do not exceed R 3
billion. The 15 per cent requirement effectively fulfils the medium producer's
obligation to promote local beneficiation with the excess being freely allowed
for export.
Subclause 2
Like large producers, medium producers also receive the
"5 per cent window" relief for small shortfalls (see the explanation
of clause 7(2).
Subclause 3
Like large producers, retention of the exemption via
the "5 per cent window" comes at a price. Thus, if a medium producer
reaches a 14 per cent threshold for local sales, the diamond export levy equals
1 per cent (in lieu of the standard 5 per cent) multiplied by an amount equal
to 86 per cent of the total sales value of its exports for the assessment
period. (See explanation of clause 7(3)).
Exemption
for small producers: Clause 9
Small producers receive relief from the export levy without any prerequisite of
sales to local diamond beneficiators. These producers
are simply too small to be expected to perform anything beyond their core
extraction activities. Like medium producers, the small producer exemption only
provides relief from the levy, not from the section 48A of the Diamonds Act
DEEC tendering requirements.
In order for
this exemption to apply, the small producer must satisfy two basic sets of
requirements. Firstly, the small producers total sales cannot exceed R20
million. The R20 million requirement is measured over
the aggregate of the current 6-month assessment period as well as the prior
assessment period. Secondly, a small producer cannot be part of a more than 50
per cent group during the same periods. In other words, a small producer cannot
hold a more than 50 per cent ownership interest in another producer, have its
ownership interest be more than 50 per cent held by another producer, and no
person can hold a more than 50 per cent ownership interest in that producer and
another producer. The more than 50 per cent ownership interest rules operate as anti-avoidance measures that prevent small
producers from splitting sales across several companies for purposes of
avoiding the levy.
Exemption
for diamond beneficiators: Clause 10
Unlike producers, it is anticipated that the exemption
for diamond beneficiators will be based on the
beneficiation (i.e. polishing and cutting) of purchased unpolished diamonds,
not the gross sales formulation. This beneficiation requirement is to be set by
regulation by the Minister of Minerals and Energy and is to be monitored by the
Regulator (as opposed to SARS) because only the Regulator has the capacity to
make the beneficiation determination (whereas, by comparison, sales can readily
be measured via financial statements).
This beneficiation requirement will operate as a pre-requisite for diamond beneficiators seeking an export permit to be issued by the
Regulator under section 26(h) of the Diamonds Act. According to regulations,
the anticipated price for this permit is a showing that 1he local beneficiator will cut and polish approximately 80 per cent
of its purchased unpolished diamonds over a 12-month period. More specifically,
20 per cent of a diamond beneficiators unpolished
diamonds intended for export are exempt from the levy if: (i)
the Regulator grants it a 26(h) export permit and that export covers the entire
assessment period and (ii) the exported diamonds are first subject to the
tendering process of the DEEC pursuant to section 48A of the Diamonds Act.
Gross sales value: Clause 11
The terms "gross sales to diamond beneficators" and "total gross sales" are
central for the producer exemption calculations (whereas the diamond beneficiator exemption calculation is performed through
comparison of beneficiation against purchases). The purpose of clause 11 is to
clarify these "gross sales" terms in a consistent way for all three
producer exemptions.
Subclause 1
The definition "gross sales to diamond beneficiatiors" operates as the numerator for the 40
per cent and 15 per cent thresholds required for the large and medium producer
exemptions, respectively. These sales equal all receipts and accruals (an
income tax concept) received during an assessment period for unpolished
diamonds sold to local diamond beneficiators.
The definition "total gross sales" operates as the denominator for
the 40 per cent and 15 per cent thresholds, respectively. This definition is
also crucial in respect of the R3 billion distinction
between large and medium producers and for setting the R20 million threshold
for small producers. Total gross sales equal all receipts and accruals received
during an assessment period for unpolished diamonds sold to local diamond beneficiators (e.g. all sales and other dispositions) as
well as all exports (regardless of whether those exports are part of sale or a
mere transfer to a foreign head office or branch).
Subclause 2
Both the "gross sales to diamond beneficiators"
and the "total gross sales" definitions include non-cash receipts and
accruals. For instance, any transfer by a producer resulting in the cancellation
of that producer's debts is added to these calculations. Other inclusions for
these calculations are the market value of any property, financial assistance,
service or other benefits received in exchange for unpolished diamonds
(including any premiums received or accrued on options for unpolished
diamonds).
Subclause 3
Both the "gross sales to diamond beneficiators"
and the "total gross sales" definitions include amounts associated
with unpolished diamonds. Gross sales accordingly, with respect to an
unpolished diamond, do not include any taxes imposed by the Value-Added Tax
Act, 1991 (Act No. 89 of 1991) or any incurred cross-border transportation and
insurance costs.
As a final matter, diamonds transferred
to and acquired from the State Diamond Trader are completely excluded from both
the "gross sales to diamond beneficiators"
and the "total gross sales" definitions. In other words, transactions
with the State Diamond Trader do not count for or against any producer
exemption. Sales to the State Diamond Trader do not count toward the 40 and 15
per cent large and medium producer exemptions because the levy is designed as
an added incentive for local beneficiation on top of State Diamond trader
mechanism. On the other hand, sales to the State Diamond Trader should not
count against these exemptions (like exports) because the levels of these sales
requirements are outside the producer's control.
Example. Facts. Large
Producer has a calendar financial year. During the aggregate of first and
second assessment periods of 2008, Large Producer generates R 100 million of
total unpolished diamond sales. Of this total, R38 million are sold to local
diamond beneficiators and R10 million are sold to the
State Diamond Trader.
Result. Sales to the State Diamond Trader are completely excluded from the
calculation. Hence, the 40 per cent calculation is measured by comparing the
R38 million sales to diamond beneficiators over the
R90 million sales to parties other than the State Diamond Trader.
Subclause 4
To the extent an amount of a producer's
gross sales in respect of an unpolished diamond is unquantifiable,
that amount is excluded from that producer's gross sales determination until it
becomes quantifiable (similar to the principle found in section 24M of the
Income Tax Act, 1962 (Act No. 58 of 1962).
PART V
Ministerial
reduction: Clause 12
Subclause 1
While the levy is regulatory in nature
(Le., not intended to raise revenue), the Minister of Finance may limit the
import credit described in clause 4 and the exemptions described in clauses 7,
8 and 9 in order to raise revenue if desired.
Subclause 2
All import credit limits and exemption
limits are intended to apply on a general basis (equally and simultaneously to
the credit and exemptions limits). Moreover, any limitation of this kind would
also apply on a general basis (Le., equally to all
producers and diamond beneficiators).
Acquisitions
from State Diamond Trader: Clause 13
The State Diamond Trader was established to assist in the development of local
beneficiation through the continuous supply of unpolished diamonds to local
diamond beneficiators. So as not to undermine the
State Diamond Trader's mandate, any unpolished diamond that is acquired
(directly or indirectly) from the State Diamond Trader and then subsequently
exported will not be exempt from the 5 per cent levy (notwithstanding any other
provision in the Diamond export Levy).
Local diamond beneficiators (satisfying the 80 per
cent beneficiation requirement as required for export) and persons granted a
permit to export unpolished diamonds pursuant to section 26(h) of the Diamonds
Act, 1986 (Act No. 56 of 1986), however, are not subject to this exemption
override. This escape hatch for diamond beneficiators
is in recognition of the fact that diamonds purchased in a parcel may not be
entirely useable for the diamond beneficiator at
issue. This escape hatch for section 26(h) exporters is in recognition of two
facts. One, section 26(h) exporters would find it exceedingly administratively
difficult to parse and distinguish State Diamond Trader unpolished diamonds
from non-State Diamond Trader unpolished diamonds. Secondly, purchases at the
DEEC need to be facilitated in order to bolster our regional "diamond
hub" endeavor.
PART V
Short title and commencement
Clause 14
The operational date for the Diamond Export Levy will be
set by the Minister of Finance via proclamation in the Gazette. The debt is
being set via the Gazette in order to ensure that the requisite administrative
systems are fully in place as the law goes into operation.
Transitional arrangements: Clause 15
Transitional measures are required for the first six months after the
Diamond Export Levy takes effect because the exemptions for producers are
measured over a 1-year period (Le. two 6-month assessment periods). This clause
accordingly allows the 6-month period prior to the Diamond Export Levy's
implementation to be taken into account for the first 6 months after
implementation.