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DIAMOND EXPORT LEVY BILLS

DIAMOND EXPORT LEVY BILLS. Report-Back Portfolio Committees on Finance and Mining 16 May 2007. Background. History of the Bill. Pre-2005: Theory : 15% levy for the export of unpolished diamonds Practice : Almost never applied due to exemptions (e.g. section 59 agreements) Late 2005:

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DIAMOND EXPORT LEVY BILLS

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  1. DIAMOND EXPORT LEVY BILLS Report-Back Portfolio Committees on Finance and Mining 16 May 2007

  2. Background . . .

  3. History of the Bill • Pre-2005: • Theory: 15% levy for the export of unpolished diamonds • Practice: Almost never applied due to exemptions (e.g. section 59 agreements) • Late 2005: • Diamond amendment acts (expressing intent to change the levy) • Late 2006: • Initial version of the Diamond Export Levy presented to the portfolio committees but held over for 2007 because of the discretionary nature of the exemptions

  4. Objective of the Bill (Restated) • The purpose of the levy is to discourage the export of all unpolished diamonds; not to raise revenue • Local diamond beneficiation (i.e. cutting and polishing) is one way of maximising the nation’s non-renewable resources to enhance employment • However, the Bill recognises: • that the local cutting/polishing industry is fairly small (1,900 to 2,100 cutters/polishers); and • No reason exists to discourage the export of unpolished diamonds that cannot (at present) be cut/polished locally

  5. SA Diamond Production and Beneficiation (Rough) Stats • Carats produced/sold in South Africa • Between R15 -16 million • Value produced in SA • Approximately $1,2 billion • % cut in SA by carats • 4.8% (691,000 ct) • % cut by value • Approximately 40% ($500M) • Total of current jobs • Between 1,900 and 2,100

  6. SA Sources of Cutting/Polishing for Future Skills Development • Three Schools • Harry Oppenheimer Diamond Training School • 107 graduates in 2006 • 14 graduates were foreign • Diamond Education College • 175 graduates in 2006 • 30 graduate were foreign • Corlia Roberts Diamond Educaiton College (New) • Estimated 60 graduates per year • On the job training (from the 1,900/2,100)

  7. Sawers saws along lines made by marker Cutter Cross worker Blocks stone Adds 18 facets Brilldeur Adds final facets (40) Finishes stone Marker Ready on graduation 6 months 1 year 1-2 years Many years Job Training Required

  8. Large: Medium: Small: De Beers Trans Hex PetraDiamond Alexcor Formal diamond diggers Farmers Artisans Profile of SA Producers

  9. General Process of Export • Once the Diamond Amendment Acts go into effect: • All diamonds must go through a Diamond Exchange and Export Centre (“DEEC”) before Export • At this stage, one DEEC is designated for Johannesburg (with a possible second DEEC elsewhere) • Three stage process: • All unpolished diamonds are locally auctioned at the DEEC (giving local polishers/cutters an effective right of first refusal) • All unpurchased diamonds are released after an agreed-upon valuation by the DME (section 69 of the Diamonds Act) • All released diamonds then go through customs supported by a bill of entry for export

  10. General terms . . .

  11. Charging Provisions – Restated (Sections 2 & 3) • A 5% Levy applies to all exports of unpolished (natural) diamonds • Synthetically manufactured (human-made) diamonds are excluded • The Levy liability is triggered on export at Customs (but payment is later – see administration) • The Levy applies based on the “value” of the exported rough diamonds

  12. Rationale for the 5% Rate - Restated • The proposed 5% rate replaces the previous 15 per cent rate • The reduction to 5% is viewed as sufficiently high to discourage wholesale exports while sufficiently low so as not to unduly encourage smuggling; note: • Smuggling of diamonds is easy (lined jackets, briefcases, pots, etc…) • Professional smuggling costs from 2,5% to 5%

  13. Use of Funds – Restated(Section 2(3)) • To repeat, the purpose of the Diamond Export Levy is not to raise revenue but to encourage sufficient local supply of unpolished diamonds. • However, should revenue needs arise, these funds will go into the national revenue fund. • Note: The Minister of Finance has the power via regulations to reduce the Levy relief measures (i.e. credits and exemptions) as a means of revenue raising should the need arise

  14. Administration • All relevant stakeholders in diamonds must register with SARS for purposes of the Levy (e.g. producers, beneficiators, dealers, etc…) • 45 days after the Bill goes into effect for current stakeholders; or • 45 days after the license is issued for new stakeholders • Registered parties pay export levies twice per year (every 6 months) along with 6-monthly returns; stated differently, no payment is made to Customs on export, export is only a liability trigger for the 6-monthly payment

  15. Relief measures . . .

  16. Import Credits – Restated (Section 4) • Objective: • Foreign-sourced diamonds (from Namibia or elsewhere) should not be subject to the Levy so as not to discourage diamond imports (i.e. South Africa as a diamond trading hub) • Stated different, only net exports should fall within the Levy • Terms: • Stakeholders registered with SARS for the Levy receive credits for diamond imports • These credits can be used to offset the Levy on export (and unused credits can be carried forward) • Rules exist to prevent round-tripping (i.e. the artificial creation of credits by importing SA diamonds that were previously exempt upon export) • Note: Amendments are being made to the Diamonds Act for stricter control over imports (e.g. to prevent over-valuations of credits and to enhance the Kimberly Process)

  17. Relief For Temporary Imports – New(Section 5) • Objective: • Temporary exports should not be subject to the Levy if returned in the same form • Diamond Act terms: • Section 64 of the Diamonds Act allows temporary exports of unpolished diamonds solely for exhibition, display or expert opinion (i.e. they cannot be altered) • The temporary period cannot exceed 180 days • The Bill similarly exempts temporary exports from the 5% levy (if section 64 is followed) • Penalties for violations will be enforced solely by the Regulator

  18. Producer and Beneficiator Relief Measures: Objectives • Diamond producers and beneficiators are central players in local diamond beneficiation • The DME provides diamond beneficiator licenses on the expectation that these licenses will be used to cut and polish diamonds to the maximum extent • Producers are encoraged to promote beneficiation as part of the price of extracting SA’s non-renewable mineral resources • Relief from the Levy accordingly exists when both sets of stakeholders demonstrate that they are promoting a specified level of beneficiation

  19. Prior Bill Versus Current Bill:Key Conceptual Change • In the prior Bill, the exemptions for producers were largely the subject of Ministerial discretion • Regulations were to be issued for clarification • The new Bill simply puts all requirements into law so: • Parliament has full oversight • The lines are clear so private parties can plan accordingly (and Government does not need to intervene administratively)

  20. Three Sets of Producers • Due to the wide-diversity in the marketplace, one of three relief measures are available for producers: • Relief for large producers (i.e. above R5 billion annual gross sales) • Relief for medium producers (above R10 million/up to R5 billion annual gross sales) • Relief for small producers (up to R10 million annual gross sales per annum)

  21. Relief for Large Producers – Background (Section 7(1)) • Large producers are eligible for two sets of relief: • A waiver from the DEEC auctioning process; and • Exemption from the levy • Both the DEEC waiver and the levy exemption operate roughly the same • Notes on the DEEC waiver: • The DEEC waiver ensures that the auctioning process is not overwhelmed by unmanageable volumes of unpolished diamonds • The DEEC waiver will exist in regulation via the DME Minister’s discretion under section 74 of the Diamonds Act

  22. Relief for Large Producers – Details (Section 7(1)) • Relief for large producers has two basic criteria: • The producer must be large, selling over R5 billion per 12 months; and • The producer must sell at least 40% of its sales to local beneficiators during the same 12 months • DEEC waiver process (prospective): • The DME Regulator provides a waiver for the upcoming 12 months based on the belief the requirements can be met) • Diamond Export Levy process (retrospective): • SARS confirms exemption at the close of the 6 months based on the prior 12 months • Policy: The 40% local sales requirement effectively fulfills the large producer’s obligation to promote local beneficiation

  23. Relief for Medium Producers – Background (Section 8(1)) • Medium producers are: • Eligible for exemption from levy; • BUT NOT the waiver from the DEEC auctioning process • Because there is no DEEC waiver, the medium producer must: • Send all unpolished diamonds producers through the DEEC for auctioning; and • Only unpolished diamonds not sold locally on auction can go for export

  24. Relief for Medium Producers – Details (Section 8(1)) • Relief for medium producers has two basic criteria: • The producer must be neither large nor small, selling up to R5 billion per 12 months but more than R10 million; and • The producer must sell at least 15% of its sales to local beneficiators during the same 12 months • Diamond Export Levy process (retrospective): • SARS confirms exemption at the close of the 6 months based on the prior 12 months • Policy: The 15% local sales requirement effectively fulfills the medium producer’s obligation to promote local beneficiation; the test is lower than for large producers because: • Medium producers receive only a Levy exemption (not a DEEC waiver) • Medium producers have less practical power in the market to influence beneficiation

  25. 5% Window (Sections 7(2)&(3) and 8(2)&(3)) • The “all-or-nothing” nature of both the 40% and 15% local sales thresholds for large and medium producers can be overly harsh in certain circumstances • To alleviate the harsh impact of small shortfalls, a “5% window” may apply • Under this window, • The exemption will partially apply if the producer falls below the 40% and 15% thresholds by a margin of no more than 5 percentage points (i.e. reaching only 35% and 10% for large and medium producers respectively) • Additionally, SARS must be satisfied that the shortfall is due to reasons that are temporary and out of the producer’s control • A Levy still applies at a rate equal to each percentage point the producers falls short (hence, if a medium producer reaches 14% local sales level, the levy applies at a 1% rate)

  26. Relief for Small Producers – Background (Section 9) • Small producers are: • Eligible for exemption from Levy; • BUT NOT the waiver from the DEEC auctioning process • Because there is no DEEC waiver, the small producer must: • Send all unpolished diamonds producers through the DEEC for auctioning; • The diamonds must be presented in parcels of no more than 10 stones; and • Only unpolished diamonds not sold locally on auction can go for export

  27. Relief for Small Producers – Details (Section 9) • Relief for small producers has two basic criteria: • The producer must be small, selling no more than R10 million per 12 months; and • If the producer is a company, the producer must not have a more than 50% shareholder connection to another producer company • Diamond Export Levy process (retrospective): • SARS confirms exemption at the close of the 6 months based on the prior 12 months • Policy: Small producers have no obligation to promote local beneficiation because these producers have no practical power in the market to influence beneficiation (i.e. they are simply to small to be expected to perform anything beyond their core extraction activities).

  28. Gross Sales Terms – Background Section 11 • The terms: • “gross sales to diamond beneficators”; and • “total gross sales” are central for the producer exemptions (whereas, the diamond beneficiator exemptions are based on a comparison of beneficiation against purchases). • Section 11 clarifies these terms for the large, medium and small producer levels and for the 40% and 15% thresholds

  29. Gross Sales Terms – Details(Section 11) • The 15% and 40% thresholds are based on: • Sales to local beneficiators/Total local transfers plus exports • Gross sales include: • Discharge of debts • Market value of non-cash property, financial assistance, services and other benefits • Premiums paid on options to acquire unpolished diamonds • Gross sales do not include: • VAT on unpolished diamond sales • Transport and insurance for unpolished exports

  30. Relief for Beneficiators – Background (Section 10) • Diamond beneficiators are: • Eligible for exemption from levy; • BUT NOT the waiver from the DEEC auctioning process • Because there is no DEEC waiver, the diamond beneficiators must: • Send all unpolished diamonds producers through the DEEC for auctioning; and • Only unpolished diamonds not sold locally on auction can go for export

  31. Relief for Beneficiators - Details (Section 10) • Core focus: Unlike producers, the exemption for diamond beneficiators is based on the beneficiation (i.e. polishing and cutting) of purchased unpolished diamonds, not the gross sales formulation • Oversight: This requirement is to be monitored by the DME Regulator (as opposed to SARS) because only the DME Regulator has the capacity to make the beneficiation determination (whereas sales is an item that that can be readily measured by SARS via the financial statements) • Export permit (as required by DME regulation): • the price for this permit is a showing to the DME regulator that the local beneficiator will cut and polish 80% of the diamonds purchased over the upcoming 12-month period • Once this permit is issued, the diamond beneficiator is fully exempt from the Levy upon export in respect of the 20% remainder if: (i) the export permit covers the entire assessment period, and (ii) the exported diamonds are first subject to the tendering process at the DEEC

  32. Relief for DEEC Purchasers – Background(Section 6 of 1st Bill and section 7 of the 2nd Bills) • Exempt producers and beneficiators can export their excess diamonds free from the levy (most after going through the DEEC) • Comparable relief is needed for local DEEC purchasers • To prevent the Levy acting as a discentive to local purchasers who may wish to export otherwise exempt diamonds • To prevent the Levy from undermining South Africa’s potential as a diamond trading hub

  33. Relief for DEEC Purchasers – Background(Section 6 of 1st Bill and Section 7 of the 2nd Bills) • Role of producers/beneficiators: Producers and beneficiators expecting Levy exemption may elect for the upcoming 6-month period • If a purchaser acquires unpolished diamonds at the DEEC from an electing producer/beneficiator, the purchaser can: • Export the diamond without going back on the DEEC; and • Export the diamond free from the levy • Note: If the producer/beneficiator makes an election and later fails to satisfy the exemption, the electing producer/beneficiator is subject to full penalties – the purchaser still receives the full benefits of the election

  34. State Diamond Trader:Collateral Impacts • The 2005 Diamond Amendment Act created the State Diamond Trader: • To purchase unpolished diamonds from local producers; and • To sell those diamonds to local beneficiators (especially smaller stakeholders) • In terms of the Levy: • Sales to and acquisitions from the State Diamond Trader count neither for or against the gross sales calculations (section 11(3)(c)) • All diamonds routed through the State Diamond Trader can never be exported free from the Levy (because these diamonds are solely intended for local use) (section12(2))

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