Manuel, MP, Minister of Finance, National Assembly, Cape Town
19 June 2007
Introduction
Madame Speaker, the Diamond Export levy Bills, 2007, provide for a levy on
the exports of rough diamonds from South Africa. It should be noted that the
imposition of an export tax is already contained in the Diamonds Act of 1986.
One of the many positive aspects of our Constitution is the requirement that
all taxes must be imposed by way of a Money Bill, thereby providing for greater
transparency and oversight. Amendments to the Diamonds Act during 2005 have
resulted in the need for amendments relating to the export levy on rough
diamonds, thereby requiring a separate Money Bill. Both sets of changes
represent an inter-departmental effort with the Department of Minerals and
Energy working toward regulatory reform, while the National Treasury assists
with supporting fiscal measures.
Beneficiation
The original intent of the export levy on rough diamonds was to facilitate
adequate and regular supplies of rough diamonds to local cutters and polishers
(diamond beneficiators). The Diamonds Act of 1986 was only partially successful
in this regard. The Department of Minerals and Energy accordingly amended the
Diamonds Act in 2005 to improve regulatory oversight. The revised export levy
on rough diamonds is intended to compliment these regulatory provisions.
Revised levy rate
The export levy on rough diamonds in the Diamonds Act of 1986 is currently
set at 15%. However, this Act provided for relatively generous exemptions. The
proposed Diamond Levy Bills, 2007 reduce the export levy on rough diamonds to
5% but tighten the relief provisions, thereby laying a foundation for increased
effectiveness. It should also be noted that the reduced 5% rate was not
intended to undermine the power of the levy as a deterrent. According to
informal police estimates, diamond smuggling costs are between 2.5% and 5% of
gross diamond values. Therefore, the current 15% rate merely enhances
smuggling; whereas, the proposed 5% rate is high enough to deter unpolished
exports without hidden benefits for smuggling.
Relief measures/exemptions
The proposed relief measures ensure that the local supply of rough diamonds
is commensurate with local demand. No reason exists to force diamonds onto the
local market beyond local capacity. The core element of these incentives is to
encourage producers to supply the local market with rough diamonds so that they
can export the remainder free from the levy.
1. Relief for large producers
As a general rule, the Diamonds Act, as amended in 2005, requires that all
rough diamonds intended for export must be offered via a tender process at a
Diamond Export and Exchange Centre (DEEC) for sale. However, in the case of
large producers, the Minister of Minerals and Energy may waive the requirement
to offer all rough diamonds on the DEEC. This waiver is, for practical reasons,
to ensure that the DEEC tendering process is not overwhelmed by large volumes
of very small rough diamonds.
The Minister of Minerals and Energy may exempt a large producer from the
DEEC tendering process if the Minister believes that:
* 40 per cent of that producer's total gross sales over the course of a year
will comprise of sales to local diamond beneficiators
* that producer's total gross sales in the same period exceeds R3
billion.
The Diamond Export Levy Bill provides a large producer with a levy exemption
for an assessment period under similar conditions.
2. Relief for medium producers
Medium size producers will not receive a compulsory waiver from the DEEC
tendering process. However, they can obtain relief from the levy if:
* 15% of that producer's total gross sales is to local diamond beneficiators
over the course of a year
* that producer's total gross sales within the same period do not exceed R3
billion per annum.
3. Exemption for small producers
Like medium producers, small producers will not receive a compulsory waiver
from the DEEC tendering process. However, small producers receive relief from
the export levy without any prerequisite of sales to local diamond
beneficiators. In order for this exemption to apply, the producer must satisfy
two basic sets of requirements. Firstly, the producers total sales cannot
exceed R20 million per annum. Secondly, anti-avoidance measures exist to
prevent small producers from splitting sales across several controlled
companies for purposes of avoiding the levy.
4. Relief for diamond beneficiators
It is not always possible for a diamond beneficiator to cut and polish 100
per cent of the diamonds purchased. The Regulator may accordingly grant a
beneficiator permission to export rough diamonds if the local beneficiator will
cut and polish 80% of the diamonds purchased. Once this permit is issued, the
diamond beneficiator is exempt from the levy in respect of the 20 per cent
remainder for export provided that the diamonds are first subject to the
tendering process of the DEEC.
No revenue needs foreseen
While the levy is regulatory in nature (i.e. not primarily intended to raise
revenue), the import credit and the exemptions may be limited in order to raise
revenue if deemed necessary (e.g. to fund the activities of the Regulator).
Currently, we see no need for this limitation because all related
administration is being fully funded on budget.
Erroneous news reports
Before closing, I am compelled to correct recent news stories by two daily
newspapers that erroneously indicated Government's intent to make concessions
on behalf of large producers. When revising the diamond export levy, the
National Treasury was well aware of the fact that certain key stakeholders
control more than 95% of local production. Ill-considered regulation could
create undue pressures on smaller players. The loss of smaller players would
clearly undermine competition, thereby undermining free market forces. In view
of these concerns, a one-size-fits-all approach was rejected because such an
approach would unduly impact smaller players.
Instead, National Treasury sought to impose the higher local beneficiation
requirements on large producers. Only large producers have a 40% local diamond
beneficiator sales requirement; whereas, medium producers face a 15%
requirement and small producers must merely tender their diamonds at the DEEC.
The threshold for a large producer was shifted from R5 billion gross sales per
annum down to R3 billion to ensure that larger stakeholders retained the 40%
requirement despite anticipated sales of certain diamond mines. Therefore, the
R5 to R3 billion threshold change was not a concession for large producers as
erroneously reported but a tightening of beneficiation requirements.
Secondly, the news also erroneously reported that National Treasury planned
to make the diamond export levy deductible from Income Tax. What was said
during the parliamentary hearing process was that such a deduction would be
considered. I have since considered the request but have decided against this
concession. It is clear that the levy can by avoided in full if producers meet
the requirements to supply local beneficiators. Hence, the levy effectively
acts as a penalty where a producer fails in these local supply requirements. It
is therefore reasonable to argue that the penalty nature of this levy prevents
the levy from being deductible against Income Tax.
In closing, I would like to thank the Chairman Nhlanhla Nene of the
Portfolio Committees on Finance (PCOF) for his leadership, and the members of
the POCF and on Minerals and Energy for their constructive role in the process.
Madame Speaker, I hereby table the "Diamond Export Levy Bill, 2007", as well as
its companion, the "Diamond Export Levy Administration Bill, 2007".
Issued by: National Treasury
19 June 2007
