national treasury department: national treasury republic of south africa diamond export levy 1...

national treasuryDepartment:National Treasury

REPUBLIC OF SOUTH AFRICA

Diamond Export Levy1 November 20061 November 2006

2

national treasuryDepartment:National TreasuryREPUBLIC OF SOUTH AFRICA

ContentsContents

1. Global diamond industry

2. The South African Diamond Industry – a statistical overview

3. Why taxes and the principles of a good tax

4. Diamonds Act, 19865. Diamonds Act, 1986 –

2005 Amendments

6. The Diamond Export Levy Bill- Reasons for the Bill and objectives- Rate and charging provisions- Liability and payment date- Relief measures

i. Import Credit

ii. Ministerial exemption, section 74 Diamonds Act

iii. Ministerial exemption - DEEC

- Administration

- Effective date & transitional provisions- Deletions- Regulations



GLOBAL DIAMOND INDUSTRY

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Global Diamond ProductionGlobal Diamond Production

Global Diamond Production

2004 2003

Country US$: million Rank $ Carats: Million Rank C

Botswana 2,500 1 30.4 2

Russia 1,600 2 19.0 4

South Africa 1,500 3 12.8 5

Canada 1,200 4 11.2 6

Angola 900 5 5.7 7

DRC 600 6 25.0 3

Namibia 500 7 1.5 9

Australia 300 8 31.0 1

Others 400 9 3.4 8

TOTAL 9,500 140.0

Source: James Allan - Diamond Analyst, JSE, September 2005

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Other countriesOther countries

Others

Sierra Leone

Tanzania

Ghana

Brazil

Venezuela

Guinea

Central African Republic

China

Ivory Cost

Lesotho

India

6


An overview – James AllanAn overview – James Allan

• The diamond industry has long been the preserve of De Beers and has been clouded in secrecy and relatively little hard information. De Beers controlled around 80% of the supply of rough diamonds up until the early 1990s and it is only recently that De Beers controlled less than 50% of diamond supply.

• A single rough diamond can vary in value from a few dollars per carat to tens of thousands of dollars per carat.

• Diamonds of the same weight will vary in value depending on the shape, colour, and clarity of the stone and sometimes even the location of the sales / production.

• There is no terminal market value where prices are quoted and despite the publication of price lists there are “discounts to” and “premiums to” the listed price.

• There is currently a global shortage of diamonds.• De Beers’ diamond stocks have declined from $4.8bn in

1998 to an estimated $1bn at the end of 2004.

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Trends in the global diamond Trends in the global diamond industryindustry

• Producers are becoming more oriented to driving demand (led by De Beers with their change in strategy initiated in 2000)

• Vertical integration is becoming more prevalent• Cutters and polishers (and jewelers) are backwardly

integrating into production as rough diamonds becomes more scarce

• Producers are investigating becoming involved in cutting and polishing

• Countries hosting producing mines are becoming more demanding in terms of the value chain process

• Consolidation of the industry is likely to take place• Declining production in Australia is causing a shortage of

rough in India• Synthetic gem diamonds are a reality and are posing a

threat to the industry

Source: James Allan, 2005



SOUTH AFRICAN DIAMOND INDUSTRY

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2001 2002 2003 2004 2005

Sales Carats Carats Carats Carats Carats

Exports 15,926,222 98.3% 12,246,715 97.7% 11,470,449 95.3% 14,620,237 96.3% 16,237,928 96.8%

Local 275,065 1.7% 283,619 2.3% 561,979 4.7% 557,124 3.7% 540,195 3.2%

Total (A) 16,201,287 100.0 12,530,334 100.0 12,032,429 100.0 15,177,362 100.0 16,778,123 100.0

Production

Total (B) 11,238,411 10,905,889 12,642,553 14,294,024 15,775,786

Stock -4,962,876 -1,624,445 610,124 -883,338 -1,002,337

Sales Rand Rand Rand Rand Rand

Exports 5,560,670,471 86.0% 6,604,277,496 89.0% 5,491,845,470 72.5% 6,333,844,327 73.1% 8,185,556,614 75.6%

Local 904,587,683 14.0% 816,131,770 11.0% 2,085,644,448 27.5% 2,330,855,507 26.9% 2,635,341,043 24.4%

Total 6,465,258,154 100.0 7,420,409,266 100.0 7,577,489,918 100.0 8,664,699,834 100.010,820,897,65

7 100.0

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LOCAL PRODUCTION OF DIAMONDS - CARATS

2005 Sales Sales Sales Production

Carats Exports Local Total

Total 16,237,928 540,195 16,778,123 15,775,786

A 15,919,208 98.0% 44,482 8.2% 15,963,690 95.1% 15,104,034 95.7%

B 156,158 1.0% 169,596 31.4% 325,754 1.9% 142,276 0.9%

Sub Total 16,075,366 99.0% 214,078 39.6% 16,289,444 97.1% 15,246,310 96.6%

Other 162,562 1.0% 326,117 60.4% 488,679 2.9% 529,476 3.4%

Total 96.8% 3.2% 100%

A 99.7% 0.3% 100%

B 47.9% 52.1% 100%

Other 33.3% 66.7% 100%

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LOCAL PRODUCTION OF DIAMONDS - RAND

2005 Sales Sales Sales

Rand Exports Local Total

Total 8,185,556,614 2,635,341,043 10,820,897,657

A 7,118,713,881 87.0% 635,599,293 24.1% 7,754,313,174 71.7%

B 948,314,515 11.6% 1,001,030,498 38.0% 1,949,345,013 18.0%

Sub Total 8,067,028,396 98.6% 1,636,629,791 62.1% 9,703,658,187 89.7%

Other 118,528,218 1.4% 998,711,252 37.9% 1,117,239,470 10.3%

Total 75.6% 24.4% 100.0%

A 91.8% 8.2% 100.0%

B 48.6% 51.4% 100.0%

Other 10.6% 89.4% 100.0%

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Production: Carats

Category 1 Category 2 Category 3 TOTAL

2000 38,785 977,867 9,715,450 10,732,101

2001 32,626 928,581 10,482,753 11,443,960

2002 29,917 791,909 8,982,575 9,804,401

2003 40,591 867,728 10,312,095 11,220,415

2004 45,294 978,879 12,652,755 13,676,928

2005 55,349 1,125,517 14,787,324 15,968,190

2000 0.4% 9.1% 90.5% 100.0%

2001 0.3% 8.1% 91.6% 100.0%

2002 0.3% 8.1% 91.6% 100.0%

2003 0.4% 7.7% 91.9% 100.0%

2004 0.3% 7.2% 92.5% 100.0%

2005 0.3% 7.0% 92.6% 100.0%

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Carats Locally Available = Production - Exports + Imports


2000 41,644 624,273 193,163 859,080

2001 50,441 594,889 139,203 784,532

2002 32,317 586,231 37,320 655,868

2003 45,735 702,703 89,209 837,648

2004 48,769 580,442 59,997 689,208

2005 56,466 711,628 42,547 810,640

2000 107.4% 63.8% 2.0% 8.0%

2001 154.6% 64.1% 1.3% 6.9%

2002 108.0% 74.0% 0.4% 6.7%

2003 112.7% 81.0% 0.9% 7.5%

2004 107.7% 59.3% 0.5% 5.0%

2005 102.0% 63.2% 0.3% 5.1%

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Imports as a % of Production


2000 7.4% 64.9% 2.2% 7.9%

2001 54.6% 48.7% 0.9% 4.9%

2002 8.0% 92.0% 0.9% 8.3%

2003 12.7% 80.8% 0.8% 7.0%

2004 7.7% 59.3% 0.5% 4.7%

2005 2.0% 63.2% 0.3% 4.7%

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South African Diamond South African Diamond Industry Industry

• Caratage produced in South Africa– 14,4 Mct (2004)

• Value produced in SA– $1,2b (2004)

• % cut in SA by weight– 4.8% (691,000 ct)

• % cut by value– ~$500M

• Total of current jobs– ~2,100

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Grading and ValuationGrading and Valuation

• Polished diamonds are graded according to four important characteristics:– Carat – Colour– Clarity– Cut

• The quality of the cut could make a difference of up to 30% of the value of a diamond

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Why taxesWhy taxes

• Taxes are primarily imposed to raise revenue to fund government expenditure and to achieve a degree of redistribution, e.g. income taxes, consumption taxes (VAT), excise duties, etc.

• Other objectives of taxes included:– Equity, e.g. a progressive personal income tax – Protecting local industries – i.e. Customs duties (on imports)– Discourage consumption – e.g. excise duties on tobacco

products, etc. – Social security, e.g. UIF– Environmental objectives, e.g. pollution charges, fuel levy,

etc. (internalization of negative externalities)– Payments for extracting a depletable resource, e.g. mineral

royalties– Local beneficiation, i.e. export taxes ?

• However, taxes may result in the economic distortions and must therefore take account of efficiency considerations and the tax system must at the same time provide a degree of certainty to taxpayers

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Principles of good tax policy Principles of good tax policy

• Fairness / Equity: A commitment to a fair distribution of the tax burden, reflecting the ability to pay of different individuals.

• Efficiency: The tax system should not distort private decision-making. Under an efficient tax system, resources flow to the most productive areas, which will enhance productivity and growth. Exemptions and concessions should be considered in the context of the full range of policy options and accepted only when the benefits can be shown to outweigh the costs.

• Simplicity:. Measures with low compliance and administrative costs are to be preferred as long as they are consistent with other objectives.

• Integrity (revenue adequacy): A robust tax system in which people pay their intended rates of tax and appropriate tax revenues can be obtained to fund government programmes.[1]

[1] Business tax Review, A discussion document – New Zealand, July 2006

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An export levyAn export levy

• What are the main objectives of an export levy

• Can these objectives be achieved through a different route

• How does an export levy measure up against the principles of a good tax

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Hearings on the Diamonds Hearings on the Diamonds Amendment Bill, September 2005Amendment Bill, September 2005

“The development of the local cutting industry should be encouraged through the development of an export processing zone with tax breaks and incentives, the introduction of efficient technology should be encouraged and a sustainable jewellery processing industry developed”.

“There is an opportunity for an increase in employment in the cutting industry but we should be aware that this industry is part of a global market and should therefore use productivity enhancing technology to compete with Israel and Antwerp (James Allan)”.

South Africa will probably find it difficult to compete with India

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Diamonds Act, No 56 of 1986: Diamonds Act, No 56 of 1986: Local beneficiation Local beneficiation

• The Diamonds Act,1986, inter alia, sought to promote local beneficiation by imposing a 15 per cent levy on rough diamonds exported from South Africa

• The levy operated as a quasi regulatory measure, designed to encourage the supply of rough diamonds to local cutters

• Producers could get relief / exemption from the 15 per cent levy via a section 59 agreements - 2 types of exemptions:

(1) exporting party demonstrated the promotion of local beneficiation via other means such as the long-term contractual supply of rough diamonds to local cutters (site-holder system)

(2) by offering local rough diamonds on the bourse before export

» As a result the 15 per cent levy has is practice not resulted in any levy liabilities over the last 20 years

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2005 amendments to the 2005 amendments to the Diamonds Act No 56, 1986Diamonds Act No 56, 1986

• The 2005 amendments:– Delete the section 59 exemption – Replace the Diamond Board with the

Diamond and Precious Metal Regulator

– Reduce the number of diamond export centres to one, the Government controlled Diamond Exchange and Export Centre (DEEC)

– Provide for the establishment of the State Diamond Trader (SDT) to increase the supply of rough diamonds to local cutters and polishers



DIAMOND EXPORT LEVY BILL . . .

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Reasons for the Bill and objectives Reasons for the Bill and objectives

• The Diamond Export Levy Bill (“Bill”) originates as a direct consequence of the 2005 amendments to the Diamonds Act, 1986

• The Constitution prescribe that any tax / levy must be imposed by way of a Money Bill and only the Minister of Finance may introduce such a Bill

• The primary objective of the export levy on rough diamonds is the same as under the Diamonds Act, 1986 – to ensure a sufficient supply of rough diamonds to local cutters – to promote local beneficiation

• The export levy supports the State Diamond Trader’s objective to supply the local market with rough diamonds – local beneficiation

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Basic levy regime Basic levy regime Charging provision: Section 2Charging provision: Section 2• A 5% levy applies to all rough diamonds

(natural unpolished) exported • Synthetic (human) made diamonds are

excluded• The levy is triggered by section 69 of the

Diamonds Act,1986: “Release of unpolished diamonds for export”

• The levy applies to the “value” of exported rough diamonds. In order to prevent artificial under-valuations, the 5 % will be applied to the greater of the following two values:(a) The value specified by an exporter on a

return as required by section 69 of the Diamonds Act, or

(b) A value assessed by the Diamond and Precious Metals Regulator (the government diamond valuator) as described under section 65 of the Diamonds Act.

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Charging provision: Section 2Charging provision: Section 2

• If a person sells rough diamonds in exchange for foreign currency and physically exports (i.e. Customs) those diamonds, their sales value will be converted into Rands at the closing spot rate on the date of export

• Any levy or penalty payable in terms of this Act must be paid into the National Revenue Fund.

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Tax / Levy rate: Section 3Tax / Levy rate: Section 3

• The levy will be imposed as 5 per cent (as opposed to the previous 15 per cent rate as per the Diamonds Act)

• The 5 per cent rate is viewed as sufficiently high to discourage the unhindered exports of rough diamond while sufficiently low enough so as not to unduly encourage smuggling

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Liability and payment date: Liability and payment date: Section 4Section 4

• A bill of entry for export submitted by an exporter of rough diamonds to a South African Revenue Service (“SARS”) Customs official triggers liability for the levy

• The date of payment of the levy depends upon the nature of the exporter: – Producers must pay the levy twice a year –

every six months– Independent dealers must pay the levy at the

time of exports



RELIEF MEASURES . . .

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Relief measures Relief measures • Similar to provisions previously contained in the

Diamonds Act, 1986 the Diamond Export Levy Bill contains relief measures that may offset the 5% levy liability in full or in part.

• Relief measures exist to minimize any potential distortions and unintended negative impacts of the proposed levy.

• Only producers may take advantage of the relief measures

• Independent dealers and cutters that are exporting rough diamonds do not qualify for the proposed relief measures

31


Import Credit: Section 5Import Credit: Section 5

• A producer is entitled to an import credit for any imported rough diamond

• Credits can be used to offset (in full or in part) a producer’s export levy liabilities

• Credits ensure that the levy applies only to net exports (i.e. the net outflow from South Africa)

• Credits apply only upon official entry of the rough diamonds into South Africa (entry as required in section 39 of the Customs and Excise Act, 1964 (Act No. 91 of 1964).

• The credit is equal to 5% of the value of imported rough diamonds

• The credits arising during a period will offset the levy owing (i.e. paid or payable). The level of offset will be prescribed by the Minister of Finance as issued by regulation – 100% currently.

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Import Credit: Section 5Import Credit: Section 5

• All excess credits (i.e. credits that exceed the levy paid or payable during an assessment period) will be carried forward to following assessment periods for as long as that excess lasts (or the taxpayer remains in existence).

• After consultation with the Diamond and Precious Metals Regulator, the Commissioner may in determining the value of any imported rough diamond adjust that value to reflect an arm’s length price and prevent artificial over-valuations

• A taxpayer may not acquire a producer solely or mainly for import credits (acquisition of a more 50 per cent equity interest in a producer solely or mainly for that producer’s unutilised imported credits results in the wholesale denial of those credits)

• The import credit does not apply to a producer that already benefits from the receipt of a Ministerial levy exemption described in section 6 or 7

• This denial of import credits is required as a matching principle (i.e. credits for imported diamonds must be matched against the levy on exported diamonds in order to ensure that the levy applies on a “net export” basis).

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Ministerial exemption in terms of Ministerial exemption in terms of the Diamonds Act: Section 6the Diamonds Act: Section 6

• The Minister of Minerals and Energy has the power to exempt a producer from being required to offer its rough diamonds intended for export at the Diamond Exchange and Export Centre (DEEC - section 74 of the Diamonds Act, 1986)

• Section 6 Export Levy Bill provides for an automatic exemption / relief from the 5 per cent export levy if a producer has been granted an exemption to offers its diamonds on the DEEC in terms of section 74 of the Diamonds Act, 1986

• The level of the exemption will be prescribed by regulation as determined by the Minister of Finance - 100% currently

• This exemption does not apply to a producer that already benefits from the import credit described in section 5

• Neither does it apply to any rough diamond purchased from the State Diamond Trader

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Ministerial exemption at Ministerial exemption at Diamond Exchange and Export Diamond Exchange and Export

Centre (DEEC): Centre (DEEC): Section 7Section 7

• The Minister of Minerals and Energy may exempt a producer from the 5% export levy as long as that diamond is properly offered at the Diamond Exchange and Export Centre and a producers satisfy of one of the following two conditions:(i) Its activities in South Africa are supportive of local beneficiation - e.g. performs its own local polishing, has long-term contracts with local polishers

or provides local training/equipment)(ii) Is a small miner (a producer whose rough diamond sales do not exceed R10 million per annum)

• The level of the exemption will be set by regulation prescribed by the Minister of Finance

35


Ministerial exemption at Diamond Exchange Ministerial exemption at Diamond Exchange and Export Centre (DEEC): and Export Centre (DEEC):

Section 7Section 7

• In addition each diamond offered at the Diamond Exchange and Export Centre must satisfy the following four requirements in order for that diamond to qualify for this exemption. These requirements are:(i) The rough diamond must be offered for sale at the

DEEC for a minimum of four days(ii) The offer at the DEEC must not have resulted in a sale(iii) The diamond sold for export must yield a price that is at least equal to the price at which that diamond was offered for sale at the DEEC(iv) Proof of the reserve price must be submitted ??

• These requirements preserve South Africa’s “right of first refusal” by measuring whether the offer is real

• This exemption does not apply to a producer that already benefits from the import credit described in section 5 and the exemption in terms of section 6

• It also does not apply to any rough diamond purchased from the State Diamond Trader



ADMINISTRATION . . .

37


AdministrationAdministration• The Diamond Levy Bill provides for two sets of

levy payers – producers (diamond miners) and non-producers (independent dealers and cutters)

• Producers must register with the South African Revenue Service and pay their export levies twice per year (every 6 months) and non-producers must pay the full levy when exporting rough diamonds

• The definition of producer (contained in section 1) extends beyond holders of mining rights to reflect the business reality of group operations, which often separate mining from sales.– Thus, companies within the same consolidated

financial group can be treated as a producer if: (i) approved by the Minister of the Department of Minerals and Energy, and (ii) that consolidated group company sells diamonds of that producer

38


Registration: Section 8Registration: Section 8 Cancellation of registration: Section Cancellation of registration: Section

99

• The Commissioner generally has the freedom to determine the required registration process of producers

• The Bill mandates that registration occur within 45 days after the date that a person becomes a producer

• The Commissioner may cancel registration upon application

• Cancellation can only occur after the last day of the 6-monthly assessment period on which a person qualifies as a producer

39


Returns and assessment periods: Returns and assessment periods: Section 10Section 10

• Registered producers must submit 6-monthly returns

• Natural persons utilise six-monthly periods based on their year of assessment prescribed by the Income Tax Act, 1962, starting on 1 March and ending on the last day of February.

• Other persons (i.e. entities) rely on their financial year.

• The actual return plus payment must be submitted 30 days after each 6-monthly assessment period

40


Returns - Section 11Returns - Section 11 Maintenance and records: Maintenance and records:

Section 12Section 12• All registered producers (which includes

consolidated diamond sellers) must submit a single return at the same time and place determined by the Commissioner. This single return requirement will ensure that this single economic unit can be audited accordingly.

• Registered producers, submitting biannual returns, must maintain sufficient books and records for the Commissioner to verify compliance

• These books and records must be maintained for a minimum of 5 years

• This 5-year minimum requirement matches the time limit for assessments described in section 16 (as well as the time limit for refunds in section 17)

41


Assessments: Section 13Assessments: Section 13 Reduced assessments: Section 14 Reduced assessments: Section 14

Withdrawal of assessments: Section 15 Withdrawal of assessments: Section 15

• The Bill operates as a self-assessment system, much like the Value-added Tax

• A notice of assessment triggers an additional 30-day liability for payment (subject to objection and appeal)

• The Commissioner has the power to:– reduce assessments without the formal

objection and appeal process– withdraw assessments without the formal

objection and appeal process

42


Time limit for assessments: Time limit for assessments: Section 16Section 16

• The Bill has a 5-year time limit for assessments • This 5-year period begins to toll only after the

submission of a diamond levy return to which that assessment period relates

• If no return is submitted, the time limit for assessment continues indefinitely– Even if a return is submitted, the 5-year does not

apply if the Commissioner has reason to believe that failure to pay the levy stems from fraud, misrepresentation or non-disclosure of material facts

43


Refunds: Section 17Refunds: Section 17 Interest: Section 18 Interest: Section 18

• Persons may claim refunds for overpayments

• Refunds have a 5-year time limit• Both the Commissioner and diamond levy

payers are eligible for interest to the extent of underpayments and overpayments, as the case may be

• This interest is calculated on a monthly basis and calculated in accordance with the rate required by section 1 of the Income Tax Act, 1962

44


Division of responsibility: Section Division of responsibility: Section 1919

• The Commissioner is generally responsible for administering the Diamond Export Levy Act

• However, Minister of Minerals and Energy will be responsible for assisting the Commissioner on issues requiring diamond expertise

45


Applicability of the Income Tax Act: Section 20Applicability of the Income Tax Act: Section 20 Application of other laws: Section 21 Application of other laws: Section 21

• Administrative processes falling within the purview of the Bill are covered by reference to the Income Tax Act, 1962 (Act No. 58 of 1962)

• The Commissioner and the Minister of Minerals and Energy may freely share information for enforcement of the Bill (notwithstanding any secrecy provisions to the contrary)

• Discretionary decisions by the Commissioner and the Minister of Minerals and Energy are subject to objection and appeal

• The Diamond Export Levy Act will be determined solely by its terms without reference to any other Act (unless that other Act makes specific mention of the Diamond Export Levy Act)



EFFECTIVE DATES . . .

47


Commencement date and transitional Commencement date and transitional provisions: Section 22provisions: Section 22

• The Bill will come into operation on a date set by the Minister of Finance

• This discretionary date will ensure that operation of the Bill coincides with the coming into existence of supporting administration apparatus (including the apparatus relating to the State Diamond Trader)– At the present time, the “previous” 15 per cent

diamond export levy contained within the Diamonds Act is technically still applicable, except for the a waiver via a previous section 59 agreement

– The waiver via section 59 agreement only applies for one year from the Diamonds Amendment Act, 2005 (the Minister of Finance accordingly has the power to continue the section 59 agreement waiver until this Bill is fully operational

– Without this deferral, a situation could inadvertently arise in which the 15 per cent export levy applies without any section 59 agreement relief

48


Deletions - ScheduleDeletions - Schedule

• The Diamond Export Levy Act fully replaces all diamond levies required by the Diamonds Act

• All diamond levies imposed by the Diamonds Act have been removed, including the 15 percent export levy as well as the fees / levies to fund the previous State Diamond Board



REGUALTIONS

50


Ministerial Waiver: Need for RegulationsMinisterial Waiver: Need for Regulations

• Two key exemptions within the Diamond Export Levy are left to Ministerial waiver– Exemption from the diamond exchange and

export centre (section 6)– Exemption for diamonds offered (but not sold)

at the centre (section 7)• Both Ministerial waivers are left to

regulations• Regulations provide Government with

some flexibility so changes can be made as new facts emerge

• However, starting regulations must be issued rapidly to provide industry with certainty

51


Possible Criteria #1: Promotion of Possible Criteria #1: Promotion of Downstream BeneficiationDownstream Beneficiation

• Local diamonds need to generate economic activity beyond mere extraction

• Hence, producers presumably should obtain some level of exemption from the Diamond Export Levy to the extent producers generate or regularly support:– Local/regional sorting/valuing– Local/regional cutting and polishing– Local/regional jewelry making and

manufacture, and– Local/regional diamond retail and marketing

directed to intermediate or final consumers

52


Possible Criteria #2: Local UtilityPossible Criteria #2: Local Utility

• The Diamond Export Levy must account for market realities

• Levy exemptions should accordingly exist where:– Over supply of certain categories of diamonds

– more diamonds than local cutters can cut (or an over supply is anticipated)

• On a general basis• In terms of specific diamond types

– Local costs are prohibitive vis-à-vis international competitors (for low value diamonds)

53


Other Possible CriteriaOther Possible Criteria

• Economic circumstances of the producer:– Marginal mines– Small size of the producer– Employment creation by the producer

• Long-term skills development or BEE facilitation

• Geological of sampling

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