RAPAPORT… South Africa’s finance minister Trevor Manuel tabled a bill June 19, 2007, to reduce the export levy on rough diamonds from 15 to 5 percent. Manuel also made the government’s intentions clear, following local press reports claiming the government was siding with some producers, that no concessions would be made on behalf of large producers.
The bill comes as part of a general amendment to the country’s diamond mining laws designed to encourage growth in the local diamond polishing sector. South Africa has traditionally been one of the world’s largest diamond producers with most of the rough leaving the country for polishing elsewhere.
Manuel noted that while the duty was set at 15 percent under the Diamonds Act of 1986 –as a mechanism to facilitate adequate and regular supplies of rough diamonds to local cutters and polishers– “the act of 1986 was only partially successful in this regard.” The 1986 laws were updated in 2005.
In a speech to Parliament explaining the proposed bill, he said the 1986 Act provided for relatively generous exemptions which limited its success.
“The proposed Diamond Levy Bills 2007 reduce the export levy on rough diamonds to 5 percent, but tighten the relief provisions, thereby laying a foundation for increased effectiveness,” Manuel said. “It should also be noted that the reduced 5 percent rate was not intended to undermine the power of the levy as an [export] deterrent.”
While diamond producers were concerned the tax would encourage smuggling, Manuel said the 5 percent levy would be “high enough to deter unpolished exports without hidden benefits of smuggling.”
He explained that according to informal police estimates, diamond smuggling costs are between 2.5 and 5 percent of gross diamond values and therefore, the current 15 percent rate merely enhances smuggling.
As a general rule, the updated diamond laws state that all rough diamonds intended for export must be offered via a tender process at a Diamond Export and Exchange Centre (DEEC) for sale.
Manuel explained that under the new exemption structure presented by the Export Levy Bill, the minister of Minerals and Energy may waive the requirement to offer all rough diamonds on the DEEC for larger producers. For practical reasons, he said, the tendering process is not overwhelmed by large volumes of very small rough diamonds.
This exemption would occur if the minister believes that 40 percent of the large producer’s total gross sales over the course of a year will go to local diamond beneficiators, and that the producer’s total gross sales in the same period exceeds R3 billion.
Medium size producers will not receive a waiver from the DEEC tendering process, but can obtain relief from the levy if 15 percent of its annual gross sales goes to local diamond beneficiators, and if its gross sales within the year do not exceed R3 billion per annum.
Small producers will receive relief from the export levy without any prerequisite of sales to local diamond beneficiators, provided that its total sales do not exceed R20 million per annum, and provided that anti-avoidance measures exist to prevent small producers from splitting sales across several controlled companies for purposes of avoiding the levy.
Manuel also explained that the bill provides allowance for local beneficiators to export diamonds purchased as long as the company cut and polishes 80 percent of its diamonds purchased. The remaining 20 percent would be subject to the tendering process of the DEEC.
“The proposed relief measures ensure that the local supply of rough diamonds is commensurate with local demand,” Manuel told Parliament. “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,” he said.