diamond tax code

Diamond Companies Globally Face Tax Code Changes

By Michael Montgomery found at resourceinvestingnews.com Mon, Jun 14, 2010

As the diamond market continues its recovery, many companies find themselves having to dig out of the debt incurred during the economic collapse. There is good news from favorable market data from around the world.

By volume, US imports of polished diamonds rose 44 percent to 1.04 million carats year on year, the price rising by 19 per cent to $1294.69 per carat. The increase in profitability of mining and polishing companies around the world is driving some to call on their respective governments for investments in Africa for rough supply, tax regulation changes. This week is a wrap-up of current diamond market climates around the world.

India

In an attempt to gain advantage over China’s desire to become a diamond polishing hub, Surat’s diamond polishing industry is calling on the government to invest in African diamond mining operations, as well as humanitarian aid.

“China is making fast inroads into African nations to secure rough supplies. If they (Chinese government) are successful in their efforts, then we would have to depend on them for the rough supplies. However, we want the state government to make efforts in that direction to help the industry,” said Ashit Mehta, chairman of the world’s leading Blue Star diamond company.

The battle for supply of rough diamonds between China and India was covered in detail last month on Diamond Investing News.

The Surat Diamond Association is calling on the government to revise the tax code. Diamond cutters are seeking more favorable tax regulations and the introduction of a ‘presumptive tax module.’ A second complaint is over search and seizure regulations for income tax violations.

“The diamond traders’ body has also demanded to do away with the provisions under Section 139 (1) and 139 (2(f)), which authorizes income-tax official to “seize any stock in trade of bullion, precious and semi-precious stone or jewelery, found as a result of such search,” according to a Commodity Online report.

The Indian Finance Minister has been quoted as saying the regulations demanded by the diamond industry are ‘near to impossible to implement,’ citing that changes to regulation will create incentives for companies to avert paying taxes.

Canada

As new diamond mines are in the works throughout Canada, Saskatchewan has put fourth a new royalty system for diamond mining companies. Shore Gold Inc. [ETR:GOC] is advancing on its Star-Orion South Diamond project, which is said to have large kimberlite deposits. The royalty system on Saskatchewan’s first diamond mine is said to be the most competitive in the country.

“The new royalty regime introduces a 1 percent base royalty on the value of mine production, with an initial five-year holiday; a stepped royalty on profits of up to 10 percent, once the company’s capital investment is fully recovered; and full-cost recognition, including a 100 percent depreciation rate for capital costs and a processing allowance,” as reported by Avi Krawtiz, for Rapaport.

The company claims that the mine has an over 35 million karat reserve and that the deposits hold the rare Type IIa diamonds.

“Type IIa diamonds are rare, says the company, and account for probably less than 2% of all natural rough diamonds in the world. Only a small number of active mines regularly produce Type IIa diamonds, most notably the Letseng mine in Lesotho… Most importantly, many high-value, top colour, large specials (greater than 10.8 carats) are Type IIa diamonds, including all of the 10 largest known rough diamonds recovered,” according to a Canadian Mining Journal report.

Russia

Diamond mining giant Alrosa, is planning to increase production over the next three years. “Alrosa plans to produce 102.3 million carats of rough diamonds in the 2010-2012 period, expecting to generate $9.55 billion from rough diamond sales,” reports to Edahn Golan, of IDEX Online. This massive increase in production will be confirmed at an annual general meeting later in June.

In an effort to reduce the company’s debt to $3.5 billion, Alrosa has accepted a 2 year $500 million loan from Russian investment firm, VTB Capital. “Alrosa said at the beginning of this month that it planned to reduce its total debt down to $3.5 billion, compared to a former planned target of US$3.7 billion, due to due to the company’s ‘windfall profits’ of 7.8 billion rubles (US$245.6 million) for the first four months of this year,” reported DIB Online.

Alrosa’s chief executive Fyodor Andreyev is contemplating the creation of a joint-stock company in order to raise capital. This news comes in the wake De Beers seeking public placement as the Oppenhiem family and Anglo-American PLC may sell shares of the company to pay off debts occurred during the economic downturn.

“The crisis is not over, a second wave is expected. In these conditions, the company needs to be able to raise capital, which is only possible after creating a joint-stock company… It’s easier for a joint-stock company with a transparent management system to raise cheap loans,” said Alrosa Chief, Fyodor Andreyev.

Alrosa may be affected by a new tax law in Angola that seeks to redistribute wealth from the country’s diamond mines. “Under the new law, diamond companies will use 50 percent of their revenues to pay for operational costs. The remaining 50 percent will be used to pay taxes, investors and to help develop the local community,” said Sebastiao Panzo, an official from Angola’s state-run diamond company Endiama. Alrosa and De Beers operate diamond mines in the country.

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