Contents - AL-Tax

70 5 Intercompany Sale of Diamonds The rapid growth of two diversified mining groups, Rio Tinto and BHP Billiton,that commenced operations in the late 1990s and own the above-mentionedCanadian mines, along with certain important Australian holdings. Measures introduced in Russia and a number of less developed countries (LDCs)with diamond mining operations to foster the growth of domestic diamond manufacturingoperations, with the resulting diversion of rough stones from the DTC. 2For example, the Namibian government enacted The Diamond Act of Namibia onApril 1, 2000, which exempts producers from paying royalties to the governmentif their rough production is sold to domestic cutters. The South African parliamentintroduced a Diamond Amendment Bill in September 2005, containing theprovision that “the state can determine, based on market demand, the percentageof rough diamonds that diamond producers will have to sell to a state diamondtrader.” 3 Increases in state-owned production in Russia and Angola.4 One of the aforementioned EC antitrust investigations into (a) the DTC’ssightholder system (now referred to as its Supplier of Choice or “SOC” system),and (b) the DTC’s relationship with Alrosa, a large Russian mine. While theEC originally approved the SOC arrangement in January 2003, it re-openedits investigation in response to allegations of collusive conduct formally madeby the Belgian Association of Dealers, Importers and Exporters of PolishedDiamonds (BVGD) in August 2005. 5 Moreover, the EC required De Beers toreduce its purchases of rough stones from Alrosa by two-thirds of the 2005 level(from $700 million to $275 million) over 6 years. Alrosa accounts for upwardsof 98% of all rough diamond production in Russia. The termination of the DTC’s producer contract with Argyle, a large mine basedin Australia, in 1996. 6 The decision by Tiffany & Co., Inc., a preeminent jewelry retailer in the UnitedStates, to integrate backwards into production through a stakeholding in DiavikDiamond Mines, Inc. 7 This relationship creates a captive market for a substantial2 See Diamond Bank (Switzerland) Ltd.’s 2004 Annual Report. This institution specializes in theprovision of short-term financing of the diamond business on a global basis.3 See Mathews, Charlotte, “Way Forward for the SA Diamond Industry,” Business Day, September23, 2005.4 See Bream, Rebecca and Nicol Degli Innocenti, “The Global Search for New Sparkles of Life,”Financial Times, August 23, 2004.5 More particularly, the BVGD, whose membership consists of approximately 150 wholesalers ofcut stones, filed a complaint with the European Commission, alleging that “De Beers misled theEuropean Commission, has abused its dominant position, and has artificially limited the availabilityof diamonds on the market.” See the National Jeweler, “DTC Increases Sales to SecondaryMarket,” September 2, 2005.6 Fetherston, J.M. and S.M. Searston, “Industrial Minerals in Western Australia: The Situation in2004,” GSWA Record, 2004/21.7 This move was motivated in part by the sharp rise in demand for, and prices of, rough stones in2004 and 2005, and heightened concerns regarding secure access to supplies of rough.