The Bank of Mongolia, signed a cooperation agreement on June 21, 2017 with the Bank of Korea. The agreement solidifies plans by both organizations to cooperation regarding development of a comprehensive strategy for development of the foreign exchange market in Mongolia.
The Bank of Korea has been conducting a study on Mongolia’s foreign exchange market. The results of the study are expected to have an important impact on development of foreign exchange regulations and growth of the foreign exchange market in Mongolia.
Major complaints about the current state of the foreign exchange market in Mongolia include the lack of transparency in the process and inefficient operations. The study will draw on the Bank of Korea’s past experience in managing foreign exchange issues in Korea to set out a road map for Mongolia.
The plan is expected to help stabilize the exchange rate of the Mongolian Tugrug, which will facilitate a better environment for foreign investment and domestic economic growth.
According to The World Bank, a new renewable energy project is to be launched in Mongolia, utilizing over $50 million in loans and grants from international organizations. The project is a part of the World Bank’s efforts to assist Mongolia’s long term path of sustainable development.
Playing off the government of Mongolia’s plans to produce 30% of the country’s energy via renewable sources by the year 2030, the new project will focus on providing financing for renewable energy investments in Mongolia.
Mongolia is a vast, open country with abundant solar energy and wind energy potential, waiting to be taken advantage of. One key aspect of the program is the construction of the first large scale solar power plant in Mongolia, designed to supply electricity throughout Mongolia’s western regions.
Another important aspect of the program will be the revamping and renewal of Mongolia’s electricity distribution grid, which currently operates inefficiently resulting gin losses of up to 25% of energy transferred on the network.
Sustainable development and efficient electricity distribution are key to promoting long term economic growth in Mongolia. The new funding will go toward providing new opportunities for businesses and families in Ulaanbaatar, as well as throughout the rural areas of Mongolia. The project will also provide funded needed to attract foreign companies with renewable energy technologies to Mongolia.
When China held its Belt and Road Forum for International Cooperation in Beijing May 14 to 15th, China’s President Xi Jinping welcomed Mongolia’s efforts to help link the European and Asian economies.
China welcomes cooperation with Mongolia in areas of trade and investment, agriculture, industrial growth, and energy development. President Xi suggested that China Belt and Road Initiative complements Mongolia’s own Prairie Road development initiative. Cooperation is also important to promote a China, Mongolia, Russia economic corridor.
President Xi advocated for a study of establishing a Free Trade Zone on the Border wth Mongolia, and increasing economic cooperation between the countries, including cooperation on major mineral industry programs and infrastructure.
Prime Minister Erdenebat of Mongolia indicated cooperation with China is a Priority for Mongolia, and said China’s Belt and Road initiative is important for promoting development in Mongolia. According to Erdenebat, Mongolia may play an important role as a link between Europe and East Asia.
Mongolia is well placed between major powers Russia and China to serve as a conduit for economic and cultural exchange. Mongolia suffers from a lack of population compared to its large southern neighbor, however, Mongolia’s rich mineral resources mean Mongolia will be able to generate foreign interest and income for years to come. With budgetary reform in Mongolia well underway, further integration with China and Russia is one more positive development for the future of the Mongolian economy.
As we have written about in the past, Mongolia opened an internet based registration system for pledges, in March of this year. In addition to serving as a platform for registration of international pledges for some of the world’s largest financial institutions, the new system has also supported over 10,000 registrations in favor of small and medium sized entities (SME).
The registry, implemented by the Ministry of Justice and Home Affairs, is one part of a major project to reform security backed transactions and financing in Mongolia. Enabled by the newly enacted Law on Tangible and Intangible Movable Property Pledges, the online registration service offers web based filing and public access for security interests on movable collateral in complex financial transactions.
The major benefit of the online platform is the ability of potential financiers to conduct a web-based search on property held by potential partners, to determine if the property offered up for collateral is already subject to a previously existing pledge or other security. This information will have a major impact on the business of lenders and will hopefully make potential lenders more likely to make funds available to a borrower after they are able to confirm there are no other securities on the proposed collateral.
According to The Financial, 38% of the more than 10,000 overall registrations are for equipment, 25% are for livestock, 5.4 percent are receivables, and 1.7% are vehicles. These stats suggest that local farmers have been quick out of the gate to take advantage of the new opportunities opened up by the new registration system and the availability of additional financing to promote development and growth.
After the financial crisis in 2008 and a series of harsh winters, Mongolia took a few years to recover. As part of the recovery, the government set out a wide reaching development strategy, and setting 6 development goals. The government quickly realized that implementation of its strategy would relied heavily on up to date data and statistics. It recognized that Mongolia needed to improve and modernize its internal statistic generation and analytical capabilities in order to effectively implement its new strategic development plan. Mongolia’s old state statistics system was oriented to service the old state lead planned economy from years past. It required a major reorientation to address the needs of the emerging market economy.
The government of Mongolia approached the World Bank for assistance in implementing a new statistics system under a reorganized National Statistical Office (NSO). The World Bank worked with the government to develop the Strengthening of the National Statistics System of Mongolia (MONSTAT) project, designed to generate and distribute, meaningful, accurate and current statistics data, to promote evidence based law making in support of the government’s strategic development agenda.
The first step was to improve institutional, regulatory and policy framework for statistics collection, as well as to put in place higher standards for statistics collection and recording. Personnel knowledge and skill also required improvement, particularly as to survey techniques and data collection methodology. New technology was acquired and implemented to bring operations into the information age. The project introduced data management and quality standards of the EU.
As a result of the efforts of MONSTAT, use reliability and user satisfaction regarding statistics generated by NSO has increased. NSO has explored and implemented new ways to make statistics information available to the public and to researchers. NSO has implemented systems to improve inter-agency cooperation in data-collection and sharing.
The MONSTAT project and the improvements to the NSO are positive examples of Mongolia’s continuing development. The project has provided valuable information to a rage of government agencies, NGOs, and international organizations, working collectively to make lives better for Mongolians and to build a positive environment for foreign investment. With these improvements to the NSO, foreign investors are better able to develop business plans which rely on internal Mongolian statistics.
Vice President of Vietnam, Mrs. Dang Thi Ngoc Thinh, visited Mongolia for an official visit from May 07 -10. While in Mongolia, she participated in the Mongolian Vietnamese business forum in Ulaanbaatar on May 09. Mrs. Dang Thị Ngọc Thinh gave a presentation at the opening ceremony of the business forum discussing trade, investment and economic cooperation between Mongolia and Vietnam.
Vietnam’s trade volume with Mongolia is estimated at USD 59 million in 2016 alone. The trade includes over USD 40 million in race, sugar, canned foods and telecommunications equipment imported to Mongolia. Mongolia and Vietnam seek to increase cooperation and trade in natural resources and agricultural goods, which Mongolia is well placed to export to Vietnam.
Three main issues were touched on during the official talks between Vietnam’s Vice President and the Prime Minister of Mongolia. These included promotion of defense ties and cooperation between law enforcement agencies.
Also discussed was increased export of Mongolian meat products to Vietnam, particularly goat meat. Mongolia is scheduled to export 20 tons of goat meat to Vietnam this year, and trade is expected to grow significantly.
The agreement on export of goat meat highlights one of Mongolia’s current strengths in agricultural production of meat and dairy. The sector is ripe for foreign investment, including funding, technologies and techniques.
In 2016, matters related to Free Trade Zones (FTZ) came under the power of the Deputy Minister. There are three FTZ in Mongolia: Zamiin-Uud, Altanbulag and Tsagaannuur. The Law on FTZ was revised in 2015 to enabled and promoted the cooperation between private entities and public authorities in developing FTZs.
Altanbulag Free Zone in Selenge province covers 500 hectares of land. Since the establishment of Mongolian FTZs, MNT 35 billion has been allocated by State Budget and 77 per cent of the budget was invested to the infrastructures of Altanbulag Free Zone. At the moment only Altanbulag has drawn investment from private entities, which totals MNT 6.2 billion.
Zamiin-Uud Free Zone in Dornogobi province covers 900 hectares of land. In 2010, Development of Zamiin Uud infrastructure project started with soft loan of the Government of China which totals USD 58.8 million. The project performance is 95 per cent. As of this day, 23.6 hectares of land are in possession of 13 private entities for the purposes of trade, service, hotel, manufacture, storage, logistics and gas station.
Tsagaannuur Free Zone in Bayan-Ulgii province covers 708.4 hectares. 115 hectares are in possession of 5 private entities.
The Deputy Minister Khurelsukh Ukhnaa has stated that the Free zones are in need of accelerated foreign and domestic investment and noted that the Parliament and the Government should start establishing joint FTZ areas with bordering countries. Deputy Minister Office and Ministry of Foreign Relations are working on research and assessment and negotiating with Chinese authorities about a potential new joint FTZ.
The Immovable Property Tax Law was adopted in 2000 by the Mongolian Parliament and has been effective since 2001, over 16 years. Under the law, tax is imposed on all kinds of immovable properties which cannot be used for their original purpose when they are separated from the land. All persons or legal entities, who own immovable property in the territory of Mongolia, are considered taxpayers.
Local governments at the provincial level, and in Ulaanbaatar, are responsible for imposing a tax on immovable property within their respective locality. The tax level may be .6 – 1.0 of the value of the property as calculated considering the location, intended use, size, and overall demand of the property in question.
For tax purposes, the value of immovable property excluding the underlying land is determined, firstly, by the valuation as registered with immovable property state registry. If there is no such registration, the value is determined by the valuation of insurance on the property. And if there is no registration or insurance valuation, the value will be established as the value that is written down in financial records of the property owner in accordance with the law.
According to the law, the following immovable property types are exempt from immovable property tax:
- immovable property of legal persons financed by state and local budget (state owned or funded enterprises);
- residential houses;
- buildings and developments for public use;
- management of industrial and technological parks, unit production, structures within technological parks and other immovable properties; and
- buildings and facilities constructed and registered in a designated tax free zone.
A Mongolian company or other legal entity which owns taxable immovable property will pay equal amounts of tax on the immovable property before the 15th of last month of each quarter for their annual tax liability. An individual citizen of Mongolia, or a foreign citizen who owns immovable property, must pay a once annual tax on immovable property before the 15th of February.
We have encountered many clients which confuse the immovable property tax with the tax on income from the sale of immovable property, but these are not the same. The tax on income from sale of immovable property is a onetime tax assessed upon transfer of real estate, and will be equal to 2% of the transaction cost. In contrast the Immovable property tax is owed each year for the duration of ownership of the property.
Mongolia Minister of Finance B. Choijilsuren presented to the Speaker of Parliament M. Enkhbold a set of planned amendments to the 2017 state budget. These amendments have been designed to better ensure the government’s ability to meet its obligations under the International Monetary Fund’s extended fund facility program from which the government will receive substantial loans.
The amendments are intended to stabilize the national budget and the fiscal outlook financial environment, by reductions in budget deficits, and imposing discipline.
The primary changes in the new budget include:
- Increasing taxes on alcoholic beverages and imposing tariffs on imported cigarettes;
- Increasing taxes on gasoline and diesel fuel;
- Increasing taxes on imported vehicles, in accordance with engine capacity;
- Dividing personal income taxes into three brackets and increasing personal income tax for people with higher incomes;
- Charging a ten percent tax on interest earned from savings accounts;
- Raising social insurance fees;
Of these, the biggest and the one that caught the attention of our China lawyers is the changes proposed for the personal income tax. The exact income levels which will be cut off points between the three tax tiers is not yet known, however it is likely that many expatriate employees in Mongolia may be affected by higher taxes on their income.
In addition to the above, the amended budget will impose several new measures intended to reduce the government’s overall operational sending levels and bring expenditures in line with government revenues.
- Increase the efficiency of tenders being carried out in the medical sector;
- Raise the retirement age every two years;
- Promote the Meat and Milk Campaign to develop Mongolian meat and dairy industry;
- Provide the state’s monthly welfare allowance of 20,000 MNT for children and other state assistance only to targeted groups;
- Repeal existing laws that put pressure on the state budget.
The government will aim to limit deficit spending to 10.6% of overall GDP, with revenue expected to be 23.1 percent of GDP, and overall spending to be 33.7% of GDP.
Of the above measures, LehmanLaw Mongolia is pleased to see efforts to promote the Mongolia meat and dairy industry included. Mongolia’s large expanse of green pasture land, clean water and fresh air should provide excellent opportunities for entrepreneurs and foreign investors seeking to establish meat and dairy production operations in the country. Exports of such products to China should find a willing market, as Chinese meat and dairy consumption is expected to continue rising trends.
The other good news is the general commitment to eliminate old laws that cause unnecessary financial strain on the government. This review process is necessary and is expected to help the government identify new areas where spending can be reduced by smart changes to the law. This is the kind of reform needed to stabilize the Mongolian economy and prepare for long term growth.
One of the new drafts scheduled to be considered by Parliament during its next session later this year is a new Law on Investigating Infringement.
Currently in Mongolia, regulatory infringements are addressed by a range of different laws, each addressing specific subject matter. These laws range from the Customs law, Taxation laws, Competition law, Mineral law, Law on State inspection and supervision. In the current state of things, there are several overlapping areas of regulation, sometimes resulting on conflicting provisions. There are also gaps where specific sectors are without relevant regulations. The different laws also treat procedures and process of investigations of infringements differently, which as resulted in concerns about whether constitutional rights are appropriately upheld in each case. The new draft law to be discussed will be designed to cure such faults by protecting individual rights which establishing a uniform standard of official process and powers when resolving suspected regulatory infringements.
The draft to be proposed differentiates regulatory infringement from criminal offences and will adopt a systematic approach to unifying over 230 laws which pertain to various types of regulatory infringement.
Currently the various laws grant 26 different classes of official, ranging from police officer, to tax inspectors, state inspectors, prosecutors and others) ability to investigate suspected infringement and impose penalties. This new law will consolidate those procedures seek to apply uniform procedures.
Under the draft to be proposed all procedures for resolving infringements should take up to 30 days. Up to two extensions of 15 days each will be available if authorized by higher office where additional investigative measures are required.
Individuals or organizations which are the subject of a decision following the investigation of an infringement will be obligated to comply with the terms of the decision within 14 days. In the event there is no compliance, the official Court enforcement agency will have responsibility to enforce the decision.
Individuals or organizations challenging the results of an investigator may appeal the final decision to the prosecutor’s office, and will also have the opportunity to appeal the decision of the prosecutor to a court.