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.
As we have discussed in the past, the Law on Capital City Tax was approved by the Parliament and new law has come into valid since October 1, 2015. Regulations dealing with procedures to register a tax payer, removal from registration and receipt of information was also approved in order to implement the law.
According to the law, the Capital City Tax is imposed on entities providing four special services including bars, restaurants, hotels and resorts. Other type of entities are exempt from the Capital City Tax.
However, retailers of all types of alcoholic beverages (including vodka, wine, whiskey, cognac, champagne, beer and airag /horse milk/ etc) and cigarettes (cigar, pipe and tobacco), which are operating on the premises of the Capital City are also considered tax withholders under the law.
The tax rate can be determined around 0-1.0 percent by the Citizens Representative Khural of Capital City based on the location and concentration of the population of particular area in Ulaanbaatar. Thus, the Resolution No 29/19 of Citizens Representative Khural of Capital City, September 29, 2015, set the Capital City Tax at 1 percent for above mentioned services and products in Capital City.
As for improving the Capital City Tax and taxation system, the Mayor of Ulaanbaatar, S. Batbold, and Head of the General Taxation Department L. Zorig signed recently a memorandum of understanding (MOU) in 2017.
Under this document The General Taxation Department will collaborate with the Mayor’s Office to monitor the implementation of tax laws and regulations, and continue the implementation of the law on Capital City Tax and the VAT.
As we posted previously, the general corporate income tax rate for an economic entity incorporated in Mongolia is ten percent (10%) for the first 0-3.0 billion; and a 300 million MNT base tax, plus twenty-five percent (25%) tax on all income exceeding 3.0 billion MNT.
However, Parliament recently approved amendments to the Law on Corporate Income Tax. The amendment aimed at supporting “small and medium-sized enterprises” (SMEs) in particular sections by offering a 90% tax reduction for a period of several years.
The 90% tax reduction will be available to SMEs with less than 1.5 billion MNT in sales operating in the following four sectors:
- the food production industry;
- the clothing and textiles industry;
- the production of construction materials; and
- the agricultural and livestock industries and its supplementary operations.
The SMEs will be eligible to pay a 1% tax on business conducted from January 1, 2017 to January 1, 2021 (That’s 4 years at a 1% corporate income tax rate!). The government believes that this will reduce the tax burden for SMEs, create a favorable environment for increasing employment, result in increased investment, encourage entrepreneurship, and increase the number of SMEs.
Now is the time to start your new operation in Mongolia!
Mongolia is a country with vast open land, and few people. While the economy has been slow in recent years, the country has a huge amount of untapped potential. Now could be an excellent time to consider starting a new unique business opportunity in China.
LehmanLaw Mongolia is pleased to introduce our clients to the Business Counsel of Mongolia, and its support for the Doing Business in Mongolia project.
The Business Council of Mongolia (BCM) strives to make real effective contributions to bettering the environment for businesses large and small in Mongolia. BCM fosters international trade and healthy business relations by providing a network for its members and Mongolian businesses. BCM also works closely with the Mongolian Government private sector, embassies, NGOs, special interest groups and business associations to advance these goals. About 370 individuals act as volunteers on the BCM’s working groups which help to make recommendations on key areas for effective advocacy.
The Doing Business in Mongolia project aims to identify and promote new opportunities in Mongolia and well as help businesses struggling with common issues and challenges regarding operating their business in Mongolia. The volume will include 12 detailed and insightful interviews exceptional Mongolian business leaders.
Regional Deputy Vice President for Europe, Asia, Pacific and Latin American of Millennium Challenge Corporation’s (MMC) Department of Compact Organizations, Ms. Fatema Z. Sumar has informed the Mongolia Minister of Foreign Affairs Mr. Ts. Munkh- Orgil that MCC’s Board of Directors have decided to include Mongolia in a list of countries eligible to sign the Second Compact Agreement.
Mongolia’s first MCC compact, a five-year, $285 million infusion of targeted development assistance from the United States was concluded on September 17, 2013.
The MMC’s second compact agreement will be focused on creating comprehensive ways to create sustainable and suitable solutions for Mongolia’s long-term development.
The MCC will cooperate with Mongolia to improve sanitation and water supply facilities serving the ger districts of Ulaanbaatar. The Board of directors of MCC believes that maintaining efforts to combat corruption in Mongolia will yield improvements for the economy. The preparations for the signing of the Second compact are underway and it expects to sign in 2017.
This is seen as an important development for Mongolia, as securing clean water and sanitation is a key element to attract Foreign Direct Investment. It is expected that new water and sanitation facilities will help to bring in new investments and help to diversify the Mongolian economy.
The 4th Trilateral Intellectual Property Conference between Mongolia, Russia and China was held in Ulaanbaatar on 6 September, 2016. The theme of the conference was, “Protecting intellectual property rights; bringing intellectual property to the market; and encouraging innovation, technology, and SMEs.” Participants included the Head of the State Registration and Intellectual Property Rights Office of Mongolia R. Sodhuu, the Commissioner of the State Intellectual Property Office of the People’s Republic of China Shen Changyu, the Director General of The Russian Federal Service for Intellectual Property Grigoriy Ivliev and around fifty other intellectual property officials and representatives from all three countries.
Mongolia ranks 55th on the innovation index and the State Registration and Intellectual Property Rights Office of Mongolia representative G. Sarnai noted that although Mongolia conducts a great deal of research, little is being done to patent the research abroad and more needs to be done to bring the intellectual property to the market.
The Commissioner of the State Intellectual Property Office of the People’s Republic of China Shen Changyu noted new policies adopted by State Council in regards to intellectual property development and protection of innovation, highlighted China’s focus on bring new intellectual property to the market in addition to promoting new effective measures for guarding against infringement of Intellectual property.
The Director General of The Russian Federal Service for Intellectual Property Grigoriy Ivliev indicated that Russia also is increasing the investment for research and innovation, and pointed to positive results including new legislation for copyright protection Russia is also focused on decreasing the infringement of intellectual property online.
The conference is an important indication of the regions dedication to promoting Intellectual Property development and legal protection. The conference allows senior officials to share experiences and practical knowledge as regarding effectively promoting intellectual property development and legal protections. A key goal of the conference is to promote commercialization of intellectual property in all three participating countries through technology and innovation support centers and small and medium-sized factories. The conference is organized regularly each year.
These are difficult times for the construction and real estate sectors in Mongolia. This is demonstrated by the recent trend in which newly build apartments are not being sold. Apartment prices are so high that ordinary citizens are often unable to afford the price for an apartment. At the same time, construction companies are relying on high interest loans to fund continued development projects. On top of that, many construction projects lack coordination and city planning and end up without access to basic needs such as parking areas, playgrounds and parks, or access to schools.
The situation has been described as a bubble, driven from the economic boost the country had received from the mining sector. As a result of the bubble, it is often impossible to obtain a clear and accurate valuation of a property, including land and any structures. This results in inflated property purchases by construction companies without any reasonable ability to obtain a return on the investment. Construction companies which cannot repay loans risk the seizures of properties and buildings by banks seeking to collect. If this happens, the properties are sold at a 40% discount off market price.
Typically in Mongolia, a construction company plays the role of a Real Estate company. Construction companies not only build buildings, but become responsible for sales and continued maintenance of the property. A better system may be for Construction companies to focus on building a building in compliance with all environmental and safety regulations, and then sell directly to a property development company, which has responsibility for such things as funding, community planning, and long term maintenance.
It is clear some kind of reform is needed in the sector. Experts have proposed three main solutions. Firstly, the system for property zoning should be improved. There should be government designated zones for residential spaces, industrial areas, and green areas. Secondly, steps should be taken to limit high interest loans for property development, and valuations should be moved to a lower more market based rate, property taxes should be imposed. Finally, an electronic database should be established containing all information in connection with any given property. This would provide the public with convenient access to property information, which will allow for more informed purchases.
Parliament approved the Law on Capital City Tax on 19 June 2015 and the law entered into effect on October 1, 2015. The Law on Capital City Tax encompasses and includes the General Taxation Law, Budget Law and the Law on the Legal Status of the Capital City and other laws and legal acts enacted in conformity with them.
The law imposes a capital city tax for the first time In Mongolia. The capital city tax is imposed on the sale of alcohol and cigarettes, the supplies of hotel and resort services, and services offered in restaurants and bars.
The tax rate (up to 1%) will be determined, region by region, by the Citizens Representative Khural of the Capital City (or by the local parliament) depending on the location and population size of a particular area within Ulaanbaatar city.