Taxation and mining in Mongolia

Taxation and mining in Mongolia

Mongolia’s previously sound system of mining property rights undermined by the imposition of a Windfall Profit Tax (WPT)

The state great hural passed the 1997 minerals law to regulate mining as part of Mongolia’s transition to a market economy. In 2006 the state great hural amended the 1997 law and added a new tax. The major changes included: imposition of a 68 percent windfall profit tax (WPT) on gold and copper production; and a provision for the Mongolian Government to acquire up to 50 percent of the equity in all mineral deposits of strategic importance.

These changes have been a complete setback for mining in Mongolia as they are highly unattractive to private investors. The WPT is unprecedented. It has raised the effective tax rate (ETR) on mining in Mongolia to more than twice as compared to Chile or Botswana, which are judged to be international best practice.

The very high ETR on mining in Mongolia drive private investors away from its mining sector. The recent tax changes will have heightened their perception of escalating sovereign risk in Mongolia. Both factors will have negative implications for public revenue, employment and GDP in Mongolia.

Due to the economic problems associated with the WPT, some people have proposed the WPT be replaced by a resource rent tax (RRT). The RRT is a more technically sophisticated version of the WPT but it retains most of its key economic disadvantages from an economic perspective. Therefore, it is not a policy solution in any realistic sense.

The ETR has to be cut substantially to encourage the mining sector to contribute much more for ordinary Mongolians in terms of local employment, GDP and taxation revenue over the long run. The present taxation settings are simply incapable of generating sustainable outcomes.