April 2010
Moves are afoot to introduce a new form of taxation, likely to be called increased royalty, from January 1, 2011, immediately after we bid farewell to the old year and with it the 68% windfall profits tax. The new entrant is meant to rectify the mistakes made in the implementation of what may be called its elder brother. Many in Parliament wanted this to be part ofthe Oyu Tolgoi investment agreement during negotiations but the investors succeeded in persuading the working group against such a move.
Increased royalty fees are charged in many countries and is not something really novel. The system comes in two principal ways. In advanced countries, it is usually linked to the profit level of the companies. In others, like many in Africa, the form is somewhat more stringent. It is imposed depending on the volume of output and sales. The risk in linking it to the profits is that companies may utilise their considerable accountancy skills to manipulate the statement of profit and thus pay less. That is why countries less capable of monitoring complicated and convoluted financial records opt for clearer specifics. Mongolia has chosen the more certain method of computing the tax depending on the commodity price in the global market. The higher the price, the more the tax. In this, it is almost the same as the 68% tax. However, it is not so brusque and will fetch less revenue. According to the estimates made by the Ministry of Finance, for example, when the price of copper is $7,000 per ton, Erdenet Mining Corporation pays $2,448 according to present tax, but its liability under the proposed one will be just $280.
New tax
A windfall profits tax on copper was first proposed by MP N.Batbayar in 2006. Worried that the Russians would perceive it as aimed at Erdenet, the MPRP got the ambit of the tax extended to cover gold as well. This time the net is cast wider. Increased royalties are to be paid not only on copper and gold, but also on molybdenum, iron ore, tungsten, fluorspar, and coal, according to the draft made by the Ministry of Finance.
Article 47 of the Minerals Law will have to be amended before the new tax can be approved and introduced. That will increase royalty rates from the present 5% to 10% when the copper price is more than USD 8,000 per ton. If the price is less than that, the rate will be correspondingly less. Similarly, royalty on gold will be 10% in place of the present 5% when its price hits $1,300 or more per ounce. The 10% rate will apply to coking coal when its price is $70 or more per ton. The Ministry is still not sure if the tax will cover bituminous coal, too. It is common international practice to have different standards for different minerals.
Pledge
The Spring session of Parliament has a full plate before it. Mongolia does not have a policy on the mineral sector, and MPs will debate on the need for one and on what this should be. The general opinion at the recent mining conference was against passing amendments to existing laws or adopting new laws until such a long-term policy is apptoved. In a statement that reinforced this position Prime Minister S.Batbold said that the concept behind utilisation of the Tavan Tolgoi deposit should be adopted before specificregulations are considered. All details have to comply with the general concept.
This also means, by extension, that the State policy embracing Tavan Tolgoi, railway routes and the mineral sector in its totality has to come before any amendments to any law to do with the sector. The above mentioned tax amendment, a new law on the earth, small-scale mining laws, and new and more professional regulations on determining reserves — all these can be discussed only in the light of a comprehensive policy.
Positive developments are expected in the legal environment of the minerals sectorto bring it into compliance with world practices and incorporating the lessons learnt from mistakes made in the Oyu Tolgoi agreement. How do we reconcile the decision to give more cash to citizens with our expectations from the new policy? The cash flow from the proposed increased royalty and from the anticipated increase in tax revenues will all be eaten up by the cash disbursement program. MP S.Oyun warned at the conference that it would be disastrous to impose new taxes in the mining sector only to pay for the programme. The sector is already being governed by absent minded, accidental and abrupt laws. The Oyu Tolgoi agreement is certainly not a template. The Prime Minister has made it clear that the agreement on Tavan Tolgoi will stay clear of the mistakes made in the case of Oyu Tolgoi.
He has stressed six principal areas where a new approach will be seen. Mongolian companies and individuals will play a larger role in developing the project in cooperation with foreign investors and operators. He has also emphasized that the benefit to national interests will be the main criterion for selection of the investor(s). He has made it clear that preference will be given to companies and consortiums with their national Government behind them. This indicates that investors from Russia, China, the USA, South Korea and Japan will be the ones to participate in the third stage of negotiations. The Government is likely to split Tavan Tolgoi equally between consortiums from Russia, South Korea and Japan on the one side and Chinese and American companies on the other. Not only will the “advance payment” demanded be “much more than in the case of Oyu Tolgoi”, but the Prime Minister has indicated that selection would be conditional on Russia and China agreeing to reduce transit transport rates and, in the case of Russia, on its agreeing to buy more meat from Mongolia. With regard to the USA, the demand will extend to a free trade agreement and offering opportunities for young Mongolians to study in the USA. Advance payment will thus not be in cash only. So far the Government working group has listened to the interested investors; now it will do the talking.
There would be other demands also, such as a $2-billion fund for the infrastructure projects in the southern Gobi region, setting up of value added production plants and import of advanced technology.
People
The Government intends to distribute a lot of cash to citizens, buoyed by all the revenues to be yielded by the mining sector. Whose pocket is being picked when paying Tg70,000, Tg120,000 and now the latest crazy announcement of the Tg500,000 largesse? All efforts directed to the development of the mineral sector and all profits from the strategic deposits are going to be swept away by this one populist and insane decision. No matter what form the policy on the mineral sector takes, there will not be any development without political prudence to support it. Not one among the demonstrators in the main square really expects to be given a large amount in cash. They actually want to give the message that the parties should be more careful when making a pledge and should not play with people’s sentiments. What is the justification of agreeing to give MNT500,000 to every citizen when there is no pay increase for overworked medical staff?
The Mongolian economy is poised to make rapid progress. It will be wise to heed the people’s warning that they do not want bad management to ruin good money and to respect their judgement that the Mongolian state was doing no good to them. Rather than trying to trace who is behind the demonstration, the Government should be more focused on ascertaining what is wrong with itself and mapping out a course that would assure sustainable development for all.