Source: The Mongolian Mining Journal   Date: April 30, 2010

The Finance Ministry intends to introduce, subject to approval by Parliament, a new form of taxation from January 1, 2011, immediately after bidding farewell to the old year and with it the 68% windfall profits tax. Increased royalty fees are charged in many countries and the system comes in several ways. It may be linked to the profit level of the companies, or can be imposed depending on the volume of output and sales. The risk in linking it to the profits is that companies may utilize 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, according to the preamble to the draft law on gradually increased royalty, it is less stringent. The maximum graduated rise will be 5%, added to the basic 5% rate now in force.

This maximum total royalty charge of 10% will be collected from copper when its price is more than USD 8,000 per ton, from gold when its price hits USD1,300 or more per ounce, and from coking coal when its price is USD70 or more per ton. When prices are less than these, the rate will be correspondingly less. This means when copper price is around USD7,000 in the world market, according to the windfall profit tax law, a company is subject to payment of USD2,448 in tax, while it is to pay USD280 according to the additional 4% of the gradually increased royalty applicable. Similarly, if gold price in the world market is around USD1,100 per ounce, the windfall profit tax is USD170, while the gradually increased 3% of royalty will be USD33. The Ministry estimates the gradually increased royalty will earn the state budget MNT95 billion a year.

A windfall profits tax on copper was first proposed in 2006. Worried that the Russians would perceive it as aimed at Erdenet, the Government 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 on gold, copper, zinc, tungsten, molybdenum, coking coal, iron ore and fluorspar.