Policy

The Ministry of Finance and the Parliament to blame for the royalty disputes

2019  |  October   |  023

By annulling several clauses in the Minerals Law during the High-members’ session of the Constitutional Court, Mongolia is now unable to receive royalties, the main source of revenues from the mining sector. Minister of Finance Ch. Khurelbaatar tweeted “Members of the Constitutional Court, as a result of your decision today, the royalty tax is written off causing budget revenues to fall by 1.3 trillion tugrugs annually. In short, minerals have become the property of companies, not the people. All copper, gold, coal, iron and zinc mines owned by Oyu Tolgoi, Erdenet, Erdenes Tavan Tolgoi, and Tsairt Minerals are now unentitled to paying royalties. Minerals are now miners’ PROPERTY, not the people’s. This is not a game”, prompting the public to finally turn their attention to the overlooked clause after six months. Such statements made by Minister Ch. Khurelbaatar and the President’s Chief of Staff Z. Enkhbold is politicizing the issue rather than carefully considering and finding solutions.

In addition the VAT, three forms of payments under the categories of “used, sold and shipped”

In reality, this situation represents the negative outcomes created by multiple legal loopholes in Mongolia’s minerals sector and a series of changes in the sector’s legal environment. Sectoral experts and analysts are also criticizing the Parliament and Cabinet’s negligence towards legal amendments. From leaving out recommendations from each sectoral stakeholder in drafting the amendments in the first place to failing to fix the mistakes after the decision being made by the Constitutional Court, both the Cabinet and the Parliament are to blame for this outcome. In this edition, we are presenting the report on when the amendments on royalty started and what justifications the Constitutional Court provided to annul the clause.   

March 26, 2019

The dispute surrounding royalties can be traced back to the Law on making amendments to the Minerals Law passed by the Parliament on March 26 earlier year. The amendment introduced major changes in who should pay royalties. Previously, only the mining license holders had an obligation to pay royalty as calculated from the sales price of all types of minerals they sold or shipped for sale or used from the mining site. The amendment changed this provision as “Any person that sold minerals, shipped minerals for sales, and used minerals, or sold gold to the Bank of Mongolia and commercial banks is now obliged to pay royalty fees, and the royalty shall be paid to the state budget as calculated from sales price of all type of minerals they sold or shipped for sale”. This enforced all who undertake minerals related businesses to pay royalties.

The Ministry of Finance justified this change as the state’s entitlement to full taxes from natural resources. 

The amendment was presented to the Parliament on November 21, 2018. The concept note of the draft states “There’s a legal possibility which enabled license holders, artisanal mining unions, partnerships, and individuals as well as legal entities that purchase minerals from artisanal miners and export to abroad and refinery and processing factories not to pay any royalty or submit due reports to the relevant authorities.” “Therefore, for the purposes of ensuring any non-license holding individuals and operators of artisanal mines, processing factories, concentrators and refineries to pay royalties, report their business activities and registering them, as well as avoiding a drop in the amount of gold submitted to the Bank of Mongolia, increasing foreign currency reserves, and ultimately centralizing the royalties in the state budget and expanding the taxation foundation….” 

The example presented by the Government was the fluorite sector. In 2012-2016, from the total export of 1.6 million tons of fluorite worth 381 million USD, 11.1 billion MNT was collected as royalty in the state and local budgets. It was viewed, however, that the actual royalty amount of 34.6 billion MNT was not paid due to legal loopholes.   

June 28, 2019

Citizen S. Bayarmaa filed a complaint to the Constitutional Court, saying that the Minerals Law amendment violated the Constitution. In her report, it mentioned “A royalty imposed on the business entity who mined the natural resources. Again, a royalty is imposed on entities who processed and used these resources. Then, an additional royalty is required from entities who sold and exported them. This means the state is imposing four types of taxation, including VAT, on the same product. Therefore, it is too unfair that entities who sold, shipped and used minerals are required to pay, also, the VAT, three forms of payments under the categories of “used, sold and shipped”. 

The Constitutional Court discussed this matter during its members’ session on June 28 and concluded that S. Bayarmaa’s statement was justified. The conclusion stated, “Clause 1.2 of the “State Minerals Sector Policy” passed by the Parliament states “The purpose of the state minerals sector policy is to … improve minerals exploration, production, and processing qualities, produce value-added products, and increase international competitiveness…” and clause 35.11, Article 35, Minerals Law states “Mined, refined and half-refined products shall be supplied to processing factories operating on the territory of Mongolia on a priority basis at market prices”. Moreover, in addition to these regulations, around 30 resolutions by the Parliament, Cabinet, President, and other relevant authorities legislate to support domestic production of value-added products”.

The Constitutional Court’s conclusion promulgated that specific clauses of Article 47 of the Minerals Law violated Clause 4, Article 5 of the Constitution that says “The State shall regulate the economy of the country to ensure … the development of all modes of production and social development of the population” and Clause 1, Article 19 that says “The State shall be responsible to the citizens for the creation of economic, social, legal and other guarantees for ensuring human rights and freedoms…” Therefore, the Court informed the Parliament to annul the specific clauses of Article 47 of the Minerals Law from November 1, 2019, and submit its response within 15 days.

July 16, 2019. During its session of July 16, the Parliament discussed conclusion no.03 of the Constitutional Court and passed resolution no.70 that states “unable to accept”. 

October 30, 2019. As the Parliament did not accept the Constitutional Court’s conclusion no.03, the Court re-convened the members’ session to discuss and issue its final decision, according to law. During this session of October 30, the members viewed the Constitutional Court’s conclusion no.03 as justified and decided to annul specific clauses of Article 47 of the Minerals Law.   

The concept of “minerals royalty” was first pinned in the Minerals Law of Mongolia of 1994. Legal experts and sector professionals see the royalty as the main “instrument” that implements the Constitutional clause “Natural resources shall be the property of the people”. Since its first legal conception, the royalty was imposed on the sales income of legal entities who extract mineral resources under a license. Meanwhile, the issue of collecting the revenues either in the state or local budgets went through several revisions.  

The Minerals Law amendment of March changed the previous practice of imposing a royalty on the products mined and sold from a license holder’s mining site, becoming the main root cause of present arguments. However, we should note that this argument is not a case of whether mining companies should or should not pay royalties. It’s nowhere near the case where companies stopped paying royalties and mineral resources slipping out of people’s control, as Minister Ch. Khurelbaatar put it. Even if royalty is annulled, coal and copper would still be exported through Gashuunsukhait port and companies are saying they would still pay their royalties.  

That being said, it’s the state’s or the Parliament’s call to decide whether to continue imposing royalty only on products mined from nature, or on companies trading and exporting the mined products or even on producers refining the mined products and producing value-added products. This decision, however, must not negatively impact the mining sector’s competitiveness. Miners have exactly this position, as well.

Although the Cabinet drafted a law to reinstate royalty, the Ministry of Finance and the Ministry of Mining and Heavy Industries do not agree in terms of the policy. The present situation calls for the Parliament and Cabinet to make changes to the mining sector tax policy that is straightforward, stable and without requiring multiple interpretations, as soon as possible. There’s an urgent need to clarify recent debates, including whether mining licensed companies should build refineries or processing plants, and what kind of taxes the trade and shipping companies should pay. 

 



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