Policy - Tax

Royalty issue not finalized

2019  |  October   |  024

◼ Number of royalty payers went up and tax base expanded


The commotion surrounding mining royalty finally settled, following much frustration by the Ministry of Finance and eventual defeat in front of the Constitution. The Parliament session convened with 43 members who discussed and passed the draft amendment to the Minerals Law by majority vote. Thus, the legal environment for collecting royalties has been reinstated starting November 22.

At the end of the surprising event which astonished not only politicians but miners at the same time, innovations were seen on royalty clauses which became clearer, more coherent and consistent. Ruling out the possibility of being called again to the Constitutional Court, it will essentially be confirmed that the root of all problems was the phrasing of the revision made at the start of this year. 

As per decision No.04 dated October 30, 2019, by the Constitutional Court of Mongolia, clauses 47.3.1 and 47.32 of section 47.3, article 47.1, section 47.4 and clauses 47.5.11, 47.5.12 and 47.5.13 of section 47.5 of the Minerals Law were annulled, which revoked collecting royalty from business entities. The annulled article 47.1 specified “Any person that sold minerals, shipped minerals for sales, and used minerals …. shall be royalty payer and is 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 imposed an overlap of royalties, according to citizen S.Bayarmaa who filed the complaint to the Constitutional Court.

The draft law developed by the Parliamentary working group regulates as follows:

47.1. The royalty payer is obliged to pay royalty fees, and the royalty shall be paid, without overlap in accordance with article 47.7 of this Law, to the state budget as calculated from the sales price of all type of minerals that were: 
47.1.1. sold and shipped for sale;
47.1.2. exported;
47.1.3. used for personal needs
47.1. Royalty payer shall be:
47.1.1. minerals license holder;
47.1.2. minerals exporting entity;
47.1.3. entity who submitted gold to the Bank of Mongolia and its authorized commercial banks. 
47.3. Royalty shall be imposed at the following rate:
47.3.1. royalty on coal mined, used for personal needs, sold domestically, or shipped for sale shall be 2.5 percent of the sales price;
47.3.2. royalty on gold sold to the Bank of Mongolia and its authorized commercial banks shall be 5.0 percent of sales price, and shall not be increased at the rate specified in clause 47.5 of this Law.
47.3.3. royalty on all types of minerals other than specified in clauses 47.3.1 and 47.3.2 of this Law shall be 5.0 of the sales price of the particular mineral.
47.7. For directly exporting minerals or exporting minerals after enriching the grades and producing concentrates, the royalty shall not be imposed in the overlap and the previously imposed royalty shall be deducted based on royalty rate for the specific mineral. 

During discussion of the draft laws at the session, Parliament member B.Choijilsuren’s proposal “minerals license holders and entities who retailed minerals shall create payment receipt as specified in the taxation laws for each minerals sale and shipment; royalty payer who purchased minerals from a non-license holder shall deduct royalty from the purchased minerals, report such activities and pay such royalty to the state budget.” was supported by majority of members present at the session. 

As the Constitutional Court’s decision is final, the Parliament has left no choice but to find a way out of this conundrum. According to Article 32 of the Law on the Procedure of the Plenary Session of Parliament, a working group consisting of members of the Budget and Economic Standing Committee developed and submitted for review a draft law on amending the Minerals Law which aligns with the Constitution of Mongolia and other legislation. 

However, past events are still ambiguous. Sources are saying that citizen S.Bayarmaa’s report to the Constitutional Court complained not only about the Government imposing multiple overlapping taxes, but also about their economic pressure on the processing sector, especially processing plants and concentrators, notwithstanding the aforementioned tax burden. The previous amendment to the Minerals Law regulated the imposition of individual royalty at each stage from extraction to export for the purpose of removing gaps in payments imposed on domestically sold coal and exported coal. 

It seems this information is omitted from the comments submitted to the Constitutional Court. The citizen explained in her report to the Constitutional Court that the overlap of taxes meant not about the percentage or amount, but about imposing the same taxes at each stage. Therefore, the High Court must provide an exact description of what “imposing overlapping taxes” means. Although the recent revision clarified wording and phrasing, the royalty payer is still “any person who sold, shipped and used minerals”.    

Nevertheless, one of Minister Ch. Khurelbaatar’s headache is gone, the numbers of royalty payers went up and the tax base expanded. But, it’s also a mistake to think everything’s solved. The need for regulating this type of tax more fairly and innovatively still exists. For example, the benchmark royalty in the coal sector is calculated in three main categories. India, for instance, categorizes thermal coal in 17 and coking coal in 14 classifications and sets different prices for each of them. Example: the price goes up each time the calorific value increases by 100 kcal. If we ask whether Mongolian coal classification is this low, the answer is no. The same answer goes to the question of whether Mongolia cannot classify its coal. According to the “Coal Classification, MNS 6456:2014” and “Coal, Coal Product Classification MNS 6457:2014” approved in 2014, coal has 13 classifications in consideration of indicators such as ash content and calorific value.      

However, some companies complain that they are suffering loss from high benchmark rates imposed on products sold at cheap prices due to such overly general and crude calculations. In addition, this benchmarking method raises the cost of products that otherwise would have been profitable through imposing royalty based on market prices, thus, rendering products unprofitable. In such circumstances, companies resort to an easier option of refusing to sell their weaker quality products and leaving them as stockpiles. On the other hand, the clause 32.1, Law of Mongolia on Subsoil, stating “to use methods to extract the core and co-existing minerals, as well as other components whose production is meaningful [feasible], fully, completely and efficiently” isn’t being satisfied. It is, on the contrary, susceptible to impose incomplete royalty on high quality and rare coal that was sold at a high price.   

The current amendment to the Minerals Law pertaining to royalty, then, focused mainly on who it should be imposed on rather than changing the method to calculate the rate. Since the introduction of royalties, calculation of their rates, as well as the basis of benchmark, haven’t been updated up to this date. Not only coal, but all other mining products have different market prices based on their ore and concentrate grading. As such, reality clearly shows that the methodology and procedure for calculating the rate of royalty must be further researched and improved.  


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