“Annulling the VAT refund is illegal and against all international practice“

How do you see the amendment to the VAT refund practice?

The VAT law is clear that exported products are exempted from paying the tax. Thus all amounts paid as VAT during production must be refunded when the product is exported. If this refund clause is withdrawn then the basic principle behind VAT is lost. We wonder if our legislators were aware of what their approval of the law meant or if they passed the amendment without realising the full import of their action. We had heard that an amendment was in the offing but nobody sought the informed opinion we could provide as a professional organizations.

The amendment is being praised as a step to increasing state revenue. The impression is being created that Mongolia was losing immensely because of the refund system. It has to be clearly understood that no mining product is or can be sold domestically, so no undue favor was being done by refunding VAT. Worldwide it is accepted that VAT is an internal arrangement and cannot apply to transactions outside a country.  Indeed, there is not a single country that imposes VAT on their exports. Mongolia is going to have the dubious honor of being the first to do so, in the face of well-established practice based on sound logic.  I fear international sanctions will now be proposed, after our lawmakers have done something quite unheard of.

I don’t know if those who initiated the law will even now understand their folly and worse, and withdraw their amendment. On our part, we are worried as a heavier burden has been placed on mining companies. They pay a quite a large amount of VAT on goods and services used during production and if the refund stops, this will have to be added to the product cost. The end-consumer will be asked to pay more, and this is not easy to negotiate in a competitive market, more so in these difficult times. 

One would really like to know how the amendment can be defended against the charge that it clearly violates the basic principles behind VAT. Do our decision makers understand or care?
 
You say the MNMA was not asked for any input…

This has now become the practice. There is no prior information on which laws will be discussed nor is there any effort to gauge public response or to receive expert opinion. Laws are now passed almost at a whim, without proper deliberation and assessment of long-term effects. This was seen in the case of the windfall profits tax also when the law was suddenly passed. Such cavalier legislation will not help the country move forward, but will harm its development.

What negative impacts will the law have, and are there no advantages to be gained?

The costs of mining will increase. Sometimes this is unavoidable and has to be seen as a natural risk in doing business. But this time the extra expenses are being artificially imposed and the whole thing is being done in an unprincipled, even illegal, way. With products becoming more expensive, exports are likely to fall. The worst hit product is likely to be coal.

What sense can one make of the conflicting signals coming out of Parliament? As soon as they say development of the mining sector is essential for the country’s growth, comes another decision that will bring the sector into stagnancy. Take the recent law about stopping mining operations at a river basin. It would be understandable if the decision was not to issue any licences from now on, but, no, the law takes effect retrospectively, and existing licences have to be scrapped. It is not just the companies holding legitimate licences that find themselves in trouble. How is the Government going to pay them back the licence fees already collected, and compensate them for expenses so far incurred? Where is the money when the Government cannot even pay salaries to its staff?

Or is the intention to give no compensation? The law does not allow this and the companies certainly wouldn’t take it lying down. They were in business not just for their own profit but also because they felt developing the mining sector was their contribution to the country’s development. All the time we hear that jobs must not be lost, and new work places created, and then comes a decision which in effect says, “Stop the work and make you employees redundant!”

Such blatant contradictions are taking place because short-term political considerations are taking precedence over long-term economic sense. Talking about jobs is easy, but creating them on the ground is not, and there is no reference ever to those who are losing their livelihood as a consequence of laws passed. These are tough problems, much tougher than passing a law without realizing what its fallout will be.

The nation’s interests are not contradictory to those of the nation’s people and protecting them does not mean you have to prejudice some people’s rights. There has to be forethought and foresight, and proper deliberation on the basis of unbiased information before momentous decisions are taken. The pros and cons have to be balanced and the mind applied. But nothing of this is done, and one gets the impression that decisions are taken to present a feigned revolutionary facade.
 
So, you see nothing good coming out of this law, do you?

Yes, I don’t expect anything positive from this. When we talk about the state of the environment, do MPs keep track of how many hectares of forests are destroyed by fire or by worms? Are they aware of how many rivers and lakes have dried out because of climate change? They are dreaming if they think the world will be greener and our ecology healthier only if they blame a group of highly visible people for all that is going wrong in nature around us. They can stop organised mining but how will they hold back the ninjas from any place where there is a reserve? These artisanal miners do not care for the laws passed by Parliament.  Who will be held responsible when they are finished, leaving the environment destroyed?  Will the people who initiated the law take the blame?

Going back to the VAT amendment, was it necessary to go for a total annulment of the refund, or could the rates have been fixed at a globally accepted level?

There can be no globally accepted rate as VAT is nowhere imposed on exports. That is totally contrary to the fundamental principles of VAT. A Government has the authority to tax exports, but VAT has to waived.

But the refunds were a burden on the budget, weren’t they?

Taxes are collected from exported products according to the terms of their export contract. The terms of these contracts are made available to the tax organization here by the exporter, and can be verified with the importers overseas and the tax authorities in the importing countries. It is common in Mongolia for companies to conceal their income and thus save on taxes. Our tax authority loses a lot of revenue this way. They have a right, indeed a duty, to put an end to this illegality but they cannot recoup their losses generated this way by cancelling VAT refunds. Let them catch the tax evaders and make them pay what is owed to the State, but let them not tweak the law to get the money otherwise.
 
The annulment is being justified as it will not be possible to pay such huge refunds to exporters from Oyu Tolgoi and Tavan Tolgoi when those projects really get going. Is there no logic in this?

The tax authority is presenting its case as if it gives a grant to companies. The operative word is “refund”. The companies got back what they had already paid in tax when they earlier bought products and services. These are not handouts from the budget; these are simply and clearly money deposited in the budget with the unequivocal understanding that some of it will have to be returned. So why did the tax authority calculate the amounts received as permanent income when they knew a part would have to be given back, that they were just holding it until final accounts were made? The tax authority wants to create the impression that the state was distributing largesse, when actually it was just paying back what it owed under the law and under international practice.
 
What has been the reaction from your member organisations?

We have received many complaints. Mining companies already have a heavy burden. They have been the highest tax payers in the country and you cannot keep adding to their costs. There are more productive ways to improve the livelihood of people.

We were never asked for ideas, nor were we provided any advance information. We don’t know if the amendment and its justification and implication were discussed at the Government level.

How does NMA now plan to protect the interests of its member organizations?

We have called a meeting on August 12 to discuss the situation. It is likely members will exchange views on the general prospects of doing business here if such snap decisions become the norm. Businesses cannot thrive in an unstable environment. If the goose is killed, where will the golden eggs come from?  It is not the Government or Parliament or the state organizations that develop the country; that responsibility is borne by enterprising and hardworking citizens who need encouragement, and are not to be treated as whipping boys.