Finance Ministry’s Preamble to proposal to levy graduated royalty rates

The steady rise in commodity prices in the world market in recent years has helped Mongolia attract increased foreign and local investment in its mineral sector. More and more mineral deposits of strategic importance are to be put into economic circulation and Mongolia is about to see a rapid growth in its mining production.  It is clear that both the economy and the State budget will be largely dependent on the mineral sector.

In the circumstances, the two-pronged challenge before us is to maximise revenues from the mining sector but at the same time to make sure that investors do not face a tax burden that might discourage them. As owner of the resources, Mongolians are entitled to claim reasonable revenues from them but conditions must also not be too tough for the investors. The prime need is for a balance.

The profit level in mining operations and returns on investment there are directly related to commodity prices. Rise in one leads to increases in the others, but Mongolia’s experience has been that the windfall profits tax gave us less benefit than anticipated. It is common practice for countries with large mineral and oil productions to impose special taxes and different levels of royalty rates, to take advantage of commodity price increases. For example, Namibia, Uganda, South Africa and Zambia have a current revenue tax, while Liberia and Ghana impose a reserve profit tax. Queensland in Australia, on the other hand, levies different rates of royalty on different levels of commodity prices.

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