Deputy Finance Minister Kh.Bulgantuya discusses decision to impose tax on license sales

As part of the 2018 budget, the Law on Mineral Resources was amended to include an article imposing a tax on the trading and selling of mining licenses. Deputy Finance Minister Kh.Bulgantuya addressed the new tax and clarified some concerns regarding the issue.

Following the 2018 state budget, the Law on Mineral Resources was reformed. When this law was approved, it was stated that it would help reveal the hidden sector of license sales. Can you elaborate on this?

In line with the approval of the 2018 state budget, several new legal regulations were set in place. In the past, the issue of the government’s inadequacy in taxing the trading and selling of resource licenses in mining and the sale of real estate and land has been glaring. It is forecast that this tax will bring in around 36 billion MNT in revenue to the state budget. In 2007, it was legislated that a 30 percent tax would be imposed on the transfer of mining licenses. Unfortunately, due to the high rate of the tax, those trading licenses and land sought to evade this tax. Therefore, the latest amendment was designed to correct the shortcomings in the enforcement of the law. There are many instances of companies establishing offshore companies and transferring licenses through it to a foreign company. The government is not able to tax this type of transaction. The amendment will aim to make the issue more comprehensive.

Those operating in the sectors that will be affected have obviously been opposed to this. The law became effective on January 1, 2018. Can you please tell us more about the specific rules and procedures?

There are around 3,000 mining licenses. There are only a handful of companies among those that are operational or have issued an IPO. Two rules are being approved today to support the enforcement of the law. More specifically, the tax will be imposed based on the value of the license and in accordance to the corporate income tax and the Law on Mineral Resources. We have researched more into the international practice of license evaluation. The price of the contract reported by the taxpayer will be taken into account. However, if the agreed price of the agreement has too much of a discrepancy and is not realistic, tax officials will work to determine the real value of the license. If a company sells a mining license to a foreign company, it has a duty to inform the Mongolian government. There have been cases where we have been informed after the transaction was made. It was unclear for how much the transaction was made for. The accountability has improved, as companies that have deliberately reported false numbers, omitted or underreported transactions will have their licenses revoked

The trade of mining licenses has been a hidden sector for a long time. As you said, making this sector more transparent will bring 36 billion MNT to the state budget. Who benefits from the sector becoming more open and transparent?

Even though the trade and sale of mining licenses has been going on for a long time, it has only concentrated a small amount of revenue to the state budget. Mongolians have not seen any money from license transactions abroad and even those conducted in Mongolia. For instance, when Ivanhoe Mines sold the license for Oyu Tolgoi to Rio Tinto, Mongolia did not receive one tugrug of profit. Even though the law stated that the government was eligible for a 30 percent tax, due to loopholes in the law, we were not able to receive anything. Moving forward, any license trading and selling will have a tax imposed by the government. In addition to taxes, the government will have a database and continuity regarding the real owners of licenses. In other words, the eventual owner of a license becomes more clear.

Will all licenses be liable to a 30 percent tax?

I think your understanding is that companies that launch an IPO, majority and minority shareholders will all pay a 30 percent tax if they transfer their licenses. For instance, Xanadu, Aspire Mining, and Mongolian Mining Corporation have all launched their IPOs on a foreign stock exchange. Their shares are always being sold and bought and the understanding might be that shareholders must report and pay a tax for every transfer. The majority shareholder of a license will pay all taxes regarding license transfers. Aspire Mining has 2,300 shareholders; its biggest shareholder is Nobel Resource. Therefore, only if Noble Resources sell its share in the license, a tax will be imposed. Minority shareholders will not be affected by this tax. Small transfers in shares will not be liable to pay taxes. Only the largest shareholder will have to pay a 30 percent tax. For example, if an individual owns a 20 percent share in a license, a tax will be imposed on only 20 percent of the total value of the license.

Would it be correct to say that Mongolia now follows the same rules that many resource exporting companies have employed?

We were recommended to employ this measure since 2012 by international organizations. IMF, the World Bank, and the UN all publish recommendations and models for taxation. We used standards and law practices used in other countries when drafting this law.

On September 25, 2017, the UN, IMF, and the World Bank published a report on how to impose taxes on indirect transactions through offshore zones. This report mentioned one model that was used by Peru. One of Peru’s largest oil companies, Petro Tech, was registered to shareholders in Delaware, USA. An offshore company based in Houston, USA bought the shares in 2009. The United States imposed a tax on this transaction. At that time, Peru did not have the legal measures to impose a tax on the transaction and it was later determined that Peru lost more than 482 million USD in potential tax revenue. Since then, Peru amended its tax law and legislated imposing taxes on indirect transactions of licenses. It is hard to deny that in all probability, Mongolia also lost a lot of potential revenue in tax. There is an international standard that the country which the revenue is being made in has the right to tax it. Since the transfer of licenses and land is taking place in Mongolia, we have a right to receive taxes.

Some companies take out loans using licenses as collateral. If a person loses their license to a commercial bank, would the tax still apply?

There are instances where companies take out large amounts of money in loans using licenses as collateral and eventually lose their license due to their inability to repay the debt. In accordance to the new law, if a commercial bank becomes the owner of the license, the tax will still be imposed. As a result, the bank must take the tax into account as a risk factor when deciding on loan requests using licenses as collateral.