Royalty on gold to lessen if sold to Mongolbank

“Better to impose less tax than lose all the gold without any tax”
Mining Minister D.Gankhuyag (L) and Minister of Economic Development  N.Batbayar assert that higher tax fosters illegal trade

The royalty on gold will lessen
when gold mining companies sell their
gold to the Bank of Mongolia or banks
accredited by Mongolbank. On January
23, Parliament held its first hearing of
the draft law to amend the Mining law
and the majority of MPs supported
the principle of the Bill. Today, gold
mining companies pay a royalty of 10
percent on gold. Although most MPs
voted for lessening the royalty when
gold mining companies sell their gold
to the Bank of Mongolia or banks
accredited by Mongolbank, they have
not reached a final decision of whether
the royalty should be 2.5 percent or 5
percent.
Initially the government submitted
a draft law on making gold trade
transparent which contains the same
content as this law, imposing a
different royalty on gold depending on
whether or not gold mining companies
sell their gold to the Bank of Mongolia
and accredited banks. The Government
concluded that the tax on gold,
especially increment royalty on gold
which imposes a 10 percent royalty
on income from trading, served as
the primary reason behind illegal
trading and exportation of gold, and
tax evasion by gold mines. The illegal
activities around gold mining resulted
in a steep fall in gold deposits at the
Central Bank of Mongolia as well as
having a negative impact on the state
currency reserves, as all currency in
Mongolia is backed by gold reserves.
Therefore the government not
only proposed decrease the royalty
rate on gold to 2.5 percent, but to
annul the increment royalty as well.
However, during the plenary session of
parliament on December, 18, 2013, the
Bill did not get sufficient support from
MPs to discuss it further and withdrew
it to the government. The government
and DP group in parliament considered
the meaning of the Bill; in other
words, lowering the royalty when
gold companies sell their gold to the
Mongolbank is important to prevent
gold exports and to boost the currency
reserve through accumulating more
gold in the state reserve. Therefore,
the government submitted the Bill to
amend the Mining law, adding several
clauses of the draft law on making gold
trade transparent. The government
Bill defined the royalty on gold at 5
percent unless gold mining companies
sell gold to the Mongolbank; however,
the parliamentary working group on
the Bill suggested to keep the current
royalty rate at 10 percent when gold
mining companies export their gold
and not sell it to the Mongolbank and
got support from MPs.
On 21 January, during the
discussion of the Bill at the Standing
committee on Economy, MP B.Bat-
Erdene made a proposal to impose a 5
percent royalty on gold instead of 2.5
percent when gold mining companies
sell their gold to the Bank of Mongolia
and accredited banks. Although most
MPs of the standing committee did not
support MP B.Bat-Erdene’s proposal,
at the plenary session, 50 percent of the
attending MPs voted for the proposal.
Therefore, the rate of royalty on gold
when companies sell their gold to the
Mongolbank will be clear after the
second hearing of the Bill.
Independent MPs Ts.Davaasuren
and Kh.Bolorchuluun and some
MPs were against the Bill. MP
Ts.Davaasuren considered that the
currency reserve will drop contrary to
boosting it when foreign invested gold
mining companies sell large amounts
of gold to Mongolbank and get a dollar
for it. MP Kh.Bolorchuluun said, “The
Illegal export of gold is not that big.
A decrease in the amount of gold sold
to the Mongolbank connects to the
gold reserve of placers. Companies
sold 8 tons of gold to the Mongolbank
in 2013 and it is normal compared to
many years’ average. Most gold mines
are owned by foreign companies.
Therefore, even though they sell their
gold to the Mongolbank, the currency
flow will be directed abroad. It is
estimated that in near future, 30 tons of
gold will be extracted from gold mines
each year. The Mongolbank does not
have the capacity to buy that amount
of gold. Even if the central bank buys
the gold, it will cause inflation to
grow. I suspect that business interests
are hidden behind this law, as two
laws with the same content are being
submitted by the Government under
different names”.
However Mining Minister
D.Gankhuyag and Vice Minister
of Economy and Development
N.Batbayar asserted that the high
royalty rate on gold causes illegal
trade and export as well as the
necessity to increase the currency
reserve is growing. “When the
tax rate on gold is high, hidden
illegal trade develops. For
example, the biggest gold
extraction in history which
reached 24 tons, was recorded
in 2005 when the royalty on
gold was 2.5 percent. But gold
extraction decreased dramatically
every year since the windfall tax
was introduced, and dropped to 6
tons in 2012, 4 times less. Generally,
mineral resources give much more
benefit when they are exploited and
money from mining is used for health
and education rather than saving
the resources under the earth. Other
countries’ experience is proof. The tax
rate on gold should be decreased so
that gold will remain in Mongolia and
stop illegal exports. We estimated that
if the Bill is passed, income to State
Budget in types of tax will be lower
by USD40-50 million; gold while
currency reserve in the bank will
increase by USD1.7-2 billion” said
Mining Minister D.Gankhuyag.
Vice minister B.Batbayar also said
the amount of gold to be sold to the
Mongolbank depends on tax rates.
“When the tax rate decreases, the gold
trade amount increases and it boost
money flow into the economy. Buying
gold is the main source to increase
currency reserve; therefore, it is better
to impose less tax than lose all the
gold without any tax’ he said.
The government suggested that
a different royalty rate be in force
for five years, during which a copper
smelting plant will be established.
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