Mongolia's Parliament Passes Tax, Anti-Money-

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000537

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: PGOV EMIN EINV SNAR KCRM EFIN ECON MG
SUBJECT: Mongolia's Parliament Passes Tax, Anti-Money-
Laundering, Minerals, and Anti-Corruption Laws

Ref: Ulaanbaatar 380


1. SUMMARY: Prior to the July 11-14 Naadam national
day holiday, the State Great Hural (SGH - Parliament)
passed three major pieces of legislation: an anti-
corruption law; an anti-money laundering law; and
amendments to the minerals law. The bills culminated a
busy spring session for the legislature. At the end of
June, the SGH passed several tax bills that will
significantly change Mongolia's tax regime. END
SUMMARY.

LAWS NOW UNDERGOING EDITING, PRESIDENT'S REVIEW
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2. With the exception of the tax legislation
(comprising four bills, affecting corporate, personal,
value added, and excise taxes),final texts of the laws
are not yet available. As well as last minute changes
which may have been made to bills in the hectic rush to
pass them prior to Naadam, Mongolian parliamentary
procedure allows for substantive changes to be made
during a "technical" editing period before bills are
formally sent by the SGH to the President for review.
This final editing can take a full working week. Once
the President receives a bill, he has five working days
to consider vetoing the law in full or part.

TAX CUT BILLS WELCOMED; IMPACT ON GOM FINANCES TBD
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3. Preliminarily, the bills present a mixed picture.
The tax reform bills -- which lowered rates and
introduced provisions allowing for deductions of
business expenses, depreciation, and loss carry forward
-- have generally been welcomed by domestic and foreign
businesses. However, the IMF worries about the impact
on budget finances of lower tax rates given proposed
social expenditures increases. The fall SGH session,
set to begin in October, is slated to consider customs
levies and employment taxes, measures which will
complete tax reform.

MINING FIRMS LIKE TAX CUTS; MINERALS LAW MIXED PICTURE
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4. Foreign mining companies have joined in the praise
for the tax reform measures, which move Mongolia toward
world standards. However, they have been vociferously
critical of the windfall profits tax on gold and copper
passed by the SGH on May 12 (reftel),both regarding
the tax itself and the opaque and abrupt way the
legislation was passed. Regarding the minerals law
amendments, there is a grudging acknowledgment so far
that the final version likely was "not as bad as it
could have been," but concerns remain over provisions
allowing for the state to take an equity stake in
"strategic" mining deposits under certain conditions.
Royalties for corporate miners were doubled under the
bill, from 2.5% to 5%; royalties due from placer miners
(mostly Mongolians) were reduced to 5% from 7.5%.
Canada's Ivanhoe Mines put out an upbeat press release
(www.ivanhoe-
mines.com/s/NewsReleases.asp?ReportID=143713) asserting
that the tax reform and minerals bills "set the stage"
for the company to conclude its long quest for a
stability agreement for its proposed copper mine at Oyu
Tolgoi.

ANTI-CORRUPTION, MONEY-LAUNDERING LAWS A GOOD START
-------------- --------------


5. An anti-corruption law has been under consideration
since 1999, and an anti-money laundering law for the
last three years. The State Great Hural's passage of
these two bills is a significant milestone in
Mongolia's efforts against both problems. However,
details of the measures as passed remain murky, and
prior to passage the SGH apparently removed conflict of
interest provisions from the anti-corruption law as

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being "too complicated" in Mongolia's small and
interwoven polity. Even without that excision, the
anti-corruption law would only have made a good
beginning at bringing Mongolia into compliance with its
obligations under the UN Convention Against Corruption,
with additional legislation required. Moreover,
Mongolia will require political will, human resources,
and technical skills to implement the anti-corruption
and anti-money laundering laws; concerns exist as to
whether it has any of these. Mongolia will also have
to craft anti-terrorism finance laws to complement its
new AML. (NOTE: Treasury had earlier offered to
assist Mongolia once an AML had passed with training
for its soon-to-be-created Financial Intelligence Unit.
Following an analysis of the AML itself and after
consulting with the Bank of Mongolia and Ministry of
Finance, a clearer picture will emerge of Mongolia's
technical assistance needs.)

Slutz