Compliance with the Company Law is Mongolia is still a relatively rare thing.  Most companies are not publicly listed and are owned by single shareholders so therefore do not feel the need to follow the Company Law.

Under the Company Law of Mongolia there are a number of decisions which must be approved by a shareholder’s meeting held at least once a year, including the appointment of members of a board of directors, approving annual reports, and the reorganization or liquidation of the company, amongst other matters.

While these aspects of the Company Law may not be strictly enforced in Mongolia yet, they nevertheless remain important features of properly maintaining a company.  Compliance is not overly onerous for companies in Mongolia.  A shareholder’s meeting must be held within four months of the end of the company’s fiscal year in order to make the necessary decisions.  While a company may have a different internal fiscal year, in Mongolia it is defined as January 1 through December 31 for the purpose of submitting documents to the tax authority.

A limited liability company may or may not have a board of directors.  If a BOD is defined in the company charter then it must meet as stated in the charter, which may vary from once a quarter to once a year.  The BOD meeting needs to be held before the shareholder’s meeting as the BOD sets the meeting time and place as well as the agenda for the shareholder’s meeting.  A shareholder’s meeting announcement then needs to be sent out to each of the company shareholders, assuming there is more than one.

I have not seen a case where a company has been fined or forced to be liquidated because of non-compliance with the Company Law.  In many cases it comes up with there is a due diligence investigation being done by a potential buyer/investor in the Mongolian company.  Investors, of course, want to see as much of a paper trail as possible to lead them from point A to point B, and the proper shareholder’s resolutions issued as a result of meetings is one way to accomplish this.  Not only does this show the investor the company has been compliant with the Company Law and is therefore in good standing, it also shows the company is striving to be transparent, document its decisions and has nothing to hide.

Slowly companies are beginning to keep better records and increase transparency.  We are two decades out from the very secretive days of the Soviet era and companies are starting to realize that everything cannot be done behind locked doors anymore.  While things still have a ways to go, an increasing number of companies are subsidiaries of companies that are listed in foreign markets, from Hong Kong to London to Toronto.  Of course scrutiny of publicly listed companies is very high, which then trickles down to the Mongolian subsidiary.  There is also increased interest from abroad, and perhaps now more than ever there is a large amount of international interest in investing in Mongolia, especially in already existing Mongolian companies.

While most may think corporate compliance need only be practiced by publicly traded companies, limited liability companies would do well to be more open.  As the world market becomes increasingly globalized customers and partners are going to want to work with those they know operate transparent, fair and legal businesses.  Having a partner who is loath to disclose any information automatically raises alarm bells in this era of corporate transparency and disclosure.  Currently there are a number of NGOs and other organizations focusing on corporate governance and transparency, including projects by USAID.  You can find a podcast on these topics here.   The podcast can also be found on both the Mongolia Business Blog website as well as iTunes.

The basic framework for the Oyu Tolgoi Investment Agreement is now much closer to being finalized after the Government of Mongolia agreed to pass amendments to four laws, including the repeal of the controversial Windfall Profits tax, the Corporate Income Tax Law, the Water Use Law and the Road Law.

Following is the transcript of the Power Point presentation that we have posted on SlideShare.  Please note, this is for informational purposes only and may not be the final version signed.

Oyu Tolgoi Investment Agreement presentation slideshow:

http://www.slideshare.net/icmcmongolia/oyu-tolgoi-investment-agreement-mongolia

Presentation Transcript

OYU TOLGOI INVESTMENT AGREEMENT

• THE GOVERNMENT OF MONGOLIA AND IVANHOE MINES MONGOLIA INC LLC, IVANHOE MINES LIMITED COMPANY, CANADA AND RIO TINTO INTERNATIONAL HOLDINGS LIMITED, UK

Legal Grounds, Purpose and Scope of Investment Agreement

Legal Grounds to conclude the Investment Agreement (“IA”) are:

• Article 29, Mongolian Law on Minerals;
• Parliament Resolution No. 40 of December 20, 2008 (approved main principles and directions to conclude the IA. This Resolution is also applicable for concluding IA on Tavan Tolgoi (TT) coal deposit); and
• Parliament Resolution No. 57 of July 16, 2009, allowing the Government to conclude the IA.

Main Purposes of the Investment Agreement

• To maintain stable environment for operation (including stable tax environment) of the Investor for specified period of time;
• To ensure the rights to sell products at international market price and disposal of income; and
• To determine the amount of investment and conditions of the Oyu Tolgoi (OT) project.

Scope of the Investment Agreement

• The IA will cover all types of the Investor’s activities related to the OT Project, including surface and subsoil minerals exploration, mining, construction of infrastructure and mining closure and environmental reclamation.
• Investment Agreement Term and Government Ownership,
• 30 years has been granted as initial term of the IA from the effective date of the Agreement
• The initial 30 year term is extendable for an additional 20 years.
• Government ownership – The Government of Mongolia take 34% of common shares of Ivanhoe Mines Mongolia, Inc. (IMMI) with the right to take 50% ownership within a year after the initial agreement expires.

Mining License and Land and Water Use Agreements

• The OT Mining License has been issued for an initial term of 30 years and is extendable an additional two times for 20 years each.
• Permits related to land use are to be obtained in accordance with the Law on Land and the Government shall support and assist the Investors in obtaining permits
• The Water Use Agreement shall be issued for 30 years and is extendable for another 20 years – any water discovered with Investor’s funding shall be allowed for the Project use and any excess water third party use will be allowed.

Infrastructure

Electricity will be allowed to be imported during the project’s construction period and up to four years after commissioning.

After this period, power can be supplied from three resources:

1. Investor-built Power plant;
2. Third party invested and built Power plant; or
3. The Power Network of Mongolia.

IMMI has been granted permission to build an auto road from the Project site to the Gashuun-Suhait border point with China at its own expense with the construction-related costs deductable from taxable income.

A License to Construct and License to Use Railroad from the project site to Mongolian-Chinese border may be issued to the Investor or a third party.

Tax Regime

Stabilized Tax Regime:

• Corporate Income Tax -10 % of annual income if between MNT 0-0.3 billion;
• if income exceeds 3.0 billion then MNT300 million plus additional 25% tax to the income over MNT3.0 billion;
• Shall not be obliged to pay “windfall” tax or similar tax;
• Dividend income is set at 10%;
• Royalty  income is 10%;
• Income from the sale of immovable property is 2%;
• Income from interest is 10%; and
• Income from sale of rights is set at 30%.

Customs Tax

• shall be imposed in accordance with Law on Customs;
• Value Added Tax 10% of products produced, sold, imported, work performed and services rendered;
• Excise Tax – in accordance with the Law on Excise Tax;
• Royalty -  5 per cent of sales value of products;
• Mining Licenses Fee – $15/ha for the licensed area.

Non- Stabilized Taxes:

• Taxes other than the above, which are defined in Article 7 of the Law on General Taxation as of the efective date of IA, shall not be stabilized.

Laws Rescinded and Amended in relation to the Investment Agreement

The Law on Rescinding of the Law on Imposition Of Price Rise Tax on Some Commodities:

• Windfall tax is to be rescinded from January 1, 2011.

Amendment Law to the Law on Corporate Income Tax:

• Any losses incurred shall be deducted from taxable income for four to eight years depending on the amount of investment.

Amendment Law on the Law on Auto Road

• Allows private investment into State Category Auto Roads

Amendment Law on the Law on Water

• Water discovered with Investor funding will be allowed for Project use and any excess water shall be allowed for third party use

Here is again the link to the slide presentation: http://www.slideshare.net/icmcmongolia/oyu-tolgoi-investment-agreement-mongolia

Wednesday, August 26, 2009

According the today’s edition of The Mongol Messenger, an English-language newspaper in Mongolia, and several other sources amendments to four laws were approved yesterday by the Mongolian Ikh Khural, or Parliamnet, in a bid to increase the likelihood of the Oyu Tolgoi Investment Agreement’s passing.  An extraordinary session of Parliament was convened last Wednesday, August 19, in order to discuss these possible changes to Mongolian law.

Windfall Profits Tax Out as of 2011

54 of the 64 MPs voting have supported the annulment of the Windfall Profits tax from January 1, 2011.  Opponents of the annulment argue this will cost Mongolia billions of dollars in future revenue, but often tax revenue increases after windfall taxes are annulled because of the increased investment in these sectors.  Many MPs agree that in the long run this will increase investment in the mining sector, thereby creating jobs and increasing the tax base of Mongolia.

Once the Windfall Profits Tax is no longer in effect the overall tax burden of Erdenet Mines will decrease from 116% to 49.6% and OT’s tax burden will decrease from 72% to 46%, numbers that are much more palatable to foreign investors.  Finance Minister S. Bayartsogt has stated a bill to increase royalty payments to the Government will be introduced in the Fall Session of Parliament in order to help offset loses from the Windfall Tax.

Corporate Income Tax, Road Law and Water Law Amendments

The Law on Corporate Income Tax has also been amended.  Currently loses can be carried over for a period of two years.  The new amendment, coming into effect January 1, 2010 states that a company will be 100% exempt from corporate income tax from four to eight years depending on the amount of losses.

Unspecified amendments to the Road Law and Water Law were passed.  Changes in the Road Law were passed in an effort to further development paved roads linking Ulaanbaatar to aimag (province) centers as well as the road system overall in order to meet the demands of the equipment necessary to build, maintain and operate mine sites across the country.  Ivanhoe Mines have agreed to the maintenance of roads the company builds.  While privately built roads will be Government-owned, the builder will not be charged road-use fees for a period of time.

MPs are concerned with the amounts of water necessary to run OT and surrounding towns and settlements, and are worried that the amounts OT will use from subterranean water sources will adversely affect surface water.  Conflicts have also risen between the division of water for uses in agricultural and corporate sectors and as drinking water.

While debate will most likely continue for the foreseeable future on the issue of water and road use, the amendments to the Windfall Tax and Corporate Income tax seem to bode well for the much-anticipated finalizing of the Investment Agreement.  As the world seems to be slowly pulling out of the economic malaise, hopefully this will be the spark needed to again ignite interest in Mongolia, not just in the mining sector but in the overall economy.

]]> http://icmc-mongolia.net/mongolia-inches-closer-to-oyu-tolgoi-deal/feed 1 http://icmc-mongolia.net/mongolian-currency-law-taking-effect-on-august-9 http://icmc-mongolia.net/mongolian-currency-law-taking-effect-on-august-9#comments Fri, 07 Aug 2009 07:21:31 +0000 Bobby http://icmc-mongolia.net/?p=267

ULAANBAATAR, MONGOLIA – New Mongolian currency law takes effect on August 9, 2009.  Starting on this date, all Mongolian businesses and agencies must do business in tugrugs (often referred as tugriks), the Mongolian official currency, and not in foreign denominated or foreign currency based rates.

The Government of Mongolia passed the law in July 2009 to better control the currency fluctuations as a response to the sudden devaluation of the tugrug in March 2009.  Mongolian government is taking the currency measures seriously and have passed severe penalties for the offense.  It is well advised for companies to follow the government’s new law.

Sudden Drop in Tugrug’s Exchange Rate

As the saying goes, any port in a storm will do. As the economic downturn seemed to hit its peak around at the end of 2008 and during the first few months of 2009 the Mongolian tugrug grew increasingly weak against foreign currency. While the exchange rate had been hovering around 1170 tugrugs to the US dollar for several years, it suddenly spiked to over 1700 tugrugs per dollar in March. As a result individuals and businesses began to conduct more and more business in US dollars, British pounds or other convertible currencies.

Mongolian Government’s Response to the Currency Devaluation and Fluctuation

The Government of Mongolia felt the need to get a handle on the situation, passing a Currency Law in late July 2009 in order to do this. The newly-passed Currency Law mandates that all prices, all settlements and all advertisements within the territory of Mongolia must be set in tugrug, prohibiting the use of foreign currency for domestic transactions.

US Dollar Was the Unofficial “Official” Currency in Mongolia

It is a fairly common practice, especially amongst foreign-invested companies, to advertise or charge in dollars as many of the goods sold in Mongolia are imported, most likely bought and paid for with dollars. Politicians felt this was undermining the tugrug, and thus the Currency Law was passed. Ironically, the Mongolian Immigration Office, the Foreign Investment and Foreign Trade Agency and the Mongolian Tax Authority all charge various services or fees in US dollars, at least until this law was passed.

Violators Beware

The penalties are quite high for those who continue using foreign currency for settlement in Mongolia. The first offense is confiscation of the income, the second offense is a fine ranging from ten times to one hundred times the minimum wage, and the third offense can result in the confiscation of any special licenses a company may hold.

Based on these consequences, it is clear that the Government is taking the violation of this law seriously. If you or your company currently lists prices and makes settlement within the territory of Mongolia in currencies other than tugrug it is definitely time to begin the switch to tugrugs.

NOTE: The correct way to spell Mongolian currency is tugrug, not tugrik as often spelled.