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Mongolia Inches Closer to Oyu Tolgoi Deal

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Once the Windfall Profits Tax is no longer in effect the overall tax burden of Erdenet Mines will decrease from 116% to 49.6% and OT’s tax burden will decrease from 72% to 46%, numbers that are much more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.

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