Mongolia Legislation Update: 2015 Spring Parliament Session.

Legal News & Analysis – Asia Pacific - Mongolia

10 August, 2015

 

During its 2015 Spring Session, which ended on 10 July 2015, the Parliament of Mongolia ("Parliament") enacted 20 new laws, 18 laws revoking existing laws or provisions of laws, amended 64 laws, ratified 16 international agreements and treaties, and adopted several state policies for various sectors. 

 

Below, we provide a brief overview of legal developments that may be of interest to current or potential investors in Mongolia. 

 

In general, the legislation approved by Parliament addressed several different areas: (1) supporting domestic production and promoting export, (2) improving financial reporting and the accountability of business entities and public institutions, (3) amending specific tax legislation, (4) supporting the development of specific sectors such as energy and occupational health and safety.   

 

1. LAWS TO SUPPORT DOMESTIC PRODUCTION

 

Following the approval of the State Policy on Industrialisation in June 2015, Parliament approved the Law on Supporting Production in an effort to support export-oriented domestic production of goods that are competitive, add value and are environmentally friendly.  Under the Law, the Government will support production in the following manner:
 
(a)    subsidise the difference1 between commercial interest rates on loans for technological updates and capital investment, to producers that export more than 30 per cent of their output;

(b)    provide one-time payments equal to 75 per cent of the research and development costs incurred by producers of exports that created or brought to Mongolia highly efficient or cutting edge technology; and 

(c)    support export-oriented production by various export financing arrangements.
 
Supports will primarily be provided to those businesses that engage in production that adds value using either domestic or imported raw materials.  Preferential treatment may be given to businesses that:
 
(a)    are open joint stock companies;

(b)    acquire more than 60 per cent of their main or secondary raw materials or other required goods, work or services from domestic suppliers; and

(c)    have registered on the technology register database.

 

Importantly, the Law provides that foreign-invested business entities (as defined in the Investment Law) and those investors that have entered into an investment agreement with the Government, will not be eligible to receive such support, and that the minerals sector will be excluded. 

 

In relation to the approval of the law, the Law on the Procurement of Goods, Work and Services with State and Local Funds (the “Procurement Law”) was amended to include a provision prohibiting the selection of foreign suppliers in the event that goods can be supplied through domestic production, provided that those goods meet relevant quality and other standards.  The Government is to approve the list of goods that may be purchased from domestic producers. We note that term "domestic producers" has not been defined in the Procurement Law. 

 

The prohibition will override Article 9.2 of the Procurement Law, which prohibited a procuring entity from restricting the participation of a foreign entity in tenders for work with a budgeted cost of more than 10 billion tugrugs ("MNT") and tenders for goods and services with a budgeted cost of more than 100 million MNT.  Under the Law on Supporting Production, the Government must report to Parliament in respect of implementation of the support provided as well as the procurement of goods, work and services from domestic producers.

 

In relation to the above, Parliament also increased customs duty rates for certain imported goods by amending its Resolution #27 dated 3 June 2009, which established customs duty rates for imported goods.  Accordingly, customs duty of up to 20 per cent (as opposed to 5 or 15 per cent) will be imposed on nearly 370 goods that can be produced domestically but are imported into Mongolia.  Depending on the specifics of each sector and the products concerned, the Government will determine the exact customs duty rate. 

 

2. LAWS RELATING TO TAXATION 

 

2.1 Law on Value-Added Tax

 

On 9 July 2015, Parliament adopted a revised version of the Law on Value-Added Tax2.   In addition to introducing and revising key terminology and broadening the types of activities that are applicable to VAT, the Law increased the threshold for requirement to register as a VAT payer from 10 million MNT to 50 million MNT in an effort to support small and medium sized enterprises.  Voluntary registration as a VAT payer is possible if the income of the entity reaches 10 million MNT. 

 

The Law also introduced a system of incentivising taxpayers with the possibility of recovering up to 20 per cent of the taxes paid if certain conditions are met.  It further attempts to improve the system and procedure for collating, processing and reporting data relating to the payment of VAT by creating a consolidated registration system. 


The existing VAT rate of 10 per cent remains the same, however, there have been some changes in the types of goods, work and services that are exempted from value-added tax and those that are subject to zero ("0") per cent VAT.  The Law will come into effect on 1 January 2016.

 

2.2 Law on the Capital City Tax

 

On 19 June 2015, Parliament approved the Law on Capital City Tax.  Although the General Taxation Law and the Law on the Legal Status of the Capital City conceptually provided tax, this is the first time that a capital city tax will be imposed.  Capital city tax will be imposed on the sale of alcohol and cigarettes, the provision of hotel and resort services, and services offered in restaurants and bars. 

 

The tax rate of up to 1 per cent will be determined by the Citizens Representative Khural of the Capital City (or the local parliament) depending on the location and population size of a particular area within Ulaanbaatar city.  The Law will come into effect on 1 October 2015.

 

3. LAWS CONCERNING FINANCIAL REPORTING AND ACCOUNTABILITY

 

On 19 June 2015, Parliament adopted revised versions of the Law on Auditing and the Law on Accountancy in order to improve the financial reporting system and accountability of business entities and public institutions.

 

3.1 Law on Accountancy

 

From 1 January 2016, the effective date of the Law on Accountancy, large business entities, medium and small sized business entities and public institutions will be required to apply international financial reporting standards ("IFRS") applicable to each respective entity.  Specifically, companies such as joint stock companies, companies operating in regulated sectors such as banking and non-banking financial sector, mining and petroleum companies, companies operating in the energy sector, and state and local government-owned legal entities must comply with IFRS.  Small and medium-sized business entities, as defined in the Law on Small and Medium Sized Enterprises, must comply with IFRS for small and medium sized entities, and public institutions subject to the Law on Budget must comply with international public-sector accounting standards. 
      
The Law on Accountancy further requires that accounting books and records be produced in the Mongolian language and be reported in MNT.  Businesses that must comply with IFRS will be required to submit electronic reports on a bi-annual basis (as opposed to quarterly reporting), whilst other entities are required to submit them annually.  The financial report will not only be used for determining the applicable taxes and payments to be made, but also can be used by relevant government entities for other purposes.  The purpose of the latter is aimed to improve the financial accountability of business entities.  The Law also clarifies the role and responsibilities of accountants of business entities. 

 

3.2 Law on Auditing

 

The Law on Auditing clarifies the different services that an auditing entity may offer to clients, and amends the types of business entities that are required to have their financial reports audited.  The Law aims to strengthen the independence and impartiality of auditing entities by prohibiting the engagement of auditing entities with clients in specific circumstances.  The Law also prohibits auditing entities from providing auditing services to one client for more than five consecutive years if such client is a business entity that complies with IFRS, and such auditing entity may not engage with the same client for period of three years following its rotation.  The Law protects the rights of shareholders to demand reports from auditing entities in relation to financial reports, financial status and operational efficiency etc. of the entity concerned. 

 

The Law also amends the requirements and process relating to the grant of, suspension, extension and revocation of auditing licences such as having at least two full-time certified public accountants, and having no less than four certified public accountants if the auditing entity is to provide auditing services to a business entity that must comply with IFRS.  Further, if the founding entity or the shareholder is a foreign entity, no less than one-third of the founders or the shareholders must be Mongolian certified accountants and no less than two-thirds of its certified accountants must be Mongolian citizens.  
 
With the approval of the new laws, the Law on Certified Tax Consultancy Services was amended to prohibit certified tax consultants from keeping accounting books and records and producing financial reports for clients, and permit auditing entities to provide certified tax consultancy services upon obtaining the relevant licence.  Auditing entities may also engage in property valuation, financial and accounting consultancy services and related training.  In the latter case, an auditing entity is prohibited from undertaking auditing of financial reports of an entity for which it has provided tax and accounting consultancy services or property appraisal services.  


In relation to the approval of the above laws, the Company Law provision that required the amount of a company’s share capital to be higher than the amount of its net asset value will be repealed effective from 1 January 2016.

 

Further, the provision which required a company to amend its charter every time its share capital is changed will also be repealed.  
 
4. OTHER LEGISLATION

 

4.1 Main Direction for the Privatisation or Restructuring of State Properties for 2015-2016

 

Parliament approved several state policies which set out the future direction and objectives for the development of specific sectors.  One of the key documents is the Main Direction for the Privatisation and Restructuring of State Properties in 2015-2016 (“Main Direction”).  Under the Main Direction, the Government is to approve the list of state-owned legal entities that are to be privatised or restructured, and report to Parliament on an annual basis on the outcome.  The Main Direction recommends the use of domestic or international stock exchanges or issuing new shares in undertaking such privatisation or restructuring (in addition to using conventional privatisation methods) and instructs that the income derived from such privatisation or restructuring be used primarily for undertaking technical and technological development of the business. 

 

The Main Direction provides for the privatisation or restructuring of several state owned entities such as Thermal Power Plants #2, #3 and #4, thermal powers plants of Erdenet city and Darkhan city, the Ulaanbaatar Electricity Distribution Network, certain mining companies such as Shivee-Ovoo and Baganuur, Mongol Post, Mongolia Telecom and Khutul Cement Factory within 2015-2016 by means of either disposing the government stake in its entirety or dilution of the government stake by issuing new shares.

 

4.2 State Policy on Energy and the amendments to energy laws

 

The State Police on Energy aims to ensure uninterrupted and reliable supply of energy to meet the increasing energy demands of the country and to transform Mongolia into an energy exporting country. 


The Policy reviews the existing situation and identifies the main policy direction, the key principles, and the strategic goals for each main direction and the objectives under each goal.  The Policy will be implemented in two phases (between 2015-2023 and 2024-2030).  

 

During phase one, specific measures are envisaged such as the completion of Power Plant #5; thermal power plants at Tavan Tolgoi, Baganuur, and in the eastern and western regions; hydro-power plants at Egiin Gol and Khovd Gol; construction of various power transmission lines connecting towns and cities; together with improving competitiveness in the energy sector generally based on “real” costs.  With the approval of the Policy, Parliament Resolution #32 on the Approval of the National Program on Renewable Energy and Parliament Resolution #10 on the Approval of the Revised Consolidated Systematic Energy Program of Mongolia, dated 9 June 2005 and 31 January 2007 respectively, were repealed. 

 

Parliament also amended the Law on Energy and the Law on Renewable Energy.  The amendments to the Law on Energy introduce important terminology such as methane gas (as a type of energy) and independent energy producer (to support the participation of private sector), and clarify the roles and responsibilities of the relevant government agencies to improve their coordination in regulating the energy sector.   

 

The amendments to the Law on Renewable Energy also address issues relating to subsidised renewable energy tariffs to support the production and supply of renewable energy, and broadens the powers of the Energy Commission in this regard. 

 

4.3 Amendment to the Law on Occupational Health and Safety

 

On 14 May 2015, the Law on Occupational Health and Safety was amended.  Some of the notable changes, among others, are:
 
(a)    new terminology such as industrial accidents, industrial work environment, high-risk workplace were introduced;

(b)    subject to risk-levels, business entities must spend no less than 1.5 per cent of their production and services costs on various occupational safety and sanitation related activities (a list of which is provided in the Law);

(c)    business entities and organisations with high-risk workplaces must provide workers with life and health insurance in an amount equal to at least 36 times their monthly salary;

(d)    the contract between customer/employer, contractor and subcontractor must address matters relating to occupational health and safety, and the contractor is to be held liable in the absence of such agreement;

(e)    employers must have a unit or an employee or board responsible for occupational health and safety issues depending on the specifics of their operations, workplace risk and number of employees; and

(f)    employers must include obligations relating occupational health and safety in the job description of those officials exercising supervisory roles.

 

4.4 Amendments to the Investment Law

 

Previously, the Investment Law provided that any amendment to the Investment Law will only be effective upon the affirmative vote of at least two-thirds of members of Parliament in an effort to ensure a stable regulatory framework.

 

However, on 9 April 2015, Parliament resolved to accept the conclusion of the Constitutional Court of Mongolia which ruled that the two-thirds requirement in several laws including the Investment Law, the Budget Stability Law and the Law on Public Referenda is in breach of the Constitution of Mongolia.  As such, the Investment Law can now be amended by a majority of members of Parliament as per any other law. 

 

Accordingly, on 14 May 2015, relatively minor amendments were made in the Investment Law where the powers of the now defunct Ministry of Economic Development (such as receiving and deciding applications of foreign state-owned entities wishing to operate in banking, mining, media and telecommunication sectors) were transferred to the Investment Agency under the Prime Minister. 
 
4.5 Amendments to the Immovable Property Pledge Law

 

On 2 July 2015, the Immovable Property Pledge Law was amended stating that parties to a land pledge agreement may agree to enforce a secured obligation in accordance with procedures specified in the Civil Procedure Code (a procedure where courts would recognise the decisions of non-judicial bodies such as arbitration tribunals and notaries) in the event of default.  Such pledge agreement must be notarised.  Further, a pledgee is prohibited from proposing such procedure as standard term of a pledge agreement.

 

We note that the Immovable Property Pledge Law provision which prohibits the sale of pledged land by non-judicial procedures remains in effect.  However, under the amendment, a land pledge agreement may be enforced without having to go through court proceedings by submitting a request to the relevant court to recognise a notary statement.

 

Upon reviewing the enforceability of the notary statement, a judge may issue an order to recognise the notary statement, and in such case, the pledged land will be sold through an auction administered by the Bailiff Office in accordance with procedures specified in the Civil Code and the Court Decision Enforcement Law.
       
5. CONCLUSION

 

During its 2015 Spring Session, Parliament approved several important pieces of legislation affecting the economic, social and the legal sectors.   
  
The legislation aimed to support domestic production, improve financial accountability and other responsibilities, such as in the area of occasional health and safety, of business entities, reduce the role and involvement of the state in various economic sectors as well as to improve the coordination among government agencies in certain economic sectors. Overall, and with some exceptions, we expect the legislation to be favorably received by domestic and foreign investors.   
     
It is anticipated that Parliament will pass other laws, such as the Law on Trade, the revised Labour Law, the revised Criminal Code and the Law on Promoting Economic Transparency, which will have a significant impact on business entities, during its 2015 Autumn Session, which is preceded by an extraordinary session which commenced on 3 August 2015.    

 

The Law on Trade aims to create comprehensive legislative framework for domestic and foreign trade as well as trade in special regime zones as currently these are regulated by various sector specific laws.  The draft law provides for the general requirements, the role and responsibilities of those engaged in the trade sector and determine the state policy to promote and facilitate trade. 

 

The revised Labour Law aims to broaden the scope of the employment law, align certain key terms and rights of employees with international norms, regulate new forms and types of employment and associated remuneration and improve dispute resolution mechanisms.  The draft law is considered by the private sector to be rather restrictive as it imposes a number of new obligations on employers.

 

Under the existing Criminal Code, legal entities are subject to criminal sanctions for crimes relating to money laundering and financing of terrorism.  However, under the draft revised Criminal Code, legal entities can be subject to criminal sanctions of fines, restriction of right to engage in certain activities, liquidation and expropriation of property for more than 40 crimes.  The draft Criminal Code is currently subject to vigorous debate.

 

The Law on Promoting Economic Transparency is a form of amnesty law which aims to uncover undeclared income and assets of individuals and legal entities, and ensure their proper reporting and registration without any legal or financial consequences for the individual or legal entity concerned, if voluntarily declared within a certain period of time. The law covers not only tax related matters but also reporting or registration under the social insurance, customs, immovable property registration, legal entities registration and accountancy laws.  In relation to this draft law, the Government has also submitted the draft Law on Economic Amnesty which aims to provide a one-time amnesty for crimes relating to the violation of laws on securities, insurance, auditing, and engaging in prohibited services or trade, illegal use of trademarks or name of a business entity and smuggling.

 

Hogan Lovells

 

For further information, please contact:

 

Chris Melville, Partner, Hogan Lovells
chris.melville@hoganlovells.com

 

Anthony Woolley, Hogan Lovells

anthony.woolley@hoganlovells.com

 

Bolormaa Gulguu, Hogan Lovells
bolormaa.gulguu@hoganlovells.com