OBG talks to Peter Markey, Partner, Ernst & Young

Interview: Peter Markey

How does Mongolia’s corporate tax structure compare to other developing countries in the region?

PETER MARKEY: Mongolia has a two-tier corporate tax structure where the first MNT3bn ($1.8m) of taxable income is taxed at 10% and above that at 25%, which is unusual. The 10% rate is very low on an international level. Most countries are between 10% and 20%. The 20% to 30% range is the less competitive range for corporate tax rates, and over 30% is highly uncompetitive. Thus, Mongolia has a very competitive tax rate for smaller firms and a less competitive rate for bigger companies. However, there are no specific rules to stop a larger company from splitting itself into many smaller units, therefore avoiding the higher rate. Thus, the wider issue to consider here is the proper enforcement of the existing rules to calculate taxable income correctly and make sure everybody is paying taxes in accordance with the law. This dual structure is unusual and probably merits review and reconsideration, particularly as it is easy to circumvent higher corporate taxes.

What role might the new Investment Law play in improving the investment climate in Mongolia?

MARKEY: The new Investment Law is clearly a step in the right direction. What people will now be looking at is how it works in practice, how it is implemented and how well it is followed, especially during the next election period. In any case, it will take 10 years before anyone can say that this law really helped turn a corner or not. In relation to the taxes, there have been a few changes that happened in recent years on resource related taxes, with the government modifying their rates a number of times. This is a very specific area, where it is particularly important to provide assurance to companies that are going to make significant investments in the country. The stabilisation of tax payments for investors is therefore a reflection of the need for more long-term certainty in Mongolia’s tax regime and overall investment climate. In this regard, it will improve it and make it more attractive for potential investors. If you want to start promoting investment in the country, especially after a period of bad publicity, you need to change the situation to create good publicity. The tax stabilisation agreement will likely play this role.

How can tax incentives promote small and medium-sized enterprises (SMEs)?

MARKEY: Taxes are part of the price of doing business or a part of showing your commitment to the society in which you are working. In the case of Mongolia, the tax rate for SMEs is 10%, which we believe is good enough at least not to prevent them from doing business. It is, in fact, a better setup for SMEs than many other countries. Therefore, we see that SMEs can be incentivised not through taxes, but rather through government subsidies, direct grants, less bureaucracy, and more importantly, through a good education system.

Education should encourage people to be entrepreneurial and take business risks while developing at the same time the necessary technical and business oriented skills. There are numerous examples around the world that prove the fact that education plays a key role in increasing the number of SMEs in a given country, and it would not be any different for Mongolia.

How do you assess the growth opportunities for local firms in the tax and accountancy field?

MARKEY: There are numerous local accountancy firms. Some are quite large and many others get a significant amount of work from the government, auditing government-owned entities, including hospitals and schools. Generally, that kind of work is not what international firms here do, at least not yet. So the opportunities for them are significant. Local firms have to think about how to specialise and provide niche services.

International firms in Mongolia are not typically involved in accounting, but rather in auditing – checking other companies’ accounting. This is one area where local firms have much room to grow, keeping records, doing returns, and offering a comprehensive package of services.