Beginning on January 1, 2018 Mongolia will introduce a new tax bracket system for the personal income tax. The new tax bracket system intends to replace an old system which imposed 10 percent to all citizens regardless of their income. Most would agree that tax reform in Mongolia has been long overdue but Cabinet’s proposed amendment has been met with fierce opposition. Many unions, including the Oyu Tolgoi mine workers’ union and other businesses have publically opposed the decision and have staged protests.

The Ministry of Finance has justified the move, clarifying that the increases in the personal income tax would only affect eight percent of the population. Of Mongolia’s 900,000 registered taxpayers that pay a personal income tax, 92 percent will be unaffected by the increases and will pay the 10 percent they are accustomed to. Tax breaks for the lowest earners will increase also as part of the new tax bracket system. These are all within the terms that were agreed upon with the International Monetary Fund when Mongolia requested to be enrolled into an extended fund facility.

Income

(MNT)

Included income

Intervals

(MNT)

Maximum rate of personal income tax Tax to be paid

/2017/

(MNT)

Tax break
/2018/
(MNT)
Tax to be paid

/2018/

(MNT)

Tax burden
300,000 0-1,500,000 10% 30,000 10,000 20,000 6.70%
700,000 0-1,500,000 10% 70,000 10,000 60,000 8.60%
1,000,000 0-1,500,000 10% 100,000 10,000 90,000 9.00%
1,700,000 1,500,001-2,500,000 15% 180,000 10,000 170,000 10.00%
2,700,000 2,500,001-3,500,000 20% 340,000 10,000 330,000 12.20%
4,000,000 3,500,001 or higher 25% 625,000 10,000 615,000 15.40%

 

Delving deeper beyond the surface into the tax increases shows us that the measure is not baseless and is in line with IMF’s core values of mitigating the impact of some reform measures on the most vulnerable in society. Tax breaks for the lowest earners will be increased on a step-by-step basis. In 2018, the lowest tax bracket will enjoy a 120,000 MNT tax break. The tax discount will be gradually increased each year, ultimately reaching 240,000 MNT in 2021.

Collecting taxes, especially the personal income tax, based on income brackets is not a new idea and is employed by countless countries around the world. Some might ask then if only eight percent of workers will be affected and if a similar system is employed around the world, why are people still opposed to the increase?

Logically, people who will be most affected by the tax increases will be the most opposed. It is quite rare for any government anywhere to increase taxes and for it to be unopposed.

The Mongolian Association of Woman Business Owners has publically criticized the decision as an impediment to the people’s opportunity for growth and prosperity in addition to being detached from reality.

For some, their opposition stems from the fact that their albeit high-income is the only source of income for a family. For miners, the long working hours and time spent away from the families justifies their relatively high-income salaries and they have been the most vocal opponents of the tax bracket system.

In 2017, revenue from the personal income tax is estimated to be 43 billion MNT. With the introduction of tax bracket system, revenue will jump to 88 billion MNT in 2018 and 84 billion MNT in 2019. Accordingly, the new tax bracket will only supplement an additional 40 billion MNT to the state budget, hardly enough to put a dent in the 737 billion MNT state budget deficit.

However, the issue is not only just that certain high-income individuals will pay higher taxes.

Increasingly, discussion around the issue has transformed into a debate about equal and fair taxation. In theory, a tax bracket system is a fair system of taxation but only if it is imposed fairly and evenly amongst the population. One large segment of Mongolia’s population has been consistently and systematically omitted and unofficially exempt from taxes and more specifically the personal income tax. Taxation of informal sectors has been a common issue for many developing countries and Mongolia is no exception.

There is a bigger systematic reason for the blatant tax exemption that herders enjoy. While the number of herders has been decreasing consistently as rural to urban migration increases, they still remain a major voter base. While the interests of herders might not be at the forefront in Ulaanbaatar, Mongolia still has 20 other provinces. In the majority of those provinces, livestock production is the main source of income and therefore voters tend to vote for politicians that promise to not impose taxes on herders.

The ruling Mongolian People’s Party won a 65 majority seat in Parliament mainly thanks to its platform that it would not create any additional taxes, it was obvious that appeasing to herders was a major reason for its landslide victory.

Herders, along with traders in the city’s markets account for a large unregulated untaxed sector in the economy. In theory, traders and herders alike should all have to pay taxes. Herders and their children all enjoy public services such as education, health insurance, and welfare that is funded by taxpayers without contributing their share.

Deliberately exempting herders from taxes for political gain has created a bad precedent and ultimately concentrated the majority of the tax burden on the 900,000 workers paying a personal income tax.

Admittedly, herding is a tough business in which the herder is solely responsible for any liabilities. It is a sector which can be devastated by weather or natural disease. However, since the transition into a market economy, Mongolia has seen development of whole economic sectors dependent on livestock products from herding as herders are not only subsisting on livestock but profiting.

While this may not be true for all herders, many wealthy herders benefit from not having to pay taxes. In many ways, Mongolia’s reluctance to impose taxes on herders can be likened to the United States’ reluctance to tax churches and religious organizations. A sense of traditional values and morals have become an impediment to fair taxation. In a world where herders are tugrug billionaires and churches are multi-billion dollar businesses, it is irrational to exempt a huge segment of the economy.

Many politicians have tried to skew the argument into something cultural, arguing that imposing taxes on herders would threaten the Mongolian way of living. However, as argued by economics professor G.Khashchuluun at the National University of Mongolia, at the very least, we need to tax herders that have thousands of livestock.

Another argument is that the Constitution states that pasture in Mongolia belongs to the state, classifying it as a natural resource as same as coal or petroleum. Therefore, mining companies and herders both use resources owned by the government for profit but only the mining companies pay taxes.

However, taxing herders is not the be-all and end-all solution to Mongolia’s taxation system. As a whole, the system in which taxes are determined and collected need to be more comprehensive.

2 COMMENTS

  1. I have to say the old 10% tax rate was one of the things that made Mongolia somewhat attractive for bringing in money to start a new business. This change alone is not necessarily going to be a deal-breaker for myself, but it does make investing in Mongolia substantially less appealing from a business perspective. And I’m pretty sure that overall it’s going to either stifle new small business creation or drive more people into the shadow economy where income & sales aren’t reported to the government. Now sometimes tax increases are necessary for short term emergencies (and Mongolia has a big one), but in the absence of other major incentives Mongolia will need relatively low taxes to continue to grow & develop its economy and attract more investment over the long term. Plus I would feel a lot better about it if more were done to stifle waste and embezzlement in the government; if one is taxed more one would at least want reasonable assurance that money isn’t just going to be stolen or misallocated.

  2. Use of the term “herders” to represent such an extremely diverse sector of Mongolia’s agricultural economy is to grossly distort readers’ perception of their makeup. It needs be remembered that they form the largest proportion of Mongolia’s poor, also forming 35% of those in rural poverty, a figure which has increased by 8% since 2014. Eastern, Western and Khangai regions have the highest poverty headcounts with 44%, 36% and 34% respectively living in poverty. (UN-FAO report published Dec 2017).
    In 2014 an independent survey found that a herder with less than 200 livestock was at poverty level. It’s likely that with inflation having risen drastically since then, livestock viability level has also risen.
    NSO data for 2014 analysed households by livestock head totals, with 60% having 200 or less, 27% with 200-500, 10% with 500-1,000, 2.6% with 1000-1,500 and 0.4% with over 1,500. It’s therefore reasonable to suggest that 87% of herder households are either just getting by, are poor or in poverty.
    A ‘Save the Children’ 2016 report estimated average annual income for herder households with 200 livestock at 2,500 USD. That sector alone represents 60% of all herders.
    With this in-depth level of reputable statistical data it is clearly unfair to refer to ‘herders’ as though they are all of equal wealth when the vast majority are anything but.
    It is fair to separate wealthy from non wealthy herders and appropriately tax the wealthy, as some contributors to the article suggest. However, from these statistics, out of approximately 160,000 herder households, that wealthy element applies to just 0.4% or 640 households.
    To put the subject into better perspective, it’s worth bearing in mind that out of UB’s population of 1.4 million, more than half were once herders, forced to migrate there by poverty and harsh conditions that way of life entails for the large majority of them.

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