General Department of Taxation, Mongolia

2012-05-09 09:12:09
Seven years of USAID-Mongolia partnerships to help build the basic institutions of a market economy the Economic Policy Reform and Competitiveness Project (EPRC) leave behind:   A modern tax system.   Tax legislation enacted in 2006 with USAID technical support and facilitation of intensive national dialogue and consensus building on the tax laws, brought the Mongolian tax code in line with best international practices and International Financial Reporting Standards (IFRS), simplified laws and regulations, removed economic distortions of old tax laws, and made the system more transparent and predictable by providing taxpayers with improved access to simplified instructions, information, and assistance. Analysis of the impact of the tax reform three years after enactment showed that the tax reform and technical assistance to the General Department of Taxation reduced the burden on businesses and individuals, expanded the tax base, increased tax revenues and had a measurable impact distinct from economic growth.   HELPING GOVERNMENT INSTITUTIONS WORK BETTER   In addition to helping Mongolia develop new institutions to support a market economy, the project also assisted selected government institutions to work better. One of this is Mongolian Tax Administration. Reforming the tax system, the most enduring and successful project effort, took two years of specialized and highly technical assistance, and further assistance with implementation over the subsequent two-years.   REFORMING THE TAX SYSTEM   Background   Before the tax reform that culminated with tax legislation that Parliament passed in June 2006, the main deficiencies of the Mongolian tax system were: • A high tax burden on low-income wage earners and on labor costs, promoting a large shadow economy • High corporate tax rates and administrative/legislative provisions such as unallowable business expenses and investment tax credits constrained business growth • Provisions, regulations, concepts, and definitions developed piecemeal during more than a decade were scattered in different laws and decrees and were often contradictory, unclear, incomplete, or contrary to international best practices • Low thresholds between corporate tax brackets kept companies small to avoid being taxed at higher rates, providing disincentives to company growth and more competitive access to credit • Value-added tax (VAT) exemptions and loopholes created throughout the years reduced the VAT tax base and made the system non-transparent and difficult to administer • Discriminatory provisions hindered investment by Mongolian businesses as they could not use investment tax credits • Responses to “the most problematic factors for doing business in Mongolia” from the Executive Opinion Survey conducted in 2005 by the World Economic Forum cited “tax rates” in third place and “tax regulations” in fifth place, for the most problematic factors for doing business; inefficient government bureaucracy, inadequate supply of infrastructure, and corruption were also among the top five   Objectives   In April 2005, the GOM through the Office of the Prime Minister summarized the consensus that a competitiveness-based tax reform package would have six interrelated objectives: 1. Increase country competitiveness by lowering the tax burden on businesses, enabling job creation 2. Expand the Mongolian economy by reducing the tax burden and labor costs on wage-earners 3. Simplify tax administration procedures to reduce compliance costs and arbitrariness, reducing the size of the shadow economy and expanding the tax base 4. Support domestic investors by removing discriminatory tax provisions and adjusting taxes to favor domestic production 5. Shift the tax burden from investment/production toward consumption/ ownership 6. Preserve a sound fiscal environment   Results   An impact analysis of the first three years of implementation of the USAID supported overhaul of the tax system reveals that the reforms have uniformly and measurably met their objectives. These reforms have: • Rationalized an antiquated tax system, making it compliant with best international practices and International Financial Reporting Standards (IFRS) • Eliminated economic distortions of old tax laws • Simplified laws and regulations • Provided taxpayers with improved access to simplified instructions, information, and assistance, making the system more transparent and predictable • Expanded the tax base • Increased tax revenues, achieving fiscal neutrality • Had a measurable impact distinct from underlying economic growth. As a result of a broad political consensus and collaboration among all parties, the tax legislation enacted in 2006 brought the Mongolian tax code in line with best practices and delivered measurable and distinct benefits to the economy. Further support for improving customer service and training tax inspectors also had a positive impact on taxpayers’ perceptions of the tax office. Yet, challenges remain. The projected increase in economic activity that the plethora of mining developments and investments will bring about will significantly affect the ability of the tax office to process corporate tax returns that are also likely to use technically demanding accounting and legal provisions. Effective functioning of the recently created large taxpayers’ office, revamped computer systems, continuous training of tax inspectors on accounting and IFRS provisions and revisions, and rapid development of auditing capabilities will be key priorities of the tax office in the next two or three years.             More difficult than improving tax administration will be to develop a working political consensus to continue to shift the burden of taxation from production—keeping business costs down—to consumption, i.e., higher taxes on luxury goods. Equally challenging will be to keep the so far remarkably “clean” tax laws relatively free of provisions favoring interest groups.