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Mongolian Tax Reforms Promote Business Growth
FrontLines - August 2009
Ulaanbaatar, Mongolia—“Before the tax reforms, I never considered expanding my business because I knew I could not afford to pay the taxes,” said Battogtokh Khuvit, the owner of a small company that imports, iodizes, packages, and distributes salt to retailers in Mongolia.
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Tax reform has allowed
Battogtokh Khuvit to expand
his salt distribution company
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In the past, Mongolia’s tax laws discouraged entrepreneurs from expanding their businesses. Now, however, tax reform is promoting business growth and revenues.
In 2005, Battogtokh’s business was doing well, but an expansion
would have pushed him from the 15 percent tax bracket to the 30 percent bracket. (Like most Mongolians, Battogtokh is known by his first name.)
In the 1990s, the Mongolian government set a low threshold for the higher tax bracket, resulting
in the collection of higher taxes from a larger base. Over time, the high rates led to tax evasion and the low thresholds discouraged entrepreneurs like Battogtokh from investing in business expansion. They also forced larger companies to split up into smaller entities to skirt higher taxes.
Things changed in 2005, when the government undertook a two-year tax reform program with USAID assistance.
USAID worked with the Office of the Prime Minister, members of parliament, the General Department of Taxation (GDT), and the Ministry of Finance to examine tax reform proposals. The Agency recruited international tax experts and economists to provide feedback on the proposals and to expose Mongolian policymakers to international tax policy.
“The most significant assistance
during the tax reform process was to build consensus among policymakers,” said Ariunsan Baldanjav, former deputy director of the GDT.
In preparation for the passage of the laws in June 2006, USAID helped the government organize a national education campaign to encourage people to join the formal economy by becoming taxpayers.
“Public participation in policy making was a new concept for Mongolians,” said Zorig Luvsandash, former director of the GDT.
The campaign featured newspaper
articles, brochures, and television programs to create awareness about the new tax laws and encourage public debate.
“By involving the public in the reform process, they had realistic expectations and did not put forth resistance when the new laws were put into effect,” said former Member of Parliament Tserenbaljir Bataa.
Battogtokh was convinced. “After the tax reform, I made the courageous decision to expand my business, and I am thinking of applying for a bank loan for the first time to buy equipment to enter into the bottling and beverage
distribution business,” he said.
With more disposable income on hand, he started to renovate his warehouse and expects to hire 10 additional full-time employees to handle the new beverage line.
In 2008, with support from USAID, GDT assessed the impact of the tax reforms for 2007, the first year of the reform. The assessment revealed a 41 percent increase in reported corporate revenues over 2006 collections, prior to tax reforms. A large portion of such a significant
increase was attributable to general economic growth in Mongolia, however, the tax reform was a contributing factor.
Although tax reform in Mongolia is still a work in progress,
the new laws have fostered economic growth and a competitive
business environment. USAID intends to provide support
again in 2009 to assess the impact of tax reform on 2008 tax collections.
★
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by the Bureau for Legislative and Public Affairs
U.S. Agency for International Development
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