Attitude toward Foreign Direct Investment
Foreign Direct Investment (FDI) coming into Mongolia declined by 95 percent from its 2011 peak of USD 4.7 billion to USD 232 million in 2015. Declining global prices for copper and coal – two commodity mainstays of the Mongolian economy – explain some of the investment nosedive, but GOM executive, legislative, and judicial missteps also discouraged foreign investment. Senior GOM leaders recently have publicly pledged to correct the FDI-related mistakes of past GOMs and the incumbent GOM has achieved a significant measure of remediation by adopting FDI-friendlier legislation, confirming respect for the 2009 investment agreement that established the Oyu Tolgoi copper/gold mega-mine project, decriminalizing some business tax disputes and consequently reducing the use of prosecutorial "exit bans" against foreign business executives, and acknowledging an obligation to honor international commercial arbitration awards.
U.S. investors welcome these positive steps but question whether they portend broader and more permanent progress. They are concerned that the Office of the Prosecutor General retains un-appealable authority to indefinitely bar foreign nationals from leaving Mongolia. More fundamentally, they point to stalled GOM negotiations over construction of a fifth electricity generation plant as leaving in doubt Mongolia's ability to provide business-enabling infrastructure. They also cite depressed global commodity prices as a disincentive to invest in Mongolia's mining sector and other sectors (construction, real estate, IT, etc.) that depend on mining sector activity for profitability.
International financial institutions make Mongolia a more attractive destination for FDI through their extensive activities. The European Bank for Reconstruction and Development (EBRD) has invested nearly USD two billion in Mongolia, mostly in projects designed to facilitate private sector growth in the mining, energy, financial, agri-business, and retail sectors. The Asian Development Bank's USD 700 million project portfolio largely complements EBRD efforts in its focus on the transportation, energy, urban utilities and services, education, and health sectors. The International Finance Corporation and the World Bank have committed several hundred million dollars to projects that support infrastructure development, employment generation, economic diversification as well as the institutional strengthening of the mining sector. Other UN agencies and NGOs also make significant contributions to making Mongolia more accommodating to FDI either as their primary missions or as secondary aspects of their programming.
Other Investment Policy Reviews
The GOM conducted an investment policy review through the United Nations Conference on Trade and Development (UNCTAD) in 2013 and a trade policy review with the World Trade Organization (WTO) in 2014. Although the Organization for Economic Cooperation and Development (OECD) has not conducted a comprehensive investment policy review of Mongolia in the past three years, it has completed economic studies on specific aspects of investment and development in Mongolia.
For UNCTAD Mongolia investment policy review: http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=758.
For WTO Mongolia investment policy review in the context of a Trade Policy Review: http://www.wto.org/english/tratop_e/tpr_e/tp245_e.htm.
For OECD Mongolia reports: http://www.oecd.org/countries/mongolia.
Laws/Regulations on Foreign Direct Investment (FDI)
In October 2013, parliament passed the Investment Law of Mongolia (IL) to replace the short-lived, FDI-discouraging Strategic Entities Foreign Investment Law (SEFIL), which had made private company business decisions in certain sectors (including mining, banking, and insurance) subject to GOM review. IL specifies more reasonable rights and obligations of investors in Mongolia, provides for a more stable tax environment, establishes the powers and responsibilities of the agency that regulates investment, and provides tax and other incentives to investment. Foreign investors receive the same protections as domestic investors under IL and investor residence determines whether an investor is foreign or domestic rather than nationality. Accordingly, most investments by private foreign individuals residing in Mongolia or firms need only be registered with the General Authority for Registration and Statistics (GARS). U.S. investors arguably also qualify for Mongolian national treatment under the terms of the 1994 U.S.-Mongolia Bilateral Investment Treaty (BIT). For information on the Investment Law of Mongolia: www.investmongolia.gov.mn; and for the BIT: http://www.state.gov/e/eb/ifd/bit/117402.htm.
IL offers tax incentives in the form of transferrable tax stabilization certificates which give investors in qualifying projects favorable tax treatment for up to 27 years. Affected taxes may include corporate income tax, customs duties, value-added tax, and mineral resource royalties. The criteria for participation in the tax stabilization program are transparent and include the amount of investment, the sector involved, and the geographic area involved. (For information on tax stabilization certification: www.investmongolia.gov.mn).
All enterprises must register with the GARS at www.burtgel.gov.mn. The registrant obtains form UB 03-II and other required documents from the website and can submit completed documents by email. GARS aims at a two-day turnaround for the review and approval process, but investors report that complex cases can take several weeks to three months. Once approved by GARS, a company must register with the Mongolian General Authority for Customs and Taxation (GACT). Upon hiring its first employees, a company must register with the Social Insurance Agency. GARS reports that notarization is not required for its registration process. (For information on registration of companies: www.burtgel.gov.mn and www.investmongolia.mn.)
Under the IL, the Invest Mongolia Agency (IMA), which reports to the Office of the Prime Minister, assists investors with all aspects of establishing businesses in Mongolia. IMA is also authorized to issue tax stabilization certificates. IMA services are available to all foreigners and domestic investors who plan to invest USD 100,000 or more in a registered business. To contact IMA go to www.investmongolia.com. Investors indicate that these formalized, statutory processes have eased and brought some predictability to the registration and certification processes. The World Bank’s 2016 Ranking on the Ease of Doing Business in Mongolia documents this and other improvements in Mongolia’s business environment over the last year (http://www.doingbusiness.org/data/exploreeconomies/mongolia/).
The 2009 Law on Small and Medium-Sized Enterprises (LSME) recognizes four categories of SME: manufacturing, wholesale, retail, and services. Companies qualifying as SMEs under LSME have gross annual revenues of less than USD 750,000 with manufacturing and retail sector SMEs having fewer than 200 employees, wholesale sector SMEs having fewer than 150 employees, and service sector SMEs having fewer than 50 employees. Effective in 2016, an LSME amendment brings micro-enterprises within the law's mandate in the manufacturing sector (fewer than 20 employees and less than USD 125,000 in sales) and service sectors (fewer than ten employees and less than USD 25,000 in sales). All SMEs and micro-enterprises qualify for preferential terms for financial leasing of equipment and soft loans from the Ministry of Industry-administered SME Development Fund and for low interest loans from Mongolian commercial banks. Because the LSME makes no mention of foreign entities, the eligibility of SMEs owned by non-resident foreigners for these benefits is open to question.
The Ministry of Industry (MOI) is responsible for creating and implementing an industrial policy for Mongolia aimed at promoting value-added production in non-agricultural sectors, including but not limited to minerals and metals processing, construction materials production, plastic and chemical production, and hydrocarbon refining. The Ministry of Food and Agriculture is responsible for value-added production in the food production and livestock sectors.
MOI officials describe the ministry’s goal as import substitution, to be accomplished by employing state funds, tax preferences for domestic production, and import tariffs for inputs used in producing domestic agricultural products, constructing domestic energy infrastructure, supporting domestic SMEs, and developing domestic technologies. Parliament adopted specific tax and tariff measures in 2015 – including the waiving of both the five percent import tax and the 10 percent value-added tax (VAT) – which foreign and domestic investors alike can apply to IL-qualified investments. However the process for obtaining these tax waivers has not yet been clarified. (For MOFA and MOI policies go to http://mi.gov.mn/, and http://www.mofa.gov.mn/).
Limits on Foreign Control and Right to Private Ownership and Establishment
Generally, foreign and domestic entities can establish and own all forms of legal businesses and engage in all forms of remunerative activity on an equal footing. Foreign private entities or individuals may not own or sell land but can own and sell all other forms of real property. The 1994 U.S.-Mongolia Bilateral Investment Treaty (BIT) expressly extends to U.S. investors the benefits of national treatment in Mongolia, excepting the banking and real estate sectors. (BIT: http://www.state.gov/e/eb/ifd/bit/117402.htm) (For information on the IL see 1.3.)
Although Mongolia imposes no general legal restrictions on foreign project financing or the formation of joint ventures or other business partnerships, the GOM sometimes imposes specific restrictions on an ad hoc, project-by-project basis. Legal experts and U.S. investors allege that the system by which the GOM decides upon and implements such restrictions lacks clear statutory basis and transparent, predictable regulatory procedures. Mandatory GOM equity interests or other explicitly restrictive covenants may be imposed on projects the GOM determines to be of national strategic interest. For example, the 2014 Amended Mining Law of Mongolia requires private entities to allow the GOM to assume equity positions of up to 50 percent in (non-uranium) mining projects at its discretion. Under the Nuclear Energy Law, the GOM is to hold all uranium mining licenses and to control any uranium processing facilities, although private entities may own up to 49 percent of these state-owned enterprises (SOEs).
U.S. and other foreign investors recall that "foreigner bashing" became part and parcel of the 2012 parliamentary election campaign season in Mongolia and led directly to the adoption of the FDI-discouraging SEFIL (See Chapter 1.3.) Although there has been no indication of a SEFIL-like draft coming before parliament in the 2016 campaign season, Speaker Z Enkhbold raised several foreign eyebrows during an April 5 speech inaugurating the spring legislative session when he defended parliamentary obstruction last session of the Tavan Tolgoi coal mega-mine project by alleging that the project might otherwise have been taken over by "foreign companies."
Although the GOM actively seeks to establish an effective public-private partnership (PPP) framework and describes on various websites more than 50 PPPs as theoretically open for FDI, these PPPs are still in the planning stages. The GOM and USG are negotiating a second Millennium Challenge Corporation compact that may include one or more PPPs.
In late 2015, parliament authorized the dissolution of the State Property Committee (SPC), which had held and operated numerous SOEs in mining, and also the Mongolian Stock Exchange (MSE), the national air carrier MIAT, and the Mongol Post Office. These assets have begun to be auctioned-off. Most notably, 30 percent of the post office was offered to private buyers through an initial public offering on the MSE. However, while stating that it welcomes foreign participation in privatization efforts, the GOM has yet to clarify a tendering process for the privatization of state assets that are not to be sold via the MSE. Most SPC assets have been placed under the stewardship or actual ownership of relevant GOM entities. For example, the Ministry of Finance now owns and operates the MSE, and Erdenes Mongol, the state-owned mining asset holding company, now possesses most of the SPC mining assets, particularly those in the coal sector. Further confusing matters, the GOM has been creating new state-owned SMEs in spite of its commitment to privatizing larger SOEs.
Screening of FDI
Mongolia has no formal system for screening investments as such, although U.S. investors and legal commentators report that processes are sometimes cobbled together by GOM officials of variable authority levels and that these ad hoc processes may include obstructions, ranging widely from the slow-rolling of registrations to unreasonable tax levies and even criminal prosecutions. Mongolia's National Security Council (comprising the president, prime minister and speaker of parliament) has assumed authority to review particular investments at its discretion on national security grounds. Although some U.S. investors and business entities contend that the NSC lacks constitutional or other legal grounds for assuming this authority, no effective appeal was available to them in 2010 when the NSC declared a moratorium on the issuance of mining licenses. That moratorium remained in effect until revoked in 2014 by parliament, the highest organ of state authority per the Mongolian Constitution.
Mongolia’s Agency for Fair Competition and Consumer Protection (AFCCP) reviews domestic transactions for competition-related concerns. For a description of the AFCCP and its legal and regulatory powers see http://unctad.org/en/PublicationsLibrary/ditcclp2012d2_Mongolia_en.pdf. or http://www.afccp.gov.mn/.