From the bench: New, clearer rules for investing are being implemented

Legislative changes in early 2012, like the Strategic Entities Foreign Investment Law (SEFIL), combined with a global trend of capital outflow from developing countries, unnerved investors and led to 17% and 47% year-on-year drops in foreign direct investment (FDI) in 2012 and the first three quarters of 2013, respectively. In November 2013, the newly elected government enacted a new Investment Law aimed at reversing falling FDI inflows. “The new FDI law is based around four concepts: liberalisation, business-friendliness, efficiency and diversification,” S. Javkhlanbaatar, Invest Mongolia Agency’s acting director-general, told OBG.

Equal Footing

However, investors continue to look for further signals of the government’s avowed pro-business stance. The law levels the playing field between local and foreign investors, aside from requiring each foreign investor to hold $100,000 in capital onshore – up from a previous $100,000 per foreign-invested entity, which is now defined as a firm with over 25% of its equity held by foreigners. Foreign state-owned enterprises (SOEs), defined as those where a state holds over 50% of its equity, still require government approval for purchases of stakes of over 33% although the process no longer involves parliament. SOEs already holding 75% stakes in Mongolian firms need not seek approval for additional share purchases. The law also establishes a new independent investment agency to handle promotion and investor protection, while shifting responsibility for formal approval to the Ministry of Economic Development (MED). “The new Investment Agency will have several duties including investment promotion, various consulting services to investors to help them and mitigate any disputes and also tracking implementation of investment projects.” Javkhlanbaatar said. “The old Foreign Investment and Foreign Trade Agency handled only promotion and investment approval, so the new system is clearer and establishes a comprehensive institutional platform for investors.” Parties involved in an agreement are given freedom to decide on including international arbitration clauses.

Incentives

The rules provide for “tax stabilisation certificates” meant to insulate investors from fiscal changes ranging from five to 22.5 years depending on location, industry and investment value. Four sets of taxes are covered: value-added tax, corporate income tax, Customs duties and mining royalties. The law delineates five investment zones including central, eastern, western, mid-western regions and Ulaanbaatar. Investments in mining, infrastructure and heavy industry receive the best treatment, with stabilisation periods of up to 18 years, depending on value and location, for investments over MNT30bn ($18m), while those in other sectors are eligible for up to 15 years for deals over MNT10bn ($6m). Invest Mongolia requires approved feasibility studies for investments over MNT10bn ($6m), but only business plans for smaller deals. While the agency handles issuance of the stabilisation certificates, the MED retains ultimate authority for deciding on the timeframe. These deals can be extended by another half for investments of over MNT500bn ($300m), so-called mega-investments where the government will sign an investment agreement covering all areas of the business, or for those with an import-substitution or export-oriented focus. The government also intends on offering non-tax incentives covering land acquisition and complete Customs-duty and tax waivers for machinery and technical equipment imports during construction, although these will be decided on an ad-hoc basis by line ministries and agencies.

Stability

Investors still await resolution of several issues before committing funds. “The new law includes a provision that any amendments would require a two-thirds majority in parliament,” Javkhlanbaatar told OBG. “This insulates holders of tax stabilisation certificates from change.” A major step in restoring investor confidence, the law still needs supporting regulation in sectors like mining. D. Jargalsaikhan, chairman and CEO of the Mongolian Investment Holding Group, told OBG, “With 70% of FDI in mining, consider the impact of the law if new exploration licenses are not offered.”

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The Report: Mongolia 2014

Trade & Investment chapter from The Report: Mongolia 2014

Cover of The Report: Mongolia 2014

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