S.Bold-Erdene shows how politicians’ move to raise taxes on coal export can cripple a sector that is growing rapidly.
Six years ago, when gold and copper prices reached their peak, our politicians had a brainwave and decided to impose the now infamous 68 percent windfall profits tax. The ‘author’ of the law, N.Batbayar, proudly says that in the four years the law was in force, more than MNT900 billion was accumulated in the budget. However, many economists would not agree with him that the law was useful. While Erdenet LLC was the only copper mining company that paid the tax, gold mining companies hid their gold and took it across the border. Some South Korean men attempted to fly out from Ulaanbaatar with gold hidden in their anus. Only one or two State owned companies paid this tax after selling their gold.
Before the tax, the amount of gold sold to the Mongolbankwas consistently high. For instance, the year before the law came into effect, 133 entities and 800 individuals sold 15.2 tons of gold. We can see from the chart below how that amount took a nosedive with the passage of the law. As soon as the tax was annulled with effect from January 1, 2011, the amount began to rise.
Amount of gold sold to the Mongolbank
A similar brainwave has now hit certain politicians who want to put a similar tax on revenue from coal. It might not be a direct 68 percent tax as earlier, but many are toying with ways in which the state can get a ger share of miners’ profits fromever increasing coal exports, at prices that are also getting higher. This is over and above the already considerable amount accumulated in the State budget under this head. The following chartsgive the picture.
Amount of coal export (million tons)
The amount of coal exported in 2009 was 7.6 million tons, rising to 18 million tons in 2010, and 23 million tons in 2011. The Mineral Authority’s forecast is that the figure would reach 30 million tons in 2012, 33 million tons in 2013, 40 million tons in 2014 and 50 million tons in 2015. The Mongolian Coal Association sees even farther and estimates that 100 million tons of coal will be exported in 2025.
The total tax collected from natural resources export was MNT905.2 billion in 2010, with copper accounting for MNT534.8 billion, coal MNT193.9 billion, gold MNT38.2 billion and iron ore for MNT99.8 billion. In 2011, the total stood at MNT1,057.8 billion, of which the share of coal was MNT402.56 billion, of copper MNT561.18 billion and of iron ore MNT42 billion.
Tax amount paid by mining sector
The Ministry of Finance projections for this year put the tax from iron ore at MNT121.3 billion, from coal at MNT925.1 billion, from copper atMNT583.4 billion, and from zinc at MNT31.3 billion. Incidentally, on the basis of income from various sectors, the copper era has ended in Mongolia and the coal era has begun.
All this is too tempting for politicians. In a bid to get more from the rising exports they hit uponthe ploy of levying an export tax onraw coal and iron ore, ostensibly to restrict their “overexport”.This is expected to puttrillions of MNT into the State budget, but thatis still not enough for the politicians who are planning to increase the tax further.
How much can coal exporting companies bear? As of now, they pay approximately 40 percent of their revenue in taxes such as income tax, mineral resources usage fee, surtax, royalty, air pollution tax and mining licence fees.Forced to find ways to plug the budget deficit, some proposed an export customs tax which failed to be approved by the State Great Khural. But they are planning to try again and the rates could be even more backbreaking.
Can we afford to do with coal what proved to be a costly mistake with gold? There are several reasons why the politicians must not repeat their earlier folly.
First, the entire 20 million tons of coal that is exported is mined by only five companies. They are the State owned Erdenes Tavan Tolgoi, the locally owned Tavan Tolgoi LLC, Energy Resources, the MAK Group and the foreign invested SouthGobi Sands. Thereforeany increase will hit only these five companies, just as Erdenet was the only copper miner affected by the 68 percent tax. Is this a just reward for companies that have toiled hard in the past a few years to give coal export a boom? Thanks to their efforts, investment in this sector has increased dramatically, new mines have opened and many others are preparing to start exploration work. A tax increase will badly cripple the coal sector.Companies preparing to begin exploration will for sure have second thoughts. And, many will find many ways to avoid paying the tax, as happened with gold companies earlier. Such high tax rates also means companies will not spend on introduction of new technology, will skimp on natural restoration, and shy away from their social responsibilities.
Second,a stable tax environment is crucial for companies planning to change over from exporting raw coal to processed coal, essential to demand higher prices. Their efforts in that direction have started bearing fruit. Energy Resources has started building a coal washing plant, and the four other exporters, except for the “small” Tavan Tolgoi, have plans to build a coal preparation plant and/or a coking plant. Coal preparation plants need considerable investment, and the exporting companies may well feel hamstrung if their tax burden is too heavy.
Third,the health of the global economy is suspect and minerals prices could tumble any time. This year’s World Economic Forum meeting in Davos saw general agreement that the present year would be a tough one. The European debt crisis will linger. Rating agencies have downgraded the rating of some European countries, adding to economic instability. If Europe is in the doldrums, China’s industrial and economic growth would certainly slow down. China’s industries will not come to a halt and they will keep importing coking coal. But the demand will be reduced, posing a huge risk for our country. Mongolia’s coal exports have justbegun tothreaten the Australian coking coal sector, and huge opportunities are opening up. Anything that jeopardises China’s continuing and rising purchase of coal from Mongolia, instead of Australia, bodes ill for us.
All in all, any decision by Parliament to increase the coal tax or impose any other levy will act as a strong disincentive for the coal sector.There is talk that coal companies have paid bribes to keep any increase in abeyance, but this may well turn out to be a temporary respite only. We must not be so greedy as to kill the goose that lays the golden eggs. Undue haste can take a terrible toll. My personal belief is that it makes much more sense to encourage small companies to grow, so that 50 companies will pay tax at normalrates after five years, than to demand high taxes from five companies today.We should also get our coal graded more accurately and put it into more categories than at present. Globally, there are more than twenty categories of coal, but Mongolia has only two: coking coal and brown coal. Incidentally, the same tax rates apply to both here. Any talk of raising taxes would be more appropriate after solving these issues first.