The draft bill to revert the personal income rate to a flat rate of 10 percent for all individuals is currently being discussed in Parliament. Cabinet announced the move to revert the decision to introduce four new tax brackets in the personal income tax system after negotiations with an IMF team visiting Ulaanbaatar.
On April 14, 2017, Parliament approved amendments to the Law on Personal Income Tax to introduce a new tax bracket system which imposed higher tax rates on those earning more than 1.5 million MNT a month. Individuals earning four million MNT or more would pay up to 25 percent tax.
| Income (MNT) |
Included income Intervals (MNT) |
Maximum rate of personal income tax |
Tax to be paid /2017/ (MNT) |
Tax break
/2018/ (MNT) |
Tax to be paid /2018/ (MNT) |
Tax burden |
| 300,000 |
0-1,500,000 |
10% |
30,000 |
10,000 |
20,000 |
6.70% |
| 700,000 |
0-1,500,000 |
10% |
70,000 |
10,000 |
60,000 |
8.60% |
| 1,000,000 |
0-1,500,000 |
10% |
100,000 |
10,000 |
90,000 |
9.00% |
| 1,700,000 |
1,500,001-2,500,000 |
15% |
180,000 |
10,000 |
170,000 |
10.00% |
| 2,700,000 |
2,500,001-3,500,000 |
20% |
340,000 |
10,000 |
330,000 |
12.20% |
| 4,000,000 |
3,500,001 or higher |
25% |
625,000 |
10,000 |
615,000 |
15.40% |
Cabinet received fierce opposition and pushback from the public in the lead up to the law coming into effect on January 1, 2018. In particular, miners were the most vocal opponents of the new system, as most workers employed at mines earned more than 1.5 million MNT a month. Regardless of the massive outcry against the move, the law came into effect on January 1.
At the time, the Ministry of Finance justified the move, clarifying that the increases in the personal income tax would only affect eight percent of the population.
“Of Mongolia’s 900,000 registered taxpayers that pay a personal income tax, 92 percent will be unaffected by the increases and will pay the 10 percent they are accustomed to. Tax breaks for the lowest earners will increase also as part of the new tax bracket system. These are all within the terms that were agreed upon with the International Monetary Fund when Mongolia requested to be enrolled into an extended fund facility,” said Finance Minister Ch.Khurelbaatar.
In the face of mounting protests and opposition, Prime Minister U.Khurelsukh conceded that Cabinet would discuss the issue with the International Monetary Fund (IMF) when it arrived on January 24, 2018.
After five days of negotiations with IMF, the Finance Ministry announced the decision to revert back to the flat tax rate. The personal income tax collected in January based on the four tax bracket system would be transferred back to the taxpayers.
The decision to introduce a new income tax bracket system and increase several other taxes was made under former Prime Minister J.Erdenbat’s administration in preparation for the enrollment into the IMF program. Many have speculated on whether or not IMF explicitly told the J.Erdenebat administration to increase the personal income tax.
In general, countries enrolling in IMF programs undertake austerity measures and fiscal cuts in order to maximize revenue to the state budget while decreasing costs. The fact that the current Cabinet, which was formed in October 2017, was able to negotiate with IMF to revert the taxation system in a matter of a few days could be a sign that IMF did not maintain a hardline stance on increasing the personal income tax.
However, it is also plausible that IMF relaxed its conditions regarding tax increases in light of a surprisingly quick revival in the Mongolian economy. As the Prime Minister noted, the state budget revenue exceeded expectations by 500 billion MNT and the foreign exchange reserve reached 3.2 billion USD. It is possible that Cabinet was able to use the quicker than expected revival of the economy to its advantage to convince IMF that the revenue that the tax increases would bring were not enough to justify the discontentment it created amongst Mongolians.
The new tax bracket system approved in April of 2017 was shaky from the start. It was criticized for being a very rudimentary iteration of other personal income tax brackets employed around the world. For instance, the new system would not provide exemptions based on how many dependents an individual has or costs such as medical expenses. In other countries where a personal income tax bracket is in place, exemptions are provided depending on how many people depend on a person’s salary.
Another factor regarding the increase of the personal income tax was the fact that the General Taxation Department had neither the manpower nor the capacity to ensure full enforcement. This created concern that tax evasion would increase as individuals would seek to hide revenue.
Flat tax rates became popularized in the 1990’s after Estonia became the first nation in Europe to introduce a flat tax rate, replacing three tax rates on personal income, and another on corporate profits, with one uniform rate of 26 percent. In 2001, Russia too moved to a flat tax on personal income. Mongolia jumped on board with the flat tax rate, setting the amount at 10 percent in 2006. Previously, Mongolia employed a progressive personal income tax system with three rates at 10, 20, and 40 percent.
The 10 percent flat tax rate implemented in 2007 helped to decrease the tax burden on the people, reduce the underground economy, broadening the tax base, and improving compliance.
Other nations that employ a flat tax rate for the personal income tax tend to have a higher VAT tax rate in order to compensate the losses. Mongolia recently made the VAT tax significantly more comprehensive, which has dramatically increased tax revenue. VAT is considered to be the flattest tax of all. It levies a uniform rate on the goods an individual buys, taking a cut of money when it is spent as opposed to when it is earned.
In 2017, revenue from the personal income tax was around 43 billion MNT. The new progressive tax system was supposed to increase that revenue to 88 billion MNT in 2018 and 84 billion MNT in 2019, hardly enough to put a dent in the current 737 billion MNT state budget deficit.
Therefore, the argument can be made that Cabinet was best off reverting the personal income tax back to a flat rate while continuing to make the VAT system more comprehensive. However, in the long run, Mongolia is due for an increase in the flat tax rate as it employs one of the lowest personal income flat tax rates in the world.
