Mongolian Gold Tax Deemed Illegal

Mongolia’s infamous windfall tax on gold is not being collected from gold producers — at least not for the time being.

On Dec. 13, the Mongolian Constitutional Court said the tax was in breach of the law because the government mistakenly wrote into the new legislation that the London Metal Exchange (LME) was responsible for setting the world market price for gold.

The LME sets prices for the major base metals but not for gold.

While the market-clearing price for gold is set twice daily in London, it is not connected to the LME. The price — which is known as the London fixing price and is considered the international benchmark — is set by representatives of a handful of large international financial institutions.

The windfall tax was introduced in May of last year in conjunction with a windfall tax on copper production. A 68% tax on profits took hold when gold prices stood above US$500 per oz.

The Mongolian ambassador to Canada, Dugerjav Gotov, said in late December that the Mongolian parliament has not reacted to the Court’s decision because it was not set to meet until the new year.

The parliament, Gotov said, will have the power to reinstate the tax then.

Investors are also anxiously awaiting clarification on what has been termed “strategic deposits” in the country.

The strategic classification — which applies to most of the country’s significant deposits, including Ivanhoe Mines’ (IVN-T, IVN-N, IVN-Q) Oyu Tolgoi copper-gold project — allows the government to earn-in up to 34% on deposits which it has not funded, and 50% of deposits which have received government funds at some point.

“It’s very difficult to explain how, or which way, the government would get those shares,” Gotov said.

He added that clearer answers could be forthcoming as soon as this month.