Windfall tax on gold in Mongolia 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 it 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 base metals but not for gold.

While the market-clearing price for gold is set twice day 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 five representatives of large international financial institutions.

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

The Mongolian ambassador to Canada, Dr. Dugerjav Gotov, says the Mongolian parliament has not reacted to the Constitutional Court’s decision because it is not set to meet until the new year.

The parliament, Gotov says, 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‘s (IVN-T) Oyu Togloi 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 as to how or which way the government would get those shares,” Gotov says.

He added that concrete answers could be forthcoming as soon as January.