sector do not have funds to license new technologies or to send their employees to foreign markets for training. Lack of marketing skills and information is one reason why Mongolian firms miss opportunities to expand in foreign markets. For example, they have not been able to take advantage of the duty free access to the EU for 7200 products.

High protection in China and Russia on a number of key Mongolian exports has also been cited as an obstacle to export growth. Indeed, in 2003 a number of leather, wool and meat products faced tariffs above 30 percent in Russia (Table 16). Since then protection has declined in Russia, and remains high mostly on meat and meat related products (Table 16). Currently, the main obstacle to expanding meat exports is not the tariff, but the ban on imports from Mongolia related to the Hoof and Mouth disease and the SPS requirements in foreign markets. Diversification and deepening of supply chains within Mongolia’s mining sector is also extremely important given the country’s vast mineral wealth and high transport costs.

# **_3.3.4 Is the tax code a binding constraint to private sector growth?_**

Our analysis finds that distortionary taxes, including lately in the mining sector, and complex customs and trade rules have increased the implicit cost of doing business in Mongolia. A major overhaul of the tax code which took effect in January 2007 is expected to relax this constraint somewhat, but problems related to tax administration that go hand in hand with tax burden issues (Figure 11) are outstanding.<sup>54</sup> The tax base in Mongolia has been very narrow. The top 100 taxpayers provided over 90 percent of the revenues and nearly half of the firms reported zero or negative profit in 2004. Tax evasion is rampant as well, even after the recent reduction of the windfall tax liability from the raising of the “trigger price” on gold. Tax administration remains weak. There is substantial variation in the effective tax rates implicit in the taxes paid by different firms within a net income range suggesting inconsistencies in tax administration (Figure 12). The primary cause for these inconsistencies is the excessive discretion enjoyed by inspectors and their rent-seeking behavior.<sup>55</sup> The average number of days spent meeting with tax inspectors was considerably higher than in most other countries in East and Central Asia (Table 17). Tax officers were perceived as corrupt by 95 percent of those interviewed in a 2004 survey by Partnership for Transparency.

Mongolia uses also duty exemptions on exports in order to stimulate processing and assembly. However, duty exemptions are likely to do more harm than good to Mongolia’s small open economy<sup>56</sup> because trade tariffs are already low and uniform (at 5 percent), tax administration is weak and exemptions are granted not only to imported

> 54 In June 2006 the government proposed a major overhaul of the tax structure including a unified 15 percent corporate income tax rate, a reduction in the VAT rate from 15 percent to 10 percent, and a reduction in the personal income tax rate to 10 percent.

> 55 Source: 2004 survey by Partnership for Transparency.

> 56 Mongolia can be considered a price taker both for inputs and outputs of most products (UNCTAD/WTO 2006).

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