using data from the 2016 Household Socio Economic Survey, so it refers to the distributional impact of taxes and transfers as of 2016. The third summarizes the main results by type of policy intervention and in total. The paper concludes with a comparison of the distributional effect of taxes and transfers in Mongolia vis-à-vis other countries in the world and a qualitative assessment of the distributional impact of some policy options for the country. The latter gives some basic intuition about the distributional consequences of some policy options currently discussed in the country.

# **II. Description of taxes and social expenditures in Mongolia**

This analysis focuses on taxes and transfers that can be directly traced to have an impact on households’ welfare. It focuses on first order, partial equilibrium, short-term impacts on poverty and inequality measures of welfare across households. Therefore, it analyzes the distributional impact of personal income, value and excise taxes as well as social security contributions (on the revenue side), monetary transfers such as social insurance-assistance programs, and in-kind transfers in public health and education (on the expenditure side). The study also includes quasifiscal expenditures due to subsidized interest rates or energy prices. However, it does not include corporate taxes, custom taxes, royalties or expenditures in infrastructure because, although it is certain that they have impacts on the distribution of households’ welfare, these are more the result of second order, general equilibrium, long-term impacts.

## **<mark>Tax revenue sources</mark>**

General government revenues as a percentage of GDP, have been declining in recent years. They have gone from around 30 percent of GDP in the late years of the past decade, to around 25 percent for the years 2014-2016. However, the main sources of revenue (i.e., corporate, personal, value added, excise and custom taxes, social security contributions and royalties) have remained quite stable over the years. These represent 20 percent of GDP (plus/minus one percentage point) since 2006. As of 2016, the year of reference for this study, personal income, value added, excise taxes and social security contributions represent 9.4, 19.5, 10.7 and 20.1 percent of general government revenues (see Table 1). Namely, the analysis refers to sources of revenue that represent almost 60 percent of total government revenues.

As of 2016, gross incomes are taxed for personal income at a flat rate of 10 percent. Filing of personal income tax in Mongolia is per individual and no joint filing by spouses or several family members is permitted. All sources of gross income are taxed, but there are deductions on social security contributions, and a personal annual tax credit of MNT 84,000 (approximately US$ 39). There are also exemptions on expenditures for tuition fees for tertiary education.

The VAT law was reformed in July 2015, and new rates became effective on January 1<sup>st</sup> , 2016. This taxes goods and services with a flat 10 percent rate. The reform in the law increased the threshold for registration of taxable sales from 10 million to 50 million MNT a year (from around US$ 4,672 to US$ 23,361), this with the purpose of solving the problem of very small firms having to file due to high inflation in previous years by creating a new threshold that leaves outside taxation most small firms. In addition, the VAT has multiple exemptions, particularly on stocks 2 MONGOLIA Distributional impact of taxes and transfers / May 2018