trading, banking services and gold sales, as well as on some food staples domestically produced (e.g., wheat, potatoes, vegetables, fruits, meat, milk).<sup>3</sup> Excise taxes are levied on tobacco, alcohol, gasoline and passenger vehicles. Excise taxes on tobacco are MNT 3,480 (US$ 1.63) per 100 units while excise taxes on alcohol average MNT 7,604 (US$ 3.55) per liter in 2016. Gasoline and diesel excise taxes vary by octane and frontier port of entry, ranging between US$ 11 and US$ 48 per ton. Vehicles are also taxed according to engine size and production year ranging from approximately US$ 500 (for vehicles less than 3 years old and less than 1,500 cm engine) to US$ 4,000 per vehicle (more than 10 years and over 25,000 cm engine). Some goods are exempted from excise tax: Mongolian traditional home-made liquor; legally obtained and imported duty-free alcohol and tobacco; dual-fuel cars; cars running on liquefied gas; and electric cars.<sup>4</sup> Social Security contributions include payments from both the employer and the employee. These contributions partly finance health, unemployment, work accidents, benefits and social insurance funds. Firms pay between 11 and 13 percent -depending on economic activity- of labor payroll. Employees pay a flat 10 percent of gross salaries, capped at MNT 192,000 a month (US$ 90).

**<mark>Monetary transfers</mark>**

General government expenditures as a percentage of GDP, have experienced an uneven trend in recent years. These declined from 37.6 percent of GDP in 2007 to 31.6 in 2011, soared the next year to 37.9, fell again to 30.8 in 2015 and then jumped again to 39.9 in 2016. This erratic behavior is not observed in the main monetary transfers in this study. On the one hand, social security benefits (i.e., contributory pensions and social insurance benefits) have seen a sustained increase from a little more than 5 percent of GDP in 2007-2008 to 7.4 percent in 2016. On the other hand, social assistance transfers (e.g., child program, maternity programs, merit programs) have oscillated around 2 percent of GDP during the past decade. As of 2016, these two components represent 18.6 and 5.1 percent of general government expenditures (see Table 1).

In terms of participation in the fiscal budget, contributory benefits, which include pensions, but also unemployment benefits and other social insurance benefits, represent 17 percent of public expenditures in 2016. Non-contributory benefits, which include child program, and other social assistance allowances, represent 5.1 percent of public expenditures the same year. These stand as 6.8 and 2.1, respectively of GDP (see Table 1).

The largest component among monetary transfers is pensions.<sup>5</sup> There are social welfare pensions, that support people not entitled to receive pensions from the social insurance system. These

> 3 Exemptions on gold sales are estimated to represent tax expenditures of MNT 41.3 billion. Financial, insurance and stock-market services 88.4 billion. Food staples 41.6 billion. These exemptions are estimated to represent 6.0, 12.8 and 6.0 percent, respectively, of total tax expenditures in year 2016 (or 0.7, 1.5 and 0.7 percent of total fiscal revenues in 2016). Data provided by the Mongolia Ministry of Finance in April 2017.

> 4 Exemptions on hybrid cars are estimated to represent tax expenditures of nearly MNT 160 billion, which represents around 23 percent of total tax expenditures for year 2016 (or 2.7 percent of total fiscal revenues in 2016). Data provided by the Mongolia Ministry of Finance in April 2017.

> 5 Pensions can be interpreted as a transfer or as delayed savings. The former is the usual interpretation for noncontributory pensions, whereas the latter is more common for contributory pensions. In any case, the case of <u>contributory pensions, if under a pay-as-you-go system, may have a transfer rather than delayed saving interpretation,</u>

MONGOLIA Distributional impact of taxes and transfers / May 2018 3