Sang Yong Cho, Partner, KPMG MONGOLIA
Could you introduce KPMG Mongolia?
KPMG Mongolia was established in 2012 as a JV between KPMG Korea and NIMM Audit LLC. We have grown to a team of 130 dedicated professionals, both locals and expats, and we are now ranked as the largest audit firm in the country and the best recruitment audit firm. What have been the main demand trends for your services in recent years?
Before COVID-19, there were more requests for FDI-related due diligence, valuation, and M&A transaction work, but the pandemic and the Russian war have slowed these service requests. Now, we are seeing an uptick. In response to higher inflation and interest rates, more companies explore new financing sources with lower interest rates and look to optimize group management systems and increase efficiency. In mining, the demand for advisory services mostly came from foreign investors who wanted to enter the market.
Soon, we also anticipate more demand for ESG-centered advisory services as the industry transitions towards net-zero goals and the newly passed IFRS S1 and S2 standards guide companies towards a standardized sustainability reporting structure. How competitive is Mongolia as an investment destination from a tax perspective?
The Mongolian tax system still requires development and clearer implementation guidance to align with international practices. In recent years, the Government of Mongolia has passed several laws and regulations, including Amendment to 2017 Minerals Law and the long-term developmental plan ‘Vision 2050’ to improve transparency and create a more attractive business environment. Although this is a good starting point, policymakers need to also focus on how these laws and policies are implemented. The only incentive available to foreign investors is tax stabilization to fix percentage rates of corporate tax, customs duty, VAT, and royalty for up to 27 years. We see a mismatch between the legislators’ preference for keeping domestic tax law simple and foreign investors’ need for more complex transactions. When investors try to clarify uncertainties from tax offices or departments it often takes months to hear back.
Shaukat Tapia, Country Managing Partner, PwC MONGOLIA
Could you give us an overview of PwC’s work in Mongolia?
PwC Mongolia opened its office in Ulaanbaatar in September 2010 from a completely greenfield basis. At first, we were primarily focused on audit, but today we offer all service lines, including assurance, tax, and advisory. The PwC network’s opening of a member firm in Mongolia was driven by the immense potential of the mining and extractive industries. Many investors were in town during the boom years, and to that extent we were straining to respond to the immense demand. That changed with the crash in 2012. We are now seeing recovery and the overall sentiment is one of cautious optimism.
The government is looking to update the current mineral and investment law. Could you unpack some of the main challenges that the current investment law presents?
The new investment law looks at scrapping the US$100,000 limit for investment, as well as rationalizing the legislation for the ownership of land for foreign companies and streamlining inspections. Whether the new mineral law will be enacted before elections next year is anyone’s guess, but there is a lot of pressure from private businesses on the government to act quickly. Since October last year, the relationship between Rio Tinto and the government over Oyu Tolgoi fell back into place, instilling more confidence. What are the main insights gathered from your most recent PwC ‘CEO Survey’ in Mongolia?
There was a general concern over macroeconomic and geopolitical risk, emanating from China’s post-Covid repercussions and the war in Ukraine. While China represents 90% of Mongolia’s exports, Russia has been a key source of imports. Previously, most goods, from foods to mining equipment, were imported either directly from China and Russia or from Europe through Russia via train. But with Russia under sanctions, and most multinational corporations exiting Russia, procuring these goods directly from Russia or from Europe by train due is not possible. Goods from Europe are being delivered by sea to China and then being brought into Mongolia by road or train putting a lot of pressure on costs and lead times.