OVERVIEW OF THE MONGOLIAN NGO COMMUNITY: Legal environment, types & classification, financial sources & fundraising, and taxation of NGOs
Undral Gombodorj Director Democracy Education Center (DEMO) Mongolia
There has been significant growth of non-government organizations (NGO's) in Mongolia since transition from centrally controlled to a more open society. Several dimensions of the NGO sector are important to understand the current situation of Mongolian NGOs. Four dimensions stand out: the legal structure, the types and classification of NGOs, financial sources and fundraising, and taxation of NGOs.
1.The legal structure
The passage of the NGO law in January of 1997 can only be seen as a major step forward. The law provides a legal framework for NGOs and encourages the growth of NGOs through tax exemption for NGO activities and for contributions made to NGOs.
Article 4, Section 1 of the Law on NGOs states that ‘NGO shall mean an organization, which is independent from the state, self governing, non-profit and established voluntarily by citizens or by legal entities other than state agencies (i.e., organs that exercise legislative, executive and judicial powers) on the basis of their individual or social interests and opinions.’
The law is favourable in other ways: for example it allows that if “no official response from the Ministry of Justice is received by the non-governmental organization regarding its registration in the State registry within (30 days) the non-governmental organization shall be considered to be legally registered and entitled to operate.” Thus, the State has declared that it cannot prevent registration through inaction. Within 30 days after the receipt of a complete documentation fulfilling the pertinent requirements, the Ministry of Justice and Home Affairs shall make one of the two decisions, either to register a non-governmental organization or refuse to register according to the law. If a non-governmental organization does not receive an official response from the Ministry of Justice and Home Affairs within 30 days, it shall be presumed to be legally registered, may conduct its activities and according to applicable procedure obtain its certificate. /The Law of Mongolia on Non-Governmental Organizations, Article 16, para.10/.
There are cases when non-governmental organizations were registered with the public registry due to some emergency situations despite the time period mentioned above. In the fall of 2000 there was a heavy snowfall in the country and the weather was extremely cold in the majority of its territory /in some territories of countryside the temperature was 40°C below zero/. Due to this disaster the living conditions of herders worsened and a huge number of livestock died. During this time a non-governmental organization founded with the objective to help and give assistance to the victims of a natural disaster, and accumulate donations for these victims named “Mongolian Foundation for Help to Victims of Natural Disaster” was registered on 17 February 2000 upon the request of its founders and given the registration number 1002716 despite the time period mandated by law.
2.The types and classification of NGOs
Article 4 of the Law of Mongolia on Non-Governmental Organizations distinguishes between the two types of a non-governmental organization, which are a public benefit NGO and a member benefit NGO.
‘Public benefit NGO’ shall mean an NGO that operates for the public benefit in the fields of culture, art, education, science, health, sport, nature and environment, community development, human rights, protection of the interests of specific subsets of the population, charity and other such fields.
‘Mutual benefit NGO’ shall mean an NGO other than a public benefit NGO that operates primarily to serve the legitimate interests of its members.
Currently in Mongolia, there are more than 4,000 non-governmental organizations registered. Approximately 20 percent of them are the member benefit organizations, such as a non-governmental organization of pharmacists, persons engaged in the business of leather industry, telecommunication professionals, composers, book publishers, etc. And the remained 80 percent are the public benefit organizations.
According to the sources taken from the Ministry of Justice and Home Affairs by April 1, 2004 the NGOs are classified as follows:
No. Types of Activities Number of NGOs
1 Children 203
2 Human rights 170
3 Nature and Environment 268
4 Friendship and Cooperation 456
5 Youth 210
6 Service for elders 116
7 Health 241
8 Arts/culture and education 574
9 Professional 356
10 Sports 411
11 Services for disabled 76
12 Support to social development and Humanitarian assistance 315
13 Family 45
14 Support for religious development 59
15 Women 205
16 Other 245
As we can see from the above, NGOs are mainly engaged in the activities of education and arts (14.5%), friendship and cooperation (11.5%), sport (10.4%), professional (10.65%), and environment NGOs (6.8%). However, the most active and engaged NGOs are in the field of education, human rights including women, and youth and children.
3. Financial sources and fundraising
Sources of income for NGOs are the following:
1. membership fees and contributions;
2. contributions by individuals, economic entities and organizations;
3. income generated by mission-related economic activities;
4. borrowed or inherited funds, and funds allocated from the State budget for
5. funds from international agencies and projects.
According to the survey of the UNDP where 80 NGOs -respondents of this survey -
implemented projects with total budget of 4,426.7 million MNT in 1996-2000, out of which 298.7 million MNT was put from local financial sources and 4,128.0 million MNT from outside sources making the ratio as 6.7 : 93.3. It is obvious from the above that in funding of projects and programs implemented by local NGOs foreign financial sources were dominated and a prediction can be made that that situation will be kept in the near future.
NGOs can use their income only for the attainment of their stated purposes and shall not distribute income in the form of dividends and NGOs shall not act as financial guarantors or participate in amelioration of any business losses on behalf of any person, economic entity or other organization. NGOs assets and finances can not be used in financial or economic activities for somebody’s personal gain. NGOs have no right to make contributions to political parties or to candidates in the State Great Hural and Citizen Representative Hural elections.
One of the major financial sources of non-governmental organizations is the contribution.
Except for the political parties the majority of foundations active in Mongolia are financed by contributions. Examples are non-governmental organizations such as “Oyuntulkhuur Foundation” and “Foundation for People.” These foundations spend the monies raised by contributions to feed and clothe orphan or poor children as well as to send overseas for medical treatment children with intense decease incurable in the home country. There are many charitable organizations and foundations that raise funds by the same means and engage in the same activities as mentioned above. Some of them have been created by the prominent people such as the First Lady or famous singers.
Mongolian non-governmental organizations raise funds by organizing donor meetings, musical performances, shows, lotteries and many other fundraising activities. For instance, the “Ulaanbaatar Foundation” founded in 1999 that has the purpose to develop the capital city issued a series of lottery tickets and sold them out for the 360 Anniversary of the Capital City. And the profits earned from the sale of lottery tickets were contributed to the activities for the development and progress of the capital city. The incident of raising funds through the issuance and sale of lottery tickets is common in Mongolia. Lately, Mongolian National Olympics Committee in cooperation with the Bridge LLC sold out the so-called “Sydney 2000” lottery tickets and organized the so-called “Sydney 2000” fundraising show in which celebrity singers and bands performed. All the profits made by these activities were designated to finance the travel expenses of Mongolian sports team to participate in the 2000 Sydney Olympics.
According to the laws regulating the activities of non-governmental organizations, such organizations may earn profits by conducting commercial activities for the purpose of increasing its financial reserves. However, the profit earnings may be used for financing only the activities that are to implement the purposes indicated in the charter.
The “Association of Mongolian Foresters” registered with the renewed registry has the purpose to support the protection of forests and wild animals, maintenance of the ecological balance, the rational use of the natural wealth and the development of the secondary processing industry. Upon obtaining the permit from the Ministry of Environment Unit for the Protection of Nature and the Administration of the Bogdo Khan Mountain Reserve for the purpose of reviving the forests had planted the tree seeds. Now, it sells transplants to the businesses engaged in the lumber industry basing on their duty under 1995 Law on Forests to restore the forests. The profits earned from this activity in return become the resource for financing other activities of the Association of Mongolian Foresters.
4.Taxation of NGOs
Although the non-governmental organizations are defined as not-for-profit, they must pay the fixed taxes. The reason is that according to Article 5 of the General Tax Law of Mongolia “domestic and foreign business entities, organizations and foundations on the territory of Mongolia shall be the taxpayers” and according to Article 3 of the Business Entities and Organizations Income Tax Law “non-governmental and religious organizations shall be the taxpayers.”
However, before the decision of the State Ih Hural general meeting convened in November 2000 to impose the tax on any donation made to non-governmental organizations the following incomes of non-governmental organizations were tax-exempt according to the Business and Legal Entity Income Tax Law of Mongolia:
1. member dues and supporter donations;
2. income generated by publicly registered public benefit non-governmental organizations from their activities related to the implementation of their charter purposes;
3. donations made to publicly registered public benefit non-governmental organizations.
It may not be understood that tax law-defined incomes generated from the activities related to the implementation of charter purposes are applicable to all non-governmental organizations. However, the tax law provides that only incomes generated from the activities of publicly registered public benefit non-governmental organizations related to the implementation of their charter purposes would be tax-exempt.
The Mongolian Children’s Rights Center is one example of a public benefit nongovernmental organization that conducts commercial activities for the implementation of the purposes of its charter. This Center besides doing the research works on the means of guaranteeing the rights of children in Mongolia sells books and handbooks related to this issue written and published by it under the government contract. The incomes earned from this activity shall be fully tax-exempt.
The law does not strictly prohibit non-governmental organizations to engage in commercial activities other than for the implementation of charter purposes. For instance, the Mongolian Youth Association possesses a quite large four-floor building and receives income by leasing the most part of it to business entities and other organizations. This income is taxable according to the Business and Legal Entity Income Tax Law of Mongolia. The tax laws specifically define the tax percentages. For example, the 20% tax is imposed on the income earned from leasing the above-mentioned property. Moreover, in case of a real estate sale, 2% tax is imposed on total amount of the sale price within 10 days of consummation of the sale.
The individuals and legal entities engaged in the importation, manufacturing and sale of goods as well as in providing the services on the territory of Mongolia shall be the payers of the value added tax. According to the Value Added Tax Law of Mongolia, non-governmental, religious and analogous to them organizations are defined as “Value Added Tax Payers.” It means that a non-governmental organization must pay the value added tax if it engages in the commercial activities, which generate the incomes taxable under the Value Added Tax Law. For example, according to the Value Added Tax Law the incomes generated by leasing rooms and apartments in the buildings and constructions fall under the value added taxable income. However, if the service such as consulting, drafting books, textbooks and handbooks provided by non-governmental organizations to others qualify as an activity conducted for the implementation of the charter purposes, the incomes generated from it shall not be imposed the value added tax. Moreover, the goods and commodities received by non-governmental organizations and foundations from foreign and international organizations in the form of a humanitarian assistance or aid are exempted from value added tax. /The Value Added Tax Law, Article 9, para.2.4, 2.7/.
As per the customs duties, the goods that are crossing the border in the form of a humanitarian assistance and aid from foreign and international organizations to non-governmental organizations as a recipient are exempt from customs duties. /The Law on Customs Tariffs, Article 20, para.4, 5/. However, the law is silent on whether the equipment imported from foreign country for purposes of the project implemented by a non-governmental organization shall be tax-exempt or given a preferential tax treatment. Therefore, the equipment and other supplies to be imported from the foreign country for the purposes of the project implemented by a non-governmental organization should be exempted from customs duties or given a certain type of deduction. However, in giving such preferential treatment it is appropriate to take into consideration the purposes and outcomes of the activities to be implemented.
As per other taxes, a non-governmental organization deducts the personal income tax from the salaries of its employees in the amount specified by law. If a particular non-governmental organization has in its possession any motor vehicle, it must pay the motor vehicle tax in the amount specified in the Motor Vehicle Tax Law or if it has in its possession a gun, it must pay the gun tax in accordance with the Gun Tax Law regardless of whether the motor vehicles or guns are actually used.
Medical insurance is another type of duty. An employee of a non-governmental organization shall purchase the medical insurance on a voluntary basis. /the Medical Insurance Law, Article 7, para.2/. The medical insurance premium may not exceed 6 percent of the employee compensation. /Id. Article 8, para.2/.