The fiscal federalism of Mongolia composes a two tier system as its banking sector, namely, central and local government levels.The intergovernmental transfer system, from the central to the local governments.

The central government revenue is collected through corporate income, personal income, value added, customs, excise, and gold royalty, taxes and duties. The local government revenue consists of motor vehicle, immovable property, stamp duty, land use, natural resource exploration taxes, fees and payments. The fiscal policy is constructed in such a way as to support foreign investment. It is regulated by the framework set up by the Foreign Investment Law. Import VAT and customs duty are exempted for the equipment of companies with foreign investment, oil mining companies, and companies with the activity falling into the list of the leading sectors issued by the Government , also, there is an exemption for the companies producing export oriented goods. There are also a few nuances concerning the tax credit and exemptions in VAT and corporate income tax laws. For example, if the company exports more than 50 per cent of its produced goods then the company will be exempted 100 percent from the corporate income tax in its first three years.

For the next three years it will be exempted by 50 percent. In addition to this there is a special article in the Mineral Resource Law of Mongolia allowing compa­nies, with foreign investment, which continue to invest every year at least US$2 million and as long as they hold the proper license, to have a choice of signing the so called "Stability Agreement" with different terms depending on the investment they will put into work.

There is a common understanding that a favourable environment for foreign investors is when they are treated at least equally with the domestic companies in terms of taxation. However, the current situation in Mongolia is not just a favourable one but more than favourable, because joint ventures, and companies with foreign investment have got more tax credit and exemptions compare to domestic companies.

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