Mongolia Advances Major SME Reform Push With Focus on Tax Relief and Social Security Expansion

According to the ILO, tax obligations and social security contributions remain among the biggest obstacles preventing MSMEs and self-employed workers from entering the formal economy.

Mongolia is moving forward with plans to overhaul support policies for micro, small, and medium enterprises (MSMEs), as the government explores new tax and social security reforms aimed at helping businesses transition from the informal economy into formal economic participation.

The initiative gained momentum after an International Labour Organization (ILO) national consultant presented the findings of a major policy survey to Mongolia's working group responsible for revising the Law on Supporting Small and Medium Enterprises and Services.

The survey results were first shared during a virtual meeting on 16 February 2026 and later presented in person on 31 March to staff at the Mongolian National Chamber of Commerce and Industry (MNCCI), one of the country's most influential business organizations.

The reform discussions come at a critical time for Mongolia's economy, where informal employment remains widespread and many self-employed workers and smaller businesses continue to face significant barriers to formalization due to tax burdens, social security costs, and administrative complexity.

According to the ILO, tax obligations and social security contributions remain among the biggest obstacles preventing MSMEs and self-employed workers from entering the formal economy.

As a result, the Mongolian Government is now considering significant amendments to the SME support law to create more flexible and inclusive economic policies capable of strengthening entrepreneurship, improving worker protection, and expanding social security coverage.

The ILO-backed research reviewed international experiences from multiple countries, examining how tax concessions, simplified taxation schemes, social security contribution models, and exemptions have been used to encourage business formalization and support smaller enterprises.

The consultant also provided recommendations based on international best practices and lessons learned from other economies facing similar challenges.

The proposed reforms reflect a broader international policy trend in which governments are increasingly recognising that excessive compliance costs and rigid contribution systems can discourage small businesses from formal registration, limiting tax revenues, labour protections, and economic productivity.

During the virtual consultation meeting, Gerelzaya, Director of the Policy Coordination Department, highlighted Kazakhstan's use of the MCI index as a particularly relevant model for determining MSME classification.

The MCI index approach could potentially offer Mongolia a more flexible framework for identifying business categories beyond traditional metrics such as employee numbers or turnover.

Gerelzaya also pointed to South Korea's approach to SME classification as another potentially valuable example, noting that employee numbers alone are not always used to determine MSME status.

Policy experts say such models may provide Mongolia with more adaptive ways to support emerging businesses in sectors where workforce size fluctuates or where digital and informal economic activity is growing rapidly.

Meanwhile, working group member Munkhbayar stressed the importance of strategically prioritizing key development sectors while discussing the potential introduction of a mono-tax approach for targeted industries.

A mono-tax system — commonly used in some developing and transition economies — typically simplifies multiple business taxes into a single streamlined payment structure, reducing administrative burdens for smaller firms and encouraging tax compliance.

Economists note that simplified taxation regimes can play a significant role in helping businesses formalize operations while improving government revenue collection over the long term.

The discussions also underscored growing concern over social protection coverage for workers operating outside Mongolia's formal employment system.

At the presentation hosted by the Mongolian National Chamber of Commerce and Industry, MNCCI General Secretary Saruul emphasized the importance of expanding social security coverage as a central component of the proposed reforms.

She said the survey findings provided valuable insights into how Mongolia could strengthen protections for smaller businesses and self-employed workers while improving long-term economic resilience.

Saruul also confirmed that the MNCCI — acting as a representative of employers — would advocate strongly for the report's recommendations during future discussions on the draft SME law.

Business organizations and labour experts alike have increasingly argued that extending social security access to informal and self-employed workers is essential for improving economic stability, reducing vulnerability, and strengthening workforce productivity.

The ILO has repeatedly highlighted that formalization policies must balance business competitiveness with worker protections, particularly in developing economies where informal employment often accounts for a substantial share of total labour activity.

Mongolia's reform efforts also align with broader regional and global initiatives aimed at supporting MSME growth as a driver of economic diversification, employment generation, and sustainable development.

Micro, small, and medium enterprises are widely considered the backbone of many developing economies, often accounting for the majority of businesses and a large share of employment.

However, limited financing access, regulatory complexity, weak social protection systems, and tax compliance costs continue to constrain growth for many smaller enterprises across emerging markets.

The proposed legal reforms are expected to continue undergoing consultation as policymakers, employer organizations, labour representatives, and economic experts work to finalize recommendations for the revised legislation.

Observers say the outcome could play a significant role in shaping Mongolia's future business environment and its efforts to modernize labour market and social protection systems in the years ahead.