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INVESTMENT GUIDE

Tax environment

Overview

The tax laws of Mongolia were updated to deal with the new market economy in the early 1990s, after the democratically elected Government took office following withdrawal of the former Soviet Union. The General Law of Taxation was introduced in 1993 and provides the infrastructure for the tax regime and other tax laws followed.

There are four principal tax laws affecting companies in the mining sector:

  1. The General Law of Taxation: This law contains general provisions relating to tax but does not impose taxation. It also includes provisions regarding the administration of taxation, including the rights and duties of both taxpayers and administrators, and tax audit protocols.
  2. The Mineral Law of Mongolia: It contains provisions specific to the prospecting, exploration and mining of minerals and also imposes royalties on mining license holders.
  3. The CIT Law: The provisions within this law apply to all companies; there is no separate corporate tax law for mining companies.
  4. The VAT Law of Mongolia: It is an indirect tax regime relevant to all companies, with no separate section for miners.

The Mongolian Tax Authority (MTA) is responsible for administering and collecting taxes and is composed of the General Department of Taxation (which is in charge of taxation); tax agencies; and offices of the capital city, provinces, districts and district tax inspectors.

Stability agreements

As mentioned earlier, the new Investment Law has been introduced, which covers a stability agreement. Please refer to Investment law section earlier, page 14 in the document for more details.

Royalties

The primary tax that applies to mining companies is the royalty imposed on offt ake under the Mineral Law of Mongolia. A mining license holder must pay a royalty that is calculated on the basis of total sales value of the minerals extracted. The sales value is determined differently depending on the product, as mentioned below.

  • Exported products: The sales value is the average monthly price of the product or a similar product, based on regularly published international market prices or on recognized principles of international trade.
  • Products sold or used on the domestic market: The sales value is the domestic market price for that product or a similar product.
  • Products sold in international or domestic markets where it is impossible to determine market prices: The sales value is based on the revenue derived from the sale of the product as declared by the license holder.

The standard royalty rate is 2.5% for coal sold in Mongolia and for other common mineral resources sold in Mongolia. A 5% royalty is levied on all other minerals that are sold, shipped for sale or used. Mineral royalties are deductible for tax purposes.

In 2010, the Parliament of Mongolia introduced an amendment to the Mineral Law and a new surtax royalty regime effective from 1 January 2011. Under the new two-tier system, a surtax royalty is imposed on the total sales value of 23 types of minerals in addition to the standard flat-rate royalty. The surtax royalty rates vary depending on the type of mineral, its market price and the degree of processing, generally from 0% to 5% of market prices. Copper is an exception and attracts the highest rate of surtax royalty of up to 30% for unprocessed ore.

The rates for processed minerals tend to be lower than unprocessed minerals, ostensibly to encourage further local investment. No surtax royalty is charged on any minerals below a certain threshold market price, which varies depending on the type of minerals.

Royalties are generally applied to a benchmark tax base, which references spot prices. However, there is often discussion and negotiation with the MTA as to what is the appropriate base to use for royalties.

According to the Mineral Law amendment of January 2014, royalty for gold is 2.5% if it is sold to the Central Bank or authorized banks.

Corporate income tax

Mongolia operates a system of worldwide taxation both on corporations and individuals. The Law on General Taxation contains general provisions relating to t ax (including t ax administration and the rights of taxpayers and the tax authorities). However, it is the CIT Law that legislates which income and expenses are taxable or deductible. Although there is no official English translation of the CIT Law, from our discussions with the MTA, we have gained a strong understanding of how the MTA interprets the law and then applies it in practice.

Taxpayers

Permanent residents of Mongolia are t axed on their worldwide income. A company is regarded as a permanent resident of Mongolia if it is incorporated in Mongolia or if a foreign entity has its head office in Mongolia.
Non-residents of Mongolia are t axed on Mongolia-sourced income only. Non-residents are defined as foreign corporate entities that conduct business in Mongolia via a representative office and foreign entities operating there that do not qualify as permanent residents.

Taxable income

Taxable income is determined by excluding deductible expenses from operational income. Operational income is the income earned in the ordinary course of a business and includes income from the sale of extracted minerals, shares and securities and the sale of movable property.

Corporate income tax rate

The corporate tax system is progressive, with annual taxable income of up to MNT3 billion subject to tax at a rate of 10 %, and taxable profits in excess of this amount taxed at a rate of 25%. There is no separate tax regime for mining entities.

Other tax rates

  • Dividends: 10%
  • Royalties: 10%
  • Interest income: 10%
  • Immovable property: 2%
  • Income from the sale of rights: 30%

Deductible expenses

Deductible expenses are explicitly listed in the tax legislation and include depreciation and amortization on noncurrent assets, interest payments on shareholder loans or any realized losses on foreign exchange rates. Any items not detailed as deductible in the tax legislation must be added back when computing taxable income. Mining operating expenses, including operational maintenance and repairs, and payment for work and services performed by others, are tax deductible in the year incurred.

If taxpayers use their own funds to establish a border crossing and related infrastructure and to repair and maintain it, an amount equivalent to these funds can be deducted from the investor’s taxable income.

Tax losses

Generally, tax losses can be carried forward for two years, and the use of such losses is limited to 50% of taxable income in any year. However, for companies in the mining and infrastructure sectors, tax losses can be carried
forward four to eight years, depending on the investment amount. There is no percentage restriction on the use of these losses.

Depreciation for tax purposes

Depreciation and amortization for tax purposes is calculated on a straight-line basis using the below rates.

Noncurrent asset

Period of use (in years)

Building and construction

40

Machinery and equipment

10

Computers, computer equipment and soft ware

3

Intangible asset with indefinite useful life

10

Intangible asset with definite useful life (includes license for mineral exploration and mining)

Valid period: for mineral and mining licenses, depreciation rates are determined by service

payments done to acquire/ transfer the license, license fee and sales value of the license

Other noncurrent asset

10

The depreciable value includes the excess of maintenance expenses over allowable limits. Leased assets shall be recorded in the financial statements of either a lessor or lessee upon mutual agreement of the contractual parties.
Machinery and equipment typically includes equipment fixed or attached to a building, machinery and equipment fixed or attached to a construction, and machinery and equipment fixed or attached to the underground
infrastructure. Other noncurrent assets typically include capitalized pre-stripping and overburden removal, underground shaft s and roadways, draw points, ventilation shaft s, and other underground infrastructure.

Land and inventory reserves are non-depreciable assets. Unused assets are deemed to have been sold.

Tax compliance

The tax year in Mongolia is the calendar year. The MTA delivers monthly and quarterly tax schedules to the
taxpayer who must, in accordance with these schedules, pay tax before the 25th of each month. Taxpayers must also file quarterly returns within 20 days after the end of each quarter. An annual return is due on 10 February
following the end of the tax year, and the taxpayer must settle all outstanding liabilities by this date.

Withholding tax (WHT)

Non-residents of Mongolia are subject to a 20 % withholding tax on Mongolia-sourced income. This includes dividends, interest, royalties, services fees paid offshore and income from goods sold in the territory of Mongolia. The “goods sold” category is a common source of confusion; some mines, for example, insist on deducting a 20% WHT from payments for the acquisition of heavy equipment from offshore vendors. Planning opportunities are available to reduce or mitigate these taxes, which should be discussed with your professional advisor.

Effective from 1 January 2015, non-residents who have bought bonds issued by Mongolian commercial banks at international and local stock exchange are subject to a 10% WHT on earned interest.

Any WHT due must be paid over to the state within seven working days. All WHT statements must be submitted within 20 days after the end of the quarter, and an annual statement must be filed by 10 February following the end of the tax year.

Mongolian entities are required to withhold tax on domestic dividends and royalties to residents in Mongolia. The in- country WHT rate is 10 %.

Double tax treaties

Double tax treaties can offer reduced WHT rates on most forms of passive income and can also operate to eliminate WHT from trading profits or purchases of goods. To date, Mongolia has signed 26 double tax treaties, of which 24 are in force.

The application of a double tax treaty is usually a self-assessment process. That is, there is no advance clearance required. However, taxpayers need to demonstrate that the recipient is a tax resident of the foreign country, which usually involves obtaining a certificate of residence from the foreign state.

A table of WHT rates for all of Mongolia’s double tax treaties can be found in below table.

Country

Dividends (%)

Interest (%)

Royalties (%)

Austria

5/ 10*

10

5/ 10*

Belgium

5/ 15*

10

5

Bulgaria

10

10

10

Canada

5/ 15*

0/ 10*

5/ 10*

China

5

10

10

Czech Republic

10

0/ 10*

10

France

5/ 15*

0/ 10*

0/ 5*

Germany

5/ 10*

0/ 10*

10

Hungary

5/ 15*

0/ 10*

5

India

15

0/ 15*

15

Indonesia

10

0/ 10*

10

Kazakhstan

10

10

10

Korea (South)

5

5

10

Kyrgyzstan

10

10

10

Malaysia

10

10

10

Poland

10

0/ 10*

5

Russian Federation

10

10

20 (u)

Singapore

0/ 5/ 10*

5/ 10*

5

Switzerland

5/ 15*

10

5

Turkey

10

10

10

Ukraine

10

0/ 10*

10

United Kingdom

5/ 15*

7/ 10*

5

Vietnam

10

10

10

Non-treaty  countries

20

20

20

Permanent establishment

Mongolia’s tax law recognizes the concept of permanent establishment (PE). However, it is the source of income that is key in determining whether a foreign entity is taxable, not the PE.

Dividends

Dividends paid between permanent residents of Mongolia are taxed at a rate of 10%. Dividend income received by a non-resident from a permanent resident is subject to a 20% WHT. This rate may be reduced under an applicable double tax treaty.

Foreign tax relief

The domestic law states that a foreign tax credit is available only if the foreign tax is paid in a country with which Mongolia has a double tax treaty.

Capital gains

Capital gains and losses are treated in the same manner as other taxable income and losses. Gains are subject to
the progressive Mongolian corporate tax rates of 10% and 25%. The exception to this rule is that gains derived from the sale of immovable property are subject to tax at a rate of 2%. Gains derived by non-residents on the disposal of Mongolian assets may be exempt from tax if the transaction is appropriately structured.

Thin capitalization

Thin capitalization rules restrict deductions for interest where the debt–to-equity ratio exceeds 3:1. Interest paid in excess of this ratio is instead reclassified as a dividend that is taxable or subject to WHT. Only related party debt sourced from certain “investors” are subject to this restriction.

Transfer pricing

There are various provisions within the CIT Law and the General Tax Law that require related party transactions to follow the arm’s-length principles. There is some weakness in the definition of “related party,” which makes these provisions in general not as strong as those in more developed markets. Although the law does not specify a preferred approach, the MTA usually accepts the OECD methodology.

Value-added tax (VAT)

A VAT of 10% is imputed on the supply of taxable goods and services in Mongolia and on imports into Mongolia. In general, the taxable amount is the fair market value of the goods sold, work performed or services provided.

Transactions in a foreign currency are translated into the Mongolian currency of togrogs at the rate applicable on the tax date of the transaction.

Registration requirements

All taxpayers registered for VAT purposes are required to impute VAT on any taxable supplies and comply with the reporting requirements.

Taxpayers must register for VAT when taxable turnover exceeds MNT10 million. Taxpayers can voluntarily register for VAT when taxable turnover reaches MNT8 million.
Taxpayers can voluntarily register for VAT if they have invested more than US$2 million in Mongolia.

Failure to register for VAT after having met the registration threshold will result in a penalty composed of the following:

  • The VAT amount that is payable
  • Interest of 0.3% on the taxable amount due
  • A fine will be imposed and should not exceed 50% of the VAT payable

Scope of VAT

VAT shall be imposed on the following goods, work and services:

  • Goods sold in Mongolia
  • Work performed in Mongolia
  • Goods exported out of Mongolia for use or consumption outside Mongolia
  • Goods imported into Mongolia for sale, use or consumption The provision of services includes:
  • Electricity, heat, gas, water, sewers, postal services, communication and other utilities
  • Leasing of goods for possession or use in other forms
  • Renting of immovable and movable property other than buildings and houses or allowing to possess or use them in other forms
  • Sale, transfer or leasing of patent s, copyrights, trademarks, software, know-how and other information on assets
  • Work performed and services provided for the repayment of debts owed to other entitie
  • Work performed and services provided by any entity that does not reside in the territory of Mongolia, based on orders placed by citizens or legal entities of this country

The relevant sale of goods in the mining sector that will be subject to VAT includes:

  • The provision of right to conduct business activity
  • Assets retained by the taxpayer upon the termination of trade
  • Goods used to settle debt balances
  • Sale of goods by a non-resident to a resident

The following work, goods and services (applicable to the mining sector) are zero-rated:

  • Sale of exported goods
  • International passenger and cargo transportation
  • Services provided outside Mongolia
  • Services provided (including tax free services) to a foreign citizen or legal entity that was not in the territory of Mongolia when the services were provided

The following goods shall be exempt from VAT:

  • Full or partial sale of property used as residence
  • Equipment, materials, raw materials, spare parts, gasoline and diesel fuel imported for activities of a product- sharing contract concluded with the Government of Mongolia in the oil sector
  • Gas fuel, gas fuel containers, machinery, equipment, special purpose machinery, mechanism, tools and gears
  • Mongolian currency printed in a foreign country

Some services are exempt from VAT as set out in the law.

VAT calculation and offset

Net VAT payable by a taxpayer is determined by subtracting the input VAT (VAT paid by a taxpayer to its suppliers) from the output VAT (VAT charged by the taxpayer) in a given reporting period. The excess of any input VAT over output VAT can be carried forward for offset against future VAT or other t ax liabilities. VAT refunds and credits are available only once the taxpayer has registered for VAT. Pre-registration VAT is not creditable.

Reverse-charge VAT

Where the sale of goods or provision of services are rendered by a non-resident of Mongolia who is not registered
for VAT in Mongolia, the Mongolian purchaser of these goods and services is required to self-assess and pay VAT to the state via a reverse-charge mechanism.

The obligation to pay the VAT will be on the Mongolian purchaser of the services, in which the Mongolian entity will withhold VAT when making payment for the services received. The Mongolian entity pays the withheld VAT over to the state.

VAT compliance

VAT is accounted for monthly and VAT payments must be made by the 10th day of the following month. Where
total tax paid exceeds the tax liability, the excess can be credited against other taxes due, credited against future tax payments or refunded. Since refunds take six months to one year, credits are usually preferred.

An entity becomes a VAT taxpayer in Mongolia on the first day of the month following the one in which taxable
turnover reaches or exceeds MNT10 million. The entity must submit their application for registration within three working days of this date.

Excise duty

Excise tax is levied monthly on goods manufactured in or imported into Mongolia. These goods include tobacco, alcohol, gasoline, diesel fuel, passenger vehicles, physical units of special-purpose technical devices and equipment used for betting games and gambling, and the activities of individuals and legal entities that conduct such activities.

Customs duty

A flat customs tariff of 5% applies in respect of goods imported into Mongolia, with the exception of computer technology devices, medical devices and livestock, which are zero-rated. Heavy machinery and equipment purchased and imported by entities investing in priority sectors with foreign-sourced funds are exempt.

Export duties apply to certain exported goods, such as waste iron, aluminium, copper and brass.

Personal income tax

For local Mongolian companies employing local employees, the personal income tax (PIT) implications for those local employees are fairly straightforward: 10% tax on gross income, small personal allowance [deduction].

However, when foreign companies send employees to Mongolia for work, the personal tax implications become more complex. The foreign employees may have Mongolian tax obligations from the day they arrive.

Planning techniques are available that can help foreign individuals effectively manage their Mongolian tax risks, which need to be determined on a case-by-case basis.

Employees are required to lodge PIT returns annually, on 15 February following the year-end.

Social security taxes

Mongolian citizens and foreign citizens employed on a contract basis by economic entities undertaking activities in Mongolia are subject to compulsory health and social insurance taxes. Both the employer and the employee are subject to tax at the below rates.

Type of insurance

Employer tax

Employee tax

Pension insurance

7%

7%

Benefit insurance

0.5%

0.5%

Health insurance

2%

2%

Industrial accident and occupat ional disease insurance

1%–3%

NA

Unemployment insurance

0.5%

0.5%

Local employees also have to pay a social security contribution capped at MNT192,000 per month (approximately US$110)

Evolving tax landscape

As the economy develops, the state will introduce a more robust and sophisticated tax system. The Government has already solicited assistance of the World Bank and the International Monetary Fund on matters of tax reform and audit procedures. Tax law amendments occur regularly; for example, the 2012 change to the “source” rule brought most payments to foreign service providers into the ambit of Mongolia’s 20% WHT regime. We anticipate changes to related party transfer pricing and thin capitalization rules in the not-too-distant future, in addition to the announced provisions to terminate and/ or renegotiate certain double tax agreements. Taxpayers need to be mindful of the fluid tax landscape and should monitor such changes closely.
 

 

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