14 April 2016

BCM

Anthony Woolley

Proposed tax legislation revision

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• The need for tax reform

• Tax reform – Phase I (2007)

• Tax reform – Phase II (2015 - onwards)

• Phase II - proposed legislation for revision

– General Tax Law

– Corporate Income Tax Law

– Personal Income Tax Law

• Revision to VAT Law and Customs Duty and Tariffs Law

• Law on Customs Duty Exemptions

Table of contents

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• Since 1990, over 100 laws were adopted with regard to taxation

• 46 of these laws have repealed

• 55 laws are currently in effect

• Amendments to tax legislation

– 53% related to state stamp duty

– 22% relate to tax exemptions

• Amendments to tax legislation

– Creation of business-friendly environment

– Simplicity, equality and sustainability

Evolution of the current tax regime

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• Introduced "4 x 10%"

– Value added tax rate – 10% (reduction from 15%)

– Personal income tax rate – 10% (flat rate from 3 staged progressive taxation)

– Corporate income tax rate – 10% (from 15%)

– Social insurance premium rate – 10% (reduced from 29% and 19%)

Tax reform Phase I - 2007

Need for the tax reform

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• 2012 - 2016 Government Action Plan

– "All Mongolians employed and having a proper source of income"

– "To bring the public private partnership to a new level and create a business friendly

environment"

• Phase II Tax reform objectives included

– Risk management system to be introduced in respect of inspections

Tax reform

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• VAT Law recently revised

• Proposed revisions to tax legislation

– General Taxation Law

– Corporate Income Tax Law ("CIT")

– Personal Income Tax Law ("PIT")

• Revision to the Customs Duty and Tariffs Law, VAT Law and

Budget Law

• Law on Customs Duty Exemption

Tax reform Phase II

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• Current regime no longer meet social needs

• Tax disputes: 2008 - 2012

– tax disputes involving MNT 726.135.2 million relating to 274 taxpayers

– 66.8% of the disputes were decided in taxpayer's favour

• World Bank - Doing Business "Paying taxes" ranking

– 2012: 57th

– 2013: 70th

Tax Reform

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• Revised law

– Listed for agenda for 11 April 2016

– 10 chapters

– 60 articles

• Current law

– Adopted 20 May 2006

– 9 chapters

– 76 articles

General Tax Law ("GTL")

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• Reflects the merging of former General Tax Authority and

Customs General Authority

• Revised, consolidated and introduced new terminology:

– taxpayer, tax re-imposition, tax re-imposition act, authorised representative (of

taxpayer), affiliated entities (Company Law)

– "actions without a definite business purpose" (tax evasion)

– tax evasion within the framework of the law (manipulation of tax exemption and partial

relief policies etc.)

– Principle of actual price determination (affiliated entities transaction)

– Detailed sample pricing method

Draft General Tax Law

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• Tax to include inter alia:

– Asset taxes (immovable property, firearms, vehicles)

– Waste management services

– Fees for utilisation of natural resources other than minerals

• Tax support

– Tax stabilisation of tax as per relevant laws (Investment Law)

– Reimbursement of tax payments in certain circumstances (student dependents, VAT)

– Tax holiday of exemption or discount for certain purposes and definite period

• Taxpayer registration/updating of details – 21 days (now 14 / 20)

Draft General Tax Law

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• Taxpayer rights

– Right to file a complaint with Tax Dispute Committee

– Right to provide relevant evidence and grounds in defence of an allegatgion

– Benefit from a simplified tax registration regime

• Taxpayer obligations

– Clarifies sales terminal requirement for all taxpayers under the VAT Law

– Obligation to inform the relevant tax authority in the event the owner/shareholder of the

legal entity "directly" or "indirectly" changes (Article 14.1.15)

Draft General Tax Law

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• Taxpayer obligations (contd.)

– an "indirect change" means (Article 14.3):

a) "the transfer to a third party, in any form, of 50% or more of the shares and voting

rights of the owner of the relevant legal entity;

whereby

b) as a result of such transfer, the rights pertaining to an item which is taxable in

Mongolia is transferred to a third party".

Wholly or partially?

Draft General Tax Law

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• Clarification of tax inspectors' rights

– Right of entry into premises

requires the permission of the "management officer" of the relevant tax authority

must be in the presence of:

o eyewitnesses; and

o the taxpayer or his/her/their authorised representative

– Summon the taxpayer and his "client/customer" (харилцагч)

– Demand that other taxpayers who have had interactions with the taxpayer provide information relating to the income, expenses and assets of the relevant taxpayer being audited

Draft General Tax Law

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• Tax inspectors – prohibitions

– Disclose confidential information

– Disclose to the taxpayer any acts which have not yet been approved

– Over/undercharge those taxpayers who benefit from an Investment Agreement with the GoM

– undertake representation roles, within 2 years of leaving the employment with tax authority

– contact and/or pressure taxpayers re. matters not related to tax (such as persuade to purchase

goods/services)

Draft General Tax Law

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• Improvements to tax database

– information on decisions of the Tax Dispute Resolution Committee and courts

– information from relevant authorities

– information obtained from third parties

– tax payment history

• Systemisation of tax inspectors' decisions

– printed on pro forma forms as adopted by the central tax authority

– each to contain unique numbers and be registered in the database

Draft General Tax Law

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• Tax imposition

– 1 week extension if tax payment and reporting dates fall during public holidays

– taxpayer may amend a tax report already submitted unless tax inspection has started

– Points for review of tax reports have been expanded (from 6 to 10)

– Within 5 working days of such review, discrepancies in the information shall be notified to the taxpayer

– The taxpayer must make necessary changes or provide an explanation within 5 working days

– Within 5 days a receipt of response from the taxpayer, tax authority may:

agree to the taxpayer's response; and

in the event of disagreement, inform the risk officer at the tax authority and inform the taxpayer re. the same

Draft General Tax Law

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• Tax inspections/audits

– Must be risk-based (central tax authority is to adopt detailed regulations)

– Potential conflicts of interest must be taken into consideration when assigning tax

inspectors

– Entry into premises must take place during office hours but may be unannounced

– Entry into premises/property includes inspection of computer and similar devices

– Rights of ownership must be "honoured"

– The owner of the property, his/her authorised representative or local governance body

representative must be present; however absence shall not prevent the investigation

General Tax Law

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• Revised Law

– Listed on agenda for 11 April 2016

– 10 chapters

– 60 articles

• Current Law

– Adopted 29 June 2006

– 9 chapters

– 76 articles

Corporate Income Tax Law ("CIT Law")

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• Not For Profits

– Those entities whose principal activities are not for profit, but who conduct business

activities, are now subject to CIT

• Permanent establishments

– Permanent establishments of foreign entities are subject to CIT under the current law

– Draft law now defines "permanent establishments" as a permanent establishment of a

corporate entity of a country with whom Mongolia has entered into a DTT

Draft Corporate Income Tax Law

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• Revised, replaced and new terminology:

– Business entities

Current regime only business entities (such as companies, partnerships, state or

locally-owned enterprises etc.)

This has been expanded to include federations, foundations, NGOs and media,

cultural, health, training and education organisations which earn a profit

Draft Corporate Income Tax

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• Mongolian-sourced income (Article 4.1.8)

– Income from goods and services sold in Mongolia by non-resident taxpayer

– Income from organising of culture, sports and other event in Mongolia by non-resident taxpayer

– Income generated from sale of tangible and nontangible goods in his/her possession, usage, proprietorship in Mongolia by non-resident taxpayer

– Income generated from sales of tangible and intangible goods and rights pertaining to the same non-resident taxpayer

– Income generated from share sales by/of resident taxpayer

– Income generated from dividends paid by resident taxpayer

– Income generated from interest and guarantee paid by state, local government and resident taxpayer

– Income generated from goods and services sold in Mongolia to resident taxpayer by non-resident taxpayer

– Other income similar to the same

Draft Corporate Income Tax Law

Corporate Income Tax – Taxable Income

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• Operational income - new categories

– Income from similar activities

– environmental restoration fund amounts repaid to the licence holder

• Assets income - new categories:

– Fees for use of experimental equipment in industry, trade and science

– Fee for right to conduct business (Article 10.2.7): MNT 500,000

Draft Corporate Income Tax

• Asset sales income - new categories:

– Current law:

sales of movable property; and

sales of immovable property

– Revised law:

sales of immovable property;

sales of rights; and

sales from tangible property and intangible assets

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Current law

• For the purposes of the CIT Law, affiliated parties of a business entity

means those persons that:

– hold 20% or more of the issued common shares of such business entity;

– are entitled to receive 20% or more of dividends and profit distributions of such business

entity; or

– are entitled to appoint 20% or more of management personnel of such business entity or

determine policies and directions of its operations.

Affiliated parties

Corporate Income Tax Law

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Revision

- Draft law cross refers to the definitions in the Company Law, Conflict of

Interest Law and Family Law;

- In addition it includes those entities/individuals who directly or indirectly

participate in management, control and [ownership of] assets of certain

taxpayers.

Affiliated parties (contd)

Corporate Income Tax Law

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• Draft Law

– Income MNT 0 - 10 billion: 10%

– That portion over 10 billion: 25%

• Current Law

– Income MNT 0 - 3 billion: 10%

– That portion over 3 billion: 25%

Changes to standard tax rates

Corporate Income Tax Law

Corporate Income Tax – Changed/revised specific tax rates

No. Taxable income Tax rate

1 Income from dividends and proceeds of partnerships/cooperation agreements 10%

2 Income from contractual default interest and/or default penalty, compensation for

damage

10%

4 Income from sale of rights

- Mining licences

- Other rights

30%

10%

6 Income from interest and/or penalty for non-performance of contract duties, and

compensation for a damage

10%

7 Income from goods and services received free of charge from third parties

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Corporate Income Tax – Changed/revised specific tax rates

No. Taxable income Tax rate

9 Business entities that are resident in Mongolia*

10% & 2%

10 Withholding tax on income earned within Mongolia or Mongolian-sourced income of

tax payers without permanent establishment

20%

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Corporate Income Tax – Withholding tax regime

• 20% withholding tax for tax payers without a permanent establishment:

– income earned within Mongolia or

– certain Mongolian-sourced income:

– Income from goods and services sold in Mongolia by non-resident taxpayer

– Income from organising of culture, sports and other event in Mongolia by non-resident taxpayer

– Income generated from sale of tangible and nontangible goods in his/her possession, usage,

proprietorship in Mongolia by non-resident taxpayer

– Income generated from sales of tangible and intangible goods and rights pertaining to the same

non-resident taxpayer

– Income generated from goods and services sold in Mongolia to resident taxpayer by non-

resident taxpayer

– Similar incomes

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Losses carried forward

• Current law:

– Infrastructure and mining: 4 – 8 years

– Other sectors: 2 years

- Revised law: 5 years

- Exclusion: does not apply to foreign permanent establishments of

Mongolia-incorporated entities.

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• Exclusion: Article 27.9 - payment of fee (MNT 500,000) for dormant entities – Reporting for shall start the year following the year of incorporation

– Reporting by 10 February

– Simplified tax report shall be submitted once a year (Article 27.10)

• Tax payments – threshold-based – Income of MNT 1.5 billion or more – quarterly reporting to be submitted within 20

days of the next quarter

– Income of MNT 50 million - 1.5 billion semi-annual reporting by 10 February and 20 July (Article 27.5)

Reporting

Corporate Income Tax Law

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• Tax payments – threshold-based (contd)

– Income MNT 50 million or less (Article 27.6)

now may report semi-annually by 10 February and 20 July (Article 27.5)

Reporting

Corporate Income Tax Law

Draft Corporate Income Tax Law

Tax exemptions

• Current CIT Law contains multiple tax exemptions

• Revised law exemptions reduced to:

– interest accrued on bonds issued by the government or Development Bank;

– income of legal entity with more than 25 employees of whom at least 2/3 are

handicapped;

– income from sales of technique and equipment that are environmentally friendly, efficient

in terms of natural resources usage, reduces environmental pollution and waste; and

– income from sale of products allocated to the taxpayer as per the relevant product

sharing agreement in the petroleum sector (GoM to determine)

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Draft Corporate Income Tax Law

Tax credits

• For those legal entities whose resident in Mongolia and whose income is below MNT 1.5 billion, 90% of the tax shall be credited

• The relevant taxpayer shall benefit from the credit in the following year

• New/revised exclusions:

– Minerals extraction, import, export

– Petroleum extraction, import, export

– Mobile communications operations

– Banking and finance

– Alcohol producers and sellers

• Such 90% shall not apply to dormant entities who pay MNT 500,000

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• Tax regime is undergoing major changes

• Political circumstances are affecting the legal development

• Tax reform Phase II, first part - VAT Law

- Amendment to PIT Law

• Tax reform Phase II, second part

- General Tax Law – more clarity provided

- CIT Law – amendments and clarifications

• Overall message is business-friendly tax regime

• Real implications to be tested once proposed laws and adopted and implemented

Conclusion