Foreign investors that are looking to engage in business in Mongolia must be aware of the local tax code and regulations. The following provides an overview of the common concerns and questions facing those who engage in business in the country and are attracted to the wide range of opportunities afforded by Mongolia’s rich mineral resources.
The Mongolian Accounting Law requires that international accounting standards and International Financial Reporting Standards (IFRS) be followed in preparing financial statements. Statutory financial statements and tax returns are prepared using official forms prescribed by the Ministry of Finance, and the unit of accounting is the Mongolian tugrik. Transactions denominated in foreign currencies are to be recorded using exchange rates published by the Central Bank of Mongolia. Accounting books must be kept in the Mongolian language. If documentation is done in a foreign language, translation into Mongolian is required. The Ministry of Finance requires that accounting software that is sold and used by business entities must have ministry approval. The software must keep accounting records and generate financial statements in Mongolian language.
Given the complex accounting standards required by regulators and investors operating in the international market, foreign companies that are members of multinational groups often face challenges in complying with Mongolian regulation requiring that they use locally certified accounting software.
Online Tax Filing
The tax authority has now implemented online tax filing and tax payments, and the social insurance office is also now online. A digital signature issued by the tax office is required to access the tax portals. The person authorised by the company to sign financial statements and tax returns must apply for a digital signature in order to be able to access the online tax portal system. The mandatory use of company stamps on accounting and business documentations has created challenges in the modern digital era. The tax authority has introduced online submissions and tax payments while there is still a requirement to use the company stamp to ascertain that documents are genuine and valid.
Currency in Domestic Transactions
The Law on Conducting Settlement in National Currency requires the use of tugrik in all transactions between Mongolian entities (except for banks and non-bank financial institutions) and individuals, unless approved otherwise by the central bank. Transactions between Mongolian and foreign legal entities can be denominated in foreign currency.
Both residents and non-residents can hold bank accounts in any currency. There are no restrictions on the remittance of profits, dividends, interest or royalties into and out of the country.
The New Investment Law
A new law regarding investment came into effect on November 1, 2013. The law applies to both local and foreign investors and provides them with common legal investment guarantees, mainly in the form of a guaranteed tax environment and stabilisation for investments exceeding MNT 30bn ($18m). Except for investments by stateowned foreign legal entities, the law removes restrictions to investments in sectors previously considered strategic. These include mining, banking, and media, information and communications.
The Mongolian Tax Administration is comprised of a number of entities and demarcated by several spheres. The main organisation is the state administrative body, referred to as the General Department of National Taxation, followed by the agencies and district tax offices of the Capital City Taxation Department; followed by tax branches at the provincial, district and smallest political administrative units).
Tax inspectors work within this system in order to ensure the smooth collection of duties. Large taxpayers from city and district tax offices are transferred to a special office at the General Department of Taxation to improve tax administration.
Tax evaluations are made on a self-assessment basis. Tax reports, once submitted, are subject to administrative checks to ensure that they comply with the requirements for completing the report. A tax inspector is empowered to examine financial documents connected with the payment of taxes and ask for explanations. Tax inspectors review the tax position taken and the underlying documentations. At the conclusion of an audit, the authorities will issue an act setting out their findings or may decide to transfer the case to the police for criminal investigation.
Arbitration & Appeals
Where a taxpayer objects to a decision of the tax inspector, the taxpayer has a right to complain to the Tax Dispute Resolution Council (TDRC). The TDRC consists of 11 persons and is chaired by the head of the Budget Policy Regulation Department of the Ministry of Finance. If the taxpayer disagrees with the resolutions of the TDRC, the case can be taken up to the Administrative Court.
A fine equal to three to five times the monthly minimum wage, currently MNT192,000 ($115), is imposed on late filing of tax returns. A late payment penalty is imposed during the audit at the rate of 0.1% of the tax due per day of delay with no cap.
Common Tax Concerns
There are a number of common concerns related to the current tax environment in Mongolia, including: 1. Law interpretation: The tax authority has no legal power to interpret tax laws. Only the Supreme Court has the power to do so. Tax officials often have differing opinions on implementing tax provisions. 2. Tax audit: In some cases, tax cases are transferred to the economic police for criminal case recording, which could lead to a criminal case investigation.
A criminal investigation is pursued by tax inspectors when they judge that actions or inactions by the taxpayer, involve the transfer of profits to third parties; transfer or letting other entities use the firm’s name, company stamp or state registration documentation; overstatement of liabilities and omissions of taxable items in the tax return; etc. Such investigation can sometimes be sought without a substantial attempt of assessing the matter of objectively. 3. Tax payments: Income tax returns are filed on a quarterly basis and taxes due are paid quarterly. The tax authority can, however, require large taxpayers to pay taxes in advance, often on a monthly basis.
Corporate Income Taxation
An economic entity with registration and a permanent residence in the form of a headquarters in Mongolia is considered a resident taxpayer. A foreign economic entity that earns income from Mongolia or conducts business in Mongolia through a permanent establishment is considered a non-resident taxpayer.
Resident taxpayers are also taxed on worldwide income; non-resident taxpayers are taxed only on Mongolia-sourced income.
Corporate Tax Rate
Taxable income up to MNT3bn ($1.8m) is taxed at 10%, while the excess is taxed at a rate of 25%. A company must file and pay corporate income tax by the 20th of the month following the end of each quarter. Furthermore, an annual return must be submitted by February 10 of the year following the calendar year.
Losses may be carried forward for four to eight years for businesses in the mineral and infrastructure sectors, and up to two years for other businesses. In the latter case, only 50% of losses may be offset against taxable profits.
A number of stipulations apply to withholding taxes in Mongolia:
- Withholding taxes on dividends, interest and royalties paid to a resident entity and resident individuals are subject to 10% withholding on the gross amount.
- Withholding taxes on dividends, interest and royalties paid to non-resident entities are 20%, unless the tax is reduced under a tax treaty.
- Income from services rendered to Mongolia-registered entities by non-resident taxpayers directly or through the use of the internet or other electronic means is subject to a 20% withholding tax.
- A 2% withholding tax on gross receipts applies to gains derived from the sale of real property.
- Repatriation of profit to non-resident entities is subject to a 20% profit repatriation tax, unless the rate is reduced under a tax treaty.
The current corporate taxation environment has left taxpayers with two main concerns. The first relates to taxation of support costs. Support costs billed to a Mongolian company by the foreign parent company are subject to 20% withholding tax according to a recent article that went into effect on January 1, 2012. Second is a limit on tax deduction for maintenance costs. Deductible regular maintenance expenses cannot exceed 2% of the book value of fixed assets and 5% of other property, while excess costs are capitalised.
Value-added tax (VAT) is levied on goods sold, work rendered and services provided in the territory of Mongolia and on goods imported into Mongolia. The VAT rate is a flat 10%. Companies are required to register as a VAT taxpayer when their sales reach MNT10m ($6000). Voluntary registration is allowed if sales reach MNT8m ($4800) or if they bring in $2m in investment.
Input VAT paid on purchase of goods and services used in the production or rendering of services can be recovered or offset against sales VAT in the monthly VAT statement. Input VAT paid on purchase of goods and services used in the production of goods, or rendering of services that are exempt from VAT are nondeductible or cannot be recovered. Excess VAT payment is usually carried forward against future VAT liabilities or the taxpayer may apply to offset excess against other tax liabilities. The VAT Law provides a mechanism for applying for refund of excess VAT payments. In reality, it is a lengthy process to obtain tax refunds, as the request triggers a tax audit. Monthly payment and filing of monthly VAT statements are due by the 10th of the following month.
VAT Common Concerns
A number of issues remain with Mongolia’s current VAT tax environment. There has been an interpretation by the tax authority that the VAT on onshore services rendered by non-resident entities are non-claimable and non-refundable, on the basis that the offshore service provider is not a registered VAT taxpayer and cannot issue a valid sales VAT slip. The refund of the excess VAT involves a lengthy process of approval which results in cash flow constraints for the companies in the development stages as they incur capital and other costs that are subject to 10% VAT, and they cannot recover these costs until production starts and cannot receive refunds on the VAT. The lengthy process of refunding is also discouraging for exporters.
The Ministry of Labour limits the number of foreign workers employed by an entity. The quota is expressed as a percentage of the total number of local employees on a firm’s payroll. Its calculation would depend on the registered entities invested capital, industrial sector classification and the number of local employees. The minimum percentage is 5% of total local employees, and this could create a major challenge when the local talent market is tight. Expatriates may apply for an investor visa (T) or foreign worker visa (HG). The firm must pay twice the minimum wage (MNT384,000, $230) per month in workplace fee for each HG visa holder it hires.
Individuals who reside in Mongolia and those who have stayed in the country for over 183 days in a calendar year are considered resident taxpayers. Individuals who are not resident and have not stayed 183 days in a calendar year in Mongolia are non-resident taxpayers. Resident taxpayers are subject to tax on their worldwide income while non-resident taxpayers are taxed only on income earned in Mongolia. The personal income tax rate in Mongolia is a flat 10% tax on gross compensation.
Expatriates assigned to Mongolia from countries with which Mongolia has signed a tax treaty may claim tax treaty protection. Individuals with worldwide noncompensation income such as interest, dividend or rent are required to file an annual personal income tax return by February 15 of the next year.
Social Insurance Contributions
Local employees and expatriates are subject to compulsory social insurance. Employees pay 10% social insurance ( pension, 7%; benefit insurance, 0.8%; health insurance, 2%; unemployment insurance, 0.2%). Personal social insurance contribution is capped at MNT192,000 ($115) per month. In Ulaanbaatar MNT192,000 ($115) is the prevailing minimum monthly wage. Employers pay 10% plus 1% to 3% industrial accident and occupational health and safety insurance, depending on risk classification. The employer’s contribution is uncapped.