Mongolia Taxation 2011
Corporate Income Tax Rate 10 to 25% (N1)
Capital Gains Tax Rate 2%
Branch Tax Rate (N3)
Withholding Tax Rate
Dividends 20%
Interest 20%
Royalties 10%
Net Operating Losses (Years)
Carryforward 2 Years
Carryback N/A
Personal Income Tax Rate 10%
Social Security Tax Rate
Immovable Property Tax
Windfall Profit Tax
Tax System for Corporate Income and Gains.
Tax System - The National Tax Administration is comprised of the State administrative body which is in charge of taxation, tax agencies and offices of capital city, province, district; and tax branches of soum and state tax inspectors.
Direct and indirect taxation – All taxes are subdivided into direct and indirect ones. VAT and excise tax are recognized as indirect taxes.
Principal Taxes –
· Taxes on corporate income (including branch profits tax, withholding tax and capital gainstax)
· Personal Income Tax
· Social Insurance Tax
· Value-added Tax
· Excise Tax
· Immovable Property Tax
· Windfall Profits Tax
Taxation Legislative Framework - The main laws with regard to taxation are those governing the above together with laws governing specific types of activity:
· Law on Foreign Investment
· Law on Minerals
A wide ranging review was conducted in 2006, with many of the above being re-drafted, and further amendments were made in 2008, 2009 and continue to be made in 2010. Despite this progress the legislation remains in its infancy and complicated issues may well not be dealt with clearly.
Obtaining advice on the interpretation, implementation and practice of the tax authorities is vital as well as ensuring that the most recent legislation is being considered.
Income Taxation
Mongolian Corporate income tax rate uses progressive rate.
· 10% Tax rate – for income up to MNT 3,000,000,000 or Approximately $ 2 Million US Dollar
· 25% Tax rate - for income in excess of MNT 3,000,000,000
The Economic Entity Income Tax law governs the taxation of profits of:
· Mongolian economic entities;
· Foreign economic entities that have their headquarters in Mongolia;
· Foreign economic entities that conduct business through a permanent establishment in Mongolia
· Foreign economic entities that earn income in Mongolia other than via the above.
Taxable income = aggregate annual income (-) less allowable deductions
20% repatriation tax for foreign entities operating through a permanent establishment in Mongolia, but may reduce depending on Double Tax Treaty. This applies to both natural persons and legal entities.
Taxable income falls under the following three categories:
1. Income from activities which includes:
a) Business activities
b) Sale of shares and securities
c) Gains on foreign currency exchange rates
2. Income from property which includes:
a) Rental
b) Royalties
c) Dividends
d) Interest
3. Income from the sale of property (both immovable and movable except for shares and securities)
Certain types of income are taxed at different tax rates
· Dividends – 10%
· Royalties – 10%
· Interest – 10%
· Gambling, betting games and lotteries – 40%
· Sale of immovable property (gross) -2%
· Sales of rights – 30%
Tax incentives
Tax incentives or benefits are available to the agriculture and mining industries. Foreign investors may obtain similar benefits where they meet minimum investment levels.
Tax treaties - Mongolia has currently concluded Double Tax Treaties with 30 countries and 3 which are pending.
Countries with Double Tax Treaties (DTT) with Mongolia
Domestic tax law in Mongolia - 15% Dividends, 15% Interest & 10% Royalties
1. People's Republic of China - 5% Dividends, 10% Interest & 10% Royalties
2. Republic of Korea - 5% Dividends, 5% Interest & 10% Royalties
3. Germany – 5 - 10% Dividends, 10% Interest & 10% Royalties
4. India - 15% Dividends, 15% Interest & 15% Royalties
5. Vietnam - 10% Dividends, 10% Interest & 10% Royalties
6. Russian Federation - 10% Dividends, 10% Interest & Royalties varies with national laws
7. Turkey - 10% Dividends, 10% Interest & 10% Royalties
8. France - 5 - 15% Dividends, 10% Interest & 5% Royalties
9. United Kingdom – 5 - 15% Dividends, 10% Interest & 5% Royalties
10. Czech Republic - 10% Dividends, 10% Interest & 10% Royalties
11. Hungary - 5% Dividends, 10% Interest & 5% Royalties
12. Belgium – 50 - 15% Dividends, 10% Interest & 5% Royalties
13. Poland - 10% Dividends, 10% Interest & 5% Royalties
14. Malaysia - 10% Dividends, 10% Interest & 10% Royalties
15. Kazakhstan - 10% Dividends, 10% Interest & 10% Royalties
16. Indonesia - 10% Dividends, 10% Interest & 10% Royalties
17. Kuwait -
18. Egypt - 15% Dividends, 15% Interest & 15% Royalties
19. Luxembourg – 5 - 15% Dividends, 10% Interest & 10% Royalties
20. Romania - 10% Dividends, 10% Interest & 10% Royalties
21. Uzbekistan - 10% Dividends, 10% Interest & 10% Royalties
22. Bulgaria - 10% Dividends, 10% Interest & 10% Royalties
23. Ukraine - 15% Dividends, 15% Interest & 10% Royalties
24. Switzerland – 5 - 15% Dividends, 10% Interest & 5% Royalties
25. Belarus - 10% Dividends, 10% Interest & 10% Royalties
26. Kyrgyz Republic - 10% Dividends, 10% Interest & 10% Royalties
27. Canada – 5 - 15% Dividends, 10% Interest & 5 - 10% Royalties
28. United Arab Emirates - 0% Dividends, 0% Interest & 0% Royalties
29. Italy - 5 - 15% Dividends, 10% Interest & 5% Royalties
30. Singapore - 15% Dividends, 10% Interest & 5% Royalties
31. the Netherlands - 15% Dividends, 10% Interest & 5% Royalties
32. North Korea -
33. Austria -
Tax Assessments - Tax reports, once submitted, are subject to an administrative check to ensure that they comply with the requirements for completing the report. A technical review of the tax position taken and the underlying documentation forms part of the tax audit. Upon the conclusion of an audit the tax authorities will issue and act setting out their findings.
Withholding Tax - Mongolian entities are required to withhold tax on dividends, royalties to economic entities resident in Mongolia and just on royalties to individuals as dividends are exempt from taxation for individuals until 2013. In both cases the rate is 10%. Withholding tax is applied to gains on the sale of immovable property at 2%.
Non-residents with no presence in Mongolia are subject to 20% withholding tax on Mongolian source income. This covers the following types:
· Dividends;
· Certain types of loan interest;
· Royalties;
· Rental;
· Management and administrative expenses;
· Income goods, work or services provided in Mongolia.
Tax Audits
A tax inspector is empowered to examine financial documents connected with the payment of taxes and ask or explanations. The official can temporarily seize documents which are evidence of tax avoidance and copy them.
Penalties
Interest, calculated on a daily basis for the period between the due date and for payment and the actual payment date, and penalties are imposed on late payment of taxes. Flat rate penalties also exist for the failure to comply with various administrative requirements.
Tax Rulings
Rulings can be obtained from the tax authorities.
Arbitration & Appeals
Where a taxpayer objects to a decision of the tax inspector, the legal department of the tax administration will investigate the dispute and give an opinion. In case the dispute cannot be resolved by the legal department, the case is reviewed by the Tax. Dispute Council consisting of 6 persons and is chaired by the head of the Revenue Department of the Ministry of Finance. If the taxpayer disagrees with the resolutions of the Council, the case can be taken to the General Court..
Deductibility of Expenses
· General Expenses. Expenses mostly associated with the earning of aggregate annual income are deductible for corporate income tax purposes (provided that they are properly documented).
· Interest Expenses. Interest paid to third parties is deductible. Interest paid to related parties is subject to a 3:1 debt to equity restriction. Further restrictions apply to interest on loans made from a Mongolian individual who controls the entity.
Depreciation.
Depreciation, for tax purposes, is calculated using the straight line method over the useful economic life of the asset. This depends upon the nature of the asset, ranging from 3 years for IT equipment to 40 years for buildings and constructions.
Disallowable expenses. Generally expenses need to be specifically stated as deductible so there are not many expenses stated as specifically disallowable. However the following have been:
· Finance lease payments;
· Fines and penalties;
· Expenses incurred for earning exempt income;
· Expenses not documented by the taxpayer;
· Payments from which tax is not withheld but required to be withheld;
In the case of branches of foreign legal entities, two further specific items are not deductible:
· Expenses incurred outside the territory of Mongolia;
· Management and administrative expenses not related to earning the income.
Related Party Transactions
In general, transactions are valued for tax purposes at fair market value. Where transactions take place between related parties above or below this that tax authorities have the right to alter the value used onto an arms length basis.
The CIT Law of Mongolia specifies and determines related parties as follows:
· If a party holds at least 20% of the common stock of another party;
· If a party has the right to receive at least 20% of dividends or distributions; or
· If a party has the right to appoint at least 20% of management or otherwise able to determine its policies.
Foreign Exchange
Income and expenditure in foreign currencies should be translated in MNT on the date of the transaction. Realized gains and losses from foreign currency exchange rates are taxable and deductible.
Losses
Losses can be carried forward for up to two years and use of such losses is restricted to 50% of the taxable profit in any year.
Tax Computations
Taxpayers should submit quarterly and annual returns to the tax authorities by the 20th of the month following the end of each quarter and 10th February for the annual return.
Based on these, the tax authorities issue monthly / quarterly payment schedules and payments must be made by the 25th of each month.
In practice the Mongolian tax authorities allow concessions as follows:
· A company with annual taxable income of less than MNT 500,000 may pay tax on a quarterly basis;
· Where total tax paid exceeds the tax liability, the excess can be credited against other taxes due, credited against future tax payments. It may also in theory be refunded; practice here is less clear and consistent.
Withholding taxes must be paid within 7 to 10 days of the underlying payment (depending upon the nature of the payment) and taxpayers should prepare quarterly and annual returns for submission to the tax authorities by the 20th of the month following the end of each quarter and 10th February for the annual return.
Other Taxes
Excise Tax
Excise tax is levied on goods manufactured in or imported into Mongolia such as tobacco, alcohol, gasoline and diesel fuel and passenger vehicles. Excise tax is also imposed on the physical units of special purpose technical devices and equipments used for betting games and gambling, and activities of individuals and legal entities that conduct such activities.
Immovable Property Tax
An immovable property tax is levied at 0.6% of the value of the immovable property. For tax purposes, the value used is the value registered with the government registration authority. If the property is unregistered, the insured value is used. In the absence of either a registered or insured value, the accounting value is used.
Stamp duty
Stamp duties are imposed on the following under the Law of Mongolia on State Stamp Duties:
§ Monitoring of and decisions on matters of legal status by a court of law;
§ Registration of business entities and organizations;
§ Permission to register business entities with foreign investment and allowing persons to be employed with representative offices of foreign organizations;
§ Permission to carry out services and carry out production which requires special permission or expertise;
§ Grant of certification for copyright, patent or trademarks;
§ Registration of copyrights;
§ Granting of permission to carry out activities in respect of securities and registration of securities, and foar authorization to issue and register securities;
§ Other services.
The amount of duty varies according to the type of services involved.
Customs duty
A flat customs tariff of 5% applies in respect of goods imported into Mongolia. Certain equipments imported by small and medium size enterprises ("SME"), are exempt from Customs tariff.
Export duties apply to certain exported goods such as waste iron, aluminum, copper, brass and indentured cashmere.
Windfall profits tax
A windfall profits tax is imposed on the marginal prices of gold and copper ore and concentrate when they exceed a certain base price. The tax is levied at the rate of 68% on gold and copper profits when they reach USD 850 per ounce and USD 2,600 per ton respectively. The windfall profits tax is to be annulled from 1 January 2011.
Branch versus Subsidiary
There is not a significant tax difference operating via a branch or subsidiary where double tax treaty protection is available. Both suffer the same rates of domestic taxation and suffer 20% WHT on the payment of a dividend or 20% Branch Profits Tax on the repatriation of profits. These may be reduced by the application of the relevant Double Tax Treaty.
In the absence of such protection, there are two items of expenditure that are specifically not deductible for branches when computing taxable income:
§ Expenses incurred outside the territory of Mongolia;
§ Management and administrative expenses not related to earning the income.
Group Taxation
There are no rules permitting grouping for tax purposes in Mongolia.
Special Taxation Regimes
Foreign Investment
A foreign investor investing certain amounts may apply for a stability agreement to govern their investment, providing stable tax conditions for a fixed term. Currently an investment of up to USD 20m will permit a 10 year term and a USD 50m investment a 15 year term.
Mining
A mining stability agreement covers tax stability and other business rights. The minimum investment refers to the amount invested in the first five years of the project and will provide stability for a fixed term as follows:
§ USD 5m for ten years;
§ USD 10m for fifteen years; and
§ USD 30m for thirty years.
All exploration costs should be capitalized and then amortized on a straight line basis over the first five years following the commencement of production. License acquisition costs are amortized over the life of the license.
Losses can be carried forward for 4 to 8 years depending upon the exact nature of the business and up the whole taxable profit may be offset in a year.
TAXATION OF INDIVIDUALS
Territoriality and Residence
A permanent resident taxpayer of Mongolia is subject to tax on his/her world-wide income. A non-resident taxpayer of Mongolia is subject to tax on the income earned in the territory of Mongolia in a tax year.
A permanent resident taxpayer of Mongolia is:
§ An individual with a residence in Mongolia;
§ An individual who resides in Mongolia for 183 or more days in a tax year.
A non-resident taxpayer of Mongolia is:
§ An individual who has no residence in Mongolia and has not resided in Mongolia for 183 or more days in a tax year.
Related parties defined as the following:
§ The parent, child, grandparent, grandson or granddaughter of the taxpayer;
§ The brother or sister of the taxpayer, or a child of a brother or sister;
§ The spouse of the taxpayer, or a parent, child, brother or sister of that spouse;
§ A legal entity under the control of the taxpayer or the individuals mentioned above.
Gross income
Employee Gross Income
All direct and indirect income received through employment or related activities during a calendar year. This includes both taxed and untaxed income at the source of payment.
Dividends and interest income are exempt until 1 January 2013.
Capital gains and investment income
Gross income from sale of immovable property is taxed at a rate of 2%. Income from sale of movable property including securities is taxed at a rate of 10%.
Dividends and interest income earned by individuals is generally subject to tax at the rate of 10%, withheld at source.
Deductions
Business Deductions
There are no business deductions allowed for employees. An individual may claim business deductions if registered as an entrepreneur.
Social insurance charges are deductible for PIT purposes.
Non-business expenses
There are no deductions for nonbusiness expenses.
Personal Allowances
The most notable allowance is a general deduction based on the minimum monthly wage of 84,000 Mongolian Tugrik ("MNT") per annum (approx. USD 56).
Tax Credits
A credit is available for individuals who have suffered tax in other countries under the terms of a Double Tax Treaty. Tax credits are also available for agricultural production and educational fees.
Other Taxes
Social Security Taxes
Citizens of Mongolia, foreign citizens and stateless persons employed on a contract basis by all types of economic entities, organizations, government servants, religious or other organizations and foreign economic entities carrying out activities in Mongolia are subject to the following compulsory insurance:
§ Pension insurance (employer: 7% employee: 7%);
§ Benefit insurance (employer: 0.50 %; employee: 0.50%);
§ Health insurance (employer: 2%; employee: 2%);
§ Industrial accident and occupational disease insurance (employer: 1% to 3%);
§ Unemployment insurance (employer: 0.50%; employee: 0.50%).
Employees charges are capped at MNT108,000 per month (USD 80). Employer charges are not capped. These charges are deductible for PIT purposes.
Obligatory Pension Contributions
Included in Social Security Taxes.
Wealth Tax
There is no wealth tax in Mongolia.
Local Taxes
There are no additional local taxes on income.
Tax Administration for PIT (Personal Income Tax)
Assessment
The following types of income are subject to withholding tax:
§ Employment income;
§ Interest;
§ Royalties; and
§ Dividends.
Please note that dividends and interest are exempt from taxation including withholding tax until 1 January 2013.
Returns
A withholder shall submit a monthly report of tax withheld by the 20th of the first month of the following quarter and year-to-date tax report by February 15 of the following year to the corresponding tax authority.
Income not covered by the above should be reported on an annual tax return to be submitted to the tax authorities by 15th February following the end of the tax year.
Payment of Tax
Tax withheld should be paid to the tax authorities by the 10th of the following month. Tax on other income should be paid by the 15th of the first month of the following quarter.
Tax Rates for Individual
§ Employment income – 10%
§ Business & Professional income – 10%
§ Income from property, i.e. dividends, royalty, interest, capital gain from sales of securities/stocks – 10%
§ Sales of immovable property (Gross) – 2%
§ Income from scientific, literacy artistic work, inventions, product – 5%
§ Designs and useful designs (Gross) – 5%
§ Income from sports competitions, art – 5%
§ Performances, and similar income (Gross) – 5%
§ Income from betting games, gambling & lotteries – 40%
VALUE ADDED TAX (VAT)
Value Added Tax at the rate of 10% is imposed on the supply of taxable goods and services in Mongolia, and on imports into Mongolia. Taxpayers are required to register for Mongolian VAT purposes when their taxable turnover exceeds 10 million MNT (USD 7K). Taxpayers may also voluntarily register when their taxable turnover reaches 8 million MNT (USD 5.6K) or if they have invested more than USD2m in Mongolia.
Scope of VAT
VAT is levied on the following in Mongolia:
performedWork services rendered in Mongolia; and
§ Goods sold in Mongolia;
§ Goods imported into Mongolia to be sold or used; and
§ Goods exported from Mongolia for use or consumption outside Mongolia.
The provision of services also includes the following:
§ To provide electricity, heat, gas, water, sewer, postal, communications, and other services;
§ To lease goods or allow one to possess or use them in other forms;
§ To rent out rooms in hotels or similar places or allow one to possess or use them in other forms;
§ To rent out rooms in houses or buildings or allow one to possess or use them in other forms;
§ To lease immovable and movable property other than houses and buildings or allow one to possess or use them in other forms;
§ To transfer, lease, or sell innovations, product designs, useful designs, copyrighted works, trademarks, know-how, and information on assets;
§ To issue lotteries, operate quizzes or gambling or provide intermediary services;
§ To pay off debts by performing work or providing services;
§ The performance of work or provision of services from a non-resident to a resident; and
§ To pay interest and fines to others due to misconduct.
The sale of goods also includes the following:
§ Sale of right to conduct economic activity;
§ Retention of assets upon the termination of trade;
§ Settlement of a debt with goods; and
§ Sale by a non-resident to resident.
Zero-Rating (VAT)
The following are zero-rated for VAT purposes:
§ Export sales of goods;
§ International transportation services;
§ Services provided outside Mongolia;
§ Services provided to a foreign citizen or legal entity not present in the territory of Mongolia during the provision of services (including tax-exempt services);
§ Services provided to domestic or international aircrafts conducting international flights;
§ State medals and coins produced domestically;
§ Export of finalized mining products.
Exempt Supplies
The following goods shall be exempted from value-added tax:
§ Passengers personal items in amounts approved and permitted by the customs authority for tax-free entry;
§ Goods imported for the use of foreign diplomatic missions or their officials residing in the territory of Mongolia on a permanent basis;
§ Humanitarian and non-repayable aid goods;
§ Custom appliances for developmentally challenged persons;
§ Weapons and special equipments imported for armed forces, police, and state security and judicial enforcement agencies;
§ Civil aviation aircrafts and spare parts;
§ Income from sale of an apartment and its part used for residential purposes;
§ Equipments, materials, raw materials, spare parts, gasoline and diesel fuel imported for the purpose of oil exploration, extraction, and use under a product-sharing agreement entered with government in the oil industry;
§ Blood, blood products, and organs for medical treatment purposes;
§ Gaseous fuel and its containers, equipments, custom machinery, mechanisms, tools, and spare parts;
§ Mongolian currencies printed in foreign countries by orders;
§ Gold sold;
§ Newspaper sold;
§ Products resulting from scientific research
§ Mining products other than those zero rated;
§ Certain types of loans.
The following services shall be exempted from value-added tax:
§ Currency exchange operations;
§ Banking transactions;
§ Insurance and property registration;
§ Transactions in stocks and securities;
§ Loans;
§ Transactions concerning issuance and transfer of interest for placement of monetary assets of social and health insurance funds;
§ Residential accommodation;
§ Educational services;
§ Health services;
§ Services of religious organizations;
§ State services;
§ Public transport;
§ Some services to tourists;
Goods, work, or services transferred free of charge or used for personal purposes other than for production shall not be exempted from value
Taxable Amount
VATable Supplies
In general, the taxable amount is the fair market value of the goods sold, work performed or services provided. For imported goods, this should include customs duty, excise tax and other such taxes to the customs value of the goods. There are a number of methods for establishing the customs value; transportation, insurance and any commission or royalty amounts are included.
Taxpayers should account for VAT on goods, work or service obtained from non-resident.
Transactions in a foreign currency are translated into MNT at the rate applying on the tax date of the transaction.
VAT Offset
VAT on paid for goods, work or services can be offset against VAT payable to the budget; this must be substantiated by documentary evidence.
Pro-rating is required where VAT is incurred partially for exempt and partially VATable purposes.
VAT Calculation and VAT Offset Carry-Forward
The VAT liability of a taxpayer is calculated as output VAT (i.e., VAT charged by a taxpayer) less input VAT (i.e., VAT paid by a taxpayer to its suppliers) in a reporting period.
The excess of input VAT over output VAT may generally be carried forward against future VAT liabilities or offset against other tax liabilities. In practice refunds are difficult to obtain, although the rules do prescribe a procedure for refunds under certain conditions.
Non-Deductible Input VAT
Value-added tax paid in the course of import or purchase of the following goods, work or services shall not be credited against total value-added taxes due by a buyer:
§ Automobiles and its components and spare parts;
§ Goods or services purchased for personal or employee uses.
§ Goods, works, or services imported or purchased for specific production purposes.
VAT Incentives
A number of VAT exemptions have been introduced outside of the law on VAT. These are targeted at specific industries as well as specific projects which have been funded by international institutions (such as the World Bank) or foreign governments.
VAT Simplification
Group reporting for VAT is possible.
VAT Compliance
VAT is accounted for on a monthly basis and paid by the 10th of the following month. Returns must be submitted by the 15th of the month and records should be kept for 6 years.
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