BCM

1. 30 May 2016
Business Council of Mongolia
Anthony Woolley, Counsel, Hogan Lovells
Proposed revision of tax legislation
The good, the bad, and the slightly perplexing

2. | 2Hogan Lovells
• VAT Law recently revised
• Proposed revisions to tax legislation
– General Taxation Law
– Corporate Income Tax Law ("CIT")
– Personal Income Tax Law ("PIT")
Tax reform

3. Hogan Lovells | 3
• Reflects the merging of former General Tax Authority and
Customs General Authority
• Revised, consolidated and introduces new terminology
• Taxpayer registration/updating of details
– now 14 / 20 days
– 21 days
Draft General Tax Law

4. Hogan Lovells | 4
• Taxpayer to inform the relevant tax authority in the event the
owner/shareholder of the legal entity "directly" or "indirectly"
changes (Article 14.1.15)
– 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".
Draft General Tax Law

5. Hogan Lovells | 5
– automatic 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)
– clarification of process and timelines for review of tax
reports
Draft General Tax Law

6. Hogan Lovells | 6
• Tax inspections/audits – clarified/expanded regulations
– 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/property includes inspection of computers and similar
devices
– entry into premises must take place during office hours but may be
unannounced
– the owner of the property or representative should be present; however
absence shall not prevent the investigation
Draft General Tax Law

7. Hogan Lovells | 7
Draft Law
– Article 37.14 – In the event a
taxpayer brings a complaint to the
TDRC, an amount equivalent to 50%
of the disputed amount must be paid
to a separate fund
– Implication: unfair and negates the
simplicity of the initial stage of tax
dispute resolution
Current Law
– Currently, no fee is paid to the tax
dispute resolution committee
("TDRC")
Draft General Tax Law

8. Hogan Lovells | 8
Draft Law:
– certified tax professional
accountants only
Current Law
Current qualification requirements
– economist, financier, accountant
or lawyer
Qualification of tax inspectors and TDRC members
Draft General Tax Law

9. Hogan Lovells | 9
Draft law
− confiscate temporarily and seize evidence and
assets that evidence hiding of taxable goods,
pledge, obtain and sell goods for the purpose of
collection of tax debt (Article 16.2.4)
Implication
− The inspectors will have for-reaching powers
Current Law
− confiscate temporarily and
seize evidence and assets
that evidence hiding of
taxable goods, pledge assets
for the purpose of collection of
tax debt (Article 29.1.3)
Draft General Tax Law
Tax inspectors powers

10. Hogan Lovells | 10
• Revised, replaced and new terminology:
– Business entities
 Current regime only business entities (such as companies, partnerships, state or locally-
owned enterprises etc.)
 Expanded to include federations, foundations, NGOs and media, cultural, health, training
and education organisations which earn a profit
Draft Corporate Income Tax

11. Hogan Lovells | 11
• Mongolia-sourced income (Article 4.1.8) – New definition
– 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

12. 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 from tangible and intangible assets; and
 sales of rights
12

13. Hogan Lovells | 13
• 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- Current law
Corporate Income Tax Law

14. Hogan Lovells | 14
- 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.
• Implication
- "Indirectly" is not defined
- Too broad
Affiliated parties - Draft law
Corporate Income Tax Law

15. Hogan Lovells | 15
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

16. 16
Current Law
– Income from sale of rights - 30%
Corporate Income Tax – Changed/revised specific tax rates
Draft Law
− Income from sale of rights:
 mining licences 30%
 other rights 10%

17. Losses carried forward
Current law:
– Infrastructure and mining: 4 – 8 years
– Other sectors: 2 years
Revised law:
– 5 years
17

18. Hogan Lovells | 18
• Dormant entities
– MNT 500,000
– Simplified tax report submitted once per annum (Article 27.10)
• Threshold-based tax payment deadlines
– 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

19. Draft Corporate Income Tax Law
Tax exemptions
• Current CIT Law contains multiple tax exemptions
• Revised law reduces to four exemptions :
– interest accrued on bonds issued by the government or Development Bank of Mongolia;
– income of legal entity with more than 25 employees of whom at least 2/3 have disability;
– income from sales of techniques and equipment that are environmentally-friendly,
efficiently-use natural resources, reduce 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
19

20. 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
• Not applicable to dormant entities who pay MNT 500,000
20

21. Hogan Lovells | 21
Draft Law - Article 14
− Now changed to be accrual and cash basis
 According to cash basis, the advance
payment will be considered as revenue so
that it will be subject to CIT
 Implication:
o if either accrual basis or cash basis is met first,
such transactions are subject to CIT.
o Advance payment which are usually used for
performing the contractual undertaking shall be
taxable.
Current position
– The revenue is recognised
according to the IFRS on an
accrual basis, which means
that revenue is to be
recognised when service is
provided or work is
performed.
– Advance payments are not
subject to CIT.
Recognition of taxable income
Draft Corporate Income Tax Law

22. Hogan Lovells | 22
Draft Law
– Calculation of maintenance expense is
based on book value, not on historic
value
• Implication
– Book values are subject to
depreciation
– Historical value means the amount to
be deducted shall be calculated from
the actual initial cost of the asset,
hence the deductible amount is higher
Current Law
– Regular maintenance expenses shall
not exceed 2 percent of the book value
of immovable property and 5 percent of
the book value of other property, and
the excess regular maintenance
expense shall be accounted as capital
maintenance.
Draft Corporate Income Tax Law
Deductible expenses – regular maintenance

23. Hogan Lovells | 23
Draft Law
− “interest on loans obtained in relation to
industry and services" (Article 17.1.)
− Implication: in the absence of definition,
it may cause confusion
− Suggestion: refer to current position
Current Law
– Interest payments for loans borrowed to
carry out primary and auxiliary
production, work, and services
deducted from gross taxable income.
Draft Corporate Income Tax Law
Deductible expenses – loan interest

24. Hogan Lovells | 24
Draft Law
– Article 17
– Calculation of the amount of deductible
interest expense shall be based on the
taxpayer’s debt/equity ratio (Article 17.2)
 Article 17.8 "If debt/previous
investment ratio in relation to a loan
issued by an affiliated entity to a
taxpayer exceeds 3 times"
 Article 17.5 "If debt/equity ratio
calculated exceeds 3 times" - does not
define parties involved
– Implication: Too broad and confusing
Current Law
– Article 14
– Loan interest is deemed as deductible
expense from gross taxable income
– In relation to a loan granted by an
investor to a taxpayer, if debt/equity
ratio calculated exceeds 3 times then
the interest shall not be tax deductible,
and shall be regarded as dividend
Draft Corporate Income Tax Law
Thin capitalisation rule

25. Hogan Lovells | 25
Draft Law
– Certain expenses relating to
vocational training shall be excluded
(Article 18.1.1-18.1.4)
– Implication: still covers expenses
related to VT, but not generic training
– Suggestion: add "training for staff"
Current Law
– Deductibles included expenses
incurred to create training
environment of a vocational
training ("VT") centre, provide
with equipment and repair
training facilities
Deductible expense from gross taxable income
Draft Corporate Income Tax Law

26. Hogan Lovells | 26
• Draft Law
− New article: Amortisation shall not be calculated on asset re-valuation
− Suggestion: difference in re-valuation of assets shall not included in
evaluation of amortisation
− Reasoning: as a result of re-valuation, the amortisation rate may increase
or decrease
Amortisation
Draft Corporate Income Tax Law

27. Hogan Lovells | 27
• Current Law
– Expenses incurred in possessing or transferring a mining license shall be
included in the operating expenses and amortized over the term of the mining
licence
• Draft Law
– Minerals license holder shall calculate and accumulate exploration expenses
and licence fees shall be amortised during the period of a deposit is being
mined
Amortisation in relation to minerals licences
Draft Corporate Income Tax Law

28. Hogan Lovells | 28
Current Law
− If non-residents sell securities, corporate income tax will be levied on the
profit, being the difference between the sold value (revenue) and the
acquisition value (cost incurred at initial acquisition)
Draft Law
− If non-residents sell securities, corporate income tax (20%) will be levied
on the total consideration
Draft Corporate Income Tax Law

29. | 29Hogan Lovells
• Tax regime may undergoing major changes
• Some good points, especial for SMEs
• Further research, analysis and dialogue required
• Unlikely to be adopted this parliament
Conclusion