In its relatively short history as a democracy, Mongolia has updated its tax laws several times. It has not, however, completely revised its tax code for 10 years. Like many developing countries, it has recently had to reconsider its tax policy to allow the tax regime to keep pace with economic growth.1 Since 2017, against a backdrop of rapid development, Mongolia has been implementing extensive tax reform. This article provides a brief overview of recent tax reforms, highlighting the main changes to the tax code and how they can affect business entities and investors.
Why Tax Reform?
Mongolia's recent tax reform touches several laws, including updates to the General Tax Law, Company Income Tax Law, Personal Income Tax Law, Additional Income Tax Law and other laws.2 The Government of Mongolia has concentrated on crafting a tax system that is more sophisticated and nuanced, as well as legislation that promotes and encourages consistent compliance from taxpayers.
In recent years, it has been widely acknowledged that taxpayers have carried a heavy burden of compliance under pressure by the tax authorities. For example, there are no mechanisms to resolve damages caused by an incorrect decision of the tax authorities, who can impose large fines and even seize taxpayer's property. On the other hand, some taxpayers pretend to have no profit by submitting an “X” report, and there is a regular phenomenon where legal entities have two different financial reports, one 'official' report used to avoid tax and another for their actual accounting purposes. For these and other reasons, it has been clear to observers and officials that tax reform was necessary.
What is the Main Change of the Company Income Tax Law?
The Company Income Tax Law, originally approved in 2006, has been amended several times. At present, a draft of this law is before the Standing Committee of Parliament for discussion. It is important for investors and business entities to be aware of the possible changes and opportunities presented by this law; there are three main changes of particular importance.
First and foremost, several different tax rates will be significantly reduced. For example, the applicable tax rate for a foreign-invested company that is engaged in business in Mongolia or a foreign-economic entity and its representative office earning income sourced from Mongolia will be reduced from 20% to 15% for income transferred outside the territory of Mongolia. Moreover, taxpayers in sectors that do not require a mineral license, radioactive material license, oil exploration license, or mining license will pay 5%, down from 20%, for dividend income and interest income from bonds.3 Income tax for the sale of rights (patent rights, trademark rights, etc.) will be reduced from 30% to 10%.4 Obviously, foreign-invested companies appreciate these changes. On the other hand, the Government of Mongolia anticipates that they will encourage compliance and thus reduce non-payment and the need for (and costs of) enforcement.
The second change is that even in the absence of a double-taxation agreement, taxpayers who pay tax in their country of domicile will be eligible for deductions. This provision is designed to prevent the complications inherent in double taxation. However, the Government of Mongolia still needs to reconsider many of its bilateral-tax agreements, which many companies take advantage of to avoid paying tax in Mongolia.
The third noteworthy change is that if a business entity's annual income is less than 50 million MNT (US$ 20,000), it will only be required to submit a financial report once a year. This provision is intended to support small and medium-sized businesses. In accordance with the drafted law, a business entity with income between 50 million and 3 billion MNT (US$ 20,000- 1,212,000) must submit a financial report twice a year. Only businesses with income greater than 3 billion MNT (US$ 1,212,000) will be required to submit quarterly financial reports.
In summary, the Government of Mongolia aims to become a more tax-friendly state through its latest proposed tax reforms. It intends this reform to accelerate business development, attract foreign investment, create jobs, and raise the real income of citizens.
For investors, this tax reform should create a more stable investment environment through tax incentives, tax refunds, tax discounts and easier income transfer.
In recent years, a number of Mongolian startups have launched. Many young entrepreneurs are starting businesses built around new and innovative technology. Going forward, the Government of Mongolia should engage these startup companies to continue to develop flexible and supportive tax policies that further spur innovation and new technology in Mongolia.
3. A draft of the Company Income Tax Law, Article 20.2.5
4. A draft of the Company Income Tax Law, Article 20.2.1