IMF advises Mongolia to re-think tax agreement to safeguard mining revenue

The current Mongolian Double Tax Agreement (DTA), which is a tax claim by two or more jurisdictions on the same income, is prone to international tax planning as it allows residents of other countries to substantially reduce the amount of tax they pay in Mongolia, said International Monetary Fund (IMF)’s report released on November 14.

“The Mongolian authorities are increasingly faced with cases of international tax planning,” the report said.
Under DTAs, a company can be a tax resident in two countries which would make it subject to the tax laws of each. If both places tax their residents on worldwide income they could be taxed twice on the same income. Double tax agreements decide which country or territory has the first or sole rights to tax specific to income.

As the mining sector ,which makes up more than 90 percent of Mongolia’s exports, flourishes in Mongolia and foreign investors are strategically laying out their plans so as to minimize overall tax through the establishment of intermediate companies in the country.

Therefore, the Mongolian government is currently considering extreme measures such as cancelling all 30 active DTAs and start up fresh in the attempt to avoid tax (revenue decline due to tax) planning by international companies.

On November 2, Mongolia cancelled DTA with five countries including Holland, Luxemburg and United Arab Emirates because companies primarily residing in those countries have been avoiding taxes in Mongolia.

Most of the DTA were made before 1999, before Mongolia peeked the world’s interest with its vast mineral resources; hence it was more than willing to sign the agreements in the hopes to attract more investors. During the time the DTAs were made Mongolia had little experience with tax contracts without fully realizing its long term significance.

IMF advised Mongolia to strategically examine and renegotiate or amend DTA’s which aren’t beneficial to the country and only use termination as a last resort.

“In the current situation, only a few DTAs can be considered potentially harmful as they insufficiently protect the Mongolian tax base. Some DTAs are in need of amendment due to changes in the domestic legislation (i.e. the introduction of taxation on indirect transfers of exploration and mining licenses). Such amendments may also be realized by negotiating additional protocols. Most DTAs – although slightly out of line with the proposed Mongolian DTA Model – do not require immediate attention,” the IMF report stated.

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