November 2022 Issue
First and foremost, Mongolia is not a tax haven despite consistently having some of the lowest tax rates in the world – at 10 percent flat for the major types, including corporation tax, personal income tax and VAT. These rates have been in effect since 2007. Mongolia has elaborate tax legislations and regulations that are comparable to sophisticated tax systems.
Some of Mongolia’s key tax policies are reflected in the Corporate Income Tax Act of 2019 (CITA). The country’s policies have been changing in recent years. The government promotes the stability of Mongolia’s tax laws with the aim of attracting foreign direct investment (FDI). These policies are reflected in various aspects of the CITA, as outlined below.
Reduced rates for small and medium-size enterprises (SMEs). The government supports SMEs in various ways, including through tax policy. While the standard rate of corporate tax is 10 percent for taxable profits up to MNT6bn and 25 percent on taxable profits in excess of MNT6bn, corporations with taxable income up to MNT300m pay 1 percent corporate tax.
Corporations that do not fall into this 1 percent tax bracket have an alternative tax incentive, under which corporations that have taxable income of up to MNT1.5bn can have their tax bill reduced by 90 percent.
These incentives, however, do not apply to corporations involved in minerals, alcoholic beverages, tobacco or petroleum. In any case, these incentives may greatly benefit investors that may wish to start a business in Mongolia, as well as existing businesses.
Loss carryforward. The loss carryforward rules in Mongolia allow corporations to offset trading losses over four years. In each year, the amount of trading loss that can be offset is limited to 50 percent of taxable profits.
Industry-specific policies and incentives. Mongolia’s policymakers also give tax incentives depending on the industry that taxpayers are engaged in. Covered industries include fruit, vegetables, dairy and poultry. These taxpayers are entitled to have their tax bill cut by 50 percent. Educational institutions such as private schools and universities are exempt from corporation tax.
Accelerated depreciation. Under rules before 2020, buildings and computers had to be depreciated over 40 and three years, respectively. Starting 1 January 2020, these assets can be depreciated over 25 years (buildings) and two years (computers and software). However, the 40-year depreciation period is still applicable to mining companies.
These are just some of the incentives provided by Mongolia’s policymakers to businesses in the country.
In recent years, policymakers have expressed the need for more plants and factories to be built in Mongolia so the country is less reliant on imported goods.
Despite the mining industry’s role in the economy, its contribution to the nation’s wealth, and the fact that it is primed for FDI, the tax laws and regulations do not appear to support the mining and petroleum industries.
For example, the incentives (such as the 1 percent tax rate and 90 percent reduction of the tax bill) discussed above do not apply to mining companies, Mongolian companies that own licences to engage in exploration, mining or petroleum are taxed in the event of changes to their ultimate beneficial owners, and provision for accelerated depreciation over 25 years is not applicable to exploration and mining companies.
Moreover, while the loss carryforward period under previous rules was four to eight years for mining companies, the term has been reduced to four years under the new CITA rules. These four years are applicable to all companies. These policies appear to be a signal for the Mongolian government to prioritise other industries for the diversified economic development of Mongolia.
Onchinsuren Dendevsambuu is a tax partner and Tuvshin Javkhlant is a tax director at Onch Tax Services CTC LLC. Ms Dendevsambuu can be contacted on +976 9909 0450 or by email: odendevsambuu@onch.mn. Mr Javkhlant can be contacted on +976 8000 7795 or by email: tjavkhlant@onch.mn.
© Financier Worldwide
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Onchinsuren Dendevsambuu and Tuvshin Javkhlant
Onch Tax Services CTC LLC
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