Mongolia adopts new VAT law Issue No. MTIN2015002 2 September 2015 Executive summary The Government of Mongolia has been undertaking an extensive tax reform by making policy changes in the taxation system to ensure the system is aligned with today s economy as the existing tax laws are not well suited to the current Mongolian economy after the economic development in the last several years. It is expected that the major tax laws including General Taxation Law, Corporate Income Tax Law, and Personal Income Tax Law and VAT regulations will be rewritten reflecting the new policies. The current VAT Law was adopted in 2006 and is no longer performing efficiently; therefore, significant changes are required. Newly introduced Capital City Tax Law followed by revised VAT regulations The Mongolian parliament adopted a new VAT Law in July 2015 which is to take effect on 1 January 2016. The key policy changes include a greater VAT-sourced revenue target made possible by disallowing less input credit or refunds for capital expenditures, mineral exploration and pre-mining activities; an increased VAT registration threshold with the aim of exempting small business owners from VAT obligations and reducing tax collection costs; and interestingly a new law introducing a new mechanism centered on business-to-customer to combat the unofficial economy through a VAT-refund leverage by end-customers. For more details please read our detailed discussion in this publication.
Detailed discussions The Mongolian Parliament adopted a new VAT law (hereafter referred as New Law) in July 2015. (footnote as published on State Gazette No. 29 /890/ released on 31 July 2015) The New Law shall be in force from 1 January 2016; however, the VAT rate remains unchanged at 10%. We have highlighted below the most significant 10 policy changes. 1. Increased VAT registration threshold Under the current Mongolian VAT regime, there is a VAT registration threshold of MNT 10 million in annual turnover. This threshold has not increased since 2007 whilst the Mongolian currency has depreciated enormously over the years. Now the threshold has been increased to MNT 50 million (USD 25,000) with the aim of exempting small-business owners from VAT obligations. Persons are able to voluntarily register under the new rules provided the value of taxable turnover reaches 20% of the MNT 50 million threshold. Currently the law requires a minimum of 80% of the threshold for voluntary requests. The current law also allows voluntary registration provided the person has invested more than USD 2 million in Mongolia. However, the New Law has removed the alternative voluntary registration possibility. The New Law also introduces a new anti-avoidance measure with regards to VAT registrations. Historically, it was common for a company wishing to register as a VAT payer to sell a small portion of its fixed assets (more than MNT 10 million) to related parties or third parties. Under the new rules, any such VAT registration attempt is not allowed. 2. VAT Registration timing A person shall be an effective VAT withholder as of the day a VAT payer certificate (VAT certificate) is issued by the tax authorities. According to the new rules the person must apply for a VAT certificate within 10 working days of the day on which taxable sales income reaches MNT 50 million. Then the tax authorities must register within 3 working days for the issuance of a VAT certificate to the applicant. 3. Significant unrecoverable VAT costs to businesses The New Law is designed to retain greater VAT revenue for the state budget by disallowing fewer input credits or refunds due to the increasing revenue deficit. In this respect, any input VAT incurred on a business capital expenditure shall not be allowed to be deducted as input credit or refunds. This stipulates that input VAT paid on purchasing, procuring or developing fixed assets is now unrecoverable irrespective of whether or not the person is a VAT payer. However, the term fixed asset is not defined in the New Law. Consequently it could lead to uncertainties and controversy as to how to interpret the clause during the implementation. Nonetheless, we expect that any assets purchased by companies and recorded as fixed assets on the balance sheet would be considered fixed asset. Another big restriction on input credit is the input VAT incurred on mineral exploration and pre-mining operation are also not recoverable according to the new rules. 4. Reverse-charge VAT mechanism remains unchanged Mongolia has been employing a reverse charge VAT system (RC-VAT) since February 2009 whereby local service recipients are obliged to pay input VAT on services procured from non-residents. Under the current practice (court practice), the input RC-VAT costs paid by local service recipients are not recoverable. The New Law retains the above RC-VAT mechanism on foreign services. Based on a cursory read, it is not clear that whether an RC-VAT input credit is allowed. Article 14.5 of the New Law stipulates that a taxable good or service should be supported by a commercial invoice, a VAT invoice and other necessary supporting documents. Uncertainty arises whether any or all of these documents are required for qualifying for a credit. This treatment is subject to further implementing guidelines by the MoF (Ministry of Finance) or future developments. Another issue in current practice in the arena of scope of transaction subjected to Mongolian RC-VAT is how to determine the location of the services provided by nonresidents. Current wording of the law explains that only services rendered by non-residents in the territory of Mongolia are subject to Mongolian VAT. But the MTA often argues and tries to expand the scope to services provided to Mongolian companies from offshore. In this respect the New Law now clarifies that services provided by non-residents to Mongolian companies are subject to Mongolian VAT. It doesn t distinguish the location of the service provision. Therefore, it will likely allow the MTA to cover all services provided by non-residents to Mongolian companies for the RC-VAT base irrespective of the location of the service provision. 2
5. VAT refunds Getting a VAT refund is one of the most difficult tasks in Mongolia. As a general rule, companies are entitled to a refund if the input VAT exceeds the output VAT payable and the refund procedure (i.e., involving obtaining corresponding tax authority s verification, review and approval by General Taxation Department and Ministry of Finance) technically takes less than 3 months after a refund request is made by companies. However, in practice, the refund process typically takes one to three years or even longer if larger sums are involved due to lack of funds in the state budget. This is due to a restriction such that the VAT refund must not exceed 15% of the total VAT collected by the state account in a given year. With the new rules, this 15% restriction is doubled to 30% quota which should result more VAT refunds to companies available starting from financial year of 2016. One of the key articles of the New Law is Article 14.6.4 as it limits the credibility of input VAT. In other words, the input VAT paid for the import or purchase of goods is creditable only if it is related to goods sold, jobs performed, or services rendered that are subject to VAT in the reporting period. 6. Changes to VAT zero-rated goods and services Following the significant changes in the New Law with respect to zero-rated goods and services: The New Law separates domestic freight forwarding services from international freight forwarding services to be a taxable service (Art. 12.4 of the New Law) As a general rule, services provided by a local person to foreign person who is not present in Mongolia at the time of receiving the services are subject to zerorate treatment. The current law clarifies the foreign person as below with Article 12.4 (Old Law): Article 12.4. A citizen or a legal person specified in provision 12.1.4 of this Law shall be deemed to be outside the territory of Mongolia if that person: 12.4.1 Has a permanent establishment in his country but has no permanent establishment in Mongolia; 12.4.2 Has no permanent establishment in his country but resides permanently in the country other than Mongolia; 12.4.3 Has a permanent establishment either in his country or in Mongolia, but the services are wholly or mainly used for the permanent establishment in his country. The New Law now removes the definitions and Article12.4 merely says services provided to nonresidents are subject to zero-rate treatment. This should mean services provided by Mongolian companies to non-residents shall qualify for zero-rate treatment irrespective of the local presence test. 7. Changes to VAT-exempt goods and services Additions The following goods and services have been added in the New Law as VAT-exempt: Imported wood, timber, plank or wooden semifinished products (Art. 13.1.20 of New Law) Washed and combed cashmere when exported (Art. 13.1.21 of New Law) Funeral and burial services (undertaking) (Art. 13.5.16 of New Law) Goods and services or projects financed by funding from a ratified international convention signed between the Mongolian Government and other foreign governments (Art. 13.14 of New Law). Such specific projects shall be approved by the Government case-by-case (Art. 13.15 of New Law). Removals The following goods and services have been removed in the New Law from the exempted goods and services list: Sale of newspapers (Art. 13.1.14 of Old Law) Revised or clarified articles Article 13.6.3 of Old Law. Insurance, reinsurance, and property registration services is re-worded as insurance, brokerage of insurance, reinsurance, and property registration services in Article 13.5.3 of the New Law, to cover any brokerage activities related to insurance as exempted. Article 13.6.5 of Old Law. Issuing of advances and loans reworded as Issuance of loans in Article 13.5.5 of the New Law just to simplify and clarify that any loan transactions are exempt from tax. Article 13.5.7 of the New Law clarifies that interest on loans by non-banking financial Some other revisions/clarifications Some more 3
8. Changes to taxable goods and services The general rule is that all goods and services other than those specified in Article 12 (VAT zero-rated) and Article 13 (VAT-exempt and zero-rated) are considered. However, Article 7 of the Old Law provides a group of goods and services to be taxable. The following are some other additions or revisions to the taxable goods and services list under the new rules: Article 7.3.1 of Old Law. Sales of business rights or rights to undertake certain business activity is reworded as just Sale of rights in Article 7.2.1 of New Law, to broaden the scope of rights to catch all sales related to rights for taxable goods and services cover any brokerage activities related to insurance as exempted. Notary services (Article 7.2.3) Industrial and scientific royalties includes software (Article 7.2.10) Brokerage activities defined in section 39 of Civil Code of Mongolia i.e., brokerage, exclusive brokerage right, trading agent and commissionaires (Article 7.2.12) Property revaluation services (Article 7.2.14) State funding, subsidy and incentives (Article 7.2.15) Sale or transfer of debt claims including factoring services and forfaiting (Article 7.2.16) Legal services (Article 7.2.17) Haircut, beauty, maintenance, washing & laundry, or cleaning services (Article 7.2.18) Any other services other than those tax-exempted (Article 7.2.18) Some other minor changes 9. Tax refund leverage on business-to-customer transactions One of the main policy changes in the New Law is to combat against the Mongolian unofficial economy through a new VAT mechanism. This change has been reflected in the New Law by referring to end-consumer involvement. This policy is focused on business-toconsumer transactions. The New Law proposes that individual end-consumers are encouraged to apply for a 20% VAT refund of their total taxes on their purchases from businesses provided the end-consumers report their cash receipts to the tax authorities. By doing so, it is believed that the other side of transactions shall be disclosed by the sellers, resulting in an increase of the entire tax base and minimizing the unofficial economy. From an implementation perspective, all businesses are required to use an automated registration machine (i.e., an invoicing device) to control all taxable transactions. The invoicing system equipment is expected to be provided by an operator licensed by the government authorities. Business-to-business transactions will also need to be covered by the new centralized VAT-invoicing system. The MoF is now working on the necessary implementation infrastructure for the new VAT system, which must be ready for use by the end of 2015. 10. New penalty regime on non-compliance Last but not least, we highlight changes to the penalty regime as per the new rules on non-compliance with respect to the New Law. Currently, the VAT law provides a specific penalty and interest regime on non-compliances such as up to a 100% penalty plus 0.3% daily interest on failure to register correctly and remit taxes. These heavy penalty regimes have now been quite eased. They are now removed from the VAT Law itself, and the penalty regime on VAT shall be regulated by Article 74 of the General Taxation Law. Under Article 74 of the General Taxation Law (new VAT penalty articles introduced), tax matter non-compliance are subject to a 30% penalty plus daily interest which is annually set by the MoF based on an average of the commercial bank lending rates. However, the combined penalty and interest is typically capped at 50% of the due tax. The possible non-compliances are discussed below: Failure of charging tax by VAT-registered persons on its taxable goods and services (art 74.1.11 of GTL) Failure of charging tax by persons on its taxable goods and services who must have registered for VAT (art 74.1.12 of GTL) Failure of remitting tax to tax authorities by VATregistered persons (art 74.1.13 of GTL) Failure of remitting tax to tax authorities by persons who should not have charged tax on its goods and services, but so charged (art 74.1.14 of GTL) Apart from the above general penalty measures towards non-compliance, the New Law also introduced a separate administrative penalty on the failure of more deliberate non-compliances by persons. Facing businesses such as retailers, shops, supermarkets, restaurants, and any other end-consumer service providers should be especially aware of these additional penalties. According to the additional penalty rules, persons, e.g., retailers and sellers are subject to the following penalties: Non-compliance Penalty Failure to provide cash receipts of services and goods bought by customers Providing falsified cash receipts higher or lower than the actual value of goods or services A 2% penalty equal to gross sales proceeds (Art. 74.5.1 of GTL) A 20% penalty equal to gross sales proceeds (Art. 74.5.2 of GTL) 4
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2015 Ernst & Young TMZ LLC All Rights Reserved. APAC no. 03002269 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com