Tag Archives: Compliance

Requirements for Offering Tax Consulting Services in Mongolia

Some activities must be conducted under a specialized license in accordance with Mongolian law. One of those activities is specialized tax consulting service. Tax consulting service is allowed to be conducted by a legal entity with a license granted by the appropriate government agency, similar to auditing. The Law on specialized tax consulting was adopted on December 27, 2012 and is the primary legislation to regulate this service.

According to the law, an authorized tax legal entity must satisfy a number of requirements, such as having a physical workplace, equipment and software necessary for the conduct of the required activities; having handbooks or manuals and methodology to be used in its operations; having archive for storage of work documents of consulting services; and ensuring confidentiality of a client information and information security.

In addition, there are specific human resources requirements. An authorized tax consulting company must have 3 and more specialized tax consultants and its founder must be a specialized tax consultant. License for specialized tax consultant is issued for 3 years term.

The specialized tax consulting service aims to provide a client with an opportunity to perform its duties to pay taxes and protect its rights and legal interests. The law stipulates that the tax consulting service includes following activities:

  • to provide advice on legislation on taxation and professional assistance regarding its implementation and promote;
  • to make tax estimation and adjustment, review primary and accounting documents, register tax influence and develop tax reports in accordance with approved template;
  • to communicate with taxation office and other relevant persons on behalf of a client.

As we mentioned in our earlier post, an auditing legal entity may carry out the auditing or review of financial statements and provide relevant financial services to the client. In addition, an auditing legal entity can engage in specialized tax consulting service after acquiring relevant license. If auditing legal entity provides the tax consulting service on the bases of additional license, it is not required to use a proper name which includes abbreviated letter of “STC” (Specialized tax consultant”) as an ordinary authorized tax legal entity does.

If a business offers tax consulting services without the required license, the company and personnel are subject to legal penalty.  A person may be fined for three hundred thousand tugrugs and a legal person is fined for three million tugrugs.

Mongolia Minerals Exploration License: Review and Revocation

In our previous post, we introduced Mongolia’s new tender process for obtaining a license for minerals exploration activities. Here, we will briefly discuss the procedures and requirements on review of an application for the exploration license. 

Application Review

After receiving applications for a license to explore for minerals in a particular plot, the State Administrative Agency of Mongolia will evaluate each technical proposal and fee proposal submitted by the interested parties on a scale, and will notify the candidate who obtained the highest scoring evaluation that it is eligible to receive the exploration license. If two or more applicants obtained equal or similar evaluation scores, the applicant which first submitted the application is first eligible to be issued the exploration license. If an applicant submitted incomplete documents or a review of the technical aspects of the documentation reveals that the application does not meet the requirements to be eligible for the exploration license, the State Administrative Agency will notify the applicants in writing regarding their exclusion from the remainder of the tender process, and will provide and explanation along with returning the application documentation to the applicant.

The selected candidates are required to pay an initial annual exploration license fee within 10 days after receiving notice of eligibility. If the candidate fails to pay this fee, it will be deemed to be a ground to revoke the license. After payment of the initial fee, the State Administrative Agency will issue an Exploration License valid for a three (3) year period. When the Exploration License is issued, the Ministry of Environment, the local province, district, city’s governor, and local Inspection Agency with jurisdiction over the target plot will each be notified directly, and the aware of the exploration license will be published in public media.

Revocation of a License

There are several potential issues which may result in revocation of an issued minerals exploration license. Breach of rules and standard procedures for exploration will result in revocation, and the holder will be required to transfer the license back to the State Administrative Agency. Failure to pay required corporate income taxes, to duly report to the tax office and to report relevant information to the tax office will also result in revocation of the license. The Exploration License will be revoked in the event that the license holder does not report such status to the Mongolia Legal Entity Registration Office (LERO), along with relevant details about its corporate structure and holdings, or where changes to the license holders corporate governance and information is not reported within 10 days to the Tax Office.

What Are The Audit Requirements for a Foreign Invested Company in Mongolia?

The National Audit Office of Mongolia has opened up public discussions on the Audit Law which was last amended in 2015 and effective from January 1, 2016. The working group of Audit law has been receiving suggestions from the public online and organizing a regular series of public discussions on changes to the current Audit Law.

On December 25 2017, a public discussion was held for independent legal auditors. There are now over 50 international and local audit companies admitted conducting the audit services in Mongolia.

Mongolia has some unique regulations regarding required corporate audits. According to the law, a particular audit firm is not allowed to provide auditing services to a certain client company for more than 5 consecutive years. Furthermore, an audit firm which had provided 5 consecutive years audit service to a certain client company may not provide auditing services to that company for at least 3 consecutive years. These requirements are designed to prevent arrangements between clients and audit firms to carefully disguise potentially non-compliant financial practices at the client company.

Under the current Audit Law, the following business entities or organizations must have mandatory auditing of financial statements:

  • business entities or organizations following the International Financial Reporting Standards;
  • business entities or organizations issuing consolidated financial statements;
  • business entities or organizations under a reorganization or liquidation process or selling all their assets through auction;
  • any foreign invested business entities or organizations;
  • any kind of financial fund; and
  • any other business entities or organizations which may be required to have mandatory auditing of their financial statements under the law and international treaties which Mongolia is a party.

Most business entities or organizations are required to have their financial statements audited by the April 30 of the following financial year. As for banks, annual final financial statements are due within March 31 of the following financial year. As for joint stock company, financial statements are required at least 2 weeks prior to any shareholders’ meeting in which it is intended to discuss financial statements of the reporting period.

For evading performance of obligations specified in law having its financial statements audited, or failure to have audited within above mentioned period, an individual is fined by amount equal to MNT 100,000 and a legal entity is fined by amount equal with MNT 1,000,000, in addition to compensate the damages occurred in accordance with Law on Infringement in Mongolia.

Is your Mongolia Company Compliant? Are You Sure?

Our Mongolian lawyers often work with foreign companies to establish and close down Mongolian companies and Representative Offices in Mongolia. Almost every time, when closing down one of these Mongolian companies our lawyers encounter compliance issues and tax irregularities which must be dealt with carefully. Sometimes these are intentional, other’s they are caused by local employees who just didn’t know any better.

Just this week we have encountered a similar situation in connection with the Representative Office of an international company. The below is almost exactly the email one of our Mongolian lawyers sent to this client, explaining the situation in Mongolia. Names and identifying information have of course been removed.

“Yesterday afternoon we were summoned to the tax office. The tax inspectors showed us their preliminary calculations of the amount of taxable income of the Rep Office, from which pursuant to law, taxes must be withheld. The tax inspectors specifically pointed out that the Rep. Office employees and accountant had been negligent and failed in their responsibility to duly collect and maintain financial documentation, including failing to maintain appropriate ledgers, and financial reports.

For example, one employee withdrew a large sum of money from the Rep. Office’s USD account and didn’t deposit the money into the MNT account. We can assume that she may have taken this to the office as cash on hand, however because no official ledger was kept, there is no record of the office receiving that cash and it is impossible to prove that the money was so deposited.

Because of this lack of documentation, the tax inspectors must consider the value of that transaction as the withdrawing employee’s personal income. Now, since from the perspective of the tax office those funds were paid to the employee as personal income, the Rep. Office should have withheld the standard 10% income tax, which of course did not happen. Therefore, we must now make up for the value of that 10% with a payment in taxes.

There are other examples where the Rep. Office gave donations or sponsorships to certain local events or business partners. Normally of course these payments are subject to tax. However, again, the Rep. Office did not withhold relevant taxes. There are quite a lot of such transactions, and unfortunately, most are relatively large sums.

Yesterday, we met with the tax inspectors and reviewed all financial documentation again, seeking to find documentation for those transactions the tax office as identified as suspicious. We were able to find corroborating documentation for some transactions, but not all. All of those remaining have been identified by the tax office, added up, and the value is are required to be paid to the tax office before we will be allowed to finally liquidate the Rep. Office. Because of the relatively large amount of unpaid taxes, the Rep. Office is also subject to a fine, which must also be paid prior to liquidation.

Once the inspection is finished completely, the tax office will specify the exact amount of taxable income in the official inspection decision.”

To avoid this, we recommend your Mongolia company implements a corporate compliance system, which includes oversight of accounting issues by a local accounting firm. Our firm regularly works with approved Mongolian accountants, and is able to make recommendations and provide accounting support.

Mongolian Public Officers May Soon be Subject to Dismissal

We have already provided an overview of the new Law on Imposing Liability on Selected and Appointed High Ranking Government Officials, we would like to follow that with a closer look a few specific provisions in the new draft.

The law will set forth the legal basis and official procedures imposing disciplinary actions, political and moral accountability on officials including the President of Mongolia, the Parliament Speaker, the Deputy Speaker of Parliament, members of Parliament, the Prime Minister, Cabinet members, and officials appointed by the Parliament, or appointed by  provincial governors or Chairmen of local representative councils.

Officials in violation of legislation, oath or code of conduct or who fail to perform his/her duties will be subject to disciplinary actions depending on the nature of the violation committed. The said actions will be in form of warning the said official individually or warning among public. Furthermore, other disciplinary actions will be taken pursuant to other applicable legislations.

For the political accountability, officials in violation of the Constitution, legislation and code of conduct, will be dismissed or recalled, or his/her right to hold government high ranking position will be subject to 2 or 4 year restriction.

Furthermore, the law categorized ethics accountability as type of accountabilities in order to develop political culture in Mongolia, and aims to make officials feel greater regret for poor performance or taking advantage of their position and voluntarily assume accountability. However, if an official was subject to ethics accountability, he/she will be exempted from political accountability.

Chapter two of the law clearly states grounds for dismissal of President of Mongolia subject to overwhelming majority voting of members attended in Parliament session.

Chapter three states grounds and procedure for dismissal of the Parliament Speaker and the Deputy Speaker of Parliament and dismissal subject to overwhelming majority voting of members attended in Parliament session. Moreover, Parliament members elected from constituency will be dismissed according to majority voting of total members attended in Parliament session based on request by voters.

Chapter four includes wider grounds for dismissal of Prime Minister, Cabinet members and officials appointed by the Parliament, dismissal subject to discussion and majority voting of members attended in Parliament session and regulates other relevant issues. Furthermore, the chapter states basis for dismissal of aimag or city Governor.

Chapter five states basis for dismissal of chairman of the Citizen’s Representative Khural of aimags or city and issue on dismissal will be decided according to majority voting of total representatives attended in meeting.

Chapter six regulates matters regarding public statement, informing officials about dismissal, conducting investigation, discussing about dismissal, imposing liability on officials, reporting and informing public about compensation of damage incurred to state due to breach of law by officials.

This new law which clearly outlines procedures for dismissal of public officials will be a significant improvement over the current situation in which misdeeds by public officials are not adequately addressed. We expect this new law will go a long way to reduce or eliminate any feeling by public officials that the does not apply to them due to their position of authority.

Mongolia Anti-Corruption Law: Overview of Restricted Activity (Part II)

We have previously written about certain activities prohibited by Mongolian public officials according by Mongolia’s anti-corruption law. In this post we will summarize the activities which Mongolian officials may engage in, but which are subject to specific legal restrictions.

Mongolian public officials are generally prohibited from accepting or requesting from individuals or legal entity’s donations or other financial aid to address public needs, which may include funding assistance for their specific governmental department. However, officials and government organizations may accept donations and other financial aid for purposes such as improvement of staff training, organizational operations and structure, or in providing technical support, which will provide public benefits by increasing the capacity of that government organization to perform its responsibilities. When this is done, care must be taken to ensure it will not present a conflict of interest for officials. Officials must obtain permission from their management or the relevant government authority before accepting even an allowed donation or financial aid. In the event a donor provides such aid as described above for an official purpose, the government officials involved are legally prohibited from making any decision which concerns the donor for a period of two years following the receipt of the donation. This means a private donor may make a donation to a public agency, but the individuals at that agency which benefit from such donation will not be allowed to make regulatory decisions or approvals as regards the donor for at least two years.

 Public officials are restricted from concurrently holding any private employment or public office other than as specifically allowed by the law. The following are expressly allowed:

A member of the Parliament or Government of Mongolia may concurrently have or hold the following occupations or offices:

  • offices allowed by law and/or international treaties;
  • offices directed at public benefit activities;
  • occupations of a teacher, researcher or creative work;
  • if allowed by law, other offices in the Parliament or the Government;
  • if allowed by law, offices in international organizations.

Members of the Constitutional Court, judges of all levels, prosecutors, investigative officers are prohibited from holding concurrent offices or occupations except for a professor or a researcher.

An officer of the armed forces may perform work or exercise authority under a labour or work-performance contract concluded on the basis of a written permission by that officer’s superior officer.

Officials are restricted from certain actions which are considered fraught with conflict of interest, for at least two years after they leave public office:

  • take up employment with an legal entity or organization which close relationship to their former official duties;
  • conclude agreement or contract with former government employer or seeking/requesting a license issued by the former government employer;
  • lobby for any individual or a legal entity before the former government employer.

This restriction will not apply to an agreement, contract that had been concluded or extended prior to the official’s election or appointment to public office, or will it apply to an agreement or contract that has been awarded through public tender or that has a value with an annual income less than the amount equal to 12 million MNT (~$5,000).

What is the Mongolia Capital City Tax?

As we have discussed in the past, the Law on Capital City Tax was approved by the Parliament and new law has come into valid since October 1, 2015. Regulations dealing with procedures to register a tax payer, removal from registration and receipt of information was also approved in order to implement the law.

According to the law, the Capital City Tax is imposed on entities providing four special services including bars, restaurants, hotels and resorts. Other type of entities are exempt from the Capital City Tax.

However, retailers of all types of alcoholic beverages (including vodka, wine, whiskey, cognac, champagne, beer and airag /horse milk/ etc) and cigarettes (cigar, pipe and tobacco), which are operating on the premises of the Capital City are also considered tax withholders under the law.

The tax rate can be determined around 0-1.0 percent by the Citizens Representative Khural of Capital City based on the location and concentration of the population of particular area in Ulaanbaatar. Thus, the Resolution No 29/19 of Citizens Representative Khural of Capital City, September 29, 2015, set the Capital City Tax at 1 percent for above mentioned services and products in Capital City.

As for improving the Capital City Tax and taxation system, the Mayor of Ulaanbaatar, S. Batbold, and Head of the General Taxation Department L. Zorig signed recently a memorandum of understanding (MOU) in 2017.

Under this document The General Taxation Department will collaborate with the Mayor’s Office to monitor the implementation of tax laws and regulations, and continue the implementation of the law on Capital City Tax and the VAT.

New Draft Mongolia Law on Investigation of Regulatory Infringment

One of the new drafts scheduled to be considered by Parliament during its next session later this year is a new Law on Investigating Infringement.

Currently in Mongolia, regulatory infringements are addressed by a range of different laws, each addressing specific subject matter. These laws range from the Customs law, Taxation laws, Competition law, Mineral law, Law on State inspection and supervision. In the current state of things, there are several overlapping areas of regulation, sometimes resulting on conflicting provisions. There are also gaps where specific sectors are without relevant regulations. The different laws also treat procedures and process of investigations of infringements differently, which as resulted in concerns about whether constitutional rights are appropriately upheld in each case. The new draft law to be discussed will be designed to cure such faults by protecting individual rights which establishing a uniform standard of official process and powers when resolving suspected regulatory infringements.

The draft to be proposed differentiates regulatory infringement from criminal offences and will adopt a systematic approach to unifying over 230 laws which pertain to various types of regulatory infringement.

Currently the various laws grant 26 different classes of official, ranging from police officer, to tax inspectors, state inspectors, prosecutors and others) ability to investigate suspected infringement and impose penalties. This new law will consolidate those procedures seek to apply uniform procedures.

Under the draft to be proposed all procedures for resolving infringements should take up to 30 days. Up to two extensions of 15 days each will be available if authorized by higher office where additional investigative measures are required.

Individuals or organizations which are the subject of a decision following the investigation of an infringement will be obligated to comply with the terms of the decision within 14 days. In the event there is no compliance, the official Court enforcement agency will have responsibility to enforce the decision.

Individuals or organizations challenging the results of an investigator may appeal the final decision to the prosecutor’s office, and will also have the opportunity to appeal the decision of the prosecutor to a court.

Mongolia Anti-Corruption Law: Overview of Prohibited Activity

Mongolian law prohibits certain activities by public officials, while other activities are restricted. These prohibitions and restrictions are intended to prevent conflicts of interest in public service and to eliminate opportunities for bribery and other forms of corruption. However, even in the face of legal prohibitions and restrictions, sometimes officials will in communications with our clients suggest “options” or “solutions” that amount to barely disguised violations of these laws. Foreign invested enterprises in Mongolia should “keep an eye out” for these kinds of activities so they are not caught up in an illegal scheme.

Mongolian public officials are prohibited from disclosing in a manner not related to their official duties, information that has been acquired via official capacity. Unfortunately, violations of this prohibition are widespread as politicians and unelected officers will often seek to share or trade in private information gained through their position of privilege. Officials will seek to use this information to further their own interests, or to spread damaging propaganda about opponents.

Public officials are also prohibited from utilizing their official position to issue a decision, or to control, supervise, inquire or impose liability on another for the private purposes of themselves or their friends and family. They are also prohibited from using their official position to put pressure or influence on others. While this is not as common as the information sharing described above, one would not be surprised when encountering an official who seeks to wield their power in this way.

An official is prohibited from using the power of public office in any kind of advertising, except in connection with their official duties, and where participation is in favor of activities in benefit of the society.

Public officials are further prohibited from utilizing public service to represent their own private interests, or those of other individuals, organizations, or companies they are directly or indirectly associated with. Even so, many members of parliament are successful in business and continue ot be involved with a private business. For many a primary reason to become a member of parliament is to enhance or extend to their business opportunities and income. Parliamentarians have been known to introduce new laws and regulations which are beneficial to their private business or their personal interests.

Officials are prohibited from accepting any payment or supplementary payment, or gifts in connection with the performance of their official duties, however, this is another common violation which is often performed discretely.

With regard to an official’s accepting a gift, there is a legal obligation for an official to file a written report within 30 days in the event the value of a one-time gift or service received exceeds the equivalent of that official’s salary for one month, or where the value of gifts received from a single source in the course of one year exceeds the equivalent of that official’s salary over three months. If the value of a gift or service received by an official is in excess of that official’s salary over 6 months, the gifted items shall become the property of the State. The official can accept or redeem these gifts only by way of paying the government the value in excess of the official’s six month total salary.

This is a strange arrangement per western standards as a gift of 6 months total salary may still be a substantial amount. Keep in mind that while a gift of this nature may be legal in Mongolia, foreign companies and individuals may still be subject to anti-corruption laws in their home country, such as FCPA in USA.

Public officials are further prohibited from participating in the business of a company or serving in a management role of a company. Additionally, officials are subject to a two year prohibition on being a shareholder, stockholder or a partner in a legal entity for which the official had been involved decision making on awarding such company government procurement contracts, allocation of central government, provincial or municipal funding, or where the public official had exercised official supervision or control over such company in connection with the official’s public duties.

This is only an introduction to official prohibitions on actions of public office holders. Future blogs will continue our review.

Keep up to Date on The Mongolia VAT

As we posted previously, the newly adopted Mongolia Value-Added Tax  (VAT) law has come into effect since January 1, 2016.

According to the VAT law, “Any citizen and legal person, who is engaged in the import and export of goods as well as the sale and manufacturing of any goods, performance of work and rendering of services in the territory of Mongolia, shall be value-added taxpayers.” VAT shall be applicable for the following goods, works and services where operational income value reaches 50 or more million tugrugs:

  • all types of goods, works and services sold within the territory of Mongolia;
  • all types of goods, works and services imported from abroad to Mongolia; and
  • all types of goods, works and services exported from Mongolia;

Furthermore, the VAT shall apply to the representative office of a foreign legal entity whose revenue of sold goods, performed works and rendered services in the territory of Mongolia, has reached 50 million tugrugs or more.

In almost all cases, the value-added tax shall be imposed at the rate of 10 percent of the taxable amount of imported, manufactured or sold goods, performed works and rendered services.  However, some certain types of goods, work and services can be subject to zero (“0”) percent VAT. The payment of VAT must be within the first ten days of the following month.

The newly adopted law also creates an incentive system with the possibility of recovering up to 20 percent of paid taxes if certain conditions are met. Initial such tax returns are expected to refund in the first quarter of this year.

A conference with our Mongolian Tax Law specialists can help you determine whether your company may be able to take advantage of the 0% VAT, or the VAT recovery.