Tag Archives: Trade

Letter of Credit in Mongolia – a Trade Finance Tool

Foreign trade is an important part of the economic life of any country and for Mongolia it is an essential part of its economic life. In recent years foreign trade in Mongolia is expanding, offering consumers a wide variety of goods and services. Thereby traders, both importers and exporters, must carefully and mindfully choose from range of trade finance tools to help their transactions run smoothly.

Most popular and commonly used trade finance tool is a letter of credit. Working with an overseas buyer can be risky because you don’t really know who you’re working with. A buyer may be honest and have good intentions, but business troubles or political unrest can delay payment or put a buyer out of business. In addition, due to different laws, different time zones, and different languages there might occur certain difficulties. A letter of credit spells out the details so that everybody is on the same page. Instead of assuming that things will work a certain way, everybody agrees on the process up front.

A letter of credit is a document issued by a bank that guarantees payment. There are several types of letters of credit, and some of them may be defined by their purpose. Still they provide security when buying and selling. Importers and exporters regularly use letters of credit to protect themselves.

Commercial letter of credit is a standard letter of credit that is commonly used in international trade and may also be referred to as a documentary credit. This is a negotiable financial instrument from an importer’s (buyer’s) bank guaranteeing that payment to an exporter (seller) will be the correct amount and received on time subject to the exporter presenting compliant shipping documents (assuming those documents meet the requirements listed in the letter of credit).

To get a letter of credit, importers must contact a bank in their home country and apply for opening a letter of credit. In Mongolia most banks issue letters of credit. In turn sellers must trust that the bank issuing the letter of credit is legitimate and that the bank will pay as agreed. If sellers have any doubts, they can use a “confirmed” letter of credit, which means that another (presumably more trustworthy) bank will guarantee payment. Sellers typically get letters of credit confirmed by banks in their home country.

However, prior to contacting a bank, important to remember that buyer and seller must have mutual agreement that the payment will be done with a letter of credit and list all requirements to shipping documents in the contract.

Issues with Mongolian Competition Law

Our Mongolian lawyers have encountered an unusual number of inquiries regarding Mongolian competition and anti-monopoly issues in the past few months. The scenario below takes a looks a common situation found in Mongolian trade.

Let’s assume that multinational company A currently sells to several Mongolian counterparties (Supplier Customers) who have a product import permit. Under the terms of sale, title passes to the Mongolian counterparty before the product is imported on either the Russian or Chinese border.

Mongolian wholesale client (Company B) proposes a profit-sharing agreement whereby Company B will Purchase products from Company A for purposes of:

  • storing product in Company B’s facilities and reselling to the other Supplier Customers within Mongolia; and
  • selling to wholesale clients provided that they are not already existing customers of the Supplier Customers.

In this scenario Mongolian Competition Law does not apply to the company A.  The Mongolian Competition Law does not apply to business entities which are not registered in Mongolia and are operating outside of its borders. Since the proposed transaction contemplated by the agreement would have company A deliver the products to the purchaser outside of Mongolian territory, the provisions of the Competition Law would not be applicable.

In our view, Company A and B would not be forming a monopoly because the transaction is cross-border, and A is not a “business entity” within the meaning of the Competition Law.

Company B only occupies approximately 1% of the domestic market for sale and supply of certain products. Accordingly, since it does not occupy a “dominant position” in Mongolia’s market (defined as a party which sells or produces 1/3 or more of a certain type of goods), the prohibitions in Mongolia’s Competition Law with regard to monopolistic activities would not be relevant to its operations.

With regard entering into agreements and monopolies, the following activities are prohibited under the Mongolian Competition Law:

  • mutually agreeing to fix prices of products;
  • dividing markets by location, production, services, sales, name or type of products or consumers;
  • restricting the production, supply, sale, shipping, transportation and market accessibility of products, investment, technical and technological renovation;
  • participating in competitive tender or bid auction or activities procuring goods, works or services by state and local funds having in advance agreed on the price, other conditions and criteria of products;

In addition, the following agreements or entered between business entities shall be prohibited where they contradict the public interests or create circumstances restricting competition:

  •  refusing to establish economic relations without economic or technical justifications;
  • restricting sales to or purchase by third parties of products;
  • collectively refusing to enter into agreements or negotiations which have significance for competition;
  • preventing competitors from joining organizations with the purpose of running their businesses profitably;

Mongolian business entities are prohibited to enter into agreements with effects as described above.

Mongolia’s Double Taxation Treaties

Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxationDouble taxation is the levying of tax by two or more jurisdictions on the same declared income, asset or financial transaction. Double liability is mitigated in a number of ways, for example:

  • the main taxing jurisdiction may exempt foreign-source income from tax,
  • the main taxing jurisdiction may exempt foreign-source income from tax if tax had been paid on it in another jurisdiction, or above some benchmark to not include tax haven jurisdictions,
  • the main taxing jurisdiction may tax the foreign-source income but give a credit for foreign jurisdiction taxes paid.

Another approach is for the jurisdictions affected to enter into a tax treaty which sets out rules to avoid double taxation. In the all over the world, over 3000 double taxation agreement (DTAs) are in effect.

Mongolia has entered into “The Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” with other 25 jurisdictions as of 2017. Namely,

Country In force since
1 The People’s Republic of China Jan 01, 1993
2 The Republic of Korea Jan 01, 1993
3 The Federal Republic of Germany Jan 01, 1997
4 The Republic of India Jan 01, 1997
5 The Socialist Republic of Vietnam Jan 01, 1997
6 The Republic of Turkey Jan 01, 1997
7 The United Kingdom of Great Britain and Northern Ireland Jan 01, 1997
8 The Republic of Hungary Jan 01, 1997
9 Malaysia Jan 01, 1997
10 The Russian Federation Jan 01, 1998
11 The Republic of Indonesia Jan 01, 1998
12 The Republic of France Jan 01, 1999
13 Czech Republic Jan 01, 1999
14 The Kingdom of Belgium Jan 01, 1999
15 The Republic of Kazakhstan Jan 01, 2000
16 The Republic of Kyrgyz Jan 01, 2000
17 The Republic of Poland Jan 01, 2002
18 The Republic of Bulgaria Jan 01, 2002
19 The Swiss Confederation Jan 01, 2002
20 Ukraine Jan 01, 2003
21 Canada Jan 01, 2003
22 The Republic of Singapore Jan 01, 2005
23 The Democratic People’s Republic of Korea Jan 01, 2005
24 The Republic of Austria Jan 01, 2005
25 The Republic of Belarus May 28, 2001

Mongolia’s double tax treaties with United Arab Emirates and Kuwait were terminated from 1 January 2015 and 1 April 2015 respectively. Mongolia’s double tax treaties with Luxembourg and The Netherlands were terminated from 1 January 2014 due to failure to provide for the balance and equity rights of parties.

Mongolia Deliberates Major Tax Revamp

Under the leadership and coordination of the Ministry of Finance, consultations on the Ministry’s proposed tax amendments started on March 5. The first session was held with business sector representatives regarding tax law reforms and amendments at the Mongolian National Chamber of Commerce and Industry.

Ministry of Finance is conducting a public discussion on revising 24 tax-related laws, including General Taxation Law of Mongolia, Laws on Corporate Tax, Personal Income Tax and Value Added Tax, in order to hear voices of taxpayers and collect best proposals from the relevant parties. The Government noted that no fundamental changes and revisions were made to tax laws in the last decade and the taxation law ‘package’ was created to improve tax environment and decrease some taxes. The taxpayers expect favorable environment from this tax reform.

According to the proposed tax law amendment, if the annual revenue of enterprises operating in Mongolia is lower than MNT 1.5 billion, the government will return 90 percent of paid taxes. Furthermore, small and medium sized enterprises which have MNT 50 million of annual revenue, will be able to pay only one percent tax from sale revenue. The proposed amendments would also reduce the number of reports required from SMEs. Companies with an annual income of over three billion MNT would be required to issue tax reports four times a year, and those with less than three billion MNT in annual income would be required to file reports twice per year. The amendments include major changes to the VAT law.

The proposed amendments expect to be discussed and voted on during the spring parliamentary session and, if approved, will come into force on  January 1, 2019.

Using Customs Seizure to Stop Import of Infringing Products to Mongolia

Our firm’s Mongolian intellectual property lawyers have seen a lot of inquires in recent months from clients seeking assistance regarding counterfeit products which were being sold in Mongolia.

There are several mechanisms our Mongolian lawyers recommend to deal with counterfeit products in Mongolia.  One of the most important of these is utilizing Customs to restrict entry of counterfeit products or goods infringing registered trademarks from entering Mongolia.

This works by seizing infringing goods at Customs upon attempted entry into Mongolia. Before this may be done, the authentic goods bearing a validly registered Mongolian Trademark must be registered with Customs.

This registration process is relatively easy, requiring documentation of the registered trademarks, basic information regarding the trademark owner, a description of the products, and a list of items requested to be reviewed and protected by Customs. Our Mongolian lawyers will walk you through the process. The review procedure will talk approximately 30 days from the date of submission of the application, after which, the registered information will be forwarded to Customs entry points around Mongolia.

A written request for seizure of infringing goods, must be submitted along with a small cash deposit or bank guarantee. The customs office prefers having the deposit to avoid incurring any damages to importer before starting examination of infringing goods based on the original goods with customs registration.

Our Mongolian lawyers and clients have found such Customs seizures to be effective at blocking incoming shipments of infringing products. However it is important to note the applicant seeking to block the shipments must have a valid, registered Mongolian trademark in order to support such action by Customs.

Mongolia Continues Cooperation with China on Mutual Free Trade Zone

Chinese news media is reporting that China and Mongolia are beginning a new process of conducting a feasibility study regarding development of a new Free Trade Zone (FTZ).

This comes in the contest of the second China-Mongolia Expo, held in Hohhot, the capital of China’s Inner Mongolia region. The conference will occur in late September, and will serve as a forum to discuss issues of mutual cooperation and development between China and Mongolia.

Mongolia’s trade with China in the first six months of 2017 has been USD $3.1 billion. This is a 44.2% increase year-on-year. China mainly exports gas, diesel, food, machinery and equipment to Mongolia, and imports natural resources, fur and raw materials.

Talk of the new FTZ comes after the China-Mongolia Cross-border Economic Cooperation Zone (CECZ) was announced in 2015. The CECZ is a 18 square kilometer  territory evenly divided along the China-Mongolia border. The CECZ is intended to facilitate import/export processing, logistics, warehousing, and e-commerce.

The increase in economic cooperation between China and Mongolia is a core part of the wider China-Mongolia-Russia economic corridor, which seeks to facilitate integration of Mongolia with the economies and infrastructure of China’s northern territories and Russia’s far east.

Importing Products into Mongolia without a Buyer? Put it in a Bonded Warehouse.

Foreign investors who import products into Mongolia may be required or need to place their products into a custom bonded warehouse. In this case, below are main regulations of the bonded warehouse and things to know.

The purpose of the placing products in the custom bonded warehouse is providing an opportunity to find a market for imported products, as well as to time for the importers to pay customs duties and other taxes.

The kinds of goods which should be stored in the bonded warehouse are firstly, Mongolian goods, secondly, foreign goods coming from abroad and thirdly, goods which are placed in the bonded warehouse temporarily in connection with other non-import or export procedures.

Importantly, Foreign goods placed in bonded warehouse are not subject to non-tariff restrictions which means goods which are not generally prohibited to cross the national border of Mongolia are not required to obtain any further permissions from the relevant authorities when goods are entering into the border of Mongolia. When products are kept in the bonded warehouse, any permission or licenses normally required for possession of such products are not required to be obtained from the relevant government organization. This is because the customs bonded warehouse is considered as being outside of the customs territory of Mongolia. Keep in mind that the relevant license or permission is required upon release of the products from the bonded warehouse.

The product is to be stored in the bonded warehouse under the name of the importer. When imported products are exported directly from the custom bonded warehouse out of Mongolia, payment of an export tax is not required. There are not any export controls/restrictions and/or any licences/permits, to be obtained in order to export the product from the bonded warehouse.

In contrast to imported goods, Mongolian goods placed in the bonded warehouse will be subject to non-tariff restric­tions, which mean the exporter is required to obtain permission from relevant authority and limits may be imposed on the quantity of the goods. Of course, goods which are prohibited to be carried through the national border will not be allowed.

There are two types of bonded warehouse in Mongolia, open and closed. Open bonded warehouse is for public use and all goods allowed to enter or leave Mongolia may be stored or placed in the open bonded warehouse.

A closed bonded warehouse is not for public use and is designated for use solely by one or more legal entities or organization. Goods which require special storage condi­tions, facilities and equipment or which may have af­fect on other goods are typically placed in a closed bonded warehouse.

The timeline for storage of goods in a bonded warehouse is up to two years. The Customs Office will extend the timeframe by up to 1 year with no further renewal possible.

Mongolia’s Role in the New Silk Road

When China held its Belt and Road Forum for International Cooperation in Beijing May 14 to 15th, China’s President Xi Jinping welcomed Mongolia’s efforts to help link the European and Asian economies.

China welcomes cooperation with Mongolia in areas of trade and investment, agriculture, industrial growth, and energy development. President Xi suggested that China Belt and Road Initiative complements Mongolia’s own Prairie Road development initiative. Cooperation is also important to promote a China, Mongolia, Russia economic corridor.

President Xi advocated for a study of establishing a Free Trade Zone on the Border wth Mongolia, and increasing economic cooperation between the countries, including cooperation on major mineral industry programs and infrastructure.

Prime Minister Erdenebat of Mongolia indicated cooperation with China is a Priority for Mongolia, and said China’s Belt and Road initiative is important for promoting development in Mongolia. According to Erdenebat, Mongolia may play an important role as a link between Europe and East Asia.

Mongolia is well placed between major powers Russia and China to serve as a conduit for economic and cultural exchange. Mongolia suffers from a lack of population compared to its large southern neighbor, however, Mongolia’s rich mineral resources mean Mongolia will be able to generate foreign interest and income for years to come. With budgetary reform in Mongolia well underway, further integration with China and Russia is one more positive development for the future of the Mongolian economy.

Foreign Exchange in Mongolia

Financial Regulatory Commission (the FRC) and Bank of Mongolia (Mongol Bank), which serves as the central bank of Mongolia, are authorized to regulate Foreign Exchange (ForEx) trading within Mongolia. The Law on Currency Settlement is the primary legislative authority as to conduct of ForEx in Mongolia.

The currency market of Mongolia operates on the basis of supply and demand and consists of the currency exchange activities of the authorized banks, exchanges and brokerage companies.

Mongol Bank is permitted to buy currencies and gold bullion from domestic and foreign banks, as well as from business entities, other organizations and from individuals. Mongol Bank’s primary official purpose for such purchases is management of currency and wealth reserves of Mongolia. Mongol Bank may likewise sell foreign currency and gold from its reserves as part of efforts to maintain the general stability of the Tugrug (the currency of Mongolia).

Mongol bank acts to fix the official exchange rate of the Tugrug, and to provide guidance as to the same. These fixed rates are set in relation to currencies which are bought and sold on the currency market by commercial banks on a comparative basis against a stable foreign currency used in foreign commerce by a majority of countries. The rate fixed by Mongol Bank is used in the State budget and for customs purposes.

An increase or decrease in the Tugrug exchange rate by 5 percent or more from the previous day shall be brought to the attention of the Prime Minister of Mongolia. This is only report and the Prime Minister has no authority to personally order or to prevent the Governor of Mongol Bank from increasing or decreasing the Tugrug exchange rate in accordance with market conditions.

Mongol Bank also sets various rules and regulations regarding foreign exchange activities, including as to FX swaps, forward transactions, and Forex auctions.

Commercial banks are able to establish their own exchange rate for using Tugrugs to buy and sell foreign currencies based on market conditions. Likewise the bank sets its own rate of commission.

Upon obtaining a license from Mongol Bank, Mongolian Commercial banks are allowed to facilitate non-cash transactions in foreign currency, buy and sell foreign currency in cash, establish and operation accounts in foreign currency (and pay required interest), provide credit and provide guarantees in foreign currency.

A Non-banking financial company may trade foreign currency after obtaining a license from the FRC.

Mongolia and Vietnam Promote Trade in Goat Meat

Vice President of Vietnam, Mrs. Dang Thi Ngoc Thinh, visited Mongolia for an official visit from May 07 -10. While in Mongolia, she participated in the Mongolian Vietnamese business forum in Ulaanbaatar on May 09. Mrs. Dang Thị Ngọc Thinh gave a presentation at the opening ceremony of the business forum discussing trade, investment and economic cooperation between Mongolia and Vietnam.

Vietnam’s trade volume with Mongolia is estimated at USD 59 million in 2016 alone. The trade includes over USD 40 million in race, sugar, canned foods and telecommunications equipment imported to Mongolia. Mongolia and Vietnam seek to increase cooperation and trade in natural resources and agricultural goods, which Mongolia is well placed to export to Vietnam.

Three main issues were touched on during the official talks between Vietnam’s Vice President and the Prime Minister of Mongolia. These included promotion of defense ties and cooperation between law enforcement agencies.

Also discussed was increased export of Mongolian meat products to Vietnam, particularly goat meat. Mongolia is scheduled to export 20 tons of goat meat to Vietnam this year, and trade is expected to grow significantly.

The agreement on export of goat meat highlights one of Mongolia’s current strengths in agricultural production of meat and dairy. The sector is ripe for foreign investment, including funding, technologies and techniques.