Tag Archives: Trade

What to Know About Outsourcing in Mongolia



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In recent years, in Mongolia outsourcing is becoming a common practice that enables small, medium and sometimes even large businesses to get access to skills and services that they would otherwise find hard to achieve either because of manpower or financial restrictions. So, let’s look into what outsourcing is.

Outsourcing is a business practice of hiring services of another company or individual, either internationally or domestically to perform tasks, handle operations or provide services for your business. The outside company, which is the service provider or a third-party provider, arranges for its own workers and resources to perform the tasks or services either on site at the hiring company’s facilities or at external locations. Outsourcing can also involve hiring individual independent contractors, temporary office workers and freelancers.

There are several models of outsourcing, and depending on the process, one may be preferable over another. Broadly there are three models based on the distance between the hiring company and the third-party provider. These are onshore, offshore and nearshore outsourcing. Onshore outsourcing is when the third-party provider resides in the same country as the hiring company. Offshore outsourcing is opposite of onshore outsourcing, which means the third-party provider resides in another country. Nearshore outsourcing is to hire a third-party provider that resides in neighboring countries or bordering regions.

Companies can outsource a number of tasks and services. Many companies often outsource information technology services, such as software development, infrastructure solutions, software support, as well as technical support. Also, many companies frequently outsource HR tasks, tax accounting and bookkeeping, legal services, customer service and call service, and delivery service (food and goods). For certain processes, like programming, content creation or translation, hiring freelancers on job-to-job basis is becoming more appropriate option.

Companies often outsource as a way to lower costs and improve efficiencies. Companies that decide to outsource rely on the third-party providers’ expertise or innovative technologies, that they don’t have in-house, in performing the outsourced tasks or services to gain such benefits. The underlying principle is that because the third-party provider focuses on that particular task or service, it is able to do it better, faster and cheaper than the hiring company could. Given such benefits, companies often decide to outsource supporting functions within their businesses so they can focus their resources more specifically on their core activities or the areas of the business that are most critical, thereby helping them gain competitive advantages in the market.

Outsourcing, however, can produce challenges and drawbacks for companies. For instance, companies that outsource could face heightened security risks, as they exchange with their third-party providers the company’s proprietary information or sensitive data that could be misused, mishandled or inadvertently exposed by the outsource provider. So, for a company to effectively outsource tasks and services, it is important to focus on the business partnership as much as the logistics. Maintaining and securing a trusted partnership relationship is essential in outsourcing. Therefore, companies engaged in outsourcing must adequately manage their agreements and their ongoing relationships with third-party providers to ensure success. Some might find that the resources devoted to managing those relationships rivals the resources devoted to the tasks that were outsourced, thereby possibly negating many, if not all, of the benefits sought by outsourcing.

There are some important things to remember when drafting an outsourcing agreement. Having the right legal agreement is the central core of a good outsourcing agreement, so seeking expert legal advice ahead of time might be a smart decision. The agreement needs to be fair and clear from the start, in addition to clearly defining what services are being outsourced. While they can be complex, good outsourcing agreements should contain following important information: detailed description of outsourced tasks and services, deliverables/service expectations, payment schedule, terms and conditions, inspection and acceptance, any potential penalties and/or awards, expected timeframe, and potential exit strategies. Formally agreed-upon targets, like service levels, can be a list that is as long or short as the business requires. They should be formed using detailed schedules so neither side has confusion or doubt about what is required of the service provider.  It is important for companies to know when the contractual agreement inevitably times out and ensure that the involved parties fulfill their obligations and stick around until the agreement is up. Therefore, good termination clauses or exit strategies should be in place from the start and continue after the end of the agreement.

There is a variety of other sections a good outsourcing agreement should include: confidentiality clause, independent contractor clause (if the third-party provider is independent contractor or freelancer), warranties, insurance requirements, force majeure, severability, dispute resolution, and governing law (if offshore or nearshore outsourcing). The agreement should discuss retained rights and the fact that each party retains all rights, interest, and title to its own pre-existing intellectual property. The provider should not use pre-existing intellectual property unless it has the right. Also, the clause on confidentiality should be detailed and discuss what constitutes confidential information and how sensitive information is to be handled. It should include specific details on customers’ confidential information and what is not to be disclosed to third parties.

Using Factoring as a Finance Tool



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Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is commonly referred to as accounts-receivable financing, accounts receivable factoring, and sometimes invoice factoring.

Accounts-receivable financing is a type of asset-financing arrangement in which a company uses its receivables — outstanding invoices or money owed by customers — to receive financing. The company receives an amount that is equal to a reduced value of the receivables pledged. The receivables’ age largely impacts the amount of financing the company receives. Accounts receivables financing companies typically advance companies 70 to 90 percent of the value of their outstanding invoices. The factoring company collects the debts and pays the original company any remaining amount beyond the financing amount minus a factoring fee.

This type of asset-based financing allows companies to get instant access to working capital without jumping through the hoops or dealing with the long waits associated with getting a business loan (bank loans). While bank loans may be secured by different kinds of collateral, including plants and equipment, real estate, and/or the personal assets of the business owner, accounts-receivable financing is backed strictly by a pledge of the business’s assets associated with the accounts receivable to the finance company.

This type of financing helps companies free up capital that is stuck in unpaid debts. When a business leverages its accounts receivables to boost its cash flow, it also doesn’t have to worry about repayment schedules. Instead of focusing on trying to collect bills, it can focus on other core aspects of its business.

While this type of financing is commonly used in many countries, in Mongolia it is not quite popular. Although legal definition, grounds and regulations are provided for in relevant laws, not many financing companies provide this type of financing, nor the demand for it is so big either. But with today’s rapid development and progress in international business and trade it is an open business option to consider for companies.

Bank Guarantee – a Trade Finance Tool



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In one of our previous articles we wrote about a letter of credit, a trade finance tool that is most commonly used in international trade. In this article we will discuss about another trade finance tool – a bank guarantee.

A bank guarantee is a type of guarantee from a lending institution, usually banks. A bank guarantee means a bank ensures that the liabilities of a debtor (buyer) will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.

A bank guarantee and a letter of credit are similar in many ways but they are two different things. Letters of credit ensure a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn’t go as planned. While letters of credit are used mostly in international trade agreements, bank guarantees are often used in real estate contracts and infrastructure projects.

Bank guarantees represent a more significant contractual obligation for banks than letters of credit. A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary. However, unlike a letter of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.

There are different kinds of bank guarantees, including direct and indirect guarantees. Banks typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary. The term direct guarantee applies when the bank’s security does not rely on the existence, validity and enforceability of the main obligation. Individuals often choose guarantees for international and cross-border transactions, which can be more easily adapted to foreign legal systems and practices due to not having form requirements. Indirect guarantees occur most often in the export business, especially when government agencies or public entities are the beneficiaries of the guarantee.

Banks, since they are agreeing to take on risk, thoroughly screen buyers interested in bank guarantee. After the bank has determined that the buyer is a reasonable risk, a monetary limit is placed on the agreement. The bank agrees to be obligated up to, but not exceeding, the limit. This protects the bank by providing a specific threshold of risk. Creditworthy buyers are then issued a bank guarantee.

Letter of Credit in Mongolia – a Trade Finance Tool



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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



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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



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Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation.  Double 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



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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



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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



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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.



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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.