Basics of Tax Reporting in Mongolia



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Pursuant to Article 43 of the General Taxation Law taxpayers are obliged to independently determine their taxable income and tax deductions payable in accordance with the law based on relevant documents, reflect them in their tax reports and pay either in cash and non-cash forms.

Timeframe for submission of tax reports and payment of taxes are determined by the laws of the particular tax type, and deadline for submission of tax reports and payment of taxes are usually the same. Lets have a look at timeframes for submission of tax reports and payment of taxes commonly paid by legal entities (companies) and individuals.

Corporate income tax

A taxpayer must pay the taxes due in advance by the 25th of each month, and submit the quarterly tax reports by the 20th of the first month of the following quarter and annual tax report by February 10th of the following year to corresponding tax authority and finalize tax year-end calculations.

Personal income tax

A tax withholder must pay the taxes deducted (withheld) from the taxpayer’s income to the relevant budget by the 10th of the following month and submit the quarterly reports of the withholding taxes by the 20th of the first month of the following quarter and annual report of the withholding taxes by February 15th of the following year with ascending sum to corresponding tax authority.

Value added tax

A tax withholder must pay the taxes imposed from sale of goods, rendering of works and services in accordance with the laws to consolidated account of state treasury by the 10th of the following month and submit the tax reports to corresponding tax authority in accordance with approved forms.

Capital city tax

A tax withholder must pay the taxes imposed from sale of goods and rendering of services by the 10th of the following month and submit the tax reports by the 20th of the first month of the following quarter to corresponding tax authority in accordance with approved forms.

Tax on automobiles and self moving vehicles

Individuals must pay annual tax on automobiles and self moving vehicles once a year to corresponding tax authority before June 1st of the same year. If an automobile or self moving vehicle has been imported after June 1st, taxes payable for the remainder of the year must be paid to corresponding tax authority within the same year.

In order to implement the law, on January 26th, 2015 by Resolution No. 28 of the Presidium of the Capital City Council of Citizens’ Representatives was approved “Regulation on re-implementation of vehicle registration and payment systems in the capital city”. Pursuant to this new regulation the timeframe for payment of taxes on automobiles and self moving vehicles in the capital city shall depend on the last digit number of the licence plate (state registration number) of the automobile or self moving vehicle. In other words, if your vehicle’s licence plate (state registration number) ends with 1 or 6 – the taxes must be paid before end of January, if it ends with 2 or 7 – before end of February, if it ends with 3 or 8 – before end of March, if it ends with 4 or 9 – before end of April, if it ends with 5 or 0 – before end of May.

Legal entities must pay annual tax on automobiles and self moving vehicles by the 25th of the last month of each quarter dividing annual tax into equal amounts and submit the tax report by February 15th of the following year to corresponding tax authority.

Land fee and tax on immovable property

Unless stated otherwise in the land possession or land use contracts, land fee payers must pay the land fee by the 25th of the first month of each quarter dividing the annual land fee into equal amounts; and may pay the next quarter installments in advance. The authority (or official) in charge of land fee matters (collection) must submit to the tax authority one copy of the land possession or land use contract of a citizen or legal entity and a copy of the land fee report produced at corresponding administrative level.

A taxpayer must calculate tax on immovable property based on the value of immovable property as of January 15th of each year. Legal entities that own immovable property must pay annual tax on immovable property by the 15th of the last month of each quarter dividing annual tax into equal amounts. Individuals (citizens of Mongolia, foreign citizens and stateless persons) that own immovable property must pay annual tax on immovable property once a year by February 15th of each year. A taxpayer must submit the tax reports of taxes on immovable property by February 10th of the following year to corresponding tax authority.

Pursuant to law if the deadline for submission of tax reports and payment of taxes coincides with weekends and/or public holidays, the tax reports shall be submitted, and taxes paid on the previous working day. Due to circumstances that this year’s Lunar New Year holidays fall on February 5, 6 and 7th, and that the Government of Mongolia has ruled to transfer the workday of February 8th to another day and make it a public holiday, tax authority has decided to extend the legal timeframe for submission of annual tax reports for 2018 for 5 business days, i.e. now taxpayers may submit their annual tax reports by February 15th.

Pursuant to Article 45 of the General Taxation Law taxpayers (tax withholders) are obliged to execute tax reports in accordance with instructions, forms and within timeframes specified by the law, and submit to corresponding tax authority. Taxpayers eligible for tax exemptions and returns in accordance with laws are not be relieved from duty to submit tax reports. Because the tax reports are the main documents to provide taxpayers with tax exemptions and returns.

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.

Basics of Mongolia Unemployment Insurance



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Right to get unemployment compensation

The employee or insurer is entitled to get the compensation if employee were paying the unemployment insurance fees 24 months before he or she get unemployed and moreover employee must be paid the insurance 9 months continuously.  If insurer or employee get unemployment compensation previously, then they must be paid the unemployment insurance fee for 12 months, in this occasion, they are eligible to obtain the compensation. 

Compensation amount

Compensation will be granted considering the period of employee has been paid the insurance and the compensation will be provided as a percentage of below amount of last 3 months’s average salary or equivalent amount of payment. 

Work period of paid insurance Percentage of compensation
Until 5 years 45%
5-10 years 60%
10-15 years 60%
Above 15 years 70%

Minimum standard of compensation is no less than minimum wage of 75 percentage.

Employee or insurer is obliged to register the unemployment with 14 days after completed the handover work with employer, if there is reasonable reason for employee for the delay, it should be registered in 3 months with employment department or social insurance organization.

Employment department or social insurance organization will make a decision whether to grant compensation or not within 14 days after receiving the application and relevant document

The compensation will be granted to the employee or insurer within 76 working days after the registration of unemployment.  The employment department or social insurance organization will calculate the compensation and pay it up to two times per month.

Required documents to get the compensation

Following documents need to be collected in order to obtain the compensation:

  1. Application
  2. Social Insurance Book
  3. Termination order by employer

Reduction for the unemployment insurance

If employer or insurer has not been taken or obtained any compensation from unemployment insurance fund in 5 years, following year’s insurance fee will be reduced by 10 percentage. If employer and insurer continually meeting the above requirement, the reduction will be increased by 10 percentages, but it should not be exceeded 50 percentages. 

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.

Liability of a Mongolian Company for Non-Compliance



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We have looked at the requirement for a Mongolian company to have an internal control body and discussed a little about the forms such body may take. Our readers may be interested to note that while having such body is mandatory for a Mongolian company under law, there isn’t actually any penalty for a company that does not establish an internal control process.

What this means is that while there is no penalty for not having the review body, the Company will be considered liable under Mongolian law for any compliance violation or audit irregularity caused by the actions of the company’s officers or staff, which result in legal penalties or civil damages. By making the company responsible to maintain the internal control and compliance committee, the law makes the company responsible for any failure of compliance. Such liability will be in effect even where the non-compliance was accidental or was caused by the unapproved actions of a single staff member. The theory is that these things would not happen if the company had established and followed an appropriate internal control process.

Mongolian companies should therefore take the legal requirement to establish a Internal Control and Audit Committee seriously. The internal control system will allow company management to better ensure proper operations of the company and identify and stop potentially non-compliant behavior before it results in a larger problem, potentially carrying legal penalty. Since the law makes the company liable for non-compliance in any case, it makes sense for the company to establish internal procedures to reduce this risk.

Compliance Options for Your Mongolian Company



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We talked yesterday about the Internal Control or Auditing Committee every Mongolian company should have. The Committee should operate by a set of rules, which the company approves and implements for itself. Government regulations stipulate that each, “Entity or organization must have its own internal control and auditing procedure in compliance with this regulation and consistence with its activities.”

To comply with this rule, the company must establish the Internal Control or Audit Committee, or for larger companies a complete department devoted to compliance may be used. Smaller companies have the option to appoint a single company officer to be responsible for compliance. This individual office, committee or department will have responsibly to conduct internal compliance reviews and audits.

Internal Control and Audit Requirements for Your Mongolian Company



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All types of legal entities, regardless of ownership or organization details, are required to comply with state inspection requirements. Each company is required to establish an Internal Control or Auditing Committee comprised of company officials responsible for monitoring internal company operations and compliance. Whether the company is locally owned or foreign invested, or operating in mining sector, industrial manufacturing or providing a service, the company must establish an internal audit committee.

The Internal Control and Audit Committee is responsible for internal compliance issues for the company, to ensure the company meets all of its obligations as set out elsewhere in Mongolian law. The Committee is broadly responsible for compliance as regards meeting environmental impact and conservation obligations; ensuring quality of products or services provided by the company; monitoring working conditions and workplace safety and health; ensuring the company meets all obligations regarding property registration, utilization, storage and finally, the committee is responsible to ensure accurate accounting of financial records.

If you are unsure if your Mongolian company’s internal compliance and control procedures meet requires of the law, contact your Mongolian legal counsel for a consultation.

Employment Termination by Mutual Agreement



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Yesterday we looked at termination of a Mongolian Employment Agreement due to an employee’s failure to meet disciplinary standards. In this post, we will look at another option for ending an Employment Agreement – termination by mutual agreement.

Where a company is not satisfied with an employee’s work performance but is not able to point to a series of breaches of discipline or an occurrence of serious breach and does not have procedures in place for a review Commission, the company has the option to directly negotiate with the employee, via a proposal to the employee to terminate employment. Mongolian law allows for termination of an Employment Agreement at any time if both parties agree. Often the agreement will entail some amount of severance compensation for the employee. Such severance compensation is not legally required but is required as a practicality to obtain the voluntary departure of the employee. Where a mutual agreement on termination is reached, it will legally be considered termination under the initiative of the employee, and the company’s risks of rulings against it at court are greatly diminished.

If employee agrees to such proposal, an employee must provide employer with written termination notice and may leave his/her workplace 30 days after presenting termination notice, unless the parties agree otherwise.

An employee’s written termination notice should come solely from employee’s own will and without improper influence or pressure from employer. So, if client will choose to negotiate with the employee, it is best to make sure the dismissed employee is happy with the termination deal and has no reasons to go to court against the employer. This is obviously most easily achieved by offering the employee generous terms of departure.