The Mongolian government has received a new report from the International Monetary Fund (IMF) advising of necessary changes to the nation"s network of double tax agreements (DTA) to close unintended loopholes that enable multinationals to engage in tax planning to avoid tax payable on local mineral extraction projects.
Summarizing the challenge for local authorities, the IMF report opens: "Mongolian authorities are increasingly faced with cases of international tax planning. As the activities in the mineral extraction sectors are increasing, foreign investors are carefully planning the structure of their Mongolian investments to minimize the overall tax burden. It is common practice amongst multinational companies to utilize DTA networks around the world by setting up intermediate companies to reduce their overall tax burden."
"The current Mongolian DTA network is prone to international tax planning as some DTAs contain favorable provisions allowing residents of other countries to substantially reduce source taxation in Mongolia," the report adds. "For instance, in some cases the Mongolian withholding tax on dividends, interest, royalty, service fees, or lease payments is limited or even prohibited. In other cases, capital gains on indirect transfers of mining licenses cannot be taxed in Mongolia."
Over the last two decades Mongolia has negotiated and enacted over 30 DTAs. However, to combat abuse, the Mongolian government is considering going as far as terminating all of its agreements and starting afresh.
Instead of terminating its agreements, the IMF"s report advocates an approach whereby Mongolia"s DTA network is selectively re-negotiated and/or amended. The IMF recommends that terminating DTAs should only be used as an ultimate remedy if DTA renegotiations are unsuccessful.
The IMF observed that: "In the current situation, only a few DTAs can be considered potentially harmful as they insufficiently protect the Mongolian tax base. Some DTAs are in need of amendment due to changes in the domestic legislation (i.e. the introduction of taxation on indirect transfers of exploration and mining licenses). Such amendments may also be realized by negotiating additional protocols. Most DTAs - although slightly out of line with the proposed Mongolian DTA Model - do not require immediate attention."