The mining sector is a vital pillar of Mongolia’s economy. It has driven foreign investment, trade, and growth since the country adopted a market-based economy in the early 1990s. The industry accounted for 19% of Mongolia’s gross domestic product and 94% of its export value in 2019.
As foreign capital increasingly flowed into Mongolia, the government observed that it was not receiving commensurate revenues from developments in the mining sector. This was largely due to tax base erosion and profit shifting (BEPS) by some multinational mining companies coupled with limited human resources and experience within Mongolia’s tax administration to tackle the BEPS issues.
As a member of the Intergovernmental Forum Mining, Metals, Minerals, and Sustainable Development (IGF), Mongolia sought technical assistance on mining taxation in 2019. It became the first “deep dive” country in the IGF’s BEPS in Mining program, a partnership with the Organisation for Economic Cooperation and Development (OECD) delivered alongside Tax Inspectors Without Borders (TIWB).
This unique initiative brings the complementary mining and international tax expertise held by these partners along with resources for long-term capacity-building support, which includes mining-specific guidance on BEPS challenges, training, legal and policy advisory services, and hands-on tax audit assistance.
The Mongolian Tax Authority had three top priorities:
- Building capacity to audit transfer pricing, the process by which multinationals set the price of intra-group transactions.
- Increasing capital gains tax revenues by more precisely valuing mining licences.
- Improving corporate income tax collection by preventing companies from unduly offsetting mining profits with exploration or early-stage project development costs.
Motivated to improve its transfer pricing audit practice, Mongolia’s tax administration moved quickly to make key officials available to the IGF and partners for general and industry-specific training. By October 2019, it had launched its inaugural transfer pricing division. Remarking on one such training, the head of the new transfer pricing unit, Tugsjargal Sereenendorj, said, “The most useful topic for me was pricing of different types of coal using the world market price database. In Mongolia, underpricing of coal in transactions both with related parties and independent parties is a common issue.”
In its first transfer pricing tax assessment, the government collected USD 228 million in tax revenue and denied USD 1.5 billion in carried-forward losses that would have significantly reduced tax future revenue.
By the end of 2020, Mongolia issued its first transfer pricing assessment as part of a comprehensive audit of a large multinational mining company. Through this assessment, the government collected USD 228 million in tax revenue and denied USD 1.5 billion in carried-forward losses that would have significantly reduced tax future revenue. It is notable that the taxpayer paid the tax assessment in full and that the sum represented about 1.7% of the country’s gross domestic product in 2020.
“The transfer pricing audit conducted with the essential technical assistance provided by the TIWB, IGF, and OECD experts is a major step forward for the Mongolian Tax Administration,” said Zayabal Batjargal, Commissioner, with the administration. “The resulting tax assessment is a testament to the capabilities of the Mongolian tax officials as well as the combined international effort to tackle global tax avoidance.”
Mongolia has made important changes to its legal and regulatory framework that are already yielding additional mining revenue.
In 2019, following capacity building and legal drafting support from the IGF and partners, the tax authority introduced new regulations on the valuation of mining and exploration licences for capital gains tax purposes (Decree 302). Previously, companies had been able to choose the valuation method that required them to pay the least amount of tax. Since the regulation was introduced, the tax authority has assessed approximately USD 8.7 million in taxes on the transfer of 246 licences.
Mongolia also introduced ring-fencing rules for the first time in 2020. Such rules prevent mining companies from consolidating income and costs across multiple projects to delay paying corporate income tax, sometimes for years. IGF and partners provided technical input into drafting the new rules, as well as capacity building on implementation. Officials have confirmed the ring-fencing measures are bringing in additional government revenue from mining licence holders while also making the timing and amount of tax due easier to predict.
The IGF and its partners continue to work with the Government of Mongolia to strengthen revenue collection from the mining sector.
For more information on this program, see the report Tackling Multinational Tax Avoidance in Mongolia: From Building Modern Legal Frameworks and Mining Industry Expertise to a Major Audit Outcome published by the OECD, TIWB, and IGF and available in English, French, Spanish, and Mongolian.