## _cr12306 ## Source details **Canonical URL:** [_cr12306](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12306.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12306.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12306.pdf.json) --- ### Overview and context - As 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. - Main investors are multinational companies residents of Canada, China, and Russia. - 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. - Over the last two decades Mongolia negotiated and enacted over 30 DTAs. These DTAs are—to a large extent—following the UN Model Double Taxation Convention (“UN Model”). - The UN Model contains provisions dividing taxation rights between source and residence countries and gives more taxing rights to the source country than the OECD Model Convention. - Mongolia is currently the source country in most international relations; this may change as mineral exploration takes off and Mongolia sets up Sovereign Wealth Funds (SFW). ### Main concerns about the current DTA network - Findings: - 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. - Mongolian withholding tax on dividends, interest, royalty, service fees, or lease payments is limited or even prohibited in some DTAs. - Capital gains on indirect transfers of mining licenses cannot be taxed in Mongolia in some DTAs. - Under most DTAs employment income received by teachers is exempt for at least a period of two years. - Authorities requested an assessment of their DTA network, identification of weaknesses, and suggestions for improving DTAs in future. ### Treaty (Re-)Negotiations — findings - Findings: - Mongolian authorities are considering cancelling all DTAs and building up a new DTA network with countries based on trade volumes and reciprocity in economic relations. - All Mongolian DTAs are in force for at least five years, which makes them eligible to cancellation. - Termination procedural detail: to terminate effectively by 1 January of the next calendar year requires notice through diplomatic channels at the latest on 30 June in the year before. - DTAs with Kuwait and the United Arab Emirates have slightly different wording suggesting extension for periods of 5 years and can only be terminated after such period elapses. - Terminating DTAs should be used as an ultimate remedy to force renegotiations if (parts of) the DTA provisions are potentially harmful for Mongolia. - Only a few DTAs are considered potentially harmful as they insufficiently protect the Mongolian tax base; some DTAs need amendment due to changes in domestic legislation (e.g., introduction of taxation on indirect transfers of exploration and mining licenses). - Amending DTAs may be realized by negotiating additional protocols. - Negotiating or renegotiating DTAs requires: - development of an international tax treaty policy (a DTA model), - in-depth information on the domestic tax system of the other Contracting State, since favorable DTA provisions combined with particular domestic tax treatments in the other State can result in international tax planning. - Information about other tax systems is often difficult to obtain and highly technical and complex. - Technical assistance by experienced international tax lawyers and treaty negotiators is strongly recommended. ### Treaty (Re-)Negotiations — recommendations - Recommendations: - Mongolia should take a more differentiated approach towards repairing its DTA network by selectively (re-)negotiating and/or amending its current DTAs. - Mongolia should hire an experienced international tax lawyer and treaty negotiator to assist in obtaining information about the domestic tax legislation of the other Contracting State and to help in the actual negotiation process. ### II. Assessment of the current tax treaty network — general - The current Mongolian tax treaty network is largely based on the UN Model. - The DTAs contain various provisions considered harmful to Mongolia’s development as a resource-rich nation. - The assessment provides an overview of the most critical provisions, analyzes strengths and weaknesses, and suggests improvements. ### A. Business Income — domestic tax treatment (findings) - Findings: - Non-resident taxpayers who carry on a business in Mongolia are subject to the Corporate Income Tax (CIT) to the extent that profit can be attributed to a permanent establishment (“pe”). - Article 5 CIT contains five types of permanent establishment: 1. Regular pe: fixed place of business; 2. Construction-pe: deemed to exist if a building site, construction, assembly or installation project, or supervisory activities last more than six months within any twelve-month period; 3. Service-pe: exists if certain service activities are furnished for a period or periods aggregating more than three months within any twelve-month period; 4. Agency-pe: exists where a person—other than an agent of an independent status—is acting in Mongolia on behalf of a foreign economic entity, or holds a stock of goods and merchandise from which he regularly delivers goods or merchandise on behalf of the foreign economic entity; 5. Insurance pe: if a foreign insurance enterprise, except in regard to re-insurance, collects premiums in Mongolia or insures risks situated in Mongolia through a person other than an agent of an independent status. - Profit attributable to a permanent establishment in Mongolia is determined and taxed in a similar manner as profit of a resident economic entity; domestic profit determination rules apply for both resident and nonresident business. - The CIT allows tax authorities to challenge transactions between related parties—including headquarter and permanent establishment—and correct (increase or reduce) taxable profit. ### A. Business Income — DTA treatment and issues - Findings: - All DTAs contain a definition of a regular permanent establishment identical to the Mongolian CIT. - All DTAs contain a provision that deems a construction-pe after a certain period; periods vary from 3 months to 24 months: - 3 — Kuwait - 6 — Belgium, Canada, Germany, Indonesia, Italy, Luxemburg, Malaysia, Singapore, Switzerland, and Vietnam - 9 — India - 12 — Austria, Belarus, Bulgaria, Czech Republic, France, Hungary, Kazakhstan, PR of Korea, Korea, Kyrgyzstan, the Netherlands, Poland, Ukraine, and United Kingdom - 18 — China and United Arab Emirates - 24 — Russia and Turkey - All DTAs include an agency-pe and exclude an independent agent. Only DTAs with the Czech Republic, Indonesia, Luxemburg, Malaysia, and Ukraine include the possibility of constructing an agency-pe when a person holds a stock of goods and regularly delivers goods on behalf of the foreign enterprise. - Only a few DTAs include explicit establishment of an insurance-pe (DTAs with Bulgaria, Czech Republic, Indonesia, Kazakhstan, and PR of Korea). - Although all DTAs include a transfer pricing provision allowing Mongolia to challenge profit realization on transactions between associated persons, a number of DTAs do not contain an obligation to apply a corresponding adjustment. DTAs lacking such obligation include those with Belgium, Canada, Czech Republic, Germany, India, Luxemburg, Malaysia, Poland, Singapore, Ukraine, and Vietnam, which may result in international double taxation. ### A. Business Income — assessment (findings) - Findings: - No discrepancy between the domestic and DTA-definition of a regular permanent establishment. - Mongolia applies the same minimum presence rule (permanent establishment) as is allowed under its DTAs and can effectively tax non-resident companies and entrepreneurs according to CIT and PIT rules. - Domestic CIT: permanent establishment exists if non-resident engaged in construction activities that last more than 6 months. - Most DTAs have more favorable conditions for nonresidents as they contain a longer time period before a permanent establishment can be recognized by Mongolia. - DTAs with China, Russia, Turkey, and the United Arab Emirates are unusually generous (substantially longer than 12 months). - DTA with Kuwait sets construction-pe at 3 months; a constructor working more than 3 but less than 6 months is deemed to have a permanent establishment in Mongolia under the DTA but cannot be taxed under the CIT (which requires 6 months). - Agency-pe difference: a person who habitually maintains a stock of goods and regularly delivers goods on behalf of a foreign enterprise is not considered a permanent establishment under most DTAs; Mongolia cannot tax profit allocable to these persons under its CIT. - Transfer pricing corresponding adjustment absent in multiple DTAs (see list above). ### A. Business Income — recommendations - Recommendations: - Make sure definitions of an agency-pe are consistent under DTAs and include the person holding stock of goods or merchandise from which he regularly delivers goods and merchandise on behalf of a foreign enterprise. - The time period for deeming a construction-pe should not be less than the time period used in the CIT (i.e. 6 months), and try to limit this time period to 12 months (i.e. the internationally acceptable time period). ### B. Service Income — domestic tax treatment (findings) - Findings: - Service income is taxed as business profit if the service provider maintains a permanent establishment through which the services are performed in Mongolia. - Domestic legislation deems a permanent establishment exists if services are furnished for a period or periods aggregating more than three months within any twelve-month period. - Service income is taxed at the CIT-rate of 25 per cent (rate of 10 per cent for business profits up to 3 billion Tugriks is available). - If the service provider does not maintain a permanent establishment in Mongolia but performs a service in Mongolia, payments are subject to a 20 per cent withholding tax. - For management, technical, or consultancy services the place of performance is irrelevant and Mongolia levies a 20 per cent withholding tax on all those payments. ### B. Service Income — DTA treatment and issues - Findings: - A number of DTAs deem the existence of a permanent establishment if services are furnished during a certain period of time (“service-pe”): Belarus, Canada, China, Czech Republic, Indonesia, Kazakhstan, PR of Korea, Kuwait, Kyrgyzstan, Singapore, United Arab Emirates, and Vietnam. - In most of these DTAs an aggregate of 6 to 12 months within any twelve-months period is required before furnishing services become a permanent establishment. - DTAs with China and the United Arab Emirates recognize a “service-pe” only after a period of 18 months. - DTAs with Indonesia and Kuwait confirm the domestic rule of 3 months. - In DTAs that do not contain a “service-pe”, the domestic rule cannot be applied unless a regular pe can be construed. - Some DTAs safeguard the source country's right to levy a limited tax on “technical fees”: - DTAs with Canada, Malaysia, and Vietnam allow the source country a tax of maximum [5, 10, and 10 per cent respectively]. - DTAs with India, Italy, Luxemburg, PR of Korea, and the Netherlands include a separate provision regarding technical fees in the royalty article allowing the source country to levy a tax of maximum 15, 5, 10, and 5 per cent respectively. - DTA with Belarus’s “other income”-provision contains a maximum tax of 10 per cent on technical fees by the source country. - Preserved definition: “The term ‘technical fees’ means payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any service of a technical, managerial or consultancy nature.” ### B. Service Income — assessment - Findings: - Only half of DTAs protects the domestic taxation of technical fees in one way or another (i.e. through establishing a service-pe or by allowing the source country a withholding tax). - In international practice technical fees are often used to erode the tax base and avoid paying tax in the source country. - Establishing domestic legislation to tax those payments is an effective anti-abuse measure and requires full protection under DTAs. ### B. Service Income — recommendations - Recommendations: - All DTAs should include provisions allowing Mongolia to levy a tax (CIT or 20 per cent withholding) on service fees of a technical, managerial, or consultancy nature. - A provision to establish a service-pe after an aggregate time period of furnishing services in any twelve-months period should be included in DTAs. The domestically used 3-months time period should not be extended to more than 6 months (to comply with international practice). - A separate article safeguarding the withholding tax on technical fees should be included in DTAs. ### C. Investment Income — domestic tax treatment (findings) - Findings: - Dividends, interest, and royalty paid to nonresident taxpayers are subject to a withholding tax of 20 per cent. - If those payments are made to resident taxpayers—whether individuals or legal entities—a final withholding tax of 10 per cent is due. ### C. Investment Income — DTA treatment and issues (dividends) - Findings: - Most DTAs reduce the withholding tax rate on dividends to 10 or 15 per cent. - In a number of DTAs the rate is reduced to 5 per cent (China, the Republic of Korea, and Kuwait). - The DTA with the United Arab Emirates does not allow the source state to levy a withholding tax. - Some DTAs further reduce the withholding tax rate on dividends paid to qualifying companies to 5 per cent. In a few DTAs this rate is set at zero per cent (the Netherlands, Luxemburg, and Kuwait). - In the DTAs with Kuwait and Singapore the zero-rate applies to State-owned enterprises. - Whether a company is treated as a qualifying company depends on size and/or quality of the shareholding: - Most DTAs refer to a direct and/or indirect minimum shareholding in the capital of a company; a typical minimum shareholding is 10 per cent. - In the DTAs with Hungary, Luxemburg, Singapore, and Switzerland a minimum shareholding of 25 per cent is required. - In the DTAs with Italy and Luxemburg an additional requirement is that the shares must be held for a minimum period of 12 months before the dividend distribution. - Some DTAs refer to a share in the voting power (Canada and the United Kingdom). ### C. Investment Income — DTA treatment and issues (interest) - Findings: - Most DTAs reduce the domestic withholding tax rate on interest to 10 per cent. - DTAs with Kuwait (5 per cent) and the United Arab Emirates (zero per cent) carry lower rates; DTA with India allows 15 per cent withholding rate on interest payments. - Interest on government bonds and government guaranteed loans for import/export are typically exempt from withholding tax. - In some DTAs interest on bank loans is subject to further reduced rates: - Zero rate: Belgium, France, Luxemburg, the Netherlands, and Switzerland. - 5 per cent: Singapore. - 7 per cent: United Kingdom. ### C. Investment Income — DTA treatment and issues (royalty) - Findings: - Most DTAs reduce the domestic withholding tax rate on royalty to 5 or 10 per cent. - DTA with India allows 15 per cent; DTA with Russia allows both Contracting States to levy their domestic withholding tax. - In some DTAs the use or right to use industrial, commercial, or scientific equipment is not covered by the definition of “royalty” (DTAs with Austria, Belgium, France, Luxemburg, the Netherlands, Switzerland, Ukraine, and the United Kingdom follow the OECD amendment). - In DTAs with Germany, Kazakhstan, and the Netherlands payments for the use, or right to use films or tapes for radio or television broadcasting are considered business profits. ### C. Investment Income — overview of maximum source country taxation (selected preserved entries) - Table 2. Overview of maximum source country taxation — DTA Dividend Interest Royalty Technical fees (selected entries preserved exactly as in source) - Austria — 10 5 10 5/10 - Belarus — 10 10 10 10 10 - Belgium — 15 5 10 5 - Bulgaria — 10 10 10 10 - Canada — 15 5 10 5/10 5 - China — 5 5 10 10 - Czech Rep. — 10 10 10 10 - France — 15 5 10 5 - Germany — 10 5 10 10 - Hungary — 15 5 10 5 - India — 15 15 15 15 15 - Indonesia — 10 10 10 10 - Italy — 15 5 10 5 5 - Kazakhstan — 10 10 10 10 - Korea — 5 5 5 10 - PR Korea — 10 10 10 10 5 - Kuwait — 0/5 5 5 10 - Kyrgyzstan — 10 10 10 10 - Luxemburg — 15 0/5 10 5 10 - Malaysia — 10 10 10 10 10 - Netherlands — 15 0 10 5 5 - Poland — 10 10 10 5 - Russia — 10 10 10 domestic - Singapore — 10 5 5/10 5 - Switzerland — 10 5 10 5 - Turkey — 10 10 10 10 - Ukraine — 10 10 10 10 - UAE — 0 0 0 10 - United Kingdom — 15 5 7/10 5 - Vietnam — 10 10 10 10 10 ### C. Investment Income — assessment (implied) - Findings: - Several DTAs contain favorable rates and provisions that reduce Mongolia’s ability to tax dividends, interest, royalties, and technical fees at domestic rates. - Some DTAs contain zero or very low withholding rates for qualifying situations (e.g., dividends to qualifying companies, interest exemptions, royalty treatments), and specific DTA provisions may leave Mongolia unable to tax certain capital gains. ### Withholding taxes on dividends, interest, and royalties (section findings and recommendations) - Findings: - Some DTAs distinguish dividends paid to (a) qualifying companies and (b) other companies and individuals because some countries exempt foreign sourced dividends received by qualifying companies. If those dividends are subject to a withholding tax in the source country, no foreign tax credit is available in the residence country (exempt income), constituting a final tax burden. - Mongolia does not exempt foreign sourced dividends from being taxed. Where dividends are taxed, a tax credit will be available and the withholding tax of the source country can be used to offset the tax liability in the residence country. - Mongolia has entered into DTAs that do not allow levying its domestic withholding tax on dividends, contributing to international tax planning, notably with the Netherlands and Luxemburg, and with the United Arab Emirates. - DTA provisions limiting source-state taxation to the “beneficial owner” are difficult to enforce in practice. - Interest withholding tax raises borrowing costs because cross-border loan rates are often specified as “net of all taxes”. Most DTAs exempt interest payments on government bonds and bank loans from withholding tax; intercompany loans are usually subject to a reduced withholding tax rate because they are prone to abuse. - Mongolia’s capacity to identify back-to-back loans and guarantee situations is currently low. - Withholding tax on lease payments to non-residents is not secured under a number of DTAs when “royalty” definitions do not cover use or right to use industrial, commercial, or scientific equipment; tax can then only be levied if the non-resident maintains a permanent establishment in Mongolia. - Recommendations: - The source state should be allowed to tax dividend, interest, and royalty at maximum 10 per cent (i.e. the rate applicable in domestic situations); - Mongolia should not initiate a differential tax rate for dividends, but may be willing to further reduce the maximum rate in the source country for qualifying dividends to 5 per cent providing that the DTA contains a sufficient anti-treaty shopping provision; - Interest on government bonds, government secured loans, and loans granted by (regional) development banks should be exempt from tax in the source country; - The definition of “royalty” should contain the use or right to use industrial, commercial, or scientific equipment enabling Mongolia to levy the withholding tax on lease payments. ### Capital gain on the indirect sale of a mining license - Domestic tax treatment: - Under the proposed Corporate Income Tax Act, a portion of the capital gain realized on the sale of shares of an entity which (directly or indirectly) holds an exploration or mining license in Mongolia is subject to tax at 30 per cent; i.e. the portion of the license and other depreciable assets used in a mining activity in Mongolia. - The capital gain is only taxed if more than 50 per cent of the value of the shares is attributable to such an exploration license, a mining license, and/or other depreciable assets used in mining activities in Mongolia, and if at least 10 per cent of the shares is sold. - DTA treatment and assessment: - Taxation of capital gains on sale of shares is given to the country of residence of the shareholder in all DTAs except those with Kuwait and the United Arab Emirates (which share the tax base on capital gains). - Some DTAs contain a provision allowing the source country to tax capital gains on the sale of shares if the value of these shares is derived principally from immovable property situated in that country. The DTA with Singapore requires immovable property to represent more than 75 per cent of the value of the shares; the DTA with the United Kingdom refers to more than 50 per cent; most DTAs do not define “principally”. - Mongolia is only able to safeguard its taxing rights on an indirect sale of exploration and mining licenses in a limited number of DTAs. Indirect sale via share sale is the only method available to investors to transfer ownership because mining law does not allow a direct sale of such licenses. - Exploration and mining licenses are typically regarded as immovable property; depreciable assets used in mining activities are not necessarily covered unless the DTA provision explicitly states that their value must be taken into account. - Under the DTAs with Canada and France it could be argued that Mongolian domestic tax provision is safeguarded as an exploration or mining license can be regarded as “rental property that is used by the taxpayer to carrying on its business activities”. - Recommendations: - Mongolia should include a provision in its DTAs that reserves its right to tax capital gains on the sale of shares that derive more than 50 per cent of their value from immovable property situated in Mongolia; - It should be made clear that immovable property—for the purpose of this provision—includes exploration and mining licenses, and other depreciable assets used in a mining activity. ### Elimination of double taxation - Domestic tax treatment: - Resident taxpayers are allowed to reduce their tax liability by the foreign tax paid on that part of their income received abroad. This reduction shall never exceed the Mongolian income tax due on that foreign income (ordinary tax credit). The reduction is calculated on a country-by-country basis. - DTA treatment and assessment: - All Mongolian DTAs, except for the DTA with Hungary, provide residents with an ordinary foreign tax credit. The DTA with Hungary allows resident taxpayers in Mongolia to exempt foreign business profit (and other so-called active income). - Some DTAs include an underlying tax credit for corporate income tax paid abroad in addition to the withholding tax, in case a qualifying shareholder receives the dividend. A qualifying shareholder is any shareholder who holds at least 10 per cent of the shares or voting rights in the distributing company. - Some DTAs contain a tax sparing credit for exempt income under the Mongolian foreign investment law. The DTAs with Bulgaria, Czech Republic, India, Italy, Malaysia, Poland, and Singapore still allow a tax sparing credit. The tax sparing credits in the DTAs with Canada, France, Indonesia, the Netherlands, Turkey, and the United Kingdom have expired. - Only in the DTAs with India, Italy, Malaysia, Poland, and Singapore is the tax sparing credit mutual. - Assessment: Applying a foreign tax credit prevents Mongolian residents from shifting taxable income or profit abroad because it preserves at least the Mongolian income tax rate on such income. Most countries are no longer willing to give a tax sparing credit; tax sparing encourages excessive repatriation of profits and offers opportunities for tax planning and avoidance. - Recommendations: - Mongolia should provide its residents under DTAs—as it does in its domestic legislation—a foreign tax credit; - Mongolia should refrain from including “tax sparing” provisions. ### Treaty shopping - Domestic tax treatment: - Mongolia does not have provisions in its domestic tax legislation dealing with international tax planning other than the possibility to modify income on transactions between associated persons. There is no judicial practice to deal with treaty shopping or qualification differences; no practice in interpreting DTA terminology like “beneficial ownership”. - DTA treatment and assessment: - In DTAs providing limited taxing rights for dividends, interest, and royalties, such limited rights are conditional upon the recipient being the “beneficial owner”. None of the DTAs provides an indication of the content of “beneficial ownership”; Mongolia has not developed an interpretation, making DTA limitations ineffective. - The DTAs with Italy and the United Kingdom contain a specific anti-avoidance provision disallowing treaty benefits where the main purpose or one of the main purposes was to obtain those benefits. - Assessment: Mongolian DTAs contain no effective protection against treaty shopping except through the undeveloped “beneficial ownership” concept. Persons who are not genuine residents of the other Contracting State can obtain DTA benefits (including reduced withholding tax rates). - Recommendation: - Mongolia should develop a limitation-on-benefit (or anti treaty shopping) provision that limits the application of its DTA benefits to “genuine” residents of the other Contracting State. - Suggested elements of a simplified limitation-on-benefit provision include eligibility for: - individuals; - persons engaged in the active conduct of a business; - companies the shares of which are traded on a recognized stock exchange; - not-for-profit organizations (if more than half of the beneficiaries, members, or participants are entitled to the treaty benefits); - any company that fulfills: (i) > 50 per cent of the shares are owned by persons entitled to the treaty benefits; and (ii) < 50 per cent of “gross income” is used to meet liabilities to persons not entitled to the treaty benefits. ### Other (Students, researchers, teachers and professors) - Findings: - All DTAs concluded by Mongolia contain provisions to exempt scholarships, grants, and certain income from personal services received by students and trainees. All DTAs exempt scholarships and/or grants received from sources abroad by students and trainees. - In the DTAs with India, Italy, and Kazakhstan this exemption is limited to 5 years. - In a number of DTAs income from personal services performed by students and trainees is also exempt if such services are in connection with their studies or training. - In the DTAs with Malaysia, Singapore, and United Kingdom this income is limited to a certain amount, whereas in the DTAs with Austria and Turkey the services performed should not exceed the aggregate of 183 days in a calendar year. - Recommendation: - Mongolia should include in its DTAs only a provision exempting scholarships, grants, etc. provided from sources abroad and used for the purpose of education, acquiring practical experiences, and research. - The exemption for remuneration paid to teachers and professors should be abolished in future DTAs. Such payments should follow the general rules for employment income (Article 15 UN Model). ### Exemption for visiting teachers and professors (state of source) - Findings: - Payments to a professor or teacher resident of a Contracting State present in the other Contracting State for teaching or scientific research for a limited period in a university, college or other establishment are taxable only in the state of residence. - Most DTAs set that limited period at 2 years. - The DTAs with China, Kazakhstan, PR of Korea, Luxemburg, and Russia have the limited period set at 3 years. - The DTA with Hungary does not contain any time limit. - Recommendation: - The exemption for remuneration paid to teachers and professors should be abolished in future DTAs; such payments should follow Article 15 UN Model. ### Mutual agreement procedures - Findings: - All Mongolian DTAs include a mutual agreement procedure. In case international double taxation is not resolved under the tax agreement, the taxpayer has the right to request a mutual agreement procedure. - In the DTAs with Austria and Canada a binding arbitration procedure is included, which can be initiated by the taxpayer 2 years after the start of the mutual agreement procedure. - Typically the mutual agreement procedure must be requested within 3 years from the first notification of the action resulting in taxation not in accordance with the provisions of the DTA. - In the DTAs with Turkey and the United Kingdom this time period is omitted. - Implementation of mutual agreements: - If agreement is reached, domestic law should allow the appropriate action to implement this agreement. - Most countries—like Mongolia—have domestic statutes of limitation, which prohibit modification of tax liability after a certain time period has elapsed. - DTAs usually state explicitly “any agreement reached is implemented notwithstanding any time limits in the domestic law of the Contracting State”. - In the DTAs with Belgium, Canada, Indonesia, Malaysia, Russia, Switzerland, Turkey, and the United Kingdom, such phrase is not included. This may result in reaching mutual agreements that cannot be implemented. - Recommendations: - In its domestic legislation, Mongolia should waive the statute of limitation in all cases tax liability is modified as a result of a mutual agreement reached under a DTA; - Future DTAs should contain the phrase that “any agreement reached will be implemented notwithstanding any time limits in the domestic law of the Contracting States”. ### Assistance in tax recovery - Findings: - Currently only two DTAs include a provision that enables assistance in recovery of taxes. - Based on these provisions, a Contracting State may assist the other Contracting State upon request in recovering their tax claims in accordance with the law and administrative practice for the recovery of its own tax claims. - The assistance applies only to tax claims which form the subject of an instrument permitting their enforcement in the applicant State and which are not contested. - A Contracting State can refuse a request for assistance if: - (a) the applicant State has not pursued all means available in its own territory; and/or - (b) if and insofar as it considers the tax claim to be contrary to the provisions of the DTA or of any other agreement to which both of the States are parties. - The DTAs with Belgium and the Netherlands contain such provision. - Recommendation: - Mongolia should strive to implement a provision that allows it to request assistance in tax collection from the tax administration in the other Contracting State in cases where its residents obtain property in that other Contracting State; ### Exchange of information - Findings: - Most DTAs follow the UN Model provision regarding the exchange of information. - The Mongolian tax legislation allows providing taxpayer‟s information to foreign tax administrations. The procedures, however, are unclear and the reference to the competent authorities to develop such procedures is not contained in the DTAs. - In some DTAs some Contracting States have strengthened the confidentiality rule or made sure that its domestic bank secrecy is not jeopardized (e.g., Austria, Malaysia, Switzerland). - Recommendation: - DTAs should include an exchange of information provision in accordance with the UN Model. ### Mongolian Double Tax Agreement Model — structure and selected provisions (highlights) - The Mongolian DTA Model is based on the UN Model Double Taxation Convention with additional or modified provisions safeguarding Mongolia‟s domestic tax base. - Selected articles and provisions preserved from the Model: - Article 1 – Persons covered. - Article 2 – Taxes covered; paragraph 3 lists Mongolian taxes: (i) the individual income tax; (ii) the corporate income tax (hereinafter referred to as “Mongolian tax”). - Article 3 – General definitions: includes that in the case of Mongolia, the Minister of Finance or his authorized representative is the competent authority. - Article 4 – Resident: sets criteria for residence and tie-breaker rules. - Article 5 – Permanent establishment: includes 6 months construction rule and 3 months service-pe rule in paragraphs preserved. - Chapter III – Taxation of Income: Article 6 (immovable property), Article 7 (business profits), Article 8 (shipping and transport). - Articles 9–21 covering Associated enterprises, Dividends, Interest, Royalties, Service fees, Capital gains, Dependent personal services, Directors’ fees, Artists and sportspersons, Pensions, Government services, Students. - Article 14 – Capital gains: explicitly includes that: - (a) “Immovable property” includes exploration and mining licenses, and other depreciable assets used in a mining activity in one of the Contracting States; - (b) “Principally” means the value of such immovable property exceeding 50 per cent of the aggregate value of all assets owned by the company, partnership, trust or estate. - Article 20 – Students: income derived from personal services in an amount not exceeding the equivalent of USD 7,500 in any fiscal year is exempt. - Article 22 – Capital: sets taxing rights over capital represented by immovable property and movable business property. - Article 23 – Credit method: allows deduction equal to income tax paid in the other State, not exceeding the part of tax attributable to that income or capital. - Article 24 – Non-discrimination: multiple non-discrimination protections preserved. - Article 25 – Mutual agreement procedure: a person may present a case within three years from the first notification of the action resulting in taxation not in accordance with the Agreement; “Any agreement reached is implemented notwithstanding any time limits in the domestic law of the Contracting States.” - Article 26 – Exchange of information: exchange necessary information, treat it as secret. - Article 27 – Assistance in the collection of taxes: provisions for mutual assistance and conditions for refusal. - Article 29 – Limitation-on-benefit (Anti-treaty shopping): detailed eligibility tests including subparagraph (e) conditions (> 50 percent ownership by entitled persons; not more than 50 percent of gross income used to meet liabilities to non-entitled persons). - Article 30 – Entry into force: withholding at source applies to income paid or credited on or after 1 January of the calendar year following entry into force. - Article 31 – Termination: either Contracting State may terminate by giving notice at least six months before the end of any calendar year after the period of 5 years from entry into force. ### Appendix 1 — Mongolian DTAs (list of DTA partners and entry in force year) - 1 Austria 2005 - 2 Belarus 2002 - 3 Belgium 1999 - 4 Bulgaria 2002 - 5 Canada 2003 - 6 China 1993 - 7 Czech Republic 1999 - 8 France 1999 - 9 Germany 1997 - 10 Hungary 1997 - 11 India 1994 - 12 Indonesia 1998 - 13 Italy 2004 - 14 Kazakhstan 2000 - 15 Korea 1992 - 16 PR of Korea 2005 - 17 Kuwait 1998 - 18 Kyrgyzstan 2000 - 19 Luxemburg 2002 - 20 Malaysia 1997 - 21 Netherlands 2004 - 22 Poland 2002 - 23 Russia 1998 - 24 Singapore 2005 - 25 Switzerland 2002 - 26 Turkey 1997 - 27 Ukraine 2003 - 28 United Arab Emirates 2003 - 29 United Kingdom 1997 - 30 Vietnam 1997 *Source: _cr12306 - IMF staff assessment and Mongolian Ministry of Finance information* ### 1. Mongolian authorities are increasingly faced with cases of international tax ### 1. Mongolian authorities are increasingly faced with cases of international tax ### Overview and context - As 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. - Main investors are multinational companies residents of Canada, China, and Russia. - 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. - Over the last two decades Mongolia negotiated and enacted over 30 DTAs. These DTAs are—to a large extent—following the UN Model Double Taxation Convention (“UN Model”). - The UN Model contains provisions dividing taxation rights between source and residence countries and gives more taxing rights to the source country than the OECD Model Convention. - Mongolia is currently the source country in most international relations; this may change as mineral exploration takes off and Mongolia sets up Sovereign Wealth Funds (SFW). ### Main concerns about the current DTA network - 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. - Examples of problematic provisions: - Mongolian withholding tax on dividends, interest, royalty, service fees, or lease payments is limited or even prohibited in some DTAs. - Capital gains on indirect transfers of mining licenses cannot be taxed in Mongolia in some DTAs. - Under most DTAs employment income received by teachers is exempt for at least a period of two years. - Authorities requested an assessment of their DTA network, identification of weaknesses, and suggestions for improving DTAs in future. ### Treaty (Re-)Negotiations — findings - Mongolian authorities are considering cancelling all DTAs and building up a new DTA network with countries based on trade volumes and reciprocity in economic relations. - All Mongolian DTAs are in force for at least five years, which makes them eligible to cancellation. - Termination procedural detail preserved in source: to terminate effectively by 1 January of the next calendar year requires notice through diplomatic channels at the latest on 30 June in the year before. - DTAs with Kuwait and the United Arab Emirates have slightly different wording suggesting extension for periods of 5 years and can only be terminated after such period elapses. - Terminating DTAs should be used as an ultimate remedy to force renegotiations if (parts of) the DTA provisions are potentially harmful for Mongolia. - Only a few DTAs are considered potentially harmful as they insufficiently protect the Mongolian tax base; some DTAs need amendment due to changes in domestic legislation (e.g., introduction of taxation on indirect transfers of exploration and mining licenses). - Amending DTAs may be realized by negotiating additional protocols. - Negotiating or renegotiating DTAs requires: - development of an international tax treaty policy (a DTA model), - in-depth information on the domestic tax system of the other Contracting State, since favorable DTA provisions combined with particular domestic tax treatments in the other State can result in international tax planning. - Information about other tax systems is often difficult to obtain and highly technical and complex. - Technical assistance by experienced international tax lawyers and treaty negotiators is strongly recommended. ### Treaty (Re-)Negotiations — recommendations - Mongolia should take a more differentiated approach towards repairing its DTA network by selectively (re-)negotiating and/or amending its current DTAs. - Mongolia should hire an experienced international tax lawyer and treaty negotiator to assist in obtaining information about the domestic tax legislation of the other Contracting State and to help in the actual negotiation process. ### II. Assessment of the current tax treaty network — general - The current Mongolian tax treaty network is largely based on the UN Model. - The DTAs contain various provisions considered harmful to Mongolia’s development as a resource-rich nation. - This assessment provides an overview of the most critical provisions, analyzes strengths and weaknesses, and suggests improvements. ### A. Business Income — domestic tax treatment (findings) - Non-resident taxpayers who carry on a business in Mongolia are subject to the Corporate Income Tax (CIT) to the extent that profit can be attributed to a permanent establishment (“pe”). - Article 5 CIT contains five types of permanent establishment: 1. Regular pe: requires a fixed place of business through which the business of an enterprise is wholly or partly carried on; 2. Construction-pe: deemed to exist if a building site, construction, assembly or installation project, or supervisory activities last more than six months within any twelve-month period; 3. Service-pe: exists if certain service activities are furnished for a period or periods aggregating more than three months within any twelve-month period; 4. Agency-pe: exists where a person—other than an agent of an independent status—is acting in Mongolia on behalf of a foreign economic entity, or holds a stock of goods and merchandise from which he regularly delivers goods or merchandise on behalf of the foreign economic entity; 5. Insurance pe: if a foreign insurance enterprise, except in regard to re-insurance, collects premiums in Mongolia or insures risks situated in Mongolia through a person other than an agent of an independent status. - Profit attributable to a permanent establishment in Mongolia is determined and taxed in a similar manner as profit of a resident economic entity; domestic profit determination rules apply for both resident and nonresident business. - The CIT allows tax authorities to challenge transactions between related parties—including headquarter and permanent establishment—and correct (increase or reduce) taxable profit. ### A. Business Income — DTA treatment and issues - All DTAs contain a definition of a regular permanent establishment identical to the Mongolian CIT. - All DTAs contain a provision that deems a construction-pe after a certain period; periods vary from 3 months to 24 months (see preserved table entries below). - Time period (in months) — DTAs - 3 — Kuwait - 6 — Belgium, Canada, Germany, Indonesia, Italy, Luxemburg, Malaysia, Singapore, Switzerland, and Vietnam - 9 — India - 12 — Austria, Belarus, Bulgaria, Czech Republic, France, Hungary, Kazakhstan, PR of Korea, Korea, Kyrgyzstan, the Netherlands, Poland, Ukraine, and United Kingdom - 18 — China and United Arab Emirates - 24 — Russia and Turkey - All DTAs include an agency-pe and exclude an independent agent. Only DTAs with the Czech Republic, Indonesia, Luxemburg, Malaysia, and Ukraine include the possibility of constructing an agency-pe when a person holds a stock of goods and regularly delivers goods on behalf of the foreign enterprise. - Only a few DTAs include explicit establishment of an insurance-pe (DTAs with Bulgaria, Czech Republic, Indonesia, Kazakhstan, and PR of Korea). - Although all DTAs include a transfer pricing provision allowing Mongolia to challenge profit realization on transactions between associated persons, a number of DTAs do not contain an obligation to apply a corresponding adjustment. DTAs lacking such obligation include those with Belgium, Canada, Czech Republic, Germany, India, Luxemburg, Malaysia, Poland, Singapore, Ukraine, and Vietnam, which may result in international double taxation. ### A. Business Income — assessment (findings) - No discrepancy between the domestic and DTA-definition of a regular permanent establishment. - Mongolia applies the same minimum presence rule (permanent establishment) as is allowed under its DTAs and can effectively tax non-resident companies and entrepreneurs according to CIT and PIT rules. - Domestic CIT: permanent establishment exists if non-resident engaged in construction activities that last more than 6 months. - Most DTAs have more favorable conditions for nonresidents as they contain a longer time period before a permanent establishment can be recognized by Mongolia. - DTAs with China, Russia, Turkey, and the United Arab Emirates are unusually generous (substantially longer than 12 months). - DTA with Kuwait sets construction-pe at 3 months; a constructor working more than 3 but less than 6 months is deemed to have a permanent establishment in Mongolia under the DTA but cannot be taxed under the CIT (which requires 6 months). - Agency-pe difference: a person who habitually maintains a stock of goods and regularly delivers goods on behalf of a foreign enterprise is not considered a permanent establishment under most DTAs; Mongolia cannot tax profit allocable to these persons under its CIT. - Transfer pricing corresponding adjustment absent in multiple DTAs (see list above). ### A. Business Income — recommendations - Make sure definitions of an agency-pe are consistent under DTAs and include the person holding stock of goods or merchandise from which he regularly delivers goods and merchandise on behalf of a foreign enterprise. - The time period for deeming a construction-pe should not be less than the time period used in the CIT (i.e. 6 months), and try to limit this time period to 12 months (i.e. the internationally acceptable time period). ### B. Service Income — domestic tax treatment (findings) - Service income is taxed as business profit if the service provider maintains a permanent establishment through which the services are performed in Mongolia. - Domestic legislation deems a permanent establishment exists if services are furnished for a period or periods aggregating more than three months within any twelve-month period. - Service income is taxed at the CIT-rate of 25 per cent (rate of 10 per cent for business profits up to 3 billion Tugriks is available). - If the service provider does not maintain a permanent establishment in Mongolia but performs a service in Mongolia, payments are subject to a 20 per cent withholding tax. - For management, technical, or consultancy services the place of performance is irrelevant and Mongolia levies a 20 per cent withholding tax on all those payments. ### B. Service Income — DTA treatment and issues - A number of DTAs deem the existence of a permanent establishment if services are furnished during a certain period of time (“service-pe”). - DTAs including a service-pe: Belarus, Canada, China, Czech Republic, Indonesia, Kazakhstan, PR of Korea, Kuwait, Kyrgyzstan, Singapore, United Arab Emirates, and Vietnam. - In most of these DTAs an aggregate of 6 to 12 months within any twelve-months period is required before furnishing services become a permanent establishment. - DTAs with China and the United Arab Emirates recognize a “service-pe” only after a period of 18 months. - DTAs with Indonesia and Kuwait confirm the domestic rule of 3 months. - In DTAs that do not contain a “service-pe”, the domestic rule cannot be applied unless a regular pe can be construed. - Some DTAs safeguard the source country's right to levy a limited tax on “technical fees”: - DTAs with Canada, Malaysia, and Vietnam allow the source country a tax of maximum [5, 10, and 10 per cent respectively]. - DTAs with India, Italy, Luxemburg, PR of Korea, and the Netherlands include a separate provision regarding technical fees in the royalty article allowing the source country to levy a tax of maximum 15, 5, 10, and 5 per cent respectively. - DTA with Belarus’s “other income”-provision contains a maximum tax of 10 per cent on technical fees by the source country. - The term “technical fees” (preserved definition): “The term ‘technical fees’ means payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any service of a technical, managerial or consultancy nature.” ### B. Service Income — assessment - Only half of DTAs protects the domestic taxation of technical fees in one way or another (i.e. through establishing a service-pe or by allowing the source country a withholding tax). - In international practice technical fees are often used to erode the tax base and avoid paying tax in the source country. - Establishing domestic legislation to tax those payments is an effective anti-abuse measure and requires full protection under DTAs. ### B. Service Income — recommendations - All DTAs should include provisions allowing Mongolia to levy a tax (CIT or 20 per cent withholding) on service fees of a technical, managerial, or consultancy nature. - A provision to establish a service-pe after an aggregate time period of furnishing services in any twelve-months period should be included in DTAs. The domestically used 3-months time period should not be extended to more than 6 months (to comply with international practice). - A separate article safeguarding the withholding tax on technical fees should be included in DTAs. ### C. Investment Income — domestic tax treatment (findings) - Dividends, interest, and royalty paid to nonresident taxpayers are subject to a withholding tax of 20 per cent. - If those payments are made to resident taxpayers—whether individuals or legal entities—a final withholding tax of 10 per cent is due. ### C. Investment Income — DTA treatment and issues (dividends) - Most DTAs reduce the withholding tax rate on dividends to 10 or 15 per cent. - In a number of DTAs the rate is reduced to 5 per cent (China, the Republic of Korea, and Kuwait). - The DTA with the United Arab Emirates does not allow the source state to levy a withholding tax. - Some DTAs further reduce the withholding tax rate on dividends paid to qualifying companies to 5 per cent. In a few DTAs this rate is set at zero per cent (the Netherlands, Luxemburg, and Kuwait). - In the DTAs with Kuwait and Singapore the zero-rate applies to State-owned enterprises. - Whether a company is treated as a qualifying company depends on size and/or quality of the shareholding: - Most DTAs refer to a direct and/or indirect minimum shareholding in the capital of a company; a typical minimum shareholding is 10 per cent. - In the DTAs with Hungary, Luxemburg, Singapore, and Switzerland a minimum shareholding of 25 per cent is required. - In the DTAs with Italy and Luxemburg an additional requirement is that the shares must be held for a minimum period of 12 months before the dividend distribution. - Some DTAs refer to a share in the voting power (Canada and the United Kingdom). ### C. Investment Income — DTA treatment and issues (interest) - Most DTAs reduce the domestic withholding tax rate on interest to 10 per cent. - DTAs with Kuwait (5 per cent) and the United Arab Emirates (zero per cent) carry lower rates; DTA with India allows 15 per cent withholding rate on interest payments. - Interest on government bonds and government guaranteed loans for import/export are typically exempt from withholding tax. - In some DTAs interest on bank loans is subject to further reduced rates: - Zero rate: Belgium, France, Luxemburg, the Netherlands, and Switzerland. - 5 per cent: Singapore. - 7 per cent: United Kingdom. ### C. Investment Income — DTA treatment and issues (royalty) - Most DTAs reduce the domestic withholding tax rate on royalty to 5 or 10 per cent. - DTA with India allows 15 per cent; DTA with Russia allows both Contracting States to levy their domestic withholding tax. - In some DTAs the use or right to use industrial, commercial, or scientific equipment is not covered by the definition of “royalty” (DTAs with Austria, Belgium, France, Luxemburg, the Netherlands, Switzerland, Ukraine, and the United Kingdom follow the OECD amendment). - In DTAs with Germany, Kazakhstan, and the Netherlands payments for the use, or right to use films or tapes for radio or television broadcasting are considered business profits. ### C. Investment Income — overview of maximum source country taxation (preserved table entries) - Table 2. Overview of maximum source country taxation — DTA Dividend Interest Royalty Technical fees (selected entries preserved exactly as in source) - Austria — 10 5 10 5/10 - Belarus — 10 10 10 10 10 - Belgium — 15 5 10 5 - Bulgaria — 10 10 10 10 - Canada — 15 5 10 5/10 5 - China — 5 5 10 10 - Czech Rep. — 10 10 10 10 - France — 15 5 10 5 - Germany — 10 5 10 10 - Hungary — 15 5 10 5 - India — 15 15 15 15 15 - Indonesia — 10 10 10 10 - Italy — 15 5 10 5 5 - Kazakhstan — 10 10 10 10 - Korea — 5 5 5 10 - PR Korea — 10 10 10 10 5 - Kuwait — 0/5 5 5 10 - Kyrgyzstan — 10 10 10 10 - Luxemburg — 15 0/5 10 5 10 - Malaysia — 10 10 10 10 10 - Netherlands — 15 0 10 5 5 - Poland — 10 10 10 5 - Russia — 10 10 10 domestic - Singapore — 10 5 5/10 5 - Switzerland — 10 5 10 5 - Turkey — 10 10 10 10 - Ukraine — 10 10 10 10 - UAE — 0 0 0 10 - United Kingdom — 15 5 7/10 5 - Vietnam — 10 10 10 10 10 ### C. Investment Income — assessment (implied) - Several DTAs contain favorable rates and provisions that reduce Mongolia’s ability to tax dividends, interest, royalties, and technical fees at domestic rates. - Some DTAs contain zero or very low withholding rates for qualifying situations (e.g., dividends to qualifying companies, interest exemptions, royalty treatments), and specific DTA provisions may leave Mongolia unable to tax certain capital gains (see earlier findings). *Source: _cr12306 - 1. Mongolian authorities are increasingly faced with cases of international tax* ### 32. Some DTAs make a distinction between dividends paid to (a) qualifying ### _cr12306 - 32. Some DTAs make a distinction between dividends paid to (a) qualifying ### Withholding taxes on dividends, interest, and royalties - Finding: Some DTAs distinguish dividends paid to (a) qualifying companies and (b) other companies and individuals because some countries exempt foreign sourced dividends received by qualifying companies. If those dividends are subject to a withholding tax in the source country, no foreign tax credit is available in the residence country (exempt income), constituting a final tax burden. - Finding: Mongolia does not exempt foreign sourced dividends from being taxed. Where dividends are taxed, a tax credit will be available and the withholding tax of the source country can be used to offset the tax liability in the residence country. - Finding: Mongolia has entered into DTAs that do not allow levying its domestic withholding tax on dividends, contributing to international tax planning, notably with the Netherlands and Luxemburg (participation exemption, loose substance rules, and no withholding taxes) and with the United Arab Emirates (UAE does not levy income taxes except for oil and gas production). - Finding: DTA provisions limiting source-state taxation to the “beneficial owner” are difficult to enforce in practice. - Finding: Interest withholding tax raises borrowing costs because cross-border loan rates are often specified as “net of all taxes”. Most DTAs exempt interest payments on government bonds and bank loans from withholding tax; intercompany loans are usually subject to a reduced withholding tax rate because they are prone to abuse. - Finding: Mongolia’s capacity to identify back-to-back loans and guarantee situations is currently low. - Finding: Withholding tax on lease payments to non-residents is not secured under a number of DTAs when “royalty” definitions do not cover use or right to use industrial, commercial, or scientific equipment; tax can then only be levied if the non-resident maintains a permanent establishment in Mongolia, which usually will not be the case. - Recommendations: - The source state should be allowed to tax dividend, interest, and royalty at maximum 10 per cent (i.e. the rate applicable in domestic situations); - Mongolia should not initiate a differential tax rate for dividends, but may be willing to further reduce the maximum rate in the source country for qualifying dividends to 5 per cent providing that the DTA contains a sufficient anti-treaty shopping provision; - Interest on government bonds, government secured loans, and loans granted by (regional) development banks should be exempt from tax in the source country; - The definition of “royalty” should contain the use or right to use industrial, commercial, or scientific equipment enabling Mongolia to levy the withholding tax on lease payments. ### Capital gain on the indirect sale of a mining license - Domestic tax treatment: - Under the proposed Corporate Income Tax Act, a portion of the capital gain realized on the sale of shares of an entity which (directly or indirectly) holds an exploration or mining license in Mongolia is subject to tax at 30 per cent; i.e. the portion of the license and other depreciable assets used in a mining activity in Mongolia. - The capital gain is only taxed if more than 50 per cent of the value of the shares is attributable to such an exploration license, a mining license, and/or other depreciable assets used in mining activities in Mongolia, and if at least 10 per cent of the shares is sold. - DTA treatment and assessment: - Taxation of capital gains on sale of shares is given to the country of residence of the shareholder in all DTAs except those with Kuwait and the United Arab Emirates (which share the tax base on capital gains). - Some DTAs contain a provision allowing the source country to tax capital gains on the sale of shares if the value of these shares is derived principally from immovable property situated in that country (an “indirect” sale of immovable property). - The DTA with Singapore requires immovable property to represent more than 75 per cent of the value of the shares; the DTA with the United Kingdom refers to more than 50 per cent; most DTAs do not define “principally”. - Mongolia is only able to safeguard its taxing rights on an indirect sale of exploration and mining licenses in a limited number of DTAs. Indirect sale via share sale is the only method available to investors to transfer ownership because mining law does not allow a direct sale of such licenses. - The 75 per cent threshold in the DTA with Singapore limits Mongolia’s ability to execute its domestic taxing right. If DTAs do not include a special rule for indirect sale of immovable property through share sales, Mongolia will not be able to execute its domestic taxing right; capital gains on sale of shares are normally taxable in the residence country of the shareholder. - Exploration and mining licenses are typically regarded as immovable property; depreciable assets used in mining activities are not necessarily covered unless the DTA provision explicitly states that their value must be taken into account. - Under the DTAs with Canada and France it could be argued that Mongolian domestic tax provision is safeguarded as an exploration or mining license can be regarded as “rental property that is used by the taxpayer to carrying on its business activities”. - Recommendations: - Mongolia should include a provision in its DTAs that reserves its right to tax capital gains on the sale of shares that derive more than 50 per cent of their value from immovable property situated in Mongolia; - It should be made clear that immovable property—for the purpose of this provision—includes exploration and mining licenses, and other depreciable assets used in a mining activity. ### Elimination of double taxation - Domestic tax treatment: - Resident taxpayers are allowed to reduce their tax liability by the foreign tax paid on that part of their income received abroad. This reduction shall never exceed the Mongolian income tax due on that foreign income (ordinary tax credit). The reduction is calculated on a country-by-country basis. - DTA treatment and assessment: - All Mongolian DTAs, except for the DTA with Hungary, provide residents with an ordinary foreign tax credit. The DTA with Hungary allows resident taxpayers in Mongolia to exempt foreign business profit (and other so-called active income). - Some DTAs include an underlying tax credit for corporate income tax paid abroad in addition to the withholding tax, in case a qualifying shareholder receives the dividend. A qualifying shareholder is any shareholder who holds at least 10 per cent of the shares or voting rights in the distributing company. - Some DTAs contain a tax sparing credit for exempt income under the Mongolian foreign investment law. The DTAs with Bulgaria, Czech Republic, India, Italy, Malaysia, Poland, and Singapore still allow a tax sparing credit. The tax sparing credits in the DTAs with Canada, France, Indonesia, the Netherlands, Turkey, and the United Kingdom have expired. - Only in the DTAs with India, Italy, Malaysia, Poland, and Singapore is the tax sparing credit mutual. - Assessment: Applying a foreign tax credit prevents Mongolian residents from shifting taxable income or profit abroad because it preserves at least the Mongolian income tax rate on such income. Most countries are no longer willing to give a tax sparing credit; tax sparing encourages excessive repatriation of profits and offers opportunities for tax planning and avoidance. - Recommendations: - Mongolia should provide its residents under DTAs—as it does in its domestic legislation—a foreign tax credit; - Mongolia should refrain from including “tax sparing” provisions. ### Treaty shopping - Domestic tax treatment: - Mongolia does not have provisions in its domestic tax legislation dealing with international tax planning other than the possibility to modify income on transactions between associated persons. There is no judicial practice to deal with treaty shopping or qualification differences; no practice in interpreting DTA terminology like “beneficial ownership”. - DTA treatment and assessment: - In DTAs providing limited taxing rights for dividends, interest, and royalties, such limited rights are conditional upon the recipient being the “beneficial owner”. None of the DTAs provides an indication of the content of “beneficial ownership”; Mongolia has not developed an interpretation, making DTA limitations ineffective. - The DTAs with Italy and the United Kingdom contain a specific anti-avoidance provision disallowing treaty benefits where the main purpose or one of the main purposes was to obtain those benefits. - Assessment: Mongolian DTAs contain no effective protection against treaty shopping except through the undeveloped “beneficial ownership” concept. Persons who are not genuine residents of the other Contracting State can obtain DTA benefits (including reduced withholding tax rates). - Recommendation: - Mongolia should develop a limitation-on-benefit (or anti treaty shopping) provision that limits the application of its DTA benefits to “genuine” residents of the other Contracting State. - Suggested elements of a simplified limitation-on-benefit provision include eligibility for: - individuals; - persons engaged in the active conduct of a business; - companies the shares of which are traded on a recognized stock exchange; - not-for-profit organizations (if more than half of the beneficiaries, members, or participants are entitled to the treaty benefits); - any company that fulfills: (i) > 50 per cent of the shares are owned by persons entitled to the treaty benefits; and (ii) < 50 per cent of “gross income” is used to meet liabilities to persons not entitled to the treaty benefits. ### Other (Students, researchers, teachers and professors) - Finding: All DTAs concluded by Mongolia contain provisions to exempt scholarships, grants, and certain income from personal services received by students and trainees. All DTAs exempt scholarships and/or grants received from sources abroad by students and trainees. - Finding: In the DTAs with India, Italy, and Kazakhstan this exemption is limited to 5 years. - Finding: In a number of DTAs income from personal services performed by students and trainees is also exempt if such services are in connection with their studies or training. - Finding: In the DTAs with Malaysia, Singapore, and United Kingdom this income is limited to a certain amount, whereas in the DTAs with Austria and Turkey the services performed should not exceed the aggregate of 183 days in a calendar year. *Source: _cr12306 - 32. Some DTAs make a distinction between dividends paid to (a) qualifying (IMF content provided).* ### 51. All DTAs—except for the DTAs with Canada, France, and Switzerland—contain ### _cr12306 - 51. All DTAs—except for the DTAs with Canada, France, and Switzerland—contain ### Exemption for visiting teachers and professors (state of source) - Payments which a professor or teacher, who is a resident of a Contracting State and who is present in the other Contracting State for the purpose of teaching or scientific research for a limited period in a university, college or other establishment for teaching or scientific research in that other State, receives for such teaching or research are taxable only in the state of residence. - Most DTAs set that limited period at 2 years. - The DTAs with China, Kazakhstan, PR of Korea, Luxemburg, and Russia have the limited period set at 3 years. - The DTA with Hungary does not contain any time limit. Recommendations - Mongolia should include in its DTAs only a provision exempting scholarships, grants, etc. provided from sources abroad and used for the purpose of education, acquiring practical experiences, and research. - The exemption for remuneration paid to teachers and professors should be abolished in future DTAs. Such payments should follow the general rules for employment income (Article 15 UN Model). ### Mutual agreement procedures - All Mongolian DTAs include a mutual agreement procedure. In case international double taxation is not resolved under the tax agreement, the taxpayer has the right to request a mutual agreement procedure. - In the DTAs with Austria and Canada a binding arbitration procedure is included in the provision, which can be initiated by the taxpayer 2 years after the start of the mutual agreement procedure. - Typically the mutual agreement procedure must be requested within 3 years from the first notification of the action resulting in taxation not in accordance with the provisions of the DTA. - In the DTAs with Turkey and the United Kingdom this time period is omitted. Implementation of mutual agreements - If agreement is reached between the competent authorities to eliminate international double taxation, domestic law should allow the appropriate action to implement this agreement. - Most countries—like Mongolia—have domestic statutes of limitation, which prohibit modification of tax liability after a certain time period has elapsed. - DTAs usually state explicitly “any agreement reached is implemented notwithstanding any time limits in the domestic law of the Contracting State”. - In the DTAs with Belgium, Canada, Indonesia, Malaysia, Russia, Switzerland, Turkey, and the United Kingdom, such phrase is not included. This may result in reaching mutual agreements that cannot be implemented. Recommendations - In its domestic legislation, Mongolia should waive the statute of limitation in all cases tax liability is modified as a result of a mutual agreement reached under a DTA; - Future DTAs should contain the phrase that “any agreement reached will be implemented notwithstanding any time limits in the domestic law of the Contracting States” ensuring proper implementation of mutual agreements in the other Contracting State. ### Assistance in tax recovery - Currently only two DTAs include a provision that enables assistance in recovery of taxes. - Based on these provisions, a Contracting State may assist the other Contracting State upon request in recovering their tax claims in accordance with the law and administrative practice for the recovery of its own tax claims. - The assistance applies only to tax claims which form the subject of an instrument permitting their enforcement in the applicant State and which are not contested. - A Contracting State can refuse a request for assistance: - (a) if the applicant State has not pursued all means available in its own territory; and/or - (b) if and insofar as it considers the tax claim to be contrary to the provisions of the DTA or of any other agreement to which both of the States are parties. - The DTAs with Belgium and the Netherlands contain such provision. Recommendation - Mongolia should strive to implement a provision that allows it to request assistance in tax collection from the tax administration in the other Contracting State in cases where its residents obtain property in that other Contracting State; ### Exchange of information - Most DTAs follow the UN Model provision regarding the exchange of information. - The Mongolian tax legislation allows providing taxpayer‟s information to foreign tax administrations. The procedures, however, are unclear and the reference to the competent authorities to develop such procedures is not contained in the DTAs. - In some DTAs some Contracting States have strengthened the confidentiality rule or made sure that its domestic bank secrecy is not jeopardized. - This is for instance the case in the DTAs with Austria and Malaysia. - This is the case in the DTA with Switzerland. Recommendation - DTAs should include an exchange of information provision in accordance with the UN Model. ### Mongolian Double Tax Agreement Model — structure and selected provisions - The Mongolian DTA Model is based on the UN Model Double Taxation Convention. Additional or modified provisions safeguarding Mongolia‟s domestic tax base are included in blue script. Scope of the Agreement - Article 1 – Persons covered: This Agreement applies to persons who are residents of one or both of the Contracting States. - Article 2 – Taxes covered: - 1. This Agreement applies to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied. - 2. All taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation, are regarded as taxes on income and on capital. - 3. The existing taxes to which this Agreement applies are, in particular: - (a) in the case of Mongolia: - (i) the individual income tax; - (ii) the corporate income tax (hereinafter referred to as “Mongolian tax”); - (b) in the case of [Contracting State]: - (i) ... - (ii) ... (hereinafter referred to as “... tax”). - 4. This Agreement applies also to any identical or substantially similar taxes that are imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States notify each other of significant changes made to their tax laws. Definitions and key tax rules (selected) - Article 3 – General definitions: defines “person”, “company”, “enterprise of a Contracting State”, “international traffic”, “competent authority”, and “national”. - (e)(i) in the case of Mongolia, the Minister of Finance or his authorized representative; - Article 4 – Resident: sets criteria for residence, tie-breaker rules for individuals and persons other than individuals. - Article 5 – Permanent establishment: - 1. Definition: a fixed place of business through which the business of an enterprise is wholly or partly carried on. - 3(a) building site, construction, assembly or installation project lasts more than six months; - 3(b) furnishing of services through employees or other personnel continues for a period or periods aggregating more than three months within any twelve-month period. - 4. Lists activities that do not constitute a permanent establishment, including storage, display, stock for processing, purchasing, collecting information, and preparatory or auxiliary activities. - 5–7. Agency and dependent agent rules, and independent agent exception. - Chapter III – Taxation of Income: - Article 6 – Income from immovable property: income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State; definition of “immovable property” includes property accessory, livestock and equipment used in agriculture and forestry, usufruct, and rights to variable or fixed payments for working mineral deposits; ships, boats and aircraft are not regarded as immovable property. - Article 7 – Business profits: - 1. Profit of an enterprise is taxable only in that State unless it carries on business in the other State through a permanent establishment. - 3. In determination of profit of a permanent establishment, expenses incurred for the purposes of the business are allowed as deductions; however, no such deduction are allowed in respect of amounts paid by the permanent establishment to the head office by way of royalties, fees or other similar payments, by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. - Article 8 – Shipping, inland waterways transport and air transport: - 1. Profit from the operation of ships, aircraft, road and railway vehicles in international traffic are taxable only in the Contracting State in which the place of effective management of the enterprise is situated. - 2. If the place of effective management of a shipping enterprise is aboard a ship, then it is deemed to be situated in the Contracting State in which the home harbor of the ship is situated, or, if there is no such home harbor, in the Contracting State of which the operator of the ship is a resident. *Source: _cr12306 - 51. All DTAs—except for the DTAs with Canada, France, and Switzerland—contain* ### 3. The provisions of paragraph 1 also apply to profits from the participation in a pool, a ### _cr12306 - 3. The provisions of paragraph 1 also apply to profits from the participation in a pool, a ### Article 9 – Associated enterprises - Applies where: - (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or - (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State. - If conditions between the two enterprises differ from those which would be made between independent enterprises, then: - Any profit which would, but for those conditions, have accrued to one enterprise, but by reason of those conditions has not so accrued, may be included in the profit of that enterprise and taxed accordingly. - Where a Contracting State includes in the profit of an enterprise of that State—and taxes accordingly—profit on which an enterprise of the other Contracting State has been charged to tax in that other State, and the profit so included is profit which would have accrued to the first enterprise if conditions had been those between independent enterprises: - The other State makes an appropriate adjustment to the amount of the tax charged therein on those profit. - In determining such adjustment, due regard is paid to the other provisions of the Agreement and the competent authorities of the Contracting States, if necessary, consult each other. ### Article 10 – Dividends - Dividends paid by a company resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. - Such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, but if the beneficial owner is a resident of the other State: - The tax so charged does not exceed 10 per cent of the gross amount of the dividends. - The competent authorities of the Contracting States settle by mutual agreement the mode of application of these limitations. - This paragraph does not affect the taxation of the company in respect of the profit out of which the dividends are paid. - “Dividends” means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders' shares or other rights, not being debt claims, participating in profits, as well as income from other corporate rights subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. - Paragraphs 1 and 2 do not apply if the beneficial owner, resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment and the holding is effectively connected with that permanent establishment; then Article 7 applies. - Where a company resident of a Contracting State derives profits or income from the other Contracting State: - That other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or the holding is effectively connected with a permanent establishment situated in that other State, nor subject the company’s undistributed profit, even if the dividends paid or the undistributed profit consist wholly or partly of profit or income arising in such other State. ### Article 11 – Interest - Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. - Such interest may also be taxed in the Contracting State in which it arises, but if the beneficial owner is a resident of the other State: - The tax so charged does not exceed 10 per cent of the gross amount of the interest. - The competent authorities settle by mutual agreement the mode of application of this limitation. - Notwithstanding paragraph 2, interest arising in a Contracting State and derived and beneficially owned by: - the Government of the other Contracting State, including political subdivisions and local authorities thereof, - the Central Bank or any financial institution wholly owned by that Government, or - interest derived on loans guaranteed by that Government, - is exempt from tax in the first-mentioned Contracting State. - “Interest” means income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment are not regarded as interest for the purpose of this article. - Paragraphs 1, 2, and 3 do not apply if the beneficial owner, resident of a Contracting State, carries on business in the other State in which the interest arises through a permanent establishment and the debt claim is effectively connected with: - (a) such permanent establishment, or - (b) business activities referred to in letter (c) of paragraph 1 of article 7. - In such cases Article 7 applies. - Interest is deemed to arise in a Contracting State when the payer is a resident of that State. However, if the payer has in a Contracting State a permanent establishment in connection with which the indebtedness was incurred and such interest is borne by that permanent establishment, the interest is deemed to arise in the State in which the permanent establishment is situated. - Where a special relationship causes the amount of interest to exceed an arm's-length amount, the provisions of this article apply only to the arm's-length amount; the excess remains taxable according to the laws of each Contracting State. ### Article 12 – Royalties - Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. - Such royalties may also be taxed in the Contracting State in which they arise, but if the beneficial owner is a resident of the other State: - The tax so charged does not exceed 10 per cent of the gross amount of the royalties. - The competent authorities settle by mutual agreement the mode of application of this limitation. - “Royalties” means payments of any kind for the use of, or the right to use, copyrights (including cinematograph films, or films or tapes used for radio or television broadcasting), any patent, trademark, design or model, plan, secret formula or process, or for use of industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. - Paragraphs 1 and 2 do not apply if the beneficial owner, resident of a Contracting State, carries on business in the other State through a permanent establishment and the right or property is effectively connected with: - (a) such permanent establishment, or - (b) business activities referred to in letter (c) of paragraph 1 of article 7. - In such cases Article 7 applies. - Royalties are deemed to arise in a Contracting State when the payer is a resident of that State. If the payer has in a Contracting State a permanent establishment in connection with which the liability was incurred and such royalties are borne by that permanent establishment, they are deemed to arise in the State in which the permanent establishment is situated. - Where a special relationship causes royalties to exceed an arm's-length amount, the provisions of this article apply only to the arm's-length amount; the excess remains taxable according to the laws of each Contracting State. ### Article 13 – Service fees - Technical fees arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. - Such technical fees may also be taxed in the Contracting State in which they arise, but if the recipient is the beneficial owner: - The tax so charged shall or will not exceed 10 per cent of the gross amount of the technical fees. - “Technical fees” means payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any services of a technical, managerial or consultancy nature. - Paragraphs 1 and 2 do not apply if the beneficial owner, resident of a Contracting State, carries on business in the other State through a permanent establishment and the technical fees are effectively connected with such permanent establishment; then Article 7 applies. - Technical fees are deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority thereof, or a resident of that State. If the payer has in a Contracting State a permanent establishment in connection with which the obligation to pay was incurred and such technical fees are borne by that permanent establishment, they are deemed to arise in the State in which the permanent establishment is situated. - Where a special relationship causes technical fees to exceed an arm's-length amount, the provisions of this article apply to the arm's-length amount; the excess remains taxable according to the law of each Contracting State. ### Article 14 – Capital gains - Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in article 6 and situated in the other Contracting State may be taxed in that other State. - Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, including gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State. - Gains from the alienation of ships or aircraft operated in international traffic, boats engaged in inland waterways transport or movable property pertaining to the operation of such ships, aircraft, or boats, are taxable only in the Contracting State in which the place of effective management of the enterprise is situated. - Gains from the alienation of shares of the capital stock of a company, or of an interest in a partnership, trust or estate, the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. In particular: - (a) “Immovable property” includes exploration and mining licenses, and other depreciable assets used in a mining activity in one of the Contracting States; - (b) “Principally” means the value of such immovable property exceeding 50 per cent of the aggregate value of all assets owned by the company, partnership, trust or estate. - Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, and 4 are taxable only in the Contracting State of which the alienator is a resident. ### Article 15 – Dependent personal services - Subject to articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment are taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is exercised in the other State, such remuneration may be taxed in that other State. - Notwithstanding paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State is taxable only in the first-mentioned State if: - (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; and - (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and - (c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. - Remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated. ### Article 16 – Directors’ fees and remuneration of top-level managerial officials - Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the Board of Directors of a company which is a resident of the other Contracting State may be taxed in that other State. - Salaries, wages and other similar remuneration derived by a resident of a Contracting State in his capacity as an official in a top-level managerial position of a company which is a resident of the other Contracting State may be taxed in that other State. ### Article 17 – Artists and sportspersons - Notwithstanding Article 15, income derived by a resident of a Contracting State as an entertainer (theatre, motion picture, radio or television artiste, musician) or as a sportsperson from personal activities exercised in the other Contracting State may be taxed in that other State. - Where such income accrues not to the entertainer or sportsperson but to another person, that income may, notwithstanding Articles 7 and 15, be taxed in the Contracting State in which the activities are exercised. ### Article 18 – Pensions and social security payments - Subject to paragraph 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment are taxable only in that State. - Notwithstanding paragraph 1, pensions paid and other payments made under a public scheme which is part of the social security system of a Contracting State or a political subdivision or a local authority thereof are taxable only in that State. ### Article 19 – Government services - (1)(a) Salaries, wages and other similar remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority are taxable only in that State. - (b) However, such remuneration are taxable only in the other Contracting State if the services are rendered in that other State and the individual is a resident of that State who: - (i) is a national of that State; or - (ii) did not become a resident of that State solely for the purpose of rendering the services. - (2)(a) Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority is taxable only in that State. - (b) However, such pension is taxable only in the other Contracting State if the individual is a resident of, and a national of, that other State. - (3) The provisions of Articles 15, 16, 17 and 18 apply to salaries, wages and other similar remuneration, and to pensions, in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof. ### Article 20 – Students, apprentices, and trainees - A student, business apprentice or trainee who is or was immediately before visiting a Contracting State a resident of the other State and who is present in the first-mentioned State solely for education or training is exempt from tax in that first-mentioned State on the following payments or income received or derived for maintenance, education or training: - (a) payments derived from sources outside that Contracting State; - (b) grants, scholarships or awards supplied by the Government of either Contracting State, or a scientific, educational, cultural or non-profit making organization; and - (c) income derived from personal services performed in that Contracting State in an amount not exceeding the equivalent of USD 7,500 in any fiscal year. ### Article 21 – Other income - Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing articles are taxable only in that State. - Paragraph 1 does not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment; in such case Article 7 applies. *Source: _cr12306 - 3. The provisions of paragraph 1 also apply to profits from the participation in a pool, a (IMF PDF).* ### 3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident ### _cr12306 - 3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident ### CHAPTER IV — Taxation of Capital (Article 22 – Capital) - Article 22(1): "Capital represented by immovable property referred to in article 6, owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other State." - Article 22(2): "Capital represented by movable property forming part of the business property of a permanent establishment, which an enterprise of a Contracting State has in the other Contracting State may be taxed in that other State." - Article 22(3): "Capital represented by ships and aircraft operated in international traffic and by boats engaged in inland waterways transport, and by movable property pertaining to the operation of such ships, aircraft and boats, is taxable only in the Contracting State in which the place of effective management of the enterprise is situated." - Article 22(4): "All other elements of capital of a resident of a Contracting State are taxable only in that State." ### CHAPTER V — Methods for the Elimination of Double Taxation (Article 23 – Credit method) - Article 23(1): - Where a resident of Mongolia [or a Contracting State] derives income or owns capital which, in accordance with the provisions of this Agreement, may be taxed in the other Contracting State, Mongolia [or the first-mentioned State] allows as a deduction from the tax on the income of that resident an amount equal to the income tax paid in that other State. - As a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in that other State. - "Such deduction in either case does not, however, exceed that part of the income tax or capital tax, as computed before the deduction is given, which is attributable, as the case may be, to the income or the capital which may be taxed in that other State." - Article 23(2): Where income or capital is exempt in accordance with the Agreement, Mongolia [or such State] "may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital." ### CHAPTER VI — Special Provisions (Articles 24–29) - Article 24 — Non-discrimination: - Article 24(1): Nationals of a Contracting State "are not subject in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subject." Applies also to persons who are not residents of one or both Contracting States. - Article 24(2): "Stateless persons who are residents of a Contracting State are not subject in either Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of the State concerned in the same circumstances, in particular with respect to residence, are or may be subject." - Article 24(3): "The taxation on a permanent establishment, which an enterprise of a Contracting State has in the other Contracting State, is not less favorably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities." Does not oblige granting personal allowances, reliefs and reductions for civil status or family responsibilities that are granted to residents. - Article 24(4): Except where specified (article 9(1), article 11(6), article 12(6), or article 13(6)), "interest, royalties, technical fees and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State is, for the purpose of determining the taxable profits of such enterprise, deductible under the same conditions as if they had been paid to a resident of the first-mentioned State." Similar rule for debts and taxable capital. - Article 24(5): Enterprises of a Contracting State whose capital is wholly or partly owned or controlled, directly or indirectly, by residents of the other Contracting State "is not subject in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subject." - Article 24(6): "The provisions of this article apply, notwithstanding the provisions of article 2, to taxes of every kind and description." - Article 25 — Mutual agreement procedure: - Article 25(1): A person who considers actions of one or both Contracting States result or will result in taxation not in accordance with the Agreement "may... present his case to the competent authority" of the State of residence or, if case comes under article 24(1), to that of the State of nationality. "The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement." - Article 25(2): The competent authority endeavors to resolve justified objections by mutual agreement with the other State's competent authority; "Any agreement reached is implemented notwithstanding any time limits in the domestic law of the Contracting States." - Article 25(3): Competent authorities endeavor to resolve by mutual agreement any difficulties or doubts as to interpretation or application; may consult for elimination of double taxation in cases not provided for. - Article 25(4): Competent authorities "may communicate with each other directly, including through a joint commission," and "develop appropriate bilateral procedures, conditions, methods and techniques for the implementation of the mutual agreement procedure." A competent authority may devise appropriate unilateral procedures to facilitate actions. - Article 26 — Exchange of information: - Article 26(1): "The competent authorities of the Contracting States exchange such information as is necessary for carrying out the provisions of this Agreement or of the domestic laws of the Contracting States concerning taxes covered by the Agreement," including prevention of fraud or evasion. "The exchange of information is not restricted by article 1." Information received is treated as secret in the same manner as under domestic law. If information is originally secret in the transmitting State, it is disclosed only to persons or authorities concerned with assessment, collection, enforcement, prosecution, or appeals in relation to the taxes, and used only for such purposes, but may be disclosed in public court proceedings or judicial decisions. Competent authorities develop appropriate conditions, methods and techniques for exchanges, including, where appropriate, exchanges regarding tax avoidance. - Article 26(2): The provisions of paragraph 1 do not impose on a Contracting State the obligation: - (a) "to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;" - (b) "to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;" - (c) "to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy." - Article 27 — Assistance in the collection of taxes: - Article 27(1): "The Contracting States provide each other assistance and support with a view to the collection, in accordance with their respective laws or administrative practice, of the taxes to which this Convention applies, and of any increases, surcharges, overdue payments, interest and costs pertaining to the said taxes." - Article 27(2): At request, the requested State recovers tax claims of the applicant State "in accordance with the law and administrative practice for the recovery of its own tax claims." Such claims do not enjoy priority and "cannot be recovered by imprisonment for debt of the debtor." The requested State is not obliged to take executory measures not provided for in the laws of the applicant State. - Article 27(3): Paragraph 2 applies only to tax claims which form the subject of an instrument permitting their enforcement in the applicant State and, unless otherwise agreed, which are not contested. For claims relating to liability as a non-resident of the applicant State, paragraph 2 applies only where the claim may no longer be contested, unless otherwise agreed. - Article 27(4): The requested State is not obliged to accede if: - (a) the applicant State has not pursued all means available in its own territory, except where recourse would give rise to disproportionate difficulty; - (b) it considers the tax claim to be contrary to the Agreement or any other agreement to which both States are parties. - Article 27(5): "The instrument permitting enforcement in the applicant State is—where appropriate and in accordance with the provisions in force in the requested State—accepted, recognized, supplemented or replaced as soon as possible after the date of the receipt of the request for assistance by an instrument permitting enforcement in the requested State." - Article 27(6): "The competent authorities of the States prescribe by common agreement rules concerning the application of this Article." - Article 28 — Members of diplomatic missions and consular posts: - "Nothing in this Agreement affects the fiscal privileges of members of diplomatic missions or consular posts under the general rules of international law or under the provisions of special agreements." - Article 29 — Limitation-on-benefit (or Anti-treaty shopping): - Article 29(1): A resident of a Contracting State deriving income from the other Contracting State is entitled to relief under specified Articles "only if such person is:" - (a) "an individual;" - (b) "engaged in the active conduct of business in the first-mentioned State (other than the business of making or managing investments, unless these activities are banking or insurance activities carried on by a bank or insurance company), and the income derived from that other State is derived in connection with, or is incidental to, that business;" - (c) "a company the shares of which are traded in the first-mentioned State on a substantial and regular basis on an officially recognized securities exchange or a company which is wholly owned, directly or indirectly, by another company that is a resident of the first-mentioned State and the shares of which are so traded;" - (d) "a not-for-profit organization that is generally exempt from income taxation in its Contracting State of residence, provided that more than half of the beneficiaries, members or participants, if any, in such organization are entitled, under this Article, to the benefits of this Convention;" - (e) "a person that satisfies both of the following conditions: - (i) more than 50 percent of the beneficial interest in such person or in the case of a company, more than 50 percent of the number of shares of each class of the company‟s shares, is owned directly or indirectly by persons entitled to the benefits of this Agreement under subparagraph (a), (c) or (d); and - (ii) not more than 50 percent of the gross income of such person is used, directly or indirectly, to meet liabilities (including liabilities for interest or royalties) to persons not entitled to the benefits of this Agreement under subparagraph (a), (c) or (d)." - Article 29(2): A person not entitled under paragraph 1 "may, nevertheless, be granted the benefits of the Agreement if the competent authority of the State in which the income arises so determines." - Article 29(3): For subparagraph (e)(ii), "the term 'gross income' means gross receipts, or where a person is engaged in a business, which includes the manufacture or production of goods, gross receipts reduced by the direct costs of labor and materials attributable to such manufacture or production and paid or payable out of such receipts." ### CHAPTER VII — Final Provisions (Articles 30–31) - Article 30 — Entry into force: - Article 30(1): "This Agreement is ratified and the instruments of ratification are exchanged as soon as possible." - Article 30(2): "The Agreement enters into force upon the exchange of instruments of ratification and its provisions have effect:" - (a) "in respect of taxes withheld at source, to income paid or credited on or after 1 January of the calendar year following that in which the Agreement enters into force;" - (b) "in respect of other taxes on income and taxes on capital, to income or capital in any taxable year beginning on or after 1 January of the calendar year following that in which the Agreement enters into force." - Article 31 — Termination: - "This Agreement remains in force until terminated by a Contracting State." - "Either Contracting State may terminate the Agreement, through diplomatic channels, by giving notice of termination at least six months before the end of any calendar year after the period of 5 years from the date on which the Agreement enters into force." - If terminated, the Agreement ceases to have effect: - (a) "in respect of taxes withheld at source, to income paid or credited on or after 1 January of the calendar year following that in which the notice is given;" - (b) "in respect of other taxes on income and taxes on capital, to income or capital in any taxable year beginning on or after 1 January of the calendar year following that in which the notice is given." ### Signature and language provisions - "IN WITNESS WHEREOF THE UNDERSIGNED, DULY AUTHORIZED THERETO, HAVE SIGNED THIS CONVENTION." - "Done at [place] on [date], in duplicate, in the [language of other Contracting State], Mongolian and English languages, all texts being equally authentic. In case there is any divergence of interpretation between the [language of other Contracting State] and Mongolian texts, the English text prevails." ### Appendix 1 — Mongolian DTAs (list of DTA partners and entry in force year) - 1 Austria 2005 - 2 Belarus 2002 - 3 Belgium 1999 - 4 Bulgaria 2002 - 5 Canada 2003 - 6 China 1993 - 7 Czech Republic 1999 - 8 France 1999 - 9 Germany 1997 - 10 Hungary 1997 - 11 India 1994 - 12 Indonesia 1998 - 13 Italy 2004 - 14 Kazakhstan 2000 - 15 Korea 1992 - 16 PR of Korea 2005 - 17 Kuwait 1998 - 18 Kyrgyzstan 2000 - 19 Luxemburg 2002 - 20 Malaysia 1997 - 21 Netherlands 2004 - 22 Poland 2002 - 23 Russia 1998 - 24 Singapore 2005 - 25 Switzerland 2002 - 26 Turkey 1997 - 27 Ukraine 2003 - 28 United Arab Emirates 2003 - 29 United Kingdom 1997 - 30 Vietnam 1997 *Based upon info provided by the Mongolian Ministry of Finance.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12306.pdf_