On 22 March 2019, the Parliament approved the revised versions of the laws on General Taxation, Corporate Income Tax and Personal Income Tax together with supporting amendments. The revised tax laws were set to come into force from 1 January 2020.
As the final texts of the revised tax laws were made available, the President vetoed the tax laws in their entirety together with supporting amendments. The President’s Office released the statement on the veto (“statement”) which is available here (in Mongolian): https://president.mn/8911/
The Parliament will now discuss the veto and vote on the veto. The Parliament could overrule the veto by affirmative vote of two-thirds of the members of Parliament (i.e. rejecting the veto) attending the relevant plenary session.
The following summarizes the reasons for Presidential veto.
- General notes
The statement acknowledges the importance of the revised tax laws as these laws affect all citizens and business entities and have impact on their lawful interests. Further the statement notes that the President’s proposals on the revised draft law on corporate income tax were not taken into consideration or reflected in the final text although such proposals were made to rectify those issues in the draft law that could be inconsistent with the national interest and may have adverse impacts.
The statement also refers to the request letter submitted by the Mongolian National Chamber of Commerce and Industry to veto the revised laws on General Taxation and Corporate Income Tax due to their negative impacts such as increased burden and pressure on business entities, potential increase in corruption, decrease of tax or budget revenues, and negative impact on the national economy. The statement expressly states the agreement with the request.
Although the statement acknowledges the need for additional provisions in the revised tax laws to comply with Mongolia’s obligations under multilateral cooperation in respect of tax matters, the statement criticizes the revised laws for promoting activities of money laundering, charging high interest rates and tax avoidance and enabling ways and opportunities for multinational corporations to pay lower taxes or avoid taxes.
Further, the statement criticizes the revised tax laws, among others, for failing to meet the requirements of being clear, certain and understandable, lowering the requirements for measures to combat base erosion and profit shifting activities, not complying with provisions of international tax agreements and treaties, not having sufficient basis for increasing tax base, having potential adverse impacts of not being capable of enforcement.
The statement expressly refers to certain provisions (as set out below) of the revised tax laws which, in accordance with the statement, could have adverse impact on the national interests, contribute to corruption, and not in compliance with the Constitution of Mongolia and other relevant laws.
- Reasons for vetoing the revised law on Corporate Income Tax
The statement sets out 6 reasons for vetoing the revised law on Corporate Income Tax as follows:
- The revised law lowered tax payable on interest payments to 5 percent promoting financing by way of high interest loans rather than direct equity investment. In criticizing this provision, the statement refers to Article 5.5 of the Dubai agreement for Oyu Tolgoi Underground Mine Development and states that one of the material adverse impact of the revised law would be to lower tax payable on interest payments from 20% to 5%;
- The statement also criticizes the revised law for worsening the “thin capitalization rules”, lowering limitations on interest expenses, and promoting the activities of foreign-invested companies by shifting profits by way of interest expenses and lowering domestic tax revenues. The statement again expressly refers to Oyu Tolgoi LLC criticizing the revised law for enabling the significant increase of losses reported in Oyu Tolgoi LLC’s tax reports and delaying the period for allocation of dividends by Oyu Tolgoi LLC by few decades;
- The statement criticizes the revised law on lowering the deemed license transfer tax from 30% (without deduction of any expenses or costs) to 10% (with a possibility to deduct certain expenses and costs) which could enable the unlawful profits from the mining sector without added value;
- The statement also criticizes the requirement in the revised law obliging mining companies to prepare tax reports in respect of each mineral license as such requirement could enable mining companies to duplicate their expenses, could decrease tax revenues and could go against the purpose of the revised tax law to lower reporting requirements and easing tax reporting obligations;
- The reduced tax rate for interest payments for loans and bonds of commercial banks in the revised tax law (to 5%) is also criticized for lowering tax obligations of commercial banks who charge high interest rates and who have the highest profits in the national economy whilst there are no appropriate measures that are directed at lowering interest payments for citizens and individuals;
- The statement also criticizes the provisions applicable for business entities with sales income not exceeding MNT 50 million (these business entities would pay 1% tax and would be subject to tax reporting once a year) as these provisions do not allow such business entities to benefit from other preferential provisions of the revised tax law.
- Reasons for vetoing the revised law on General Taxation
The statement sets out 6 reasons for vetoing the revised law on General Taxation as follows:
- The statement criticizes the requirement under the revised law to deposit the lower of 10% of the payable tax specified in the tax inspection decision or MNT 100 million to dispute the tax inspection decision by a tax inspector. This requirement could limit the basic right and freedom of citizens to have their complaints decided by state authorities or officials;
- The statement criticizes the provisions of the revised law empowering the Minister of Finance to approve certain implementing regulations under the revised law on a wide range of subject matters, some of which were historically within the regulatory authority of the Government;
- The revised law is also criticized for increasing the authority of the chairmen and senior officials of tax authorities that could have negative impact of enabling or contributing to corruption. In this respect, the statement also refers to Oyu Tolgoi LLC which allegedly enjoyed preferential treatment provided by tax officials;
- The statement also criticizes the provisions of the revised law which lowered statutory limitation period for tax related matters from 5 years to 4 years without justifiable reasons;
- The statement criticizes the revised law for making it possible to claim outstanding tax obligations from those who entered into contractual obligations with a relevant taxpayer within one year of the accrual of tax obligations of such taxpayer;
- The statement also criticizes certain provisions under the revised law regarding the liability of a tax inspector which provided that a tax inspector is liable for any damage or loss caused by taxpayers as these provisions could breach existing laws.
- Reasons for vetoing the revised law on Personal Income Tax
The statement sets out 2 reasons for vetoing the revised law on Personal Income Tax, being:
- The statement criticizes Articles 5.3.2 and 5.4 of the revised law on Personal Income Tax that relate to tax residency requirements for foreign individuals;
- Taking into account Articles 5.7, 5.8, and 5.10 of the revised law, the statement recommends to clarify those provisions of the law that relate to the calculation of time period for the purpose of determining tax residency status of foreign individuals and stateless persons.