Article

Tax Alert August 2015

Agile and Ahead

On 9 July 2015, the Parliament of Mongolia enacted the amended and restated Value-Added Tax Act (the “2015 Act”), which will come into force, and replace the 2006 Act, on 1 January 2016. The 2015 Act was promulgated in the Government Gazette on 31 July 2015.

OVERVIEW

Significant portions of the 2006 Act are included in the 2015 Act.  In a nutshell, the 2015 Act will have an impact on businesses because VAT on certain significant costs will not be recoverable.  We have set out below the high level changes that were introduced to the 2015 Act insofar as it affects your business.

1.       Section 5(1) redefined a VAT payer.  The VAT payer is an individual who does not sell goods, perform contract work or provide services and has purchased and imported such items for personal use and not for business purposes.

Section 5(2) introduced a definition of VAT withholder.  It provides that the following persons shall be a VAT withholder that has the duty to charge, withhold and remit to the government:

·         Goods sold, contracted work performed or services provided within the territory of Mongolia;

·         Importation of goods, contracted work or services;

·         Exportation of goods, contracted work or services.

The terms “withholder” and “withhold” were used in the 2015 Act which appears to be referring to a tax agent who is responsible for charging, collecting and remitting the VAT for and on behalf of the Government.  In the 2006 Act, the tax agent was referred as taxpayer.  In this tax alert, we shall use the terms “withhold” and “withholder” in order to stay consistent with the statutory provisions.

2.       Threshold for becoming VAT withholder is 50 million Mongolian togrogs in sales which was MNT 10 million in the 2006 Act.  The new threshold will apply equally to a permanent establishment.  However, the 2015 Act (sections 5(2) and 5(3)) does not give a specific timeframe for the 50 million togrog sales requirement.   Instead, the definitions section of the 2015 Act has expressly used the term “the day on which the operating revenue reached MNT 50 million or more”.  Sale of fixed assets will not be calculated against the 50 million threshold.

3.       Under Section 14 of the 2015 Act, the following VATs will not be reimbursed which will lead to an increase in business costs:

·         VAT on acquisition (through purchases and through construction) of fixed assets for use in operations

·         VAT on exploration activities

·         VAT on imported services

4.       The 2015 Act has omitted the chapter on penalties, which was chapter nine in the 2006 Act.  This means that Section 74 of the General Taxation Act will be used for penalties relating to VAT.

5.       The 2015 Act also incorporates the automation of the VAT system for recording and collecting the VAT.   As a result of the automation, the VAT withholders are now required to purchase and use a user system and the relevant equipment and software.

DEFINITIONS

The defined terms have been significantly expanded whereby new terms have been introduced and some of the terms that existed in the 2006 Act have revised.  Number of definitions related to the implementation of the automated VAT system.

The following are some applicable revised or new definitions to businesses:

 

Defined Term

2006 Act

2015 Act

1.

Sale

Transfer of goods for consideration to others for ownership and performance of contracted work and provision of services for consideration

 

Transfer of goods to others for ownership and performance of contracted work and provision of services

2.

Contracted work

None

As defined in Chapter 31 of the Civil Code

3.

Resident and Non-Resident

As provided for in Section 6 and 7 of the Individual Income Tax Act

As defined in the Corporation Income Tax Act and the Individual Income Tax Act

4.

The day on which the duty to withhold value-added tax arises

None

The day on which sales proceeds of individuals and legal persons reach 50 million togrogs or more

5.

Receipt

None

A paper or electronic document issued by an equipment used for that purpose and which contains information including the date and the unique payment number, VAT withholder’s name,  address, taxpayer number, the name, code, quantity, price, amount of the total price and tax and which prove the settlement of payment

6.

Unique payment number

None

A number expressed in continued numerical form the VAT withholder’s taxpayer number, branch number if it has a branch or a representative office, date of the payment and number of the payment without using any signs

7.

Day on which a business is registered as a VAT withholder

First day of the month following the day on which the amount of sale revenues of a citizen or legal entity that is engaged in activities has reached 10 million togrogs or more according to the income tax statement of legal entity or citizen’s income and tax returns

The day on which an individual or a legal person becomes registered as a VAT withholder and issued a certificate

 

VAT REGISTRATION

Individuals and legal persons must file an application to become a VAT withholder within 10 business days of reaching the minimum threshold to the relevant tax authority.  The VAT withholder certificate will be issued within 3 business days.

The VAT withholder certificate may be revoked if it is proven that (i) the withholder has no VAT chargeable income, (ii) income fails to reach the minimum threshold for 12 consecutive months, or (iii) the withholder has not carried on any business.

ACTIVITIES ADDED THAT ARE SUBJECT TO VAT

In addition to the existing types of activities under the 2006 Act, Section 7 of the 2015 Act sets out the types of economic activity that will be charged VAT as follows:

(i)                  Sale of rights;

(ii)                Retention of goods by shareholders, stockholders and taxpayers in the event the VAT withholder is deregistered as a VAT withholder or is wound up;

(iii)               Notarial services;

(iv)              Goods sold, services provided or contracted work performed by a non-resident to a resident;

(v)                Property valuation services;

(vi)              Fiscal financing, subsidies or incentives given by the State;

(vii)             Financing by way of purchase of the right to demand (factoring, forfaiting or analogous transaction);

(viii)           Advocacy and legal advisory services.

EXEMPTED GOODS

The list of VAT-exempted goods was substantially expanded by consolidating the individual Value-Added Tax Exemption Acts passed in the previous years and were incorporated into the 2015 Act.  These are as follows:

·         Equipment and parts thereof made in Mongolia or made and sold in Mongolia intended for use by small and medium sized industries;

·         Raw materials and reagents not produced domestically and which are required for manufacturing new goods and products intended for domestic and foreign markets pursuant to innovation projects;

·         Imported lumber, log, timber, plank, semi-finished wooden materials;

·         Exported raw and washed, dehaired cashmere and hides and skins;

·         Cultural heritage building repair and maintenance services

·         Materials, equipment, substances and tools to be used for the study and restoration of cultural heritage;

·         In the event the goods, services and contracted work acquired for official and personal uses of Mongolian diplomatic missions and consulates and their employees are tax-exempted in such state, the goods, services and contracted work acquired in Mongolia for official and personal uses of the diplomatic mission and consulate and their employees of such state;

·         Parcels addressed to individuals via international post containing no more than two goods with value equal to no more than 10 times one month’s minimum wage and in the case of laptop computers no more than 30 times one month’s minimum wage;

·         Special purpose machinery, equipment, devices, raw materials, chemical and explosive substances and parts imported by contractors and subcontractors for petroleum and unconventional oil operations of during the exploration period and in the first five years of production;

·         Reports, samples and petroleum related to petroleum and unconventional oil operations; and

·         Goods worth up to three million togrogs purchased by passengers in a free economic zone.

In addition to the existing VAT-exempted services under the 2006 Act, the following services were added in the 2015 Act:

1.       Insurance agency services;

2.       Cultural heritage building repair and maintenance services;

3.       Funeral services.

VAT DEDUCTIONS/VAT CREDIT

Section 14 relates to making deductions. The significant changes relate to non-recoverability of the VAT paid on the following business costs:

(i)                  Goods, services and contracted work imported or acquired which are not related to goods, services and contracted work chargeable during an accounting period.  This creates a delay in the deduction of VAT on purchases as a result, the VAT paid on goods that are on stock will not be deducted until the goods are sold. 

(ii)                Goods, services and contracted work imported or acquired for exploration or preliminary mining.

(iii)               VAT paid in respect of imported or purchased goods, services and contracted work for the purposes of constituting fixed assets or for the purchase of fixed assets shall not be deductible.

(iv)              The deduction is only allowed for imported goods.  Thus it appears that the VAT on imported services imposed through reverse charge has now become non-recoverable. 

VAT REFUNDS

VAT refunds will be made subject to the fulfilment of the following conditions:

(i)                  Goods and services must have been acquired from VAT withholders;

(ii)                The purchase must have been registered with the tax authority;

(iii)               VAT has been charged on the goods, services and contracted work; and

(iv)              Must have been registered in the registration instrument or registration machine.

VAT SYSTEM AUTOMATION

Section 17 of the 2015 Act is the new section that was introduced to the 2015 Act.  Section 17 relates to implementation of an integrated and user systems.

As a general rule, pursuant to Section 17(4) of the 2015 Act, VAT withholders are required to have a user system and have the following duties:

(i)                  to register in the user system the information related to payments made by VAT payers;

(ii)                to give receipts to VAT payers each time goods, contracted work and services are sold;

(iii)               to feed the information related to receipts registered in the user system into the integrated sales system within three days; and

(iv)              to enter in the database the information related to inter-VAT withholder sales or provision of goods, contracted work and services and send the information to the integrated system within seven days.

 

Did you find this useful?

Related topics