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Executive summary

Mongolia recently revised its key tax laws including the General Law on Taxation, Corporate Income Tax Law and Personal Income Tax Law. The new laws were adopted by the Mongolian Parliament (the legislative body) on 22 March 2019, under the Government’s tax reform packages.

A number of important changes that may have a material impact on taxpayers, requires taking appropriate actions to comply with the new requirements. Among others, the transfer pricing laws and associated rules have been amended to align with recent international developments and standards.

The Ministry of Finance is expected to release a number of implementing guidelines on the new rules.

The new tax rules will take effect on 1 January 2020.

This Alert highlights key changes regarding the transfer pricing developments.

Detailed discussion

Overview of transfer pricing developments

Various sections in the current tax laws refer to the need for transactions between related parties to be conducted on an arm’s-length basis. Failing this, the tax authorities may seek to adjust the transaction to a fair market value.

The transfer pricing rules are currently set forth in various individual tax laws including the General Taxation Law (GTL), Corporate Income Tax (CIT) Law, Value Added Tax (VAT) Law, and Personal Income Tax (PIT) Law. Definitions and rules sometimes differ among the various laws, creating uncertainty in application.

The new transfer pricing law, which will be governed mainly by the GTL and its associated guidelines, replaces the existing hodgepodge of separate laws.

Definition of related parties redefined

The old rules define related party as:

• Under Article 48.4 of the GTL – related party shall mean ”bodies who are authorized to participate directly or indirectly in the management, control or ownership” of other entities.
• Under Article 6.1 of the CIT Law – if the following relation is present with a taxpayer, it shall be a related party: (1) owns 20% or more of the common stock of the other entity; or (2) has the right to receive 20% or more of the dividends or distributions from the other entity; or (3) has the right to appoint 20% or more of the management of the other entity or is otherwise able to determine its policies.

Under the new transfer pricing rules, the term “related party” means:

Article 27 of New GTL – Related parties:

The entities who have the ability to influence each other on the conditions or economic outcome of a transaction by way of a direct or indirect participation, by a person in the other, or the same person in two or more persons, of the assets, control or managerial activities.

In addition, unrelated parties may be treated as related parties if they have entered into an arrangement for which the parties have agreed to a common position or common interest for a particular transaction.

Transfer pricing documentation requirements

Under the transfer pricing regulations, taxpayers are required to maintain contemporaneous documentation to comply with the arm’s-length standard. Part of that documentation must substantiate the most reliable measure of an arm’s-length result, given the transfer pricing methods and data available.

Consistent with the Organisation for Economic Co-operation and Development (OECD), Mongolia now will require taxpayers with related-party transactions to adopt the internationally-standardized Master file, Local file, and Country-by-Country (CbC) Report three-tiered approach to transfer pricing documentation.

The main objectives of the updated transfer pricing documentation requirements are to ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices between related parties; to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and to provide tax administrations with useful information to conduct an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction.

The Mongolian Tax Authority (MTA) will be further introducing detailed tax and transfer pricing reporting forms on the above transfer pricing reports.

Deadline for filing transfer pricing documentation

Taxpayers shall be required to provide additional information related to transfer pricing documentation prior to or during the tax audits.

Threshold and exemption from transfer pricing documentation obligations

Mongolia has not set any threshold to exempt smaller transactions from transfer pricing documentation obligations. Instead, Smaller and Medium Enterprise group companies under MNT6 billion annual turnover are exempt from certain transfer pricing documentation requirements (i.e., local file and master file). The CbC reporting threshold is set at MNT1.7 trillion or approx. €630 million (while the OECD’s recommendation was €750 million).

Administrative penalties for failure to comply with transfer pricing documentation obligations

As outlined in the table above, all transfer pricing documentation is required to be submitted by taxpayers to the MTA within the specified timeframe by law.

The new rules have imposed severe administrative penalties for failure to comply with transfer pricing documentation requirements i.e., if transfer pricing documentation is not filed with the tax authorities within the specified deadline, there will be automatic penalties. These automatic administrative penalties are equal to 2% – 4% of transaction value (as set out in the table below), apart from penalties and fines resulting from transfer pricing adjustments (if any).

OECD Transfer Pricing Guidelines

Despite the fact that Mongolia is not a member of the OECD, Mongolia has endorsed the OECD Transfer Pricing Guidelines in the GTL. With this, the OECD Transfer Pricing Guidelines may be applied by the MTA for assessing pricing arrangements of related parties provided that the OECD Transfer Pricing Guidelines do not conflict with the arm’s-length principles set out in the domestic tax laws and relevant implementing guidelines.

Actions required

The new transfer pricing documentation requirements will create additional compliance and due diligence work for taxpayers. It is expected that it will be time consuming to arrange the internal department structure and business processes to perform the work required, and to collect overseas related party information. Local group companies or multinational enterprises should proactively review their global tax framework, the value chain related to the Mongolian business, and determine whether related-party pricing arrangements are arm’s length.

Based on the new transfer pricing risk assessment tools, the MTA would likely select the target companies for special transfer pricing audits. Therefore, it is important that taxpayers pay special attention to the information provided in the new forms submitted. Incomplete or inconsistent filings or documentation could attract the attention of the MTA and lead to transfer pricing audits.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

• Martin Richter | martin.richter@hk.ey.com

Ernst & Young TMZ LLC, International Tax Services – Transfer Pricing, Mongolia

• Khishignemekh Regzedmaa | khishignemekh.regzedmaa@mn.ey.com

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