Indirect Transfer of Mineral Licenses – Taxable Starting from January 1, 2018
The tax treatment of offshore/onshore indirect transfers i.e. sale of shares of a Mongolian company holding mineral license(s) – has emerged as a significant issue in recent years in Mongolia.
The report prepared by the staff of the International Monetary Fund on “Safeguarding domestic Revenue-A Mongolia DTA[1] Model” from 2012 (“IMF Report”), as part of technical assistance to the Mongolian Government, points to the absence of taxing mechanisms for an “indirect transfer of mineral licenses” under Mongolian laws and notes the following:
- Mongolia is only able to safeguard its taxing rights on an indirect sale of exploration and mining licenses in a limited number of DTAs;
- 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 percent of their value from immovable property situated in Mongolia”.
New Regime
With effect commencing from 1 January 2018, an indirect transfer of mineral licenses will be subject to tax pursuant to the amendments to the Minerals Law, Law on Registration Legal Entities and the Business Entity Income Tax Law (“BEITL”) from November 10, 2017 (“Amendments”), which is believed to be a direct outcome of recommendations made to the Mongolian Government by various multinational and aid institutions over the years.
The Amendments provide:
- that the sale of shares of a Mongolian company, holding a mineral license, in whole, or in part, by a “beneficial holder” shall be subject to income tax in Mongolia;
- that any such transfer of mineral license shall be deemed “sale of right” pursuant to Article 17.2.7 of the BEITL, as such, shall be subject to tax at the rate of 30%;
- that any tax evasion, misreporting of income, or failure to provide documents to be used for the valuation (of shares/ and underlining assets i.e. mineral license)) shall serve as the ground for termination of a mineral license.
Transfer-Pricing and Re-assessment of Taxes
Under the current regime, the taxes to be paid in connection with the transfer of mineral licenses are separately reviewed, and if deemed necessary, re-assessed, based on Article 48 of the General Taxation Law and Article 11 of BEITL by the designated department of the General Taxation Office.
Only after the completion of such review, do the tax authorities allow the transfer a mineral license. When conducting its valuation of mineral licenses, the tax authorities take into consideration all investments put into the project, the total amount of license fees paid, and in case of mining licenses, the value of equipment and ancillary facilities to the mine, etc.
We note that there is no detailed methodology for transfer pricing in the Mongolian tax laws which allow for a restatement of income when goods are sold/transferred for a value less than the market price. Although the concept of the market price is somewhat obscure, especially in the case of mineral exploration licenses, the above procedure has been consistently followed by the tax authorities since 2011 and involved considerable discretion on the side of the tax authorities.
The Amendments provide that the detailed methodology for the valuation of shares (along with underlying assets) and assessment of taxes shall be adopted by the Ministry of Finance.
Therefore, it is anticipated that the Ministry of Finance will adopt detailed rules pertaining to the determination of arm’s-length pricing of the shares in question, simultaneously with the Amendments entering into the effect.
Effect of Double Taxation Treaties
Mongolia is a signatory to 25 double taxation treaties. Most tax treaties Mongolia has entered into contain typical UN and OECD model tax convention wording which provides that that with respect to the sale of shares that capital gains tax is to be paid only in the country of residence of the seller, except where the gain is “derived from the alienation of shares deriving more than 50 percent of their value directly or indirectly from immovable property (definition of “immovable property” normally includes “mineral licenses”) situated in the other Contracting State may be taxed in that other State” (i.e. Mongolia). Other treaties omit the “except” entirely, which seems to provide for capital gains to be paid in other treaty party jurisdiction only even in respect of companies where the value is derived from mineral licenses.
Shortcomings and Conclusion
The Amendments do not provide for an exemption for the transfer of shares as part of intragroup restructuring and sale of shares through trading on stock exchanges. These shortcomings will need to be rectified by the Parliament in a timely manner as they may adversely affect the investment image of the country.
Given the above developments, investors should consider obtaining thorough tax advice and conduct double taxation treaty analysis before structuring the corporate holdings of their mining projects in Mongolia.
[1] DTA refers to “Double Taxation Agreement”
