Onchinsuren Dendevsambuu is a Managing Partner of Deloitte Onch, Deloitte’s Mongolia arm and she is a tax consultant with extensive experience in Mongolian tax laws.
This thoughtful interview provides a fairly detailed treatment of the realities of tax assessment in Mongolia. In addition to evaluating the underlying tax laws with their implications and example of cross-border trade taxation issues, Ms Onchinsuren also reveals some of the procedural aspects of filing taxes.
Is a Mongolian tax advisor worth it? Probably.
Enkhzul Orgodol: Ms. Onchinsuren D has over 20 years of experience in tax and auditing services industry in Mongolia. She’s inevitably one of the most influential female business leaders in the country. Currently she’s working as a managing partner of Deloitte Onch, subsidiary for one of world’s biggest four professional services firms in the world.
Ms. Onchinsuren, welcome. Thank you for agreeing to talk to us. Just now I was actually asking you about the branches or the main activities of your company, of your Deloitte Onch firm. Could you explain the business structure to the viewers?
Onchinsuren D: Deloitte opened in Mongolia in 2012. We as an Onch Audit formerly, I have opened my practice in 2004, and then we became Deloitte in 2012. We are one of the longest-operating professional services firm in Mongolia, and most importantly, truly led and managed by locals.
We have three partners here in our Deloitte Mongolia office. Two of them are locals, me, myself, and Norjinbat, who is leader of consulting advisory services, and then we have the third partner who is Italian, Max Vergani, leading our audit services. Whenever there’s challenges and needs in any of the professional services area, we serve and we always welcome.
Enkhzul Orgodol: I would really high recommend your firm out of the similar firms I think mainly because of it’s run by or managed by a local, because I found if this kind of special service firm is run and managed by a local, then she or he would be more knowledgeable and better doing the nuances, finding the nuances and kind of overcoming the cultural differences.
Onchinsuren D: Won’t be lost in culture, yeah.
Enkhzul Orgodol: Right. Exactly.
Onchinsuren D: Yeah.
Enkhzul Orgodol: Could you tell us some of the government’s tax policies that are designed for such people as I just mentioned to attract more investment into the country?
Onchinsuren D: Yeah. Government is doing a lot, actually, to attract investment, specifically foreign investment for the last few years. Basically, government is doing a lot, but government is wishing lot, too. I have analyzed whether really the government wishing this policy is reflected in tax laws and how they are attracting through tax policy, which I had analyzed. Of course, we should be grateful there are number of incentives, but it could have been better and also better implemented, the issues, because although there is a policy for attracting investment, the implementation side is always left behind.
Enkhzul Orgodol: The problem with the implementation side, is it correct to understand that while there are a lot of interest and a lot of intention from the decision-makers to attract more investors into the country, that’s why they are ready to pass laws that are supporting the investment inflow to the country, but at the same time, the implementation part, the most important mechanism is left out mostly due to political instability or not so much of sustainable workflow in the administrative or implementing agencies of the government. Do you think that that’s where the problem is coming from?
Onchinsuren D: Yeah. I think it’s a hard question, too, but in my observation, the policymakers are really willing, wishing to improve the situation. The issue comes always with the implementation is because I think this process and planning well and preparing it, and then the implementing those processes, and then following up, monitoring whether these new policy is being implemented, and the beneficiaries, the intended beneficiaries are receiving it or not is really lacking, which means basically it’s administration and operational practices need to be really improved, specifically for tax.
I think our government, from our perspectives of government, they are actually happy that we have the lowest tax rates in Asia. For example, personal income tax is 10%, but by the way it’s going to be increased now, just the last week announced. The intention is announced. Corporate tax rate is 10% and 25%. It sounds like a very low tax rate, and it is, actually, and so investors and clients are always so happy to know that we have the lowest tax rates.
The expectations are, talking about expectations, I think, as I said, because the tax laws are very not clear the implementation could be a challenge.
Enkhzul Orgodol: I see.
Onchinsuren D: Do please talk to tax advisors.
Enkhzul Orgodol: I would definitely do that.
Onchinsuren D: Let me promote myself, too.
Enkhzul Orgodol: That’s valid. Talking about some low tax, the incentives, tax incentives, like the low tax for certain industries, I’ve heard that dairy producers enjoy, for example, VAT tax exemption. What other kinds of sectors, you mentioned about construction or maybe in general import substituting industries, but could you name the other sectors that are exempted from certain tax such as VAT?
Onchinsuren D: Instead of by sector, I think the tax incentives are applying to types of the operations, like whether you are manufacturing innovative products, producing innovative products, or whether you are producing a goods …
Enkhzul Orgodol: Any products.
Onchinsuren D: … that can substitute imports.
Enkhzul Orgodol: I see.
Onchinsuren D: That’s how it’s regulated or legislated. Milk and meat, I think that’s only for the purposes of consumers. These are dairy products and meat products are main consumption of food items, so just to reduce the cost on the …
Enkhzul Orgodol: Consumers.
Onchinsuren D: … consumers, this exemption, this incentive is available.
I also actually happen to see some statistics, so how many, for example, entities operating in Ulaanbaatar, registered in Ulaanbaatar and operating in Ulaanbaatar area, about more than 130,000. Out of that, more than 80% is SMEs, which means, who are the SMEs? It’s basically who has less than 50 employees and whose income is not higher than one billion tughrik, or the gross turnover sales is not higher than one billion tughrik. It’s about $400,000. The one billion is $400,000. That means the entire nation is really SMEs.
Enkhzul Orgodol: SMEs, yeah.
Onchinsuren D: The corporate world is.
Enkhzul Orgodol: The kind of tax incentives or also the requirements, et cetera, incentives, exemptions, requirements, do they all apply to locally or with a foreign-owned company is equally the same?
Onchinsuren D: Same.
Enkhzul Orgodol: I see. As long as they registered and incorporated in Mongolia. I see. Besides the tax incentives, of course there are other types of the agreement or documentations that government signs with other countries in supporting the business environment here. Of course, that includes the double tax treaty as well as the Free Trade Agreement. Could you tell us a bit about that?
Onchinsuren D: Yeah. Mongolia had more than three bilateral double taxation treaty. I think four years ago, more than four years ago, government decided to cancel four of them. These are Luxembourg, UAE … What else? Four canceled the tax treaties. Now we have maybe about 25 or 26 double taxation treaties.
I think the government is looking forward also to sign more double taxation treaties like Japan, because we had also entered into a bilateral agreement, trade agreement, so naturally, the double taxation treaty agreement is needed. The implementation is again an issue. Of course we have these treaties. Then, how do you apply these provisions of the treaties? It is another always a challenge sometimes. No, it’s most of the time, because when there is provision how to apply, for example, how do you describe, determine permanent establishment, which means this permanent establishment pays tax in Mongolia, so when do I pay tax in Mongolia, when I do not pay tax in Mongolia under this bilateral agreement? These are questions.
Then, normally, what we need to look at is, okay, what is permanent establishment under Mongolian tax laws? There is a definition, but not enough, so there’s always questions and always we refer it to the Tax Authority, and Tax Authority is also not in position to add or explain what is in the law so it’s always so challenging, the implementation.
Enkhzul Orgodol: Does it mean that although there are actually quite a number of double tax treaties signed, the implementation part is still lacking, so businesses have not been able to benefit from it as much as it was intended?
Onchinsuren D: Not exactly. The tax law allows you to assess your own tax. For example, as a taxpayer, I have a right to assess my tax. Whenever I have a transaction, a trade with, for example, let’s say, my supplier in Singapore, and my supplier provides goods and services to me, and Singapore, we have a double taxation treaty, so as a taxpayer and tax agent on behalf of the government, I have a right to assess my tax. I say like, okay, using the double taxation treaty between Singapore and Mongolia, you don’t need to pay tax in Mongolia. This is my right, but the thing is, it can be challenged by the Tax Authority later on during the tax audit.
Issues can be like, okay, my Singaporean supplier might have sent me a bank account in Hong Kong and say that, okay, “I need to collect this money in my Hong Kong bank account,” and I remit, I sent the money to Hong Kong, the Tax Authority might raise that, “Oh, you sent to Hong Kong, so you have to withhold 20% tax on this,” while I’m saying that no, because my supplier is Singaporean tax resident and we have this contract. They just instructed me to send their bank account in Hong Kong and we remitted it to Hong Kong. Therefore, I can’t charge the 20% withholding tax. There’s no tax should be, and that is double taxation treaty. Like that, this could arise.
Enkhzul Orgodol: You must advise your clients on such kind of, for example, double tax treaties and how they can benefit from it, don’t you?
Onchinsuren D: Yes. Yes, yes, we do. It’s a double taxation treaty. It’s a law, so how do you apply that, but we always advise our client that because of the implementation difficulties, challenges, you might still be questioned by Tax Authority, and there’s a risk of tax assessment, too.
Enkhzul Orgodol: To me, it seems like, for example, if I think of myself as a potential investor or a business person who’s interested in doing business with regard to Mongolia, I feel more and more like I should do my research and I should have my expectations both in the negative and the positive ways as much as possible before entering the market, or do you think it might be actually beneficial for some businesses to come in and learn while they’re doing?
Onchinsuren D: I think what drives their interest to come to Mongolia is the business opportunity. I think the business people would make decision based on their business profit opportunity and how profitable it could be. Then, the tax challenges is always there. Even if you go to operate in the U.S. or in U.K. or in Mongolia, it’s the same. Tax challenges, tax compliance is always on top of the one of the important, the priority issues for any businesses entering into foreign country. I think nothing very special about Mongolia tax, not that very scary. I do not want to scare away, but tax advisors are here.
Enkhzul Orgodol: What are the tax risks do you think the businesses should keep in mind?
Onchinsuren D: For any businesses, tax risk is, as I said, that businesses and taxpayers, they have their right to self-assess taxes, so when tax risk arises is that I assess it. I assess my tax by myself based on my reading of tax laws. Based on my suggestions, advice given by my tax advisor, I assess my taxes. There is crisis when Tax Authority does not agree with tax assessment. That’s the only thing. When this Tax Authority can be not agreeing with you is also, that’s the thing that taxpayers or any businesses need to understand.
One of the factors that are influencing different assessments by Tax Authority and taxpayers is that the tax inspectors have very big power to assess tax, assess additional tax. Those tax inspectors have this exclusive right, power to assess your tax, and that’s actually can be like one person’s judgment involves, and then also it involves the person’s knowledge and experience.
Specifically when we are discovering all these big deposits and starting, these big national, international companies started to operate in Mongolia, we are having more and more cross-border transactions. The experience of our Tax Authority and tax inspectors, understanding and handling audit in these cross-border transactions is one of the biggest factor that they may see it very differently than normal Western business person sees it or Western business practice.
That’s where biggest gap can be between this taxpayer and businesses coming from Western country, where they have all these rules and the regulations are in place and then where they have these cross-border transactions has been incurring maybe more than 100 years. They used to deal with it, they know how it happens, why it happens versus our Mongolia side, we have only experience of more than 25 years of experience in the market economy. We don’t know many of the things the trades, yeah, practices, like financial instruments that Western countries use in everyday. These are the new things to us to learn. While we are in the learning curve, people can be …
Enkhzul Orgodol: They leave the curve.
Onchinsuren D: Yeah, yeah. We can be judging it wrong.
Enkhzul Orgodol: We’re mostly talking about the tax-related issues that might be more applicable to businesses before incorporating their businesses in Mongolia. Could you tell us a bit more on after they are maybe incorporated or partnered with a Mongolian and start their businesses in Mongolia, how does the process is like? For example, there are certain countries that have digitalized their tax system or all these tax procedures. How easy or difficult it is to deal with tax-related issues after incorporation in Mongolia?
Onchinsuren D: Incorporation is, so process of registering with the state registration system takes about two weeks. Then, you can start operations. After you incorporated, you are given a taxpayer’s ID and you register as a taxpayer. Then, you need to start your compliance.
What is required is that tax returns are required to be filed quarterly basis and also you need the investors that foreign businesses or any businesses need to prepare a financial statements, statutory financial statements, and these are prepared in accordance with International Financial Reporting Standards, because our accounting law requires that we adopted IFRS as a national [cap 00:22:46], so businesses need to prepare international IFRS-compliant financial statements.
These financial statements are submitted or filed with the finance authority semi-annually. It’s been actually for also quarterly, but to ease these compliance processes, procedures, the government made it into semi-annual submission. Tax returns are now also can be submitted only through internet. You don’t need to submit it in hard copies and go in person, which we used to be. Last two, three years, the Tax Authority automated this system and we can submit this on through internet.
Enkhzul Orgodol: Please tell us a bit more on how difficult it is or please compare the situation of employing foreigners whereas employing locals in Mongolia in terms of the tax.
Onchinsuren D: I think our tax laws and social insurance law both apply to, it could be applied to foreigners and locals, but the expectation is that by businesses’ side is that if we employ foreigners and these foreign expatriates are only for short period of time and they would expect that they should not be paying as much as taxes that they are paying for employing locals, but the law is applying equal.
Yes, there are some clients do share with us that these expatriate employees are only for two years or three years or maximum five years and on abscondment, on assignment basis, but the employer at the Mongolian companies, they’ll need to pay Social Security while the employee will not be benefiting out of the Social Security. They would not get any pension here in Mongolia.
From that perspective, some businesses think it’s unfair, but we have done a number of researches and consultations and discussions with the Social Security, and I think the law was written in 2000 early and then amended subsequently in 2009 and 2008. Probably the government just, the Social Security fund needs basically a lot of contribution. We are now …
Enkhzul Orgodol: That’s also another learning curve.
Onchinsuren D: in a shortage more with, yeah. We probably need to assess taxes, tax, or have these foreign employees to pay taxes in Mongolia.
Enkhzul Orgodol: I see. Last two questions. The first one is, it’s not directly related to tax, but it’s one of the hottest topics in the country, I think. There has been lots of debate whether usage of offshore accounts should be allowed for Mongolians or for foreign companies operating in Mongolia. I think it’s a different matter when it comes to the politicians or the politically-related people, but how is the situation like for businesses? Are they allowed to have offshore accounts?
Onchinsuren D: Yes. Any foreign investment companies or any local company can open a bank account in foreign countries. It’s not prohibited in Mongolia by Mongolian laws. Opening a bank account is a contract and Mongolia laws acknowledge the freedom of contracting. Any person, any businesses can enter into any contract with any business parties.
Enkhzul Orgodol: I see, I see.
Onchinsuren D: No prohibition there. The only requirement is that the businesses need to register the foreign bank account with the State Registration Office. You have this business license, business certificate, incorporation certificate, and the State Registration Office actually registers all the bank accounts and some exact use in that state certificate, at the back of the certificate. Businesses need to have that foreign bank account registered there on that certificate. That’s it.
Enkhzul Orgodol: My last question is more to do with, I guess, your personal, how do I say, work style, because as I briefly mentioned to you, we’ve been interviewing, you’re now the eighth business leader we are interviewing, actually ninth. We’re interviewing three more. In total we will have 12 business leaders from different sectors throughout Mongolia, excluding mining, because mining has been the hottest topic for so long. We would like to show or reveal some of the hidden opportunities and under-tapped potentials of the country in other sectors.
By doing that, we want to talk to the people, the business leaders who have succeeded in the country. Besides all the technicalities we discussed about, and of course you obviously are a very knowledgeable and very experienced in your field, but what other kinds of advice or the kind of tips you think the business people or mainly the newcomers should keep in mind when they want to do business in Mongolia in successful and sustainable way?
Onchinsuren D: I think foreign businesses need to understand and explore more deeper about Mongolian culture. We have culturally nomads and we are very independent people. Sometimes there could be some misunderstanding, miscommunication when doing business in Mongolia maybe with your local business partner or maybe with your local employees due to these cultural differences.
The businesses need to be remind that Mongolians are, first of all, independent, and the secondly, very talented people. The third one factor may be, which can be in any other countries, any other nations, there could be miscommunications due to the language differences. Also there’s always communication challenge, too.
I think communication is the most important thing. Better have a very good open and face-to-face communications with your local partner. Mongolians are very actually have a good heart, specifically towards to any foreigners. They always know that you are away from your home country and you’re in a foreign land and we need to we are actually should be hosting well. There’s always such a big heart with Mongolians.
If there’s any challenges, it’s just need to be openly communicating, talking to your partners. I really wish successful partnership between Mongolian businesses and foreign businesses because we need to learn a lot in bringing high technology in the country.
Enkhzul Orgodol: Ms. Onchinsuren D, thank you very much for your time. It was a great pleasure and also great opportunity to hear the insights in your sector. Thank you.
Onchinsuren D: Thank you.