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GENERAL LAW OF TAXATION 1993

GENERAL LAW OF TAXATION OF MONGOLIA

CHAPTER 1. GENERAL PROVISIONSCHAPTER 1. GENERAL PROVISIONS

Article 1. Purpose of the Law

Article 2. Tax Legislation

1. The tax legislation shall comprise of the Constitution of Mongolia, this Law and other legislative acts enacted in conformity therewith.

2. Unless the international treaties of Mongolia stipulate otherwise than the present law, the provisions of international treaties shall prevail.

3. The relations pertaining to establishing, assessment, amendment of any taxes, tax credit and exemption, tax payment shall be regulated solely by the taxation law. (This part was added by the law of January 31, 1997).

4. A stability agreement on behalf of the Cabinet of Mongolia shall be concluded by the member of the Cabinet in charge of finance within the law framework.

5. Within the valid term of the stability agreement concluded by the Cabinet with the strategic investor the provisions of this agreement shall be applied consistently, regardless of provisions of tax legislation enacted after the conclusion of this agreement. (Clauses 4 and 5 were added by law of November 16 of 2001).

Article 3. The Tax System

1) The term "tax" means money which is transferred to the state and local budget without repayment by assessing at a fixed rate, within a fixed period of time of tax on income, property,goods,workandserviceofacitizen,businessentityandorganizationinconformity with the legislation. The taxes comprise of direct and indirect taxes.

2) The term "fee" means money which is paid to the state and local budget for the service providedbythestateorganizationstoacitizen,businessentityandorganizationinconformity with the legislation.

3) The term "payment" means money which is paid to the state and local budget and special purpose fund for use of the state property (land, entrails of the earth, and its minerals, forest and water sources not under the property of a citizen) by a citizen, business entity and organization.

Article 3-1. Law Definitions

1) "hiding taxable income and taxable items, except income" means any acts or failure to act which facilitates tax evasion, including physical hiding of income and other items subject to tax, groundless transfer thereof to other business entities, organizations and individuals, failure toreflecttheminaccounts,financialstatementandtaxdeclaration,intentionallywrongrecording in accounts and tax return, illegal transaction and fraud, failure to submit relevant documents, fabrication of liabilities, forgery of documents for purposes of tax evasion, transfer for use by others of the name, address, seal, accounts, state registration certificate, business license, property of the business entity or organization or citizen's documents;

2) "willful understating of taxable income and other taxable items, except income" means willful understating of the amount and value of taxable income and other taxable items, except income, in accounts, balance sheet, financial statement, report and income and tax return forms, forgery of documents by way of amending for purpose of understating the income, overstating expenses or artificial understating of income;

3) "imprudent understating of the amount of taxable income and other taxable items, except income" means arithmetical error in understating of the amount and value of taxable incomeandothertaxableitems,exceptincome,inaccounts,balancesheet,financialstatement, reportandincomeandtaxreturnforms,wrongassessmentoftaxableincomeandtaxdeductible expenses despite proper holding of records and accounts and balance sheet;

4) "termination of tax payment liability due to invalidation of law on certain type of law" means invalidation of the law on tax of type in question by the State Ikh Hural and completion of the term for tax settlement;

5) "evasion from payment of tax, interest and fine" means the following acts by the taxpayer: (a) wrong indication of the address; (b) a failure to report to the Tax Administration about address change and to have the note made in the state registration certificate; (c) a failure to submit balance sheet and financial statement, tax declaration, report, and income and tax return form; (d) a failure to turn up without valid reason at demand of the Tax Administration; (e) a failure to pay due taxes within time set froth by the law for the reason of not reporting about the address of residence while the court did not announce the tax payer as missing;

6) "invalid contract and transaction" means any transaction made in breach of law in terms of its content or outside the law, transactions concluded with legally incapable persons, such as under aged, mentally sick or mad persons, transactions concluded under pressure and on pretext of inevitable need, transaction made for pretending and not for achieving certain legal outcome;

7) "income gained through illegal act" means incomer gained in breach of taxation and other legislation;

8) "to pose hindrance" means willful act or a failure to act, including failure to submit to a tax inspector in discharge of his duties requested financial documents, accounts, balance sheet and tax return, to enable access to premises and warehouse, messing up inventory taking and estimates, preventing inspection and working photo taking;

9) "to exercise resistance" means beating, kicking, pushing, pouring any liquid, physical resistance,threattoexercisephysicalresistance,wordhumiliationofataxinspectorindischarge of his duties;

10)"transferred income" means transfer through account of payment for work and services provided by an individual, business entity and organization on a contract base to a business entity and organization and an individual through a business entity or organization where this individual is employed;

11) "tax payer organization" means business entity, organization or fund which is registered at the Tax Administration and other authorized organization in compliance with laws of Mongolia and defined as a taxpayer by this Law and specific tax law;

12)"profit making organization or fund" means a legal person must work on a principle of compete covering expenses from income gained from its business operations;

13)"withholding" means imposition and withholding for further transfer to the budget of tax on salary, labor remuneration , bonus, premium, and other similar income and income specified by law, paid throughout the year to individuals by individual, business entity or organization in compliance with the taxation legislation;

14)"tax liability" means tax unpaid in time set forth by the taxation laws, interest and fine on due tax, reimposed tax, interest and fine established through tax audit.(Amended by law of November 16, 2001).

Article 4. Introduction, Amendment and Annulment of Taxes

1. The State Ih Hural (Parliament) of Mongolia is authorized to introduce, amend and annul taxes by law.

2. The rate of taxes shall be set forth by the State Ih Hural of Mongolia on its authorization by the Government and Representative Hural of each aimag and capital city in conformity with the legislation.

Article 5. Taxpayer

1) A citizen of Mongolia;

2) A foreign resident and a stateless person in the territory of Mongolia, a non-resident person who gains income in Mongolia; (Amended by law of January 31, 1997)

3) Foreign and domestic business entity, organization and fund in the territory of Mongolia, legal person which is not located in the territory of Mongolia, but gains income in this country; (Amended by law of January 31, 1997 and November 16, 2001);

4) A Representative Office of a foreign business entity or organization which gains income in Mongolia. The taxpayers specified in clause 1) and 2) of this Article shall be hereinafter referred to as "individual".

Article 6. Registration of Taxpayer

1. Business entity and organization which are to be taxpayers are subject to registration at the Tax Administration.

2. Registration of a citizen, who is a taxpayer, shall be defined in conformity with the specific tax law.

Article 7. Taxable Item

Article 8. Tax Credit and Exemption

1) Tax deduction;

2) Reduction of tax rates;

3) Special-purpose tax exemption to support a taxpayer for inducement of his business;

4) Tax exemption of income, property, goods, work and services beneath established minimum level;

5) Tax exemption of a taxpayer;

6) Tax exemption of some part of taxable item ; and

7) Other tax credit stipulated by the legislation.

Article 9. Tax Payment Procedure

1. Tax is imposed by a tax return or withholding. Tax payment is done in cash or non-cash form. Other forms of tax imposition and payment of taxes shall be defined by the specific tax laws.

2. The terms of the tax payment are defined in conformity with the specific tax laws. The deadline of the tax payment and the tax return shall be the same. If a deadline falls on weekend or public holiday, then the preceding day shall be the deadline.

3. Overdue and reimposed taxes, interest, fine of business entity, organization shall be withheld in a non-disputable way. No person who conducted tax assessment, tax withholding, payment to the budget and settlement shall be paid fees and charged withholding for settlement work and services and. (The second sentence added by law of January 31, 1997)

4. Business entity and organization shall pay indirect taxes without waiting the final results of its operation.

5. A certified accountant shall carry out tax assessment and tax settlement of business entity and organization.

6. The taxable income shall be assessed by the date of issuing a claim, invoice, or payment, whichever comes first. The date of taxable income with investment financing source shall be assessed from the date of payment. (Added by law of November 16, 2001).

Article 10. Taxpayer's Obligations

1) To report one's taxable item and tax honestly and to pay taxes within the prescribed time limit;

2) To provide the Tax Administration with corresponding calculations, reports and returns on imposed taxes and payment of taxes within the prescribed time limit;

3) To keep book-keeping records in compliance with regulations, balance sheets and reports on financial and economic operations;

4) To meet the demands of the Tax Administration to eliminate any infringements are occurred in case of committing violation of the tax legislation;

5) To sign the act of the audit of the Tax Administration in case of agreement therewith. To submit written explanation in case of disagreement therewith;

6) A business entity and organization shall withhold and remit to the budget imposed taxes on salaries, wages and other similar remunerations of their employees and non-employees for the required fixed term;

7) To impose tax on income specified in taxation law as taxable and to make payment within the time limit set forth by law;

8) To notify the Tax Administration about obtaining a special permit for conducting production and services not prohibited by law within 3 days after receipt of such permit from the relevant state administrative body and to have a note made in the tax payer's certificate;

9) A business entity and organization shall submit quarterly to the relevant Tax Administration unit a report on tax withholding and payment with indication of name, address, registration number of a business entity, organization and individual;

10) To submit to the Tax Administration a document on transfer into possession of other person of taxable property and right;

11) To ensure not to provide opportunity for tax evasion by assigning for use by other person of its name, address, seal, state registration certificate, company and personal account;

12) To notify the relevant Tax Administration unit about lease or sale to an individual or legal person of a special permit obtained from a relevant organization;

13) To notify the relevant Tax Administration unit about opening or closing a bank account;

14) In connection with enabling conditions for consistent nationwide pursuance and ensuring implementation of taxation legislation to follow procedures, instructions, methodology and recommendations enacted by the General Department of National Taxation in compliance with the legislation. (Clauses 7-14 added by law of November 16, 2001).

15) Other obligations stipulated by the legislation. (Numbering of this clause amended by law of November 16, 2001).

Article 11. Termination of Tax Payment Obligation, Transfer Thereof to the Others

1. In the following cases, the obligation of the tax payment is considered to terminate:

1) The specific tax law is canceled;

2) The specific tax is paid;

3) The taxpayer is fully exempt from the specific taxes;

4) The taxpayer is died or considered to be died; and

5) The business entity and organization has been liquidated.

2. The obligation of the tax payment of a taxpayer who was died or considered to be died and the right connected with it shall transfer to the taxpayer's heir.

3. The obligation of deficient tax payment of re-organized business entity and organization and the right connected with it shall transfer to newly organized business entity and organization as a result of re-organization. If business entity and organization were separated as an independent unit, the obligation of the tax payment according to the tax base shall transfer to them.

4. If a business entity or organization is bankrupt or has been liquidated, the commission of liquidation or the committee of shareholders should pay owed payment of taxes from remaining property of that bankrupted or liquidated business entity or organization.

Article 12. Rights of a Taxpayer

1) To enjoy tax credit and tax exemption according to the tax laws, to choose the deductions and exemptions available to him;

2) To examine the tax laws and regulations made by the Tax Administration;

3) To make or get explanations in reference with tax imposition, tax payments and results of tax investigations

4) To get repayment caused by improper decisions of the Tax Administration in conformity with the legislation;

5) To get refunds of overpaid taxes or sheet to apply overpaid taxes to future taxes obligations; and

6) To protest unlawful actions and decisions of the Tax Administration and its inspector to a court or authorized administrativeagency.Thisprotestshallnotserveagroundfornotpayingtaxes.However,payment of taxes may be suspended by an investigating court.

Article 13. Liability of a Taxpayer

1. A taxpayer shall be subject to the following liability, unless their infringement of tax legislation is considered to be of criminal nature:

1) If the taxable income was willfully understated or hidden, a fine equal to the taxable income of hidden or understated income shall be imposed; (Edited by law of November 16, 2001).

2) Except income, if other tax base was hidden or its quantity or amount was reduced willfully, unpaid taxes will be recovered and the fine is equal to unpaid taxes;

3) If the amount and quantity of tax will be recovered and one per cent interest will be paid for each day of delay of unpaid amount. But the amount of paid interest should not exceed 50 per cent of the taxable income;

4) In case of overdue tax payment, an interest equal to 0.5% of unpaid tax amount for each day of delay shall be imposed. The term "interest" shall not apply to the term "forfeit" of the Civil Code of Mongolia (Edited by law of November 16, 2001).

5) Other liability stipulated in the legislation.

2. The statute of limitations relating to taxes, interest and fines shall be 5 years. This shall not apply to the statute of limitations set forth in the Civil Code of Mongolia. The statute of limitations for payment of taxes, interest, and fine shall be assessed from the date of expiry of the time set forth for tax assessment and payment. (Edited by law of November 16, 2001).

Article 14. Obligations of Bank and Financial Institutions

1. A bank and financial institution shall submit data pertaining to implementation of tax inspection to the Tax Administration. (Annulled "in conformity with the regulation set forth the Minister of Finance and the Governor of Mongol Bank" by law of January 31,

1997).

2. A bank shall execute tax payment of a taxpayer who is a client of this bank within 12 hours. The bank which got received such payment shall remit it to the budget account within the same day. In the event of a failure to fulfill this duty the Tax Administration shall impose an interest of 0.5% from amount of non-remitted tax payment for each day due.

CHAPTER 2. TAX SYSTEM OF MONGOLIA

Article 15. Types of Taxes in Mongolia

1) The state taxes are referred to taxes, rates and bases for which are introduced and which are collected in the same way in the territory of Mongolia;

2) The local taxes are referred to taxes, rates and bases for which are introduced by the Representatives Hural of each aimag and the capital city and which are collected in each territory.

Article 16. State Taxes

1) Income tax of business entities and organizations;

2) Customs duty;

3) Value-added tax;

4) Excise tax;

5) Tax on auto fuel and diesel fuel;

6) Payment for use of mineral resources (Amended editing by law of November 16, 2001).

Article 17. Local Taxes

1) Personal income tax ;

2) Gun tax;

3) City tax;

4) Dog tax;

5) Inheritance and gift taxes;

6) Real estate tax;

7) State stamp tax;

8) Payment for use of water and springs;

9) Tax on auto vehicles and self-moving vehicles;

10)License fee for use of natural resources, except minerals resources;

11)Payment for use of natural plants;

12)Payment for use of widely spread mineral resources;

13)Payment for use of hunting resources, animal hunting and catching license fee;

14)Land payment;

15)Payment for procurement and use of wood fuel and timber from forest (Amended editing by law of November 16, 2001).

Article 18. Tax Rates

1. The rates of taxes indicated in Article 16 of this Law shall be defined by the State Ih Hural. (Amended by law of June 2, 1995 and November 16, 2001)

2. The rates of taxes indicated in paragraphs 13-15 of Article 17 of this Law shall be defined by the Government within the limits approved by the State Ih Hural . (Amended by law of January 31, 1997 and November 16, 2001).

3. Hurals of aimags and the capital city citizens' representatives shall set forth the rates of taxes indicated in clauses 1-12 of Article 17 of this Law. (Amended by law of November 16, 2001).

CHAPTER 3. NATIONAL TAX ADMINISTRATION OF MONGOLIA

Article 19. System of National Tax Administration

1. The National Tax Administration of Mongolia is comprised of the General Department of National Taxation, tax agencies of aimags, capital city, soum (county) and district tax inspectors. . (Amended by law of November 16, 2001).

2. The General Department of National Taxation and in aimag and capital city tax agencies shall have a taxpayer registration unit and the National Tax Administration shall have a Tax Development Fund. The procedure for building up and disbursement of the Tax Development Fund shall be set forth by the Cabinet. (Amended by the Law of January 8, 1998 and law of November16, 2001).

3. The General Department of National Taxation, and aimag and capital city tax agencies shall run Tax Dispute Settlement Council authorized to settle disputes arising between taxpayers and the Tax Administration. The procedure of work of the Tax Dispute Settlement Council will be set forth by the Cabinet. (Amended by the Law of January 8, 1998).

Article 20. Charter of State Tax Administration

Article 21. Management of Tax Administration and Powers Thereof

1. The National Tax Administration shall have a unified and central management. .

2. The General Department of National Taxation shall work under supervision of the Minister of Finance, the aimag and capital city tax departments and divisions under supervision of the General Department of National Taxation, district tax divisions and soum tax inspectors under supervision of capital city and aimag tax department and division.

3. The General Department of National Taxation shall provide the work of tax agencies of all levels with professional and methodological management.

4. The Chairman of the General Department of National Taxation shall appoint the head of aimag and capital city tax departments and divisions, the head of the capital city tax department shall appoint a head of the district tax division respectively upon consultation with the Governor of the relevant level.

5. A state tax inspector shall be appointed by the head of the relevant tax agency.

6. A Chairman of the General Department of National Taxation shall be a Chief state tax inspector and shall exercise the following powers along with the powers of the state tax inspector specified in Article 24 of the General Law on Taxation:

1) to provide management, organization and supervision in exercising of powers of the Tax Administration;

2) to enact procedures, instructions, methodologies and recommendations to be followed anew to ensure implementation of taxation legislation;

3) to grant and suspend rights of state tax inspectors, and to impose disciplinary sanctions;

4) to issue ordinances to be followed in Mongolia within the powers extended by the taxation legislation;

5) to participate in the development of tax policy;

6) to make proposals to international treaties and agreements on avoidance of double taxation of income and property and on prevention of tax evasion;

7) to revise, amend and annul the acts of audit issued by tax inspectors in compliance with law;

8) to appoint and dismiss employees of the General Department of National Taxation;

9) to exercise supervision over exercise of powers by state tax inspectors and senior state inspectors;

10) to dispose of the budget and assets of the National Tax Administration. (This Article was amended by law of January 31, 1997 and clause 6 added by law of November 16, 2001).

Article 22. Principle of Work of The National Tax Administration and Tax Inspectors

Article 23. Functions of The National Tax Administration

1) To supervise the implementation of the tax legislation;

2) To develop procedures, instructions, methodologies to implement taxation legislation, to conduct training and public awareness building;

3) To build up the state and local tax revenue.

Article 24. Rights of The State Tax Administration and Its Inspectors

1. The State Tax Administration shall have the following rights:

1) To provide exemptions and deductions to a taxpayer in conformity with the tax legislation;

2) To impose a tax in the amount specified in law for similar types of business on a taxpayer which fails to maintain primary records and accounts and whose income and expenses cannot be defined (Amended by law of January 31, 1997).

3) To carry out activities of case investigation for prosecution in conformity with the Criminal Procedural Law;

4) To temporarily freeze the bank account of a business entity and organization which did not pay taxes on time, until full payment of taxes is made;

5) In the event of a failure of tax payer to pay taxes, interest and fines established by the Tax Administration within due time to carry out tax collection action in compliance with the relevant procedure (This clause was amended by law of April 18, 1996);

6) To withhold over paid taxes for the next tax liability or, if taxpayer should ask for a refund, overpaid taxes will be paid back within 30 days from the end of the assessment ;

7) To impose penalties indicated under the law on a taxpayer who has failed to pay taxes, interest, fine and did not submit a tax return and records in time, and who did not make appropriate measures to stop violations which were discovered during the tax inspection;

8) To annul and revise the decisions of the lower rank Tax Administration, if the higher rank Tax Administration finds it groundless;

9) To obtain information in a tax investigation from a citizen, business entity and organization and without cost; and

10) To appeal to court in the following cases: (a) to cease for ever the business operations of a taxpayer for serious violations of tax laws; (This clause was amended by law of January 31, 1997); (b) to confiscate for ever profit gained from carrying out production and services prohibited by law and the equipment, instruments, tools and raw materials used for such production; (This clause was amended by law of January 31, 1997); © to confiscate for ever income of a taxpayer gained from carrying out production and services not prohibited by legislation but for which a relevant permit was not obtained; (This clause was amended by law of January 31, 1997); (d) to confiscate for ever income gained by a taxpayer through fraud or invalid contract and transaction or illegal act (This clause was amended by law of January 31, 1997); (e) to impose appropriate sanctions on the person, who posed hindrance, resistance, put a pressure in connection with his work and endangered health and life of a tax inspector; and (f) to settle tax liability (This clause was added by law of January 31, 1997); (f) other cases stipulated by legislation.

2. The tax inspector shall have the following rights:

1) To audit accounts, balance sheets, records, projections and other financial documents connected with imposition and payment of taxes and to get explanations and surveys referred above mentioned examination;

2) To obtain at no cost from a partner business entity and financial institutions evidence and copies of documents required for tax audit (Amended by law of August 28, 1998);

3) To temporarily seize, copy, pledge and seal property and documents evidencing of hiding by a taxpayer of taxable items (This clause was amended by law of November 16, 2001);

4) To enter premises and warehouse (regardless of its location) of taxpayer used for gaining income or for storing taxable items to conduct audit, inventory taking, work photo taking and, if necessary, to carry out investigation;

5) In the event of a failure of business entity and organization to withhold pay to the budget tax on labor remuneration and income paid to others, to have the business entity and organization to repay from its assets;

6) To impose the liability defined in paragraph 1 of Article 13 of this Law on a taxpayer;

7) To maintain confidentiality of taxpayer's commercial secrets of production, sales and capitals; and

8) To inform and advise other appropriate bodies about the illegal actions by individuals, business entities and organizations revealed in the course of exercise of their duties.

Article 25. Liability of a State Tax Inspector

Article 26. Professional Rank, Remuneration for Professional Rank and Rewards

1. A tax inspector has a professional rank and he will get remuneration for such a professional rank.

2. A tax inspector is eligible to receive rewards for work performance.

3. The tax inspector will get monthly remuneration for a professional rank and may receive rewards for his service but together such compensation shall not exceed a monthly salary.

4. The rules for setting up a professional rank and remuneration and rewards for the result of service will be established and approved by the Government.

Article 27. Budget of the National Tax Administration

Article 28. Ensuring Rights of State Tax Inspector

1. A state tax inspector shall be eligible for free uniform. The design of the uniform, rank symbols of state tax inspectors, the procedure and duration of their use and shall be approved by the Chairman of the General Department of National Taxation (This clause was amended by law of January 31, 1997).

2. In the event of a state tax inspector losing temporarily working capability, becoming handicapped, losing life under influence of others while discharging his duties, he or his family shall be given grant aid and a base salary difference:

1) In the case of temporarily losing working capability, allowance for the period of being sick and a difference of base salary for the relevant rank;

2) In the case of becoming handicapped, an allowance for handicapped a difference of base salary for the relevant rank;

3) In the case of death the family shall receive one time grant aid equal to his salary for 3 years.

3. Grant aid and salary differences indicated in Paragraph 2 of this Article are allocated from the budget. These payments will be repaid by guilty persons.

CHAPTER 4. MISCELLANEOUS

Article 29. Duty of Central and Local Governments and Its Official

Article 30. Entry Into Force

General Secretary of the General Office of the

State Ih Hural of Mongolia

N. Rinchindorj

November 23, 1993 Ulaanbaatar