On 8 April 2022 the OECD published a tax and development case study entitled Tackling Multinational Tax Avoidance in Mongolia.

In 2019 the OECD and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) launched a technical assistance program in Mongolia and fourteen months later the first transfer pricing assessment was issued by the tax administration.

The mining sector contributed 19% of Mongolia’s GDP in 2019 and 94% of the value of its exports. Tax revenue from mining has however lagged behind, in large part owing to base erosion and profit shifting (BEPS) and the lack of tax administration resources to deal with this.

In October 2019 a Transfer Pricing Division was set up within Mongolia’s General Department of Taxation, focusing on tax issues from related party pricing within multinationals. Compliance initiatives also resulted from new transfer pricing rules introduced as part of the OECD’s BEPS project.

With advice from the OECD the tax administration examined options for databases to facilitate transfer pricing benchmarking studies. Following trial of the available databases and appraisal of the alternatives Mongolia began using the most suitable database for its purposes. This permitted reliable benchmarking as a basis for transfer pricing assessments.

The IGF provided capacity building support to the tax administration in 2020 in relation to the analysis and interpretation of mining contracts, which often include a stabilisation clause restricting the power of the host country to change the fiscal law in relation to an investor. The capacity building support enabled the tax administration to examine the interaction of investment contracts with the national and international law. This expertise will be applied in future contract negotiations with mining companies.

Mongolia is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and is committed to the implementation of the tax transparency standards. With advice from the Global Forum, Mongolia is setting up a legal framework for the international exchange of information. This will increase the effectiveness of tax audits and facilitate domestic resource mobilisation.

With support from the OECD and IGF Mongolia has also introduced regulations on the valuation of mining and exploration licenses for taxation of capital gains. Therefore, multinationals can no longer cherry-pick the valuation methods that result in the lowest tax charge. The regulations set out the accepted valuation techniques and therefore restrict the ability of taxpayers to engage in tax avoidance.

The implementation of standards on exchange of information has involved significant structural reforms including the elimination of banking secrecy in exchanging information for tax purposes; and updates to the money laundering legislation, which now requires legal entities to report their beneficial owners to the Registration Office.

Also, Mongolia signed the Convention on Mutual Administrative Assistance in Tax Matters in 2019 and ratified the Convention in June 2020.

The experience gained from working with Mongolia has enabled the OECD to design a more effective capacity building model, focused on outcomes. The model is based on long-term investment in capacity building and multi-faceted technical assistance.

The mining sector accounted for more than 20% of GDP in 41 developing countries and more than 10% of GDP in another 13 countries in 2019. This can be a source of wealth for local communities if appropriate tax is collected. Putting in place the correct mechanisms requires motivation within government institutions to build capacity for transfer pricing, as was the case in Mongolia.