Mongolia requires the withholding of 20% withholding tax (WHT) from payments to non-resident service providers. While this 20% WHT can be reduced to nil (or in certain cases, 5% or 15%) under the applicable double tax treaty, the Mongolian Tax Administration notified that Mongolia has double tax agreements with only 26 jurisdictions.
As a result of Mongolia’s 20% WHT, the foreign service provider grosses up their invoice so that they receive net payment and the Mongolian taxpayer’s costs increase by 20%.
We have carried out research into the jurisdictions set out herein to conduct a comparative analysis of their WHT regime with our own regime. In carrying out the research, we referred to publications issued by the Deloitte network.
Mongolian local businesses procure technical, managerial or consultancy services from foreign suppliers when they are unable to source them from Mongolia. The reasons for such procurement are multi-faceted, including but not limited to, bringing technical expertise to local staff, technical expertise, quality, scope or deliverables.
However, local businesses face tax-related problems in parallel to their acquisition of foreign-sourced services. Specifically, foreign service providers are taxpayers in their own countries, and accordingly they shift the tax burden to the customer. Technical service contracts typically stipulate that all taxes on the Mongolian side are to be borne by the service recipient or customer, and the Mongolian business that needs the consultant's services has no choice but to agree to this term.
As a result, the price of foreign consulting services increases by 30% in total including 20% WHT and 10% VAT, which is one of the reasons for the increase in the cost of goods and services for Mongolian resident taxpayers.
As foreign service providers are typically tax residents in their own home country, it is unlikely that they will be willing to pay double tax in the source country. As a result, the Mongolian customer bears the tax cost. As the non-resident service provider is unlikely to be willing to pay Mongolian income taxes by way of withholding, we think that Mongolian taxpayers and local businesses need to be supported via tax policy.
On these premises, we decided to conduct research into certain countries as to whether they have withholding tax on fees related to technical, managerial or consultancy services.
The table below shows the WHT regime of the jurisdictions we selected.
Fees for technical services: No withholding tax applies to fees for technical services.
Үйлчилгээ үзүүлсний суутган татвар байхгүй
Fees for technical services: There generally is only a tax on fees for personal services, including technical services if the services are performed within the US. If the services are performed in the US, such fees typically would be ECI.
Хувь хүн АНУ-ын нутаг дэвсгэр дээр үйлчилгээг үзүүлсэн бол суутган татвар байдаг.
Technical service fees paid to a nonresident generally are subject to withholding tax at 10% (plus any applicable surcharge and cess). The rate may be reduced under a tax treaty. Where a treaty applies, but the nonresident does not have a PAN, tax must be withheld at the higher of the applicable tax treaty rate or 20%; however, this does not apply if the payments are in the nature of technical service fees and the foreign taxpayer provides the required documents to the payer.
Оршин суугч бус этгээдээс 10%-ийн татвар дээрээс нь холбогдох нэмэгдлийг суутгадаг. Давхар татварын гэрээ байдаг боловч оршин суугч бус этгээд нь Энэтхэг улсад татвар төлөгчийн дугаар аваагүй бол 20%-ийн татвар эсвэл давхар татварын гэрээнд заасан хувь хэмжээний аль өндөрөөр нь суутгадаг.
Fees paid to a nonresident company or individual are subject to a 20% withholding tax rate. The withholding tax rate on fees paid to nonresidents may be reduced under a tax treaty or other provisions of domestic tax law, subject to the nonresident obtaining a reduced or nil withholding certificate from the tax authorities in advance.
Оршин суугч бус этгээдээс 20%-ийн татвар суутгадаг. Давхар татварын гэрээ байдаг бол татварын албанаас урьдчилж гэрчилгээ авсны үндсэн дээр бууруулсан хувь хэмжээгээр суутгуулах боломжтой.
Fees for technical services: Australia does not levy withholding tax on payments to residents or nonresidents of technical service fees that fall outside the definition of royalties
Эрхийн шимтгэл гэдэг нэр томъёоны тодорхойлолтод багтаагүй үйлчилгээний орлогоос татвар суутгадаггүй.
Fees for technical services: Fees paid for commissions, consultancy, and services performed or used in France are subject to the 25% standard corporate income tax rate as from 2022. The rate may be reduced or eliminated under a tax treaty. No withholding tax is imposed on such fees paid to residents.
Үйлчилгээг Франц Улсад ирж үзүүлсэн бол 25%-ийн татвар суутгадаг. Үйлчилгээг Франц Улсаас гадна үзүүлсэн бол татвар суутгадаггүй.
Fees for technical services: No withholding tax applies on fees for technical services paid to a resident or nonresident company.
Fees for services: A 10% withholding tax generally applies to the rental of movable property and to service fees paid to a nonresident for services rendered onshore (with no distinction made between technical and non-technical services), unless the rate is reduced under a tax treaty. Fees paid to a nonresident for services rendered offshore are not subject to withholding tax.
Үйлчилгээг Малайз Улсын нутаг дэвсгэр дээр ирж үзүүлсэн бол 10%-ийн татвар суутгадаг. Үйлчилгээг Малайз Улсаас гадна үзүүлсэн бол татвар суутгадаггүй.
Based on the above analysis, some of the jurisdictions have no WHT on service income and others do not impose WHT if the services were carried out offshore.
Should Mongolia be compelled to implement such favorable tax policies, not only will Mongolians have greater access to foreign know-how, skills and experience at reduced costs, but it will also be competitive advantage for Mongolia from a tax perspective. As such, it is time for policymakers to revisit the 20% WHT.
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