Press statement by Mongolia's Tax Authority regarding tax audit of Oyu Tolgoi LLCEconomy
Ulaanbaatar /MONTSAME/. On 23 December 2020, General Taxation Authority of Mongolia issued a press statement regarding the tax audit of Oyu Tolgoi LLC. The statement reads:
"Similar to many other countries’ designated tax administrators, the Mongolian Tax Authority (“MTA”) conducts a periodic audit of tax returns filed by companies within its jurisdiction to ensure the proper application of domestic tax laws and the satisfactory compliance of certain international transfer pricing principles, such as the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and Actions 8-10 of the BEPS Framework (the “International Rules”).
The MTA has recently completed an audit of Oyu Tolgoi LLC’s 2016-2018 tax returns and identified a number of violations and breaches of relevant laws and the International Rules. As a result, Oyu Tolgoi LLC was notified of MNT 649.4 billion (approximately US$228 million) of additional taxes, inclusive of penalty and default interests, that are due to be paid in cash to the Government of Mongolia. In addition, the MTA has reduced Oyu Tolgoi LLC’s operating loss carry forward balance by MNT 3.4 trillion (approximately US$ 1.2 billion).
Among others, the MTA concluded that certain transactions between Oyu Tolgoi LLC and Rio Tinto and its affiliates were not done at an arm’s length basis and were in violation of the International Rules. Accordingly, the value of such transactions was adjusted, for tax purposes, to reflect the actual value that would have been paid had the transactions occurred between unrelated parties dealing at an arm’s length basis. Major adjustments were made to a series of transactions between Oyu Tolgoi LLC and affiliated entities of Rio Tinto whereby economic value was transferred.
Transfer pricing audit is often seen as a complex process and the MTA conducted its audit on the basis of the "substance-over-form" doctrine in accordance with the International Rules as well as the General Taxation Law revised in 2019 which reflects the BEPS Actions. In the past 10 years, the MTA cooperated with various international organizations such as OECD, IMF, World Bank, UNDP, JICA and Intergovernmental Forum on Mining and received technical assistance from such organizations in various forms to implement transfer pricing best practices in Mongolia.
Oyu Tolgoi LLC has over 250 contractors providing services necessary for the development of its underground mine, including engineering, construction, installation, and other technical work as well as general consulting and IT services. MTA’s audit covered those transactions following the income “source” rules to determine the appropriate jurisdiction in which tax is payable, based on where the economic activities took place.
In other words, MTA determined that for any taxable income sourced from Mongolia, where the value is created, taxes should be paid to the Government of Mongolia (i.e. the source country with taxing rights). In particular, Oyu Tolgoi LLC’s treatment of “offshore” contracts and lack of taxes levied on work that were deemed by Oyu Tolgoi LLC to have not taken place in Mongolia is in violation of the internationally recognized “source” rule as adopted in Mongolian laws and regulations.
Oyu Tolgoi LLC must comply with the applicable laws and regulations of Mongolia (in accordance with the stabilized tax rates under the Investment Agreement) as well as international guidelines and issue transfer pricing documentation and reports in line with the International Rules."
Source: Tax Audit and Methodology Department, General Taxation Authority of Mongolia