Issue No. MTIN2017002
15 June 2017
Mongolia Tax Alert
The Mongolian Tax Authority (MTA) continues to focus on the area
of transfer pricing enforcement and has adopted new rules on
related party transaction disclosures and contemporaneous
transfer pricing documentation requirements.
Mongolia introduces new disclosure requirements on related party transactions
Executive summary
MTA has adopted a new tax form (XXM-01) that requires the disclosure of
information on related party transactions, as approved by the Ordinance of the
Commissioner Order no. A/96 on 28 April 2017. The key areas of impact from
these new requirements are as follows.
► It is the intention of the MTA to establish an internal database containing related party transaction pricing of Mongolian taxpayers, which could potentially be used by the MTA as ‘secret’ comparables.
► The new reporting requirements are likely aimed at enhancing the enforcement of transfer pricing rules.
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► The information provided will help the MTA in identifying non-arm’s length pricing arrangements at the time of tax filing, and in scrutinizing whether related party transactions meet the arm’s length standard.
► It is expected that the MTA will initiate targeted transfer pricing audits of related party transactions based on the initial risk assessments from the information submitted through the new forms. This is also consistent with the MTA’s initiatives of transforming its traditional statutory audit approach to a risk-assessment based audit approach.
Based on the above initial risk assessment tools, MTA
would likely select the target companies for special
transfer pricing audits. Therefore, it is important that
taxpayers pay special attention to the information
provided in the new forms submitted. Incomplete or
inconsistent filings could attract the attention of the MTA
and lead to transfer pricing audits.
These changes will have a wide-ranging impact on
taxpayers with respect to information collection and
processing, group transfer pricing policy setting, and
other areas. We strongly recommend that the local group
companies or MNEs proactively address the new
requirements as soon as possible.
Technical detailsNew Transfer Pricing Disclosure Return
The Commissioner of the MTA issued an Order no. A/96
dated 28 April 2017 that introduces a new transfer
pricing information disclosure form coded as tax form
XXM-01 (hereafter referred to as ‘TP Disclosure Form’). It
will be requirement for all taxpayers to submit the form as
part of corporate income tax filing package.
Below is a summary of key information disclosure
requirements and the level of detail that is required to be
provided in the new form:
► General information about related parties including names, addresses, ownership details, number of employees etc.
► List of each related party transaction in the reporting period disclosing transaction values, quantities and type of transactions
► Selected transfer pricing methods and selected profit level indicators or margins adopted for the related party transactions
► List of financial transactions with related parties in the reporting period including amount, type of financial transactions, interest rate and information on the time period for which interest has been accrued
► Information on cost sharing arrangements amongst the related parties, and roles and responsibilities thereof
► Disclosure on any business restructurings which has taken place during the reporting period, along with the rationale for executing such restructuring, value of the assets of the impacted entities before and after the restructure
► Changes to the indirect and direct ownership of the reporting entity
► Name of the unrelated parties which is referred to within any comparability analysis for the controlled transactions
The TP Disclosure Form is to be submitted on a semi-
annual basis starting from first half of 2017.
Transfer pricing documentation requirements
According to Mongolian prevailing transfer pricing
regulations, taxpayers are required maintain
contemporaneous documentation in order to comply with
the arm’s-length standard. The documentation should be
prepared in Mongolian. The transfer pricing
documentation should substantiate a taxpayer’s assertion
that, given the available data and the applicable pricing
methods, the chosen method (and its application)
provided the most reliable measure of an arm’s-length
result under the principles of the best-method rule.
The principal documents required by the regulations are:
► Name of the related parties, relationships between the transacting parties and incorporation documents
► Group ownership and legal structure
► Overview of group and company profile
► Description of the goods or services transferred
► Key terms and conditions of the contractual agreements
► Functions performed and risks borne by each party
► Comparability analysis
► Pricing method for the allocation of profits or losses, along with a description of the pricing method and reasons why the method was selected (a best-method analysis);
► Analysis and evaluation of external and internal economic and legal factors, including considerations of market conditions, economic circumstances and business strategy
► Benchmarking studies to support the level of arm’s length range for controlled transactions
EY observations
► The new requirements mark the beginning of a new era in Mongolia’s tax environment with the adoption of contemporaneous transfer pricing documentation requirements in the country.
► It marks the introduction of significantly enhanced requirements to disclose transfer pricing information which is more comprehensive, more detailed and more thorough than those required under current tax regime.
► The new TP Disclosure Form is now required to summarize the group’s transfer pricing policies and the outcome of those policies.
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► In our view, information contained in TP Disclosure Form will likely be input into the tax authority’s database and form a basis for the tax authority to identify potential investigation targets. As an example, if the TP Disclosure Form indicates that the taxpayer has a lower profit level than appropriate or insufficient documentation of its transfer pricing policies, inquiries from tax authority may be triggered which may also lead to a transfer pricing investigation.
► Therefore, we highly recommend that the local group companies and MNE subsidiaries prepare all information required by the forms in a complete, accurate and consistent manner.
Actions Required
The above new requirements will have wide-ranging
impact on taxpayers with respect to information collection
and processing, group transfer pricing policy setting, and
other areas.
We strongly recommend that the local group companies
or MNEs proactively address the new requirements as
soon as possible. Focus would be on evaluating aspects
such as the global tax framework, the value chain related
to the Mongolian business, and whether related party
pricing arrangements are reasonable. These initiatives will
require extensive assistance and cooperation from the
ultimate parent company of the MNE and its affiliates
(including Mongolian companies).
Practically, these new disclosure requirements will create
additional compliance and due diligence work for
taxpayers. It is expected that it will be time consuming to
arrange the internal department structure and business
processes to perform the work required, and to collect
overseas related party information.
EY assistance
EY experienced transfer pricing teams will be able to
assist clients in addressing these new requirements. Our
services can include the following.
► Providing guidance on the input required and assisting with the preparation of the new TP Disclosure Forms.
► Review and health check of existing group transfer pricing policies to identify tax and transfer pricing risks associated with intercompany pricing arrangements.
► Preparing transfer pricing documentation required by local regulations (including comparability/standardized studies).
► Planning services for establishing new transfer pricing policies and operating models.
Mongolia Tax Alert
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© 2017 Ernst & Young TMZ LLCAll Rights Reserved.
APAC No. 03004866ED None.
In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
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Contact us
Khishignemekh RegzedmaaSenior ManagerInternational Tax Service, Transfer PricingErnst & Young TMZ LLC+976 11 [email protected]
Martin Richter Partner, Transfer PricingInternational Tax Service, Hong Kong and MongoliaErnst & Young Tax Services Limited+852 2229 [email protected]
David M. AllgaierExecutive Director, Global Tax DeskInternational Tax Service, Asia Pacific, Head of Mongolian Tax PracticeErnst & Young TMZ LLC+86 21 2228 [email protected]
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