Author: Attorney R. Nyamtseren

I am pleased to meet you again through AKP Law Firm’s regular series of articles designed to present legal knowledge in a clear and accessible way.This article briefly explains the crime of tax evasion in Mongolia that frequently arises for CEOs and other corporate officers of legal entities, and how to prevent it.

Contents

1.     Business and Tax

2.     The Crime of Tax Evasion and the Administrative Sanctions of Tax Offences

3.     Court Cases Where the Court Imposed Liability on Corporate Management

4.     Cautions for Management of Legal Person

1. Business and Tax

Operating a business and paying taxes are two sides of the same coin. In other words, if you establish a company, carry on operations, and earn profit, you must truthfully report your income and expenses and pay the relevant taxes. This is not only a basic civic duty under our Constitution, but also a universal arrangement found in every country.While conducting business, several types of taxes are paid to the tax authority. Most familiar is the Corporate Income Tax. In addition, there is Value-Added Tax (VAT); if you employ staff, Personal Income Tax (withholding); and, if you hold fixed assets such as real property or vehicles, Property Tax and Vehicle Tax—among others. What liability arises if, for the purpose of reducing or avoiding these taxes, one fails to report income and assets truthfully or fails to pay the taxes due?

In practice, corporate management and CEOs may, sometimes even unwittingly, find themselves investigated for the crime of tax evasion or for an administrative offense. Being subjected to such criminal or administrative proceedings can diminish the productivity of CEOs and management and impose significant financial and psychological burdens. In serious cases, it can disrupt or delay the company’s operations. For these reasons, CEOs and management should have a basic understanding of the crime of tax evasion and of the administrative sanctions of tax offences, together with the knowledge necessary to prevent them.

2. The Crime of Tax Evasion and the Administrative Sanction of Tax Offences

The Criminal Code of Mongolia and the Administrative Misdemeanor Law both provide for liability in relation to tax-related conduct.Specifically, Article 18.3 of the Criminal Code of Mongolia sets out the crime of tax evasion, while the Administrative Misdemeanor Law of Mongolia provides for liability for the offense of violating tax legislation. 

Where tax-related conduct does not meet the elements of a criminal offense, liability is imposed on the legal person under Article 11.19 of Administrative Misdemeanor Law of Mongolia.

This is a very broad regulation. Specifically, it imposes liability including fines or additional tax assessments for acts such as failing to submit reports on time, failing to pay taxes by the due date, failing to undergo a tax audit, failing to appear when summoned, or failing to provide VAT receipts. Below are the most common infringements that Mongolian Legal Entities commit during their business activities.

3. A Court Case Where the Court Imposed Liability on Corporate Management

The following case concerns the imposition of criminal liability on a company’s executive director, management, and accountant as authorized officers.

Court case1. False entry of VAT receipts

Fact: Defendant M served as director of “O” LLC, which carried on wholesale sales of fruits and vegetables at the Bars Market in Mongolia. In or about August 2022, M. saw a Facebook advertisement stating “We will enter surplus VAT.” Acting on that advertisement, M contacted the advertiser and, for the 2022 year-end and the first-quarter reporting period of 2023, caused VAT to be entered as though “A” LLC had sold goods and services to “O” LLC under six invoices totaling MNT 618,181,816. As a result, the amount of VAT payable to the General Tax Authority by “O” LLC was reduced by MNT 61,818,179. In return, in accordance with his arrangement with the advertiser, M paid to the advertiser approximately 1.8 percent of the entered VAT amount (which is about MNT 11,000,000) to as a service fee.

The Office of the Capital City Prosecutor: Classified M’s actions under Article 18.3, paragraph 1 of the Criminal Code and submitted an indictment, transferring the case to court. The Circuit Court of First Instance for Criminal Matters: Found the defendant, M, guilty of the crime of “intentional wrong reporting of a substantial amount of taxable income, property, goods or service for the purpose of tax evasion by a taxpayer, executive authority of a legal entity” under Article 18.3, paragraph 1 of the the Criminal Code. The court sentenced M to six months of limitation of free travel right and ordered the recovery of 61,818,179 MNT from M to be transferred to the General Tax Authority.

Appeal: M participated in the case without professional attorney. In his appeal, he stated: “I want to claim MNT 11,000,000 that I paid to the advertiser as damages. I also have a heart condition, and I regularly see a doctor, undergo treatment. When my health worsens, I must urgently visit hospitals and, if necessary, go to the China for treatment. Therefore, please modify the sanction of six months’ imitation of free travel right to a fine instead.”

Appellate Court: Appellate Court rejected M’s appeal. As this case shows, buying VAT to reduce tax backfires the company CEO resulting VAT payment and additional loss of MNT 11,000,000 million to others. In addition, the criminal penalty prohibiting him from leaving Bayangol District created conditions that interfered with his personal and business activities.

Source:  Монгол Улсын Шүүхийн шийдвэрийн цахим сан

Court case2. False entry of VAT receipts

Facts: T served as the director of “A” LLC operating in Bayangol District. To conceal a large tax arrears and with the purpose of evading tax, he deliberately made false declarations during the tax reporting period from April to June 2022. He recorded transactions under “purchase returns,” as if he had purchased goods and services totaling 1,000,000,000 MNT from “B” LLC across 31 invoices, thereby reducing the amount of VAT payable to the Tax Authority by 100,000,000 MNT. He was investigated for the crime of tax evasion. The Office of the Capital City Prosecutor: Classified T’s actions under Article 18.3, paragraph 1 of the Criminal Code and submitted an indictment, transferring the case to court.

The Circuit Court of First Instance for Criminal Matters: The court noted Article 31.1 of the General Tax Law, which provides that “a taxpayer may correct its tax report within the following tax year,” and Article 31.2, which provides that “if a taxpayer makes a correction that reduces the amount of tax due, the taxpayer shall submit the corrected return together with primary and other supporting documents evidencing the correction.” In light of the legislator having afforded taxpayers the possibility of correcting tax returns, the court decided that it was necessary to investigate the initial and corrected returns for the first half of 2022 and to conduct investigative measures related thereto in order to determine the nature and purpose of the accused’s guilt and intent.

Source: Монгол Улсын Шүүхийн шийдвэрийн цахим сан

Because the motive was insufficiently established, the case was remitted for further investigation.Comparing the two court cases mentioned above, in the first the defendant, without assistance of attorney, participated in the proceedings and was convicted. In the second, with the assistance of attorney, the case was returned for reinvestigation to determine the true intent.

4. For the Attention of Management of Legal Person

In many instances, investigators focus on the material element of Criminal Code Article 18.3, whether the amount exceeds 50,000,000 MNT and initiate a criminal case on that basis alone, without carefully examining the nature of the conduct or the intent, and without scrutinizing discrepancies between the detailed financial expert opinion and the tax inspector’s findings.In some cases, an authorized officer such as an accountant may submit an incorrect or erroneous return, either intentionally or inadvertently; whether such conduct was truly motivated by criminal intent may be doubtful.

Finally, obtaining advice from a professional attorney and consulting counsel when entering into contracts will enable you to design your business model appropriately, structure your transactions and cash flows properly, and rather than attempting to avoid taxes benefit from the tax system in accordance with law.

If you want to receive detailed advice and information related to this article, please contact us at the address below.  

Phone: +976 77041414 

Email: Contact@akp.mn