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COMPARATIVE STUDY OF TAX SYSTEMS :
JAPAN AND MONGOLIA
GANCHIMEG Perenlei (Mongolia)Visiting scholar
OIRC, Policy Research Institute,Ministry of Finance, Japan
June 7, 2007
COMPARATIVE STUDY OF TAX SYSTEMS:JAPAN AND MONGOLIA
OUTLINE
I. COUNTRY BACKGROUNDII. RECENT ECONOMIC DEVELOPMENT III. TAX SYSTEM OF MONGOLIA IV. COMPARISIONS OF TAXESV. LOCAL TAX SYSTEMS AND INTERGOVERNMENTAL
FISCAL RELATIONSVI. TAX ADMINISTRATIONSVII. POLICY IMPLICATIONSVIII. CONCLUSION
I. COUNTRY BACKGROUNDI. COUNTRY BACKGROUND
•• LOCATION: CENTRAL EAST ASIALOCATION: CENTRAL EAST ASIA•• AREA: 1.57 MLN SQ KM AREA: 1.57 MLN SQ KM •• POPULATION: 2.562 MLNPOPULATION: 2.562 MLN•• POPULATION DENSITY: 1.6 person per 1 sq kmPOPULATION DENSITY: 1.6 person per 1 sq km•• CURRENCY TOGRIG (MNT) 100 CURRENCY TOGRIG (MNT) 100 ¥¥ = 983 MNT= 983 MNT•• GDP GDP (current market prices)(current market prices): 2065.0 millions US$: 2065.0 millions US$•• GDP per capita, /2005/: 806 US $GDP per capita, /2005/: 806 US $
II.RECENT ECONOMIC DEVELOPMENTII.RECENT ECONOMIC DEVELOPMENT
Real GDP Growth
0%
2%
4%
6%
8%
10%
12%
2000
2001
2002
2003
2004
2005
2006
•• Favorable weather conditions Favorable weather conditions and livestock increase and livestock increase
•• Higher commodity prices in the Higher commodity prices in the world market, especially those world market, especially those of gold and copperof gold and copper
•• Mining related foreign direct Mining related foreign direct investment investment
•• Inflows of workerInflows of worker’’s remittances remittance•• Rapidly developing service Rapidly developing service
sectorsector
Composition of GDP, Mongolia (2005)Composition of GDP, Mongolia (2005)
Trade 24.6%
Industry 25.6%
nsport 9.7%
Construction 2.6%
Service 13.2%
Communication 3.0%
Agriculture 21.3% •• Agriculture at its peak in Agriculture at its peak in
1995, constituted 40% of 1995, constituted 40% of GDPGDP
•• Changes in economic Changes in economic structure were structure were accompanied by changes accompanied by changes in employment and in employment and substantial migratory substantial migratory movements from rural to movements from rural to urban areasurban areas
Trade in goods of MongoliaTrade in goods of MongoliaMain destinations of export 2005:Main destinations of export 2005: Main destinations of import 2005: Main destinations of import 2005:
--China (48.2%)China (48.2%)
--USA (14.3%)USA (14.3%)
--Canada (11.4%)Canada (11.4%)
--UK (8.2%)UK (8.2%)
--South Korea (6.1%)South Korea (6.1%)
--Russia (2.6)Russia (2.6) --USA (3.4)USA (3.4)
--Russia (35.3%)Russia (35.3%)
--China (25.9%)China (25.9%)
--Japan (6.4%)Japan (6.4%)
--South Korea (5.4%)South Korea (5.4%)
--Kazakhstan (3.4%)Kazakhstan (3.4%)
Principal exports 2005:Principal exports 2005: Principal imports 2005:Principal imports 2005:
--CopperCopper
--TextilesTextiles
--Cashmere & Cashmere productsCashmere & Cashmere products
--PetroleumPetroleum
--Machinery & equipmentMachinery & equipment
--Transport equipmentTransport equipment
Fiscal Balance of MongoliaFiscal Balance of Mongolia ( in percent of GDP)( in percent of GDP)
-7.7
-4.5-5.8
-4.2
-2.1
3.2
9
0
10
20
30
40
50
2000 20001 2002 2003 2004 2005 2006-10
-8
-6
-4
-2
0
2
4
6
8
10
Revenue Expenditure Government deficit
Main factors of Main factors of improvement of fiscal improvement of fiscal balance are:balance are:
•• Jump in Government Jump in Government revenues due to the revenues due to the boom in copper and boom in copper and gold pricesgold prices
•• Tighter budgetary Tighter budgetary controlscontrols
•• Imposition of windfall Imposition of windfall tax on copper and gold tax on copper and gold (in June 2006)(in June 2006)
Revenue development of MongoliaRevenue development of Mongolia
/ in %, base year-1999 (266.5 billions of MNT)/
165.6
243.0
97.3%
79.0%
64.8% 31.7%
-
50.0
100.0
150.0
200.0
250.0
300.0
2000 2001 2002 2003 2004 2005
Challenges in the MongoliaChallenges in the Mongolia’’s economys economy
•• GDP growthGDP growth•• Public debt became Public debt became
manageablemanageable•• Improved fiscal and Improved fiscal and
trade balancetrade balance•• Inflation remains lowInflation remains low•• Public financial Public financial
management reform
•• Narrow base of economy Narrow base of economy •• Heavy dependent on Heavy dependent on
external marketexternal market•• Inadequate Inadequate
infrastructureinfrastructure•• Poverty Poverty •• UnemploymentUnemployment•• Urban migrationUrban migration•• Environmental pollution
management reform
Environmental pollution
III. TAX SYSTEM OF MONGOLIAIII. TAX SYSTEM OF MONGOLIA
•• The tax system of Mongolia consists of 23 taxes, 6 of The tax system of Mongolia consists of 23 taxes, 6 of them are state taxes and the others are local taxes. them are state taxes and the others are local taxes. The tax system includes not only taxes, but also fees The tax system includes not only taxes, but also fees and payments such as payment for the use of natural and payments such as payment for the use of natural resources and license fee for hunting.resources and license fee for hunting.
•• The most important direct taxes are Corporate Income The most important direct taxes are Corporate Income Tax and Personal Income Tax.Tax and Personal Income Tax.
•• The most important indirect taxes are VAT and The most important indirect taxes are VAT and Excises.Excises.
Tax burden of MongoliaTax burden of Mongolia
Tax ratios
25.629.4 28.6 28.8 30.5 30.5
74.3 74.7 75.3 7681.8 82.5
0
10
20
30
40
50
60
70
80
90
2000 2001 2002 2003 2004 2005
Tax/GDP Tax/Total revenue
•• Tax burden of the country is Tax burden of the country is the highest in Asia the highest in Asia
•• Tax revenue became the main Tax revenue became the main source of governmentsource of government’’ revenuerevenue
•• Among taxes the VAT remains Among taxes the VAT remains main source of tax revenue main source of tax revenue
•• Corporate income tax revenue Corporate income tax revenue has been increased mainly from has been increased mainly from mining sectormining sector
•• Other taxes such as Royalty Other taxes such as Royalty payment and license fee have payment and license fee have been increased in last 2 yearsbeen increased in last 2 years
Composition of MongoliaComposition of Mongolia’’s Tax s Tax Revenue, 2005Revenue, 2005
Earmarked taxes 2%
Customs8%
VAT26%
SSC14%
Income taxes26%
Other taxes13%
Excises11%
Objectives of tax reformObjectives of tax reform
•• Increase country competitiveness by Increase country competitiveness by lowering tax burden on business, enabling lowering tax burden on business, enabling job creationjob creation
•• Relief tax burden on workers by reducing Relief tax burden on workers by reducing the tax rate the tax rate
•• Support domestic investors by removing Support domestic investors by removing discretionary tax provisionsdiscretionary tax provisions
•• Simplify tax administration procedures by Simplify tax administration procedures by focusing more on service to tax payers focusing more on service to tax payers
MongoliaMongolia’’s Recent Tax Reformss Recent Tax Reforms
1.1. Review the existing system of tax incentives Review the existing system of tax incentives 2.2. Reduce income tax ratesReduce income tax rates3.3. Raise the threshold for the higher rate from 100 Raise the threshold for the higher rate from 100
million MNT to 500million MNT.million MNT to 500million MNT.4.4. Remove the limits on legitimate expenses and Remove the limits on legitimate expenses and
provide for carrying forward of lossesprovide for carrying forward of losses5.5. Improve the VAT including its provisions for Improve the VAT including its provisions for
refunds, cascading under the VAT by providing refunds, cascading under the VAT by providing input tax credits for preproduction expenses and input tax credits for preproduction expenses and prepre--registration stock of goodsregistration stock of goods
6.6. Make the tax laws simple, clear, consistent and Make the tax laws simple, clear, consistent and certaincertain
IV.IV. COMPARISONS OF TAXESCOMPARISONS OF TAXES
Main development indicatorsMain development indicators
JapanJapan MongoliaMongolia
Population (m)Population (m)Surface area (thousand sq. km)Surface area (thousand sq. km)Population density (people per Population density (people per sq.kmsq.km))Gross National Income ($ billions)Gross National Income ($ billions)GNI per capita ($)GNI per capita ($)GDP growth (%,2003GDP growth (%,2003--2004) 2004) Value added as % of GDP (2004):Value added as % of GDP (2004):
--agricultureagriculture--IndustryIndustry--ServicesServices
Life expectancy:Life expectancy:--MaleMale--FemaleFemale
128.0128.0378378351351
4,734.34,734.33705037050
2.72.7
1131316868
78788585
2.62.615671567
1.61.61.81.8600600
10.710.7
2121303049 49
62626868
Source: WB. World Development Indicators. 06Source: WB. World Development Indicators. 06
Comparison of Fiscal BalancesComparison of Fiscal Balances(as a percentage of GDP)(as a percentage of GDP)
1996FY1996FY 2000FY2000FY 2001FY2001FY 2002FY2002FY 2003FY2003FY 2004FY2004FY 2005FY2005FY 2006FY2006FY
--6.86.8 --8.08.0 --6.16.1 --7.77.7 --7.87.8 --6.26.2 --6.16.1 --5.65.6
--5.15.1 --7.57.5 --6.16.1 --7.97.9 --7.77.7 --6.56.5 --6.56.5 --6.06.0
MongoliaMongolia --12.212.2 --7.77.7 --4.54.5 --5.85.8 --4.24.2 --2.12.1 +3.2+3.2 +9.0+9.0
Note: For Japan, the first row shows the general government balaNote: For Japan, the first row shows the general government balance excluding social security funds. Hence, nce excluding social security funds. Hence, the second row shows the fiscal balance including social securitthe second row shows the fiscal balance including social security fundsy funds
Sources : Current Japanese Fiscal Conditions and Issues to be CoSources : Current Japanese Fiscal Conditions and Issues to be Considered. 2006, MOF, Japan .nsidered. 2006, MOF, Japan .Statistical bulletin, 2005, SSO Mongolia, Budget execution 2006,Statistical bulletin, 2005, SSO Mongolia, Budget execution 2006, MOF, MongoliaMOF, Mongolia
JapanJapan
Composition of GovernmentComposition of Government’’ revenuerevenue( as % of GDP)( as % of GDP)
Total revenueTotal revenue Tax revenueTax revenue Other revenueOther revenue
Developing CountriesDeveloping CountriesAsia & PacificAsia & PacificMongolia (2004)Mongolia (2004)
High Income High Income CountreisCountreisJapan (2004)Japan (2004)
22.122.116.616.637.337.332.832.831.031.0
17.617.613.213.230.530.527.527.526.426.4
4.54.54.34.36.86.85.35.34.64.6
Source: Keen & Simone (2005), OECD Revenue Statistics.1965Source: Keen & Simone (2005), OECD Revenue Statistics.1965--2005, MOF. Mongolia (2005)2005, MOF. Mongolia (2005)
Breakdown of Revenues Breakdown of Revenues (FY 2006)(FY 2006)
General Government Budget Revenue of Mongolia (FY 2006)
81.4%
18.1%
0.4% Tax revenue
Non-Taxrevenue
Foreigngrants
General Account Budget Revenue of Japan (FY 2006)
38%
5%
57%
Tax andStamprevenue
Non-Taxrevenue
GovernmentBond Issues
Level of taxation Level of taxation (% of GDP)(% of GDP)
JapanJapan** MongoliaMongolia
Tax revenueTax revenue Social Security Social Security contributionscontributions
Total Total Tax revenueTax revenue Social Security Social Security contributionscontributions
Total Total
1991199119921992199319931994199419951995199619961997199719981998199919992000200020012001200220022003200320042004
18.018.016.016.015.615.614.514.514.614.614.614.614.814.814.314.313.913.914.614.614.414.413.313.313.113.113.813.8
10.710.711.011.011.511.511.811.812.312.312.312.312.412.412.612.612.612.612.512.512.912.912.912.912.612.612.612.6
28.728.727.027.027.127.126.326.326.926.926.926.927.327.326.926.926.526.527.127.127.327.326.226.225.725.726.426.4
27.227.221.621.625.625.618.918.916.316.315.915.917.117.115.715.716.516.521.721.724.624.624.624.624.324.326.226.2
------
1.91.92.92.92.92.92.62.63.23.23.23.23.93.94.84.84.44.44.54.54.34.3
27.227.221.621.625.625.620.820.819.219.218.818.819.719.718.918.919.719.725.625.629.429.429.029.028.828.830.530.5
**Source: OECD revenue statistics,1965Source: OECD revenue statistics,1965--2005. Statistical bulletin 1998, 2005, SSO, Mongolia2005. Statistical bulletin 1998, 2005, SSO, Mongolia
Fiscal Fiscal yearyear
Composition of TaxationComposition of Taxation: : central government central government revenues, early 2000s, (% of total tax revenues)revenues, early 2000s, (% of total tax revenues)
Taxes on Taxes on income, income, profit & profit &
capital gainscapital gains
Social Social security & security &
payroll payroll taxestaxes
Domestic Domestic taxes on taxes on goods & goods & servicesservices
International International trade taxestrade taxes
Property Property taxestaxes
Developing countriesDeveloping countriesAsia & PacificAsia & Pacific
MongoliaMongoliaHigh Income CountriesHigh Income Countries
JapanJapan
25.125.135.135.125.825.832.632.626.126.1
14.414.44.04.022.122.127.927.929.929.9
39.439.440.540.526.126.133.033.023.123.1
18.318.315.915.98.28.24.94.91.81.8
1.41.41.51.50.90.92.52.52.82.8
Source: Keen & Simone (2005), MOF, Japan (2005), MOF, Mongolia (Source: Keen & Simone (2005), MOF, Japan (2005), MOF, Mongolia (2005)2005)
Sources of tax revenues of two countriesSources of tax revenues of two countries(selected years, %)(selected years, %)
JapanJapan MongoliaMongoliaDirect taxesDirect taxes Indirect taxesIndirect taxes Direct taxesDirect taxes Indirect taxesIndirect taxes
1997199719981998199919992000200020012001200220022003200320042004
63.463.459.359.357.257.261.361.359.559.556.356.356.156.158.258.2
36.636.640.740.742.842.838.738.740.540.543.743.743.943.941.841.8
51.251.243.943.938.138.139.339.336.636.636.236.239.839.839.839.8
48.848.856.156.161.961.960.760.763.463.463.863.860.260.260.260.2
Source: OECD Tax Statistics, 1965Source: OECD Tax Statistics, 1965--2004; MOF, Mongolia 19962004; MOF, Mongolia 1996--2006 Budget data2006 Budget data
YearYear
Composition of Tax RevenuesComposition of Tax Revenues
FY 2006 General Government Budget,Mongolia
Others8%
Roaylty 6%
Customs8%
Excises 11%
VAT 25%
Corporation Tax
20%
Windfall Tax 14%
Personal Income Tax
8%
FY2006 General Account Budget, Japan
Income tax 29%
Corporate Tax 28%
Consumption Tax 23%
Gasoline Tax 5%
Liquor 3%
Others 12%
Main Statutory Tax RatesMain Statutory Tax Rates
JapanJapan MongoliaMongolia**
Individual Income TaxIndividual Income Tax
Corporate Income TaxCorporate Income Tax
VATVAT
5,10,20,23,33,405,10,20,23,33,40
22,3022,30
55
10 (10,20,30)10 (10,20,30)
10,25 (15,30)10,25 (15,30)
10 (15)10 (15)
Note: In Japan, in addition to Individual Income Tax at nationalNote: In Japan, in addition to Individual Income Tax at national level, inhabitant tax also applied level, inhabitant tax also applied
with flat 10% (prefecture level 4% municipality level 6%) flat rwith flat 10% (prefecture level 4% municipality level 6%) flat rate starting from FY 2007 ate starting from FY 2007
* Numbers in brackets are the tax rates applied until 1 Jan.2007* Numbers in brackets are the tax rates applied until 1 Jan.2007
Individual Income TaxesIndividual Income Taxes
JapanJapan MongoliaMongolia
Income tax ratio to GDP(2004)Income tax ratio to GDP(2004) 8.5%8.5% 2.4%2.4%
Income tax ratio to tax revenue (2004)Income tax ratio to tax revenue (2004) 31.9%31.9% 7.8%7.8%
Tax ratesTax rates 5,10,20,23,33,405,10,20,23,33,40** 10%10%
Number of taxpayersNumber of taxpayers 46.14million46.14million** 346,700346,700
Tax burden on individual an annual Tax burden on individual an annual employment income of 10 million yenemployment income of 10 million yen
0.86 million yen0.86 million yen 0.89 million yen0.89 million yen
Source: OECD revenue statistics.1965Source: OECD revenue statistics.1965--2005. Comprehensive Handbook of Japanese taxes 2006, Tax 2005. Comprehensive Handbook of Japanese taxes 2006, Tax Bureau, MOF JapanBureau, MOF Japan
*the new rate structure (national) applied to Income tax from FY*the new rate structure (national) applied to Income tax from FY 20072007
Individual Income TaxesIndividual Income TaxesIn Japan:In Japan:
•• PIT has a small weight in the tax PIT has a small weight in the tax revenue despite relatively high revenue despite relatively high statutory ratesstatutory rates
•• Wide brackets and generous Wide brackets and generous allowancesallowances
•• PIT identifies 10 different kinds of PIT identifies 10 different kinds of income that are taxed at different income that are taxed at different effective rateseffective rates
•• Retirement and capital income are Retirement and capital income are taxed separately at lower ratestaxed separately at lower rates
•• Most of tax expenditure in the Most of tax expenditure in the system arise from the tax credit for system arise from the tax credit for individualindividual’’s acquisition of dwellings s acquisition of dwellings and deduction of contributions to and deduction of contributions to pension plans and life insurance pension plans and life insurance companies
In Mongolia:In Mongolia:
•• Tax base is narrow and yields low Tax base is narrow and yields low revenuerevenue
•• Unifies the tax rate on taxable Unifies the tax rate on taxable personal income at 10%, replacing personal income at 10%, replacing the existing threethe existing three--tired rate of 10,20 tired rate of 10,20 and 30%and 30%
•• Raises the tax credit on taxable Raises the tax credit on taxable personal income from MNT 48,000 a personal income from MNT 48,000 a year to 84,000, statutorily year to 84,000, statutorily exempting from taxes below the exempting from taxes below the poverty linepoverty line
•• Permits sole proprietorship operators Permits sole proprietorship operators to deduct more business expensesto deduct more business expenses
•• Defines fringe benefits and includes Defines fringe benefits and includes them in taxable incomethem in taxable income
companies
Corporate income taxesCorporate income taxes
JapanJapan MongoliaMongolia
Tax ratesTax rates 22, 3022, 30 10, 2510, 25
Ratio to GDP as of 2004Ratio to GDP as of 2004 3.8%3.8% 5.2%5.2%
Number of taxpayersNumber of taxpayers 2.90 million (as of 2003)2.90 million (as of 2003) 32.25532.255
Ratio to national tax revenueRatio to national tax revenue 23.8%23.8% 16.9%16.9%
Tax burdenTax burden 70% of corporations are report 70% of corporations are report making loss. Large companies making loss. Large companies shoulder 2/3 of CIT revenue.shoulder 2/3 of CIT revenue.
43% of the companies are 0 or 43% of the companies are 0 or negative net income. Top 100 negative net income. Top 100
provided over 90% of CIT revenueprovided over 90% of CIT revenue
DepreciationDepreciation StraightStraight--line and Declining balance line and Declining balance methodsmethods
StraightStraight--line methodline method
Loss carry forwardLoss carry forward 7 years7 years 3 years3 years
Main features of the CITMain features of the CIT
In Japan:In Japan:
•• The CIT structure is uniqueThe CIT structure is unique•• Second largest revenue sourceSecond largest revenue source•• Effective tax rates have been Effective tax rates have been
reducingreducing•• Two depreciation schemeTwo depreciation scheme•• Tax free reserves (for Bad Tax free reserves (for Bad
Debts and for Returned Goods) Debts and for Returned Goods) Preferential tax terms Preferential tax terms (allowances, credits, etc)(allowances, credits, etc)
•• Tax credits Tax credits •• Privileges under the blue Privileges under the blue
return system return system
Mongolia:Mongolia:
•• Reduces the lower rate from Reduces the lower rate from 15% to 10%, and the higher 15% to 10%, and the higher rate from 30% to 15% and rate from 30% to 15% and raises threshold from MNT 100 raises threshold from MNT 100 million to MNT 500 millionmillion to MNT 500 million
•• Permits business entities to Permits business entities to deduct more of their legitimate deduct more of their legitimate business expendituresbusiness expenditures
•• Provides for an investment tax Provides for an investment tax creditcredit
•• Provides for lossProvides for loss--carry forwardcarry forward•• Eliminates most discriminatory Eliminates most discriminatory
tax exemptions and holidays tax exemptions and holidays
Tax incentives for corporationsTax incentives for corporationsIn Japan:In Japan:
•• Tax credits to promote policy Tax credits to promote policy objectives such as energy objectives such as energy conservation, pollution control, conservation, pollution control, promotion of small to mediumpromotion of small to medium--sized businesses and promotion sized businesses and promotion R&DR&D
•• Special depreciation measuresSpecial depreciation measures
•• Tax free reservesTax free reserves
•• Income deductionIncome deduction
•• The Blue return system: loss carry The Blue return system: loss carry back 1 year & loss forward for 5 back 1 year & loss forward for 5 yearsyears
In Mongolia:In Mongolia:
•• The new CIT law abolished The new CIT law abolished provisions on tax holidays and provisions on tax holidays and several exemptionsseveral exemptions
•• The income tax of companies The income tax of companies engaged in manufacturing cereals, engaged in manufacturing cereals, potato and vegetables reduced potato and vegetables reduced by 50%by 50%
•• tax credit equal to 5% of the tax credit equal to 5% of the total investment made in priority total investment made in priority sectors determined by the sectors determined by the GovernmentGovernment
•• Loss carry forward for 3 yearsLoss carry forward for 3 years
VAT rates, revenue and efficiencyVAT rates, revenue and efficiencyStandard VAT Standard VAT raterate
Other VAT ratesOther VAT rates VAT VAT revenue/GDPrevenue/GDP
Efficiency Efficiency ratioratio
Applicable yearApplicable year
Asia averageAsia averageBangladeshBangladeshCambodiaCambodiaChinaChinaFijiFiji
IndonesiaIndonesiaJapanJapanKoreaKoreaMongoliaMongoliaNepalNepalPapua New GuineaPapua New GuineaPhilippinesPhilippinesSamoaSamoaSingaporeSingaporeSri LankaSri LankaThailandThailandVanuatuVanuatuVietnamVietnam
Latin America averageLatin America averageCEE averageCEE average
10.510.515.015.010.010.017.017.012.512.510.010.05.05.010.010.015.015.010.010.010.010.010.010.010.010.04.04.015.015.07.07.012.512.510.010.014.014.020.020.0
13.013.010.010.0
5.25.2
3.83.84.14.1....
5.65.66.26.23.73.72.02.04.74.77.37.33.03.04.54.53.13.110.710.71.41.45.95.93.13.15.45.44.34.35.95.98.08.0
0.380.380.270.27
....0.330.330.500.500.370.370.400.400.470.470.490.490.300.300.450.450.310.310.860.860.350.350.390.390.440.440.430.430.430.430.380.380.400.40
2003200320022002200020002003200320012001200120012001200120012001200320032002200220032003200220022001200120042004200220022002200220022002
Source: IMF Country Report No.05/337, Source: IMF Country Report No.05/337, GrandcolasGrandcolas (PFTAC, 2003)(PFTAC, 2003)
Consumption Tax & VATConsumption Tax & VAT
Japan (Consumption tax)Japan (Consumption tax) Mongolia (VAT)Mongolia (VAT)
Tax ratesTax rates 5%5% 10%10%
ThresholdThresholdTax baseTax base
¥¥ 10 million10 millionDeduction on taxable purchaseDeduction on taxable purchase
10 million MNT10 million MNT~ ~ ¥¥ 1 million1 millionInvoice Invoice
NonNon--taxabletaxable Land transfer or lease, housing lease, Land transfer or lease, housing lease, interest on loans and insurance premium, interest on loans and insurance premium, medical care, education, welfare service.medical care, education, welfare service.
Financial services, housing lease, Financial services, housing lease, medical care, education, religious medical care, education, religious activities, public transportation, activities, public transportation, newspaper and some other newspaper and some other imported goods.imported goods.
ExportExport exemptexempt ““OO”” raterate
Proportion to tax revenueProportion to tax revenue 20.2%20.2% 26.1%26.1%
Ratio to GDPRatio to GDP 2.5%2.5% 8.0%8.0%
Number of taxpayersNumber of taxpayers 2.027 thousand (tax returns in 2002)2.027 thousand (tax returns in 2002) 6800 (2005)6800 (2005)
Main features of the VAT and Main features of the VAT and consumption taxconsumption tax
In Japan:In Japan:
•• The VAT is unique, and rate is one of The VAT is unique, and rate is one of the worldthe world’’s lowest s lowest
•• Single rate and export exemptedSingle rate and export exempted
•• Few exempted goods and servicesFew exempted goods and services
•• No invoices are provided forNo invoices are provided for
•• TaxTax-- exempted sales threshold of exempted sales threshold of ¥¥10 10 millionmillion
•• A simplified VAT regime exists for small A simplified VAT regime exists for small businesses, whose sale is below businesses, whose sale is below ¥¥50 50 million
In MongoliaIn Mongolia::
•• VAT is major source of revenueVAT is major source of revenue
•• VAT is based on tax invoice and input tax VAT is based on tax invoice and input tax credit systemcredit system
•• One rate and zero rate on exportOne rate and zero rate on export
•• Threshold for registration is MNT 10 million, Threshold for registration is MNT 10 million, threshold is in lower side to compare with threshold is in lower side to compare with other countriesother countries
•• The VAT law provides a provision on The VAT law provides a provision on refunds to taxpayers in an excess credit refunds to taxpayers in an excess credit position.position.
•• The new law eliminates the majority of the The new law eliminates the majority of the exemptions, however exemptions are still exemptions, however exemptions are still wider than that of Japan.
million
wider than that of Japan.
Other consumption taxesOther consumption taxes
JapanJapan MongoliaMongolia
Ratio to total tax Ratio to total tax revenuerevenue
15.8%15.8% 11.4%11.4%
Liquor tax Liquor tax Beer(perBeer(per kl):kl):¥¥134,250134,250--178,125178,125Wine (per Wine (per klkl): ): ¥¥120,000120,000Whisky(37%): Whisky(37%): ¥¥370,000370,000Spirits(37%): Spirits(37%): ¥¥370,000370,000
Beer(perBeer(per liter): liter): $ $ 0.200.20Wine (per liter): Wine (per liter): $0,5$0,5-- $1.5$1.5Whisky (per liter): $4.5Whisky (per liter): $4.5-- $6.0$6.0Spirits (per liter): $10.0Spirits (per liter): $10.0
Tobacco taxTobacco tax ¥¥3,552 per 1000 pieces3,552 per 1000 pieces¥¥820 per 1000 pieces820 per 1000 pieces
$0.60 per 100 pieces$0.60 per 100 pieces(~ (~ ¥¥700 per 1000 pieces)700 per 1000 pieces)
Local taxes on tobaccoLocal taxes on tobacco PrefecturalPrefectural tax: tax: ¥¥1,074 per 1000 1,074 per 1000 piecespiecesMunicipal tax: Municipal tax: ¥¥3,298 per 1000 3,298 per 1000 piecespieces
Gasoline taxGasoline tax ¥¥48,600 per kilolitre48,600 per kilolitre <90 octane: $11.0<90 octane: $11.0-- $30.0$30.0>90 octane:$12.0>90 octane:$12.0-- $43.0$43.0
Main features of other consumption taxesMain features of other consumption taxes•• In Japan, each commodities are In Japan, each commodities are
regulated by the separate laws, there is regulated by the separate laws, there is no special law as excise.no special law as excise.
•• In Japan, excises on alcoholic In Japan, excises on alcoholic beverages and tobacco have beverages and tobacco have traditionally not been conceived in traditionally not been conceived in relation to negative externalities, it is relation to negative externalities, it is generally accepted that alcohol and generally accepted that alcohol and tobacco taxes may be justified to tobacco taxes may be justified to control the consumption of items that control the consumption of items that are considered unhealthy.are considered unhealthy.
•• Both national and local Both national and local govgov’’ss levy levy commodity taxes.commodity taxes.
•• Most of taxes are earmarked for Most of taxes are earmarked for specific purposes and designed as specific purposes and designed as service charges for the use of road, service charges for the use of road, airport, and power plantsairport, and power plants
•• Mongolia imposes excise duties on few Mongolia imposes excise duties on few goods like alcohol and tobacco products, goods like alcohol and tobacco products, petroleum products and imported petroleum products and imported passenger vehicles passenger vehicles
•• Starting from 2007, Mongolia imposes Starting from 2007, Mongolia imposes excise duties on slop games in the excise duties on slop games in the perspective of social justice.perspective of social justice.
•• Excise duties are levied basically with Excise duties are levied basically with the specific rates in $ USthe specific rates in $ US
•• About 70 % of excise duties come from About 70 % of excise duties come from excises on imported goods.excises on imported goods.
•• The excise tax is solely the national tax The excise tax is solely the national tax and its proceeds go to the national and its proceeds go to the national treasury account. treasury account.
V.LOCAL TAX SYSTEMS AND V.LOCAL TAX SYSTEMS AND INTERGOVERNMENTAL FISCAL INTERGOVERNMENTAL FISCAL
RELATIONSRELATIONSMongolia is Unitary state: 18 Mongolia is Unitary state: 18 aimagsaimags, 362 , 362 soumssoums
Intergovernmental fiscal Intergovernmental fiscal relations in Mongoliarelations in Mongolia
Main issues are:Main issues are:
•• The sizes of local governments are smallThe sizes of local governments are small•• The revenue raising capacity are different among The revenue raising capacity are different among aimagsaimags•• Local governments lacks autonomy & accountabilityLocal governments lacks autonomy & accountability•• Some of local taxes are still not been implementedSome of local taxes are still not been implemented•• Assignment of some taxes are not appropriateAssignment of some taxes are not appropriate•• The size of funds for transfer not based on stable The size of funds for transfer not based on stable
institutional frameworkinstitutional framework
Local taxes in two countriesLocal taxes in two countries
•• In Japan, 42.7% of total taxes collected from the local taxes, wIn Japan, 42.7% of total taxes collected from the local taxes, while hile local governmentlocal government’’ expenditures account about 63% of net national expenditures account about 63% of net national and local expenditure.and local expenditure.
•• In Mongolia, only 6.8 % of taxes collected from the local taxes,In Mongolia, only 6.8 % of taxes collected from the local taxes, local local governmentgovernment’’ expenditures account only 9.2% of general expenditures account only 9.2% of general government current expenditures.government current expenditures.
•• In Japan, main local taxes are the enterprise tax (30% in 2004) In Japan, main local taxes are the enterprise tax (30% in 2004) in in prefectures and the property tax (45.7% in 2004) in municipalitiprefectures and the property tax (45.7% in 2004) in municipalities.es.
•• In Mongolia, generally main source of local taxes is the land feIn Mongolia, generally main source of local taxes is the land fee e (25% in 2004) which is imposed on posses and use of state owned(25% in 2004) which is imposed on posses and use of state ownedland.land.
Local revenue sourcesLocal revenue sources
TotalTotal TotalTotal
¥¥ BnBn %% MNT MMNT M %%
••Local taxesLocal taxes••Local allocation taxesLocal allocation taxes••Local Transfer taxesLocal Transfer taxes••Special local grantsSpecial local grants••National Treasury DisbursementNational Treasury Disbursement••Local loans (bonds)Local loans (bonds)••Other revenue sourcesOther revenue sources
TotalTotal
35548.535548.520349.820349.8624.0624.0901.8901.814433144331181611816
16330.916330.9
100,004100,004
35.535.520.320.30.60.60.90.914.414.411.811.816.316.3
100.0100.0
••Local taxesLocal taxes••VAT transferVAT transfer••NonNon--tax revenuetax revenue••Other revenue sourceOther revenue source••National Government National Government DisbursementDisbursement
TotalTotal
47468.047468.011920.511920.511580.411580.42895.92895.95947.95947.9
79812.779812.7
59.559.514.914.914.514.53.63.67.5 7.5
100.0100.0
Source: Ministry of Home Affairs, Japan (2003), Ministry of FinaSource: Ministry of Home Affairs, Japan (2003), Ministry of Finance, Mongolia (2005)nce, Mongolia (2005)
Sources of revenue, Sources of revenue, MongoliaMongoliaSources of revenue, JapanSources of revenue, Japan
VI.TAX ADMINISTRATIONSVI.TAX ADMINISTRATIONS
•• In Japan, local tax and In Japan, local tax and social insurance are social insurance are collected by the local collected by the local governments.governments.
•• In Mongolia, state and In Mongolia, state and local tax are collected by local tax are collected by the tax authority and the tax authority and social insurance collected social insurance collected separately from the MOF. separately from the MOF.
JapanJapan National taxNational tax CustomsCustoms Local taxLocal tax Social Social insuranceinsurance
Tax policy & Tax policy & reformreform
MOF/Tax MOF/Tax BureauBureau
EnforcementEnforcement NTANTA
MOF/CustomMOF/Customs & Tariff s & Tariff BureauBureau
Ministry of Ministry of Internal Internal AffairsAffairs
Local Gov.Local Gov.
Ministry of H, Ministry of H, L,& WL,& WSocial Social Insurance Insurance AgencyAgency
Local Gov.Local Gov.
MongoliaMongolia State taxState tax CustomsCustoms Local TaxLocal Tax Social Social InsuranceInsurance
Tax policy & Tax policy & reformreform
MOF/Fiscal MOF/Fiscal policy policy Department/Department/Tax policy Tax policy DivisionDivision
MOF/Fiscal MOF/Fiscal policy policy Department/Department/Tax policy Tax policy DivisionDivision
MOF/Fiscal MOF/Fiscal policy policy Department/Department/Tax policy Tax policy DivisionDivision
Ministry of L Ministry of L &W&W
EnforcementEnforcement MTAMTA General General CustomsCustomsDepartment Department
MTAMTA Social Social insurance insurance agencyagency
Main features of two countriesMain features of two countries’’ tax tax administrationsadministrations
MongoliaMongolia’’s Tax s Tax Administration:Administration:
•• SelfSelf--assessment assessment systemsystem
•• Presumptive Presumptive taxationtaxation
•• The withholding tax
JapanJapan’’s Tax s Tax Administration:Administration:
•• SelfSelf--assessment assessment systemsystem
•• Blue return systemBlue return system•• Bookkeeping schemeBookkeeping scheme•• The withholding tax The withholding taxThe withholding tax
Efficiency of the tax administrationsEfficiency of the tax administrations
JapanJapan MongoliaMongolia
Number of personnelNumber of personnel 56315 (end of 56315 (end of 2003)2003) 1372 (end of 2005)1372 (end of 2005)
By type of duty:By type of duty:••Assessment of taxesAssessment of taxes••Revenue management &collectionRevenue management &collection••General affairs & coordinationGeneral affairs & coordination
68%68%15%15%17%17%
83.2%83.2%
Personnel expenses out of total budget of Personnel expenses out of total budget of operating costoperating cost 78.778.7 49.249.2
••Number of corporationsNumber of corporations••Individual income tax payersIndividual income tax payers
2,9 million (2003)2,9 million (2003)46.14 million46.14 million
32.3 thousand32.3 thousand346.7 thousand346.7 thousand
Cost of collectionCost of collection ¥¥ 1.781.78 1.51 MNT~1.51 MNT~¥¥ 15.015.0
* * Source: An outline of Japanese tax administration 2003. Budget FSource: An outline of Japanese tax administration 2003. Budget Framework 2005ramework 2005--2008 MOF Mongolia2008 MOF Mongolia
Other main features of Other main features of Japanese tax administrationJapanese tax administration
•• Public relations & tax educationPublic relations & tax education•• Tax consultationTax consultation•• Certified Public Tax AccountsCertified Public Tax Accounts•• Cooperative private BodiesCooperative private Bodies•• Guidance and examinationGuidance and examination•• Revenue management & collectionRevenue management & collection•• Effective withholding tax systemEffective withholding tax system•• Training for the NTA staffTraining for the NTA staff•• Human resource management Human resource management
Features & challenges of Features & challenges of MongoliaMongolia’’s tax administrations tax administration
•• Vertical structure of MTAVertical structure of MTA•• The structure of GDNT is a mixture of The structure of GDNT is a mixture of ““division by division by
functionfunction”” and and ““division by taxpayer typedivision by taxpayer type””•• Excessive focus on tax collectionExcessive focus on tax collection•• Compliance rates are low Compliance rates are low •• Tax avoidance and evasion appear to be common Tax avoidance and evasion appear to be common •• Motivating and punishing measures are inappropriateMotivating and punishing measures are inappropriate•• Luck of training and education for tax officials and Luck of training and education for tax officials and
taxpayerstaxpayers•• Needs more computerizationNeeds more computerization
VII. POLICY IMPLICATIONSVII. POLICY IMPLICATIONS
•• Tax reforms and tax policy in Japan considering Tax reforms and tax policy in Japan considering into account the economic conditions of the into account the economic conditions of the countrycountry
•• Most of tax reforms were successful when a Most of tax reforms were successful when a cadre of policymakers and experts have a cadre of policymakers and experts have a detailed knowledge with the existing system and detailed knowledge with the existing system and take responsibility for the reformtake responsibility for the reform
•• In Japan, substantial effort have been made to In Japan, substantial effort have been made to educate both the tax officers and the public and educate both the tax officers and the public and to get the policy ready to support themto get the policy ready to support them
ContCont--d:d:
•• Annual tax reductions played a vital role in Annual tax reductions played a vital role in encouraging private businesses which are closely encouraging private businesses which are closely linked to tax incentives in order to achieve specific linked to tax incentives in order to achieve specific policy targets, in particular capital accumulation, policy targets, in particular capital accumulation, saving increases, and export promotion and so on. To saving increases, and export promotion and so on. To introduce of inheritance and gift tax based on introduce of inheritance and gift tax based on Japanese experienceJapanese experience
•• To broaden local tax base by implementing local tax To broaden local tax base by implementing local tax reform and introducing the new local taxes such as a reform and introducing the new local taxes such as a city tax.city tax.
•• The amount of shared taxes to local governments The amount of shared taxes to local governments should be defined in a law and determined according should be defined in a law and determined according to the law instead of discretionary decision of the to the law instead of discretionary decision of the central government.central government.
ContCont--d:d:
•• Tax administration should be reformed and Tax administration should be reformed and enhanced to build up fair, transparent, and enhanced to build up fair, transparent, and efficient administration system based on efficient administration system based on JapanJapan’’s tax administration practices s tax administration practices
•• Establishment of a Establishment of a ““Blue ReturnBlue Return”” system system could be one of the effective measures for could be one of the effective measures for preventing tax evasionpreventing tax evasion
•• Establishment of system of Tax accountants Establishment of system of Tax accountants based on Japanbased on Japan’’s experiences experience
VIII.CONCLUSIONVIII.CONCLUSION
•• Japan is a developed country with Japan is a developed country with comprehensive and complex tax system comprehensive and complex tax system and with effective Tax Administrationand with effective Tax Administration
•• Mongolia is developing country with Mongolia is developing country with distorted tax system and inefficient tax distorted tax system and inefficient tax administrations administrations
•• Japanese experience in the area of Japanese experience in the area of taxation could serve as a useful reference taxation could serve as a useful reference for Mongoliafor Mongolia’’s economic development s economic development
Thank you for your attentionThank you for your attention
