OBJECTIVE OF VAT AND ITS IMPLEMENTATION AND FUTURE TRENDSOne. IntroductionTwo. Objective and implementation of VAT2.1. Objective and Assumption of introducing VAT2.2. Legal framework of VAT2.3. Administration of VAT and Current situation2.3.1. Tax basis2.3.2. Taxpayer2.3.3. Rates2.3.4. VAT revenue and refund2.3.5. Revenue raising capacity of VAT in Mongolia2.3.6. Common offences occurring during implementation of VAT law

Three. International trend of VAT and distinctive features

3.1. Australia

3.2. Indonesia

3.3. Kazakhstan

3.4. Canada

3.5. Russian Federation

3.6. Republic of China

3.7. Chile

3.8. USAFour. Areas for further enhancement of VAT system and recommendations

4.1. Modification of VAT legislation4.1.1.Registration of VAT taxpayers4.1.2. Imposition and Exemption of VAT4.1.3. Collection of VAT, Overpayment and Refunds

4.2. Administrative and Controlling system of Tax administrationFive.AppendicesLIST OF ACRONYMS

EEO -

Economic entity and organization

ADB -

Asian Development Bank

WB -

World BankGDP -

Gross Domestic ProductWTO -

World Trade OrganizationVAT -

Value Added TaxIMF -

International Monetary Fund

OECD-

Organization for Economic Cooperation and DevelopmentUSAID - United States Agency for International Development

JICA -

Japan International Cooperation Agency

KOICA -Korean International Cooperation Agency

LIST OF TABLES

Table-1Number of VAT taxpayersTable -2 Comparative amount of CIT taxable sales and VAT taxable salesTable -3VAT revenue and number of VAT taxpayersTable -4VAT revenue, refund and other ratiosTable -5Submission rate of return and Share of X returnTable -6 Summary of VAT return for 2008-2010Table -7. Revenue raising capability of VAT, comparable figuresOne. IntroductionAmong taxes introduced in Mongolia, VAT is a unique tax assessed as being structured in line with international standards and well-administered with satisfactory level of compliance by international organizations including IMF, World Bank, ADB, KOICAof Republic of Korea, USAID of the USA, and JICAof Japan. The VAT- perceived as the most reliable and stable source of budget revenue, neutral with less distortions to economy, broad based, with lower collection cost, bringing underground economy into tax net, and compatible with international trends- has been adopted in Mongolia for 13 years and already proved to be superior stay generating government revenue.Along with numerous earlier reviews, studies and estimations on this tax contributing 20-35 percent of the budget revenue in Mongolia, there are a variety of recommendations and initiatives towards assessing its negative and positive associations and enhancing it in the further.The principal goal of any tax lies in generating government revenue without causing distortions to economy and serving as an instrument of the state to manage fair market. Despite VAT satisfactorily fulfils its such a principal goal, there are continued efforts and initiatives towards replacing VAT with alternative options of indirect taxes, reducing refunds and annulling registration threshold. As adoption of a new tax, its amendment and revision implies huge costs besides its direct negative impact to economy, any proposals or initiatives associated therewith should be disclosed for public forum or debate only after careful studies are carried out at theoretical, quantitive analysis and research level from perspectives of its legal framework, implementation approach, economical and socialconsequences to citizens livelihood. Within the framework of Mining sector institutional strenghtening technical assistance project funded by the World Bank, the present recommendation is prepared with an aim to assessing the VAT system in Mongolia, comparing it with alternative forms of indirect taxes, identifying ways of ameliorating the system in line with expansion of current economy and development of mining sector andhence providing further proposals and recommendations. The present recommendation intends to ensure effective use of VAT in its classic designthereby bettering its implementation through appropriate amendments to the VAT legislation currently in place, raising budget revenue, cutting collection costand in particular,drasticallyreducing offences and disputes rise among tax authorities and taxpayers. Two. Objective and implementation of VAT2.1. Objective and assumption of introducing VAT

Project on introducing VAT in Mongolia is an apparent evidence of continued assistance from international organizations and donor communities extended since a period when Mongolia embarked on transition to market-oriented economy. IMF and World Bank mission and experts assigned to Mongolia since 1995 had repeatedly recommended to introduce VAT replacing sales tax and highlighted importance of this measure on tightening budget deficit and strenghtening overall taxation system. Thus the project on adoption of VAT commenced in 1997 with the World Bank funding where the IMF experts formulated a draft law and its implementation plan. Accordingly, the VAT law was approved on January 06, 1998 effective from the 1st of July of that year.When the VAT law was first developed on New-Zealand model with registration threshold of 15 million tugrugs and rates of 0 and 10 percent, it was assumed to register 800-1000 taxpayers for VAT and collect 50-60 billion tugrugs annually to the state budget. Further increase of this amount from year to year was also projected.No substantial price boost was presumed because the VAT simply replaced sales tax.Data of first few months of introduction indicated that price increase index remained at the same level of the preceding months. With effectiveness of the law the price increase impact might have absorbed in earlier months. It was also emphasized that adoption of VAT would bring taxation system of Mongolia closer to international standards thereby giving rise to a variety of positive implications to foreign investors, export-oriented production and foreign trade. It was furthermore anticipated thatthe take-up of an invoice-based VAT would facilitate administrative improvement in imposition and collection of income taxes and create a new source of information to the third party information system. Moreover there were expectations towards enhancement of the tax administration information system and information technology level, and development of new applications and new modules of the integrated database. It was highlighted that in case of indirect taxes, delivering various training and awareness programs to taxpayers and improving tax staff competencies would greatly contribute to reducing collection cost and restricting tax avoidance. 2.2. Legal framework of VATAs for legal environment the VAT is one of the most changeable taxes in Mongolia. Since its effectiveness the VAT have been subject to amendments for 31 times in addition to separate 26 independant laws approved with regard to exemption from VAT.The first amendment to the VAT law occurred on August 28, 1998 in its 58th days of effectiveness where the rate was raised to 13 percent along with abolishment of numerious exemptions. These changes were legalized to be effective in three daysof their approval. Thereafter the rate was raised again to 15 percent by the law dated on November 17, 2000 and then reduced to 10 percent by the revised law of June 29, 2006. The registration threshold was decreased to 10 million by the law of June 29, 2001. The most of the amendments were associated to exemption. Due to abundant independant laws adopted in isolation of the VAT law, the significant ambiguitiesarose because of their inconsistencies with the VAT law. These separate laws therefore were repealed in conformity with the revised VAT law of June 29, 2006, and currently there still exists 10 separate laws on exemption from VAT valid however.

As stipulated in the VAT law, the Procedure for offsetting excess credits, paying refunds and recording in accounting records approved by the resolution of the Minister of Financeand the Procedure for registration and deregistration for VATapproved by the resolution of the Director General of the General Department of Taxation are the key regulations currently effective registered ina list of publicly binding regulations.

There are 2 effective commentaries of the Supreme court on interpretation of some provisions of the VAT law.For VAT, a number of basic forms and recordkeeping documents are available including application for registration for VAT, VAT return form, VAT invoice (VAT special invoice), Sales book, Purchases book, Customs declaration on imports and exports, Act form to validate VAT excess credit, and VAT certificate.

2.3.Administration of VAT and Current situation2.3.1. Tax basisUnder the general principle of VAT, the tax is applied to most goods and services with exclusion of small variety of exempt goods and services to prevent from its negative impact to living standards and minimize regressive effect of taxes.All goods and services subject to exemption under current VAT legislation of Mongolia and thus resulting to narrow the tax basis inherit reasonable justifications based on afore-mentioned principle. For instance,Taxing small traders, manufacturers of agricultural products, herders or farmers has no considerable impact on boosting tax revenue, rather it creates administrative complication or cost to the tax administration to handle with them. The most countries set turnover threshold to exempt those who are below this threshold from VAT. Enlargement of VAT taxpayers will give rise to growth in VAT credit on inputs, overpayment and refund rather than raising budget revenue. IMF mission analyzed implementation of VAT in Mongolia (1999) and considered it appropriate to set registration threshold at 15 million tugrugs and accordingly recommended to keep it indexing in line with further capacity strengthening of tax administration, economic growth, and taxpayers business activities.Normally exemption is granted to public welfare services including health, educational, public transportation, religious, government administrative services, rent of accommodation in residential building, special purpose appliances for the handicapped, imported machinery and equipment for small and medium size enterprises, and appliances for need of the defence etc, since taxing them will in turn exert pressure on budget. Levying VAT on government services will not only contradict to social policy but also increase budget expenditure thereby creating excess tax burden.Due to administrative complexity of determining value added taxable sales of financial services including banking, insurance and securities, the exemptions are given for VAT purposes. One reason certainly hinges on the characteristics of the financial products, which allow the object of the transactions itself to undergo through multi-stage and condition realized on long-term basis, and liable for unfeasibility, and thus require more variety of regulations than those arranged for VAT imposition purposesCivil aviation aircraft, its spare parts, services provided by tourist companies, goods bought through grant and humanitarian aid are normally exempt in accordance with International treaties or conventions, or commonly adopted practices. Zero rating is commonly applied to diplomatic missions and consular offices, exports of goods and services, and services rendered overseas etc.Despite of those exemptions in place, VAT is considered as broad-based in terms of tax base.On the other hand, a person entitled to VAT exemption is considered as a final consumer or end-user. For instance, banking services are VAT exempt where the bank does not charge VAT on its services while it pays VAT (input-taxed activity) on all inputs or purchases (electricity, heating, telecommunication, internet, office rent, equipment, software etc). Thus as final consumers, individuals, legal entities and small traders, who are subject to VAT exemption have no consequences of narrowing VAT base, but they ultimately pay taxes as VAT taxpayer in a real sense.2.3.2.TaxpayerAs of beginning of 2001 there are totally 14358 VAT taxpayers. It worths deeming that taxpayers registered for VAT are withholding agents obligated to charge VAT on consumers and subsequently remit to the budget. In contrast, all consumers, individuals and legal entities importing goods and products bear incidence of this tax burden by being taxed on their consumption. On that account, we have to understand the number of taxpayers not in a sense of those actually paying taxes, but in a sense of those witholding agents imposing and remitting VAT under supervision of tax authorities, issuing VAT invoice, entitled to claiming for VAT on their purchases and receiving refunds. The basic characteristics of VAT is that VAT taxpayers registered with the tax authorities eliminate incidence of VAT burden by remitting to the budget only the net of VAT charged on their sales and VAT paid on their purchases and imports.Therefore the number of VAT taxpayers should be understood as number of witholding agents of the tax administration. As of 2010 end there are 83347 legal entities and branches registered as taxpayers with the tax administration. If exclude budgetary organizations, religious organizations, branches, permanent establishments, and public or non-government organizations, there 62232 taxpayers might potentially register for VAT.Table -1. Number of VAT taxpayersFinancial yearNumber of registered legal entities, branches and permanent establishmentsConsistingShare in total number of economic entityShare in total number of taxpayers filed CIT return

Economic entityNumber of CIT filersVAT taxpayers

123456

2005459913040127746557318.3320.09

2006523233450030579613817.7920.07

2007587944090934875763618.6721.90

2008672454859242943979320.1522.80

20097463352846463811182022.3725.48

20108334762232555351435823.0725.85

Source: GDT statistical data, 2011

A total number of 14358 VAT taxpayers by end of 2010 represents 23.07 percent of total economic entities liable for registration, and 25.9 percent of economic entities filed Corporate income tax (CIT) return. That is, one out of every four entities declaring their business operation to the tax administration is a VAT withholding agent. The remaining entities have no business operation conducted, or with annual sales below 10 million tugrugs, or carry on VAT exempt activities. In a real sense they are the persons paying VAT to VAT agents.The total sales reflected in VAT return summary grew from 75 percent of total sales in CIT return in 2005 to 94.6 percent in 2009. This indicates that 94.6 percent of total sales of those entities registered with the tax administration are subjected to VAT through a fewer number of VAT taxpayers. However, due to VAT exemption provided to mining products (intermediate/not final) on second half of 2009, this figure declined by 11.75 percent in 2010 compared to the preceding year.

Table -2 Comparative amount of CIT taxable sales and VAT taxable sales (thousand tugrugs)YearTotal sales in CIT returnTotal sales in VAT returnPercentage

1233/2Increase

20054,150,359,022.03,108,576,008.7074.90-

20065,545,198,551.04,395,468,286.8079.274.37

20077,843,051,252.06,645,036,131.0084.735.46

200810,657,371,705.09,301,004,174.6087.272.55

200910,724,938,442.010,119,734,229.2094.367.08

201016,133,247,802.713,327,522,185.0082.61-11.75

Source: GDT statistical data, 2011

There is almost no way to remain unregistered for VAT as the tax administration conducts, on quarterly basis, a survey on taxpayers with sales of more than 10 million tugrugs on their CIT return. In particular, those who have accurately declared their sales and type of operation will obviously become liable to register for VAT.

Voluntary registration for VAT is an open option. If look at those registered on voluntary basis there are few legal entities with foreign investment invested two million USD or over. There are occurences where a person registered for VAT for one-time sale of fixed assets and goods, or realization of turnover more than 10 million tugrugs from consultancy operation. In addition, there are a few number of entities with large purchases or imports despite of having no sales. Those taxpayers normally file VAT return with excess credit results and thus are entitled to claiming for refunds or offsetting overpayment against other tax liabilities. Among them there are persons engaged in mineral exploration. Option for group registration is available under VAT law, however there is currently only one taxpayer registered on a group basis.There are around 50 individuals registered for VAT, but this number remains not increased over the years. This number is too small compared to 28000 individuals currently run their business as sole-proprietorships.Table -3 VAT revenue and number of VAT taxpayers

Source: Statistical data of the Fiscal policy department, MOF, 2011 2.3.3. RatesInitially Mongolia introduced VAT at 10 percent which gradually increased to 13 and 15 percent, and then reduced to 10 percent starting from January 1, 2007. 10 percent is simple to estimate and similar if compared with VAT rates of regional countries. For indirect tax it is the most optimal rate. Scandinavian countries impose VAT at 25 percent while European other countries impose at 17-20 percent, 10 percent on an average in Asia, and 15-18 percent in Latin American countries. VAT rate only in Singapore (7 percent) and Japan (5 percent) is lower than that in our country, but they have gradually been raising this rate.Among all countries adopted VAT the single rate system dominates. Likewise, Mongolia is considered as having a single rate of 10 percent. Zero-rate for exports is not formally included in a rate schedule.

2.3.4.VAT revenue and refundsStatistical data of the last decadedemonstrates that VAT accounts for 17-33 percent of total tax revenue, which is about 14-22 percent of the total budget revenue. This level is relatively high compared to level of countries with similar rate of VAT. Whereas royalty from mineral resources and corporate income taxes are directly dependant on world market price of key export products of Mongolia and economic downfall, the VAT employes relatively incessantand regular characteristics. Data in above table-3 points up increasing trend of VAT revenue from year to years while 2007 and 2009 witnessed decline due to reduction of VAT rate from 15 to 10 percent and due to VAT exemption of mining products and economic downturn experienced in 2009. Table-4 VAT revenue, refund and other ratios

(million tugrugs)

YearGross Domestic Product*Budget revenueTax revenueVAT revenue (Domestic+Imports)VAT refundsRatios

Tax revenue/

GDPVAT/

GDPVAT/ Tax revenueVAT refunds/

VAT revenue

1234565/15/25/46/5

20001,018,885.7346,205.2260,640.876218.63200.025.67.4829.244.20

20011,115,641.4429,951.4328,203.2104193.85800.029.49.3431.755.57

20021,240,786.8469,748.6359,179.2118688.29700.028.99.5733.048.17

20031,461,169.2545,227.1420,969.2121870.61190028.88.3428.959.76

20041,910,880.9706,292.8583,119.0163080.331260.530.58.5327.9719.17

20052,266,505.5832,584.7692,206.5181634.147110.230.58.0126.2425.94

20063,715,000.01,354,098.01,128,140.6241282.646167.530.46.4921.3919.13

20075,464,300.01,855,963.61,502,309.6265051.241847.827.54.8517.6415.79

20086,130,300.02,151,049.81,890,896.6368049.459780.830.86.0019.4616.24

20096,701,900.02,030,286.61,697,735.4325956.479257.925.34.8619.2024.32

20107,171,400.02,767,508.02,417,148.0579122.65140733.78.0823.968.88

Source: www.iltod.gov.mn, Fiscal Policy Department, MOF, 2011*GDP at current prices

Ratio of GDP at current prices to total tax revenue and VAT revenue is relatively high compared to other countries. Tax burden is computed by relation of total tax revenue to the GDP at current prices. With exclusive of Social insurance premium, the result of this computation is moderately high, i.e. 25-33 percent for Mongolia, which is considered as high at the level of European countries such as Ireland, Luxembourg, Greece and Switzerland. Despite the tax revenue is a real data here, such a high ratio might have been resulted from incomplete estimation of the GDP because the type of taxes and tax rates of Mongolia are substantially lower than those in above countries.

Collection of taxes equal to 4.8-9.5 percent of the GDT at the VAT rate of 10-15 percent indicates high compliance of this tax in terms of its imposition and collection. Whereas there is a common tendency in an international practice that considered it efficient if each unit of the VAT rate collects the revenue no less than 0.4 percent of the GDP,but this figure is 0.48-0.8 percent in Mongolia. The VAT refund accounted for 4-24 percent of the total VAT revenue in periods from 2000 to 2010. According to the IMF assumption the refund should not exceed 30 percent of the total VAT revenue. Generally the refund system is considered as a key essence of the VAT implementation. During first few years of implementation of the VAT in Mongolia, there was dominant trend to carry forward the excess to offset VAT liability in the succeeding months or credit against other taxes without paying refund at all due to budget constraint. To avoid large refund claims the large exporters including Erdenet factory and Mongolrostsvetment JV were denied to register as VAT taxpayers. However, since 2004 refund has been fully paid to eligible claimants including above-mentioned entities as recommended or assigned by biggest donors such as IMF. With substantial growth in number of investors to mining industry thereby increasing imports and domestic consumption, the payment of input credit, overpayment and refund has been increasing year to year. Due to economic downturn in 2009 the number of refund claim had drastically been increased where taxpayers, particularly construction and mining industries that are in an excess credit position claimed for VAT resulting to further decline in cases of crediting the excess against next VAT payments that are due on the following months. This eventually gave rise to increase of the refund whereas it declined in July of 2009 due to granting VAT exemption to mining products except for the final ones. It therefore worths noting that this measure might have negatively impacted to the VAT mechanism thereby reducing the VAT revenue.

Submission rate of the VAT return points up a high rate, however, high share of X return or No activity conducted return draws my attention. This figure has to be drastically reduced. Despite the introduction of e-filing system plays considerable significance in both taxpayers and tax authorities activities, it worths noting that there is an increasing tendency of the number of X return. Table-6 Submission rate of return and Share of X returnDateVAT returnOf which

Due returnSubmitted returnPercentageNumber of X returnShare of X return

20055573546298.0180114.66

20066138599597.6798716.46

20077636722094.55105014.54

20089793944696.46169017.89

2009118201136996.18244521.51

2010143581350494.05295721.90

Source: GDT statistical data, 2011

As a result of measures undertaken within framework of Tax amnesty law and Law on implementation of some tax-related laws and social insurance law implemented in 2007-2008, the major portion of VAT accumulated arrears payable to the budget were included in the amnesty. Thus the additional revenue to be assesed by the VAT audit and the amount of refund to be dropped resulting from the audit had remained unchanged. It is possible to make an estimation of some factors to assess the VAT system of Mongolia based on certain items in the summary of VAT return.Table -6 Summary of VAT return for 2008-2010Summarized items of VAT return200820092010

1Gross sales 9,301,004,174.6 10,119,734,229.2 13,327,522,185.0

2Gross sales of goods, work and services subject to VAT 8,739,746,707.8 9,508,235,030.7 12,492,307,937.0

3Of which: Total sales from exportation of goods 2,278,706,432.1 2,380,112,416.7 2,742,873,460.4

4Total VAT charged 629,082,429.3 694,143,895.7 940,814,207.3

5Total purchases of goods, works and services with VAT paid 6,055,482,841.5 6,639,076,045.7 10,005,735,251.2

6Of which: Purchases of imported goods 2,636,835,224.0 3,320,150,361.2 3,634,895,577.2

8Total creditable VAT 607,369,370.6 644,521,792.4 932,359,738.7

9TOTAL VAT PAYABLE 222,424,866.1 219,068,778.2 313,291,280.4

10TOTAL VAT OVERPAID 170,606,861.5 169,477,255.2 304,836,742.7

Whereas the export sales accounts for 20-24 percent of the gross sales in the VAT return, the exempt sales accounts for 5-6 percentthereof. This demonstrates that the registered VAT payers run both taxable and exempt operations subject to the VAT. The study estimations illustrate85-90 percent of VAT on imports paid to the Customs authority declared on the VAT return as creditable inputup to 2009. This ratio however started dropping since July 2009 when an exemption was provided to mining products except for final ones. This is directly associated to non-refunding to the largest importers including Erdenet factory, also mining industries and investors to mining sector in relation to their VAT paid on imports. Non-creditable portions on the VAT return apply to those running exempt operations as well as the VAT on imports paid at the Customs by individuals who are not registered for VAT. Around 36-50 percent of the creditable VAT on the VAT return is for VAT on imports while remaining is for VAT on domestic purchases. 10throw in Table-5 shows the total VAT overpaid in years concerned. This is slightly lower than the total VAT payable due in relevant years, however it is not the amount to be fully refunded but rather is an accumulative sum of monthly overpayments. This figure is subject to either offsetting against payments due on subsequent months or some portions to refunds or further additions. The total amount payable in the 9th row is the amount exceeding the sum of VAT overpaid, VAT paid on imports and domestic purchases, i.e. a net ultimately payable by the taxpayers to the budget. Since the refund started getting paid from the budget its amount has been increasing year to year (Table-4), for instance, the refund for 2006-2009 reached to 20-24 percent of the total VAT revenue whilst it dropped to 8 percent in 2010. Despite 20-25 percent is an international average for the system with standard structure, Mongolia has made various efforts to bring it down to 8.8 percent. However it would be ambiguous or distorted to make an conclusion based solely on the amount of refund paid out of budget without examining the VAT offset against next VAT or other tax liabilities due. In order words, whereas the refund has reduced, the overpaid amount credited against other liabilities may have been increased. As previously indicated the measures undertaken towards decreasing the amount of overpayment and refund have dual effects to reduce income taxes. Despite quantitative data illustrated above points out high performance ofimposition and collection of VAT in Mongolia, it also shows there are essentialneeds for further improvement in some provisions of the law and monitoring from side of the tax authority. In addition there are still potential rooms to yield additional tax revenue, reduce tax burden and recover tax revenue loss expected due to measures aimed to reducing tax burden through enhancement of auditing and services provided by the tax authority. 2.3.5. Revenue raising capacity of VAT in MongoliaThe structure of VAT law and implementation level is measured through two main parameters: revenue raising capacity of VAT and Taxing consumption capacity. Those are standard measurements widely adopted globally.

Share of VAT revenue to GDP

1. Revenue raising capability(RRC) = __________________________________ x 100

Basic rate of VAT

Share of VAT revenue to consumption

2. Taxing consumption capacity(TCC) = __________________________________ x 100

Basic rate of VATThe table illustrates these paramaters in countries with VAT compared by their regions:

Table -7 Revenue raising capability of VAT, comparable figures

Sub Saharan AfricaAmericaEuropean unionCentral and Eastern Europe,

Commonwealth of Independent statesAsia Pacific countriesMongolia

2009 2010

Revenue raising capability273738363548,680,6

Taxing consumption capability385764625868,1100,8

Source: Consultants own estimation, internet 2011,

Whereas those parameters in New Zealand are 65 and 103 percent making the country with the best VAT structure, the result in 2010 for Mongolia is rather high according to estimation based on statistical data from National Statistical Office of Mongolia.

2.3.6. Common offences arising during implementation of VAT lawWhile examining decisions from the meeting of Dispute resolution committee at the General Department of Taxation disclosed onwww.iltod.gov.mn,a webpage of the Fiscal department of the MOF as well as court decisions available at a www.admincourt.gov.mn, a website of the Capital city Administrative courtand at www.supremecourt.mn, a website of the Supreme court, it is obvious that the VAT related disputes arise to some extent and thus can be studied by categorizing them. They are as follows: 1. Failure to register for VAT within due date specified in the law.This is the most common offence that leads taxpayers to bear significant amount of interest and penalties. Offence includes both intentional and unintentional actions which raise further essential needs to amend the law so that it is applied on uniform basis without any ambiguities. For instance, there is an arrangement where non-government organizations are never required to register for tax due to absence of responsibilities imposed thereon to submit the corporate income tax return. Article 4.1.10 of the law specifies a requirement for registration for VAT provided that it is proved to having the sales exceeding 10 million tugrugs in the income tax return. 2. Failure to pay declared taxes on time. Likewise, the taxpayers become subject to substantial amount of penalties and interests due to this offence. Rather than legal terminology, this is more a matter of formulation of the law based on overstrict principles in terms of general structure. This is incidental to general arrangements with regard to recognization of credititable inputs on cash basis, submission of returns on monthly basis, and the same date for filing and payment etc, despite sales are recognized on acrual basis of accounting.3. Failure to charge VAT on sales by postponing its timing. The VAT law provides an arrangement to adhere to acrual based accounting principle in imposition of tax, which causes taxpayers particularly, small taxpayers to fail to levy tax on time. Besides, there would occur offences including intentional concealment of sales, rejection to issue VAT invoice, deferral of income and the like. 4. Over-estimation of VAT credits. Due to legal requirement to determine the VAT input credits on cash basis of accounting, taxpayers fall under tax burden thereby failing to pay tax on time. Hence the offences have been occurring in relation to crediting inputs in line with revenue and utilizing fraudulent VAT invoice. 5. Credit for input VAT associated to exempt sales. Due to absence of mechanism of apportioning creditable inputs, the taxpayers engaged in both taxable and exempt sales subject to VAT tend to reduce tax liabilities due. 6. Claim for fictitious overpayment and refund. There area quite large number of deliberate actions where taxpayers apply for registration even no conditions are met to register for VAT or by performing fraudulent or fictitious transactions, declare regular overstatement and claim for refund or transfer of overpayment into other tax liabilities in relation to their VAT on inputs without having any sales etc. 7. No clear boundary between taxable and exempt sales for VAT purposesgives rise to further misunderstanding or ambiguity among the tax authority and taxpayers. The industrial classification of all economic activities, approved by the joint resolution of the Minister of Finance and the Chairman of the NSO, has not been appliedto proper extent. 8. Uncertainty of imposing VAT and crediting inputs for services provided by non-residents in Mongolia and importation of services.Despite a reverse charge rule is provided to be regulated through provisions 7.3.5, 7.4.9, 16.1.2 of the VAT law, this arrangement fails to function properly and thus creates regular contradiction. In particular, it is complicated to define services as rendered in the territory of Mongolia. 9. There are a number of provisions of the law and law on exemption from VAT that are contradictoryto the general principle of VAT. Instead of achieving their objectives they cause uncertainties resulting in further disputes and ambiguities. For instance, to impose VAT on final sales upon completion of building and construction work, provide exemption to tour operators of tourism services etc. In addition to this law, there are several laws specifically on exemption from VAT are still in effect and causes disputes.

According to the consultant it is highly possible to explore the ways to rectify the problems by carrying out researches on these offences and contradictions from theoretical and legal point of view and making amendments to the law. These are explained in following sections. Three. International trend and distinctive features of VAT As stated in VAT reader What Federal Consumption Tax Would Mean for America published by the Tax analysts, a publisher of leading tax journals such as "Tax Notes," "Tax Notes Today," State Tax Notes," "Tax Notes International", the VAT has been adopted by more than 140 countries and accounts for approximately 20 percent of worldwide tax revenues of 2010. This proves that the VAT has been globally accepted as a vital part of fiscal policy. With some exceptions of distinctive characteristics fewer countries, the VAT employes standard structure and if explore the legislation of neighbouring countries or countries with similar economic structure,hence we can see many interesting experiences that are suitable to our country and are directed to increasing budget revenue and reducing incidence of tax burden falling on taxpayers. To identify some experiences suitable to current circumstances of our country, the experiences of some countries where mining sector plays key role in economy are collected as reference. Careful and indepth investigation of these experiences might give further potentials of capturing new ideas, learn experiences and implement them in Mongolia. 3.1. AustraliaAustralia- one of the leading countries in the field of public administration and financing- yields substantial amount of government revenue from mining sectorlike Mongolia,. Taxation system of this country is always in center of global attention and from its experiences we can see new initiatives to modify the VAT system of Mongolia. This country with high development of mining industry and well-endowed with mineral resources introduced the VAT as Goods and Service tax taking effect from July 1 2000 with a common assumption that this tax would be one of the four main sources of goverment revenue in the future. As a country that has introduced the VAT quite late, its structure and arrangements are relatively sophisticated and modern compared to one in other developed countries. Tax rate is 10 percent and Zero rate applies to exports, international transportation. Healthcare, education, donations, humanitarian activities, transactions related to land and some groceries are tax exempt. Businesses are obliged to register for VAT if their turnover reaches 75000 australian dollar whereas non-profit organizations should register once reached turnover exceeding 150000 australian dollar. Under the VAT in Australia there are several noteworthy options for taxpayers to register for VAT, inter alia, it is possible to opt either accrual basis or cash basis of accounting in determining principles for imposing VAT. Those having sales below 2 million australian dollar choose cash-basis of accounting. Thisarrangement is of essential importance in terms of reducing tax pressure on businesses as well as deficiency of cash flow. In addition the taxpayer may opt filing frequency whether to file on monthly, quarterly or annual basis, whereas those with sales more than 20 million file monthly return. Under the VAT system there is no specific arrangement necessarily available for mining industries and thus they are treated in same manner as other taxpayers.

3.2. Indonesia

Indonesia is one of the resource rich countries with mineral, oil and naturals gas abundance that generates sizeable portion of the GDP from its mining sector. This recommendation includes Indonesian case as an example as Indonesia is one of the developing countries in Asia. Starting from April 01 1985 Indonesia adopted VAT replacing former sales tax. A person having turnover amounting 180-360 million Indonesian rupiah (equal to 26-52 million tugrugs) depending on type of operation is qualified to register for VAT. Alike Mongolia, tax rate is 10 percent and tax return is submitted on monthly basis. Healthcare, education, banking, financial, insurance, postal delivery and public transportation services are subject to VAT exemption. Distinguishing feature is that there are some kinds of goods excluded as taxable goods including public mass media, foods served in hotels and restaurants, products of mining and drilling directly taken from the source. Furthermore, the refund is paid once a year.

3.3. KazakhstanIn terms of geographical location and economic structure Kazakhstan is similar to Mongolia and overwhelmingly rich in oil and thus is included in the recommendation as a reference. Since January 1 2009 Kazakhstan has been implementing the revised VAT code under which several important changes pertinent to taxable items, exemption and refund were made. The VAT rate applicable to turnovers is set at 12 percent. The tax return is submitted on quarterly basis and payment is due within 10 working days of submitting the return. Registration threshold is 42 390 000 tenge (286500 USD or 360 million Mongolian tugrugs). Some medicaments and medical products, materials, equipment and spare parts are subject to import exempt from VAT. Pecularity is precious metals taxed at zero rate in case of sale to the Central Bank. The refund is made within 60 days to taxpayers exported no less than 60 percent of own manufactured products and within180 days to other taxpayers.

3.4. CanadaJustified on the basis that in our country there are a number of companies with Canadian investment trading shares in Toronto stock exchange, the Canadian case of VAT is taken an example in this recommendation. With a great efforts of Brian Mulroney, who was the Prime Minister at that time, the unique tax combining federal or provincial sales taxes was introduced on the 1st of January 1991. The new tax replaced the manufacturers sales tax and telecommuncation tax. The rate of the VAT known as federal Goods and Services tax is 5 percent. Business entities with turnover exceeding 30000 Canadian dollars and non-profit organizations with turnover more than 50000 Canadian dollars are eligible for registration for VAT. The main feature of Canada is that provinces have their own sales tax along with the VAT, hence 2 types of indirect taxes are charged simultaneously. Recently the provinces have started merging these 2 taxes. Currently Alberta, Yukon, Nunavut and Northwest territoriesadminister 5 percent federal VAT whereas the harmonized sales tax is charged in provinces like British Columbia at 12 percent, Manitoba at 12 percent, New Brunswick at 13 percent, Labrador 13 percent, Nova Scotia at 15 percent and Ontario at 13 percent respectively. The rate for the harmonized sales tax varies depending on fact that sequencing of imposing these taxes is different in each province. The exceptional feature is that there are certain zero rated items including basic groceries, prescription drugs, inward and outbound public transportation, and medical devices. The exempt services include healthcare, education, banking and financial, and legal advisory services.

3.5. Russian FederationIn capacity of our neighbour country and the biggest partner in trade and economy, the VAT system of Russia was taken as an example. The VAT introduced on the1st of January 2001 is the largest source of revenue contributing 30-35 percent of the budget revenue. Since 2006 the standard rate has been 18 percent while 10 percent is charged for certain foodstuff, medicine, childrens clothing, books, newspapers and magazines. The registration threshold is 2 million ruble which is approximately 90 million tugrugs. VAT declarations should be submitted on quarterly basis before 20th of the month following the reporting quarter. Legal terminologies of the VAT in Russian are much precisely and comprehensively specified. For instance, there are clear-cut specification for providing exemption to healthcare services to include medical equipment and devices, prostheses its spare parts, wheelchairs for handicapped, optical glasses, lenses (except sunglasses), medical treatment and diagnostic services, except for cosmetic surgery, in private or state clinics, health insurance service, blood acceptance and blood transfusion service, medical emergency, autopsy, prenatal care for mothers and infant care, narcological treatment, services by care facilities for the aged and disabled etc. VAT refund is one of the most important and most troublesome aspects of the Russian tax system. The process of obtaining a refund of VAT in Russia is slow and requires substantial effort and documents from the taxpayer. For example, in order to verify and pay refund of VAT for exported goods, the proceeds from exports should be transferred into bank accounts in Russia within 6 months of exporting goods outside the boundaries of Russia. In case of agreement to sell goods through barter exchange the goods should be proved by the customs as entered into the territory of the Russian Federation. Cash receipt is required to get verified by bank references as transferred into accounts held at commercial banks of Russia. In addition the exporter is required to submit a full set of documents including customs declaration on exports, transportation document with notes certifying the commodities left customs territory, references from commercial banks confirming the export proceeds were transferred to bank account, notes of records in financial statement, taxpayers written request, a copy of export contract and the like. Any violation identified during verification audit of refund becomes the basis for rejection for refund. Diamond, precious metals sold to the Central bank and Treasury fund, ore and concentrates with precious metal content sold for further re-sale, sale of precious metals and diamonds by the Central bank and Treasury fund are the VAT-exempt sales.

3.6. China

The VAT system of China was referred here as China is a key trade and economic partner, the largest investor and neighbour to our country. China started to implement VAT on 1st of January 1984 on on 24 specified items and the current law was put into effect in 1994. VAT system in China isconsidered as the most complicated and most powerful revenue generator yielding 40-47 percent of the total budget revenue. Structurally, design is not standard, but compliance level has been intensifying year to year as noted by observers.

For VAT the taxpayers are classified into two categories where manufacturers with annual turnover below 500000 yuan and traders or service providers with turnover below 800000 yuan are considered as small taxpayers.

Whereas normal taxpayers compute VAT liabilities on the basis of invoice method that used in Mongolia, i.e. by the difference between the output VAT and input VAT, the small taxpayers are taxed at 3 percent on their total revenue from sales. Exportation of goods is zero rated whereasdaily vegetables and grain, agriculture, forestry, products of animal husbandry, aquatic products, books, newspapers and magizines, water supply, heating, gas, liquefied fuel, coal products for household use, selected metal and non-metal mineral products, coal, feeds, agricultural chemicals, agricultural machinery are taxed at 13 percent, and 17 percent for other taxable goods and services. The major VAT exemptions are provided to instruments and equipment imported for education, science and research purposes; self-produced primary agricultural products sold by agricultural producing individuals, cooperatives and partnerships; grant aids; articles imported for the disabled and services provided by individual disabled persons. Besides, no VAT is levied on construction, public transportation, banks, finance and insurance, tourism, post and telecommunications, cultural activities and sports, entertainment businesses and services, but a special Business tax is charged. Another feature is that no VAT credit is allowed to input tax of fixed assets such as houses, construction and equipment. Despite non-crediting ensures not to increase amount of overpayment and refund, on the other hand it results in increasing investment and depreciation costs thereby reducing income tax revenue. Position of the Chinas tax administration towards paying refund is extremely strict under which tax is rebated as specified in the list of differentiated refund rates depending on type of operation and classisfication of export products. Even though 17 percent is charged for VAT on sales, the refund rate is 5-17 percent. It worths noting a list of products eligible for VAT refund has been getting narrower over the years. For instance, 6 kinds of products previously were eligible for refund at rate of 5-9 percent have become no longer refundable now since July 15 2010. These include: steel and non-ferrous metal products, silver concentrate, alchoholic beverages, chemical products including fertilizers, pesticides and medicine, and plastic, rubber and glass products. Due to complexities in controlling utilization of VAT invoice, there are cases where some provinces ruled to issue VAT invoice by tax authorities on behalf of taxpayers based on relevant documentations. For imported services the reverse charge rule is applied for VAT and Business taxes. 3.7. ChileIn his presentation on March 23 2011 on Official Accounts Address the Commissioner of the Chilean Tax Service (SII) noted that the total tax revenue of Chile, a leading country of copper and molybdenum production, accounted to 17.7 trillion pesos in 2010 among which the VAT share is approximately 47.7 percent, which addes up to 8.3 trillion pesos. In addition the Commissioner emphasized that the main objective of the Tax Service for 2011 isto impove the VAT auditing capability since the VAT wii be the main device to generate bugdet revenue despite the favorably higher copper price at world market induces pleasant condition to the countrys economy. Hence it is seen that Chile places priority emphasis on role and significance of VAT on further government revenue. The VAT in Chile is based on invoice method and it is levied at a rate of 19% on the sales of goods and services. Declaration is monthly. Excess VAT is carried over to the following month and only exporters are entitled to VAT refund. 3.8. USA

Researchers alway keep a watchful eye on reason why the USA, a leader of development and economy in the world, has not still adopted VAT on federal level. Hence arises further essential needs to explore reasons and come to conclusion why opponents of VAT debate their argument specifically referring to this country. Therefore let me clarify justifications for resistance to introducing the VAT up to now based on review of other academia and researchers.

45 states out of 50 in the USA use any of the indirect tax kinds for their revenue purposes among which the retail sales tax plays dominant role. The first initiative proposed to introduce VAT at federal level appeared in 1862 during the Civil war followed by a strong proposal in 1942 during the World War II. Soon after the administration of the President R.Nixon in 1969, the President Ford in in early 1977, President J.Karter, the President R.Reagan in 1984, the President in 2005 J.Bush proposed to adopt VAT while reducing heavy reliance on income taxes within the framework of reforming tax system. However neither of the proposals did obtain unanimous support. As explained by Alan Schenk, a professor of law at Wayne State University Law School, current administration of the President B.Obama examines ways ofexploring sources to close federal deficit and finance healthcare planand the VAT will be a single way to resolve both issues at once. Despite the take up of VAT brings numerous positive results to countrys economy, it becomes almost a suicide from political point of view. For instance, soon after Japan introduced the VAT in 1986 and Canada in 1991 the Prime Ministers Ya.Nakasone and B.Malruni lost the election respectively. Upon introducing VAT in Australia J.Howards party also lost a lot of seats in the Parliament. Slightly lower than half or 45-48 percent of income tax revenue submitted to Internal Revenue Service in the USA are the returns according to which the individuals are not liable to tax or entitled to credit and exemption, and so there is perception that the introduction of VAT will lead to fairer system where everyone pays tax. In contrast, there still dominates a conception that collecting a substantial amount of budget revenue through too easy way will expose to enlargement of civil service and government thereby negatively impacting economic structure. According to researchers the main reasons for, except for those political ones, opposing VAT can be classified as follows: 1. Adoption of VAT opposes to general principles of fiscal policy to cut federal spending. Instituting a VAT would reduce deficits, but likely to increase federal spending which might then tempt regularly to raise the VAT rate. Indeed, the United Kingdoms recent move to raise its VAT by 2 percentage points suggests behavior of this type.2. It is unpredictable how the structure, design, in particular rates and scope of exemtion will be changed during hearing of VAT law. 3. As most of the states rely on indirect taxes for raising their budget revenue, it is unimaginable, not only from political perspective but also from implementation perspective,how to harmonize them with federal taxes or change them. 4. Since low income group spends the most of their income on consumption, the VAT imposes higher burden on them. This also applies to middle income group and so is incompatible with income distribution principle. 5. There exists assumption that undertaking tax reform, specially at this time experiencing high budget deficit and economy is at just a level of recovery from crisis, would expose risks of re-causing downturn to economy. In addition to the United States there are 17 countries or autonomous states with currently no VAT including Bahama Islands, Bahrain, British Virgin Islands, Bermuda, Brunei, Hong Kong, Macau, Cayman Islands, Gibraltar, Guernsey, Iraq, Kuwait, Libya, Maldives, Oman, Qatar, San Marino, Saudi Arabia and Arab Emirates. Among them Arabic countries initiated discussing on adoption of VAT. Furthermore the Democratic Peoples Republic of Korea (North Korea) imposes VAT at 15 percent whereas it is 2020 percent in Cuba. Four. Areas for further improvement of VAT and recommendationsFrom the information described in previous sections it follows that this is most likely to bring more efficiency to the taxation system of Mongolia through sustained observance of the law upon enhancement of VAT system by making necessary amendments thereto, because the significance of VAT tends to growing year to year. To this end, the changes could be made into following two key areas: 1. For VAT legislation:-VAT payer and taxpayers registration-Registration threshold for VAT- VAT imposition and exemption- Collection, overpayment and refund of VAT2.For VAT administration:-Enhancement auditing/controlling system of tax administration-Simplification of taxation and payment operations4.1. Modification of VAT legislationThis objective will be achieved through making amendments and revisions to the VAT law. From it follows to change relevant regulation, instruction and return forms in relation to amendments. 4.1.1. VAT payer and taxpayer registration

Registration for VAT concerns determining tax-exempt goods and services, threshold to register for VAT, conditions for voluntary registration and due dates for registration. The current law provides that the registration for VAT is due within 1st day of the subsequent month of reaching sales of 10.0 million tugrugs or more as reported in corporate income tax return in case of legal entities and as reported in individual income tax return in case of individuals.

Hence it is obvious that there are still rooms for further improvement in areas currently causing ambiguities. They include:

-Legal entities and non-government organizations that are not required to file corporate income tax return have beenprevented from obligation to register for VAT -Provided that an individual has reached taxable sales of 10.0 million tugrugs or more, he/she is required to register for VAT starting from March 1 of the following year. If the individual proves that the taxable sales cannot reach 10.0 million in the following year, he/she becomes possible to run business without charging VAT for a whole year concerned. Recommendation:Amend the law so that registration for VAT is required for legal entities if taxable sale has reached 10.0 million tugrugs as reported in quarterly and annual financial statements;for individuals earning business and property income stipulated in Article 12, 13.1.1, 13.1.2, 13.1.5of the Individual income tax law and individuals carrying out work and services stipulated in Article 5.3 of the law on Individuals whose income is hard to determine if their income has reached 10.0 million tugrugs as reported in quarterly and annual individual income tax returns and presumptive income tax returns.

-For setting clear distinction between taxable and exempt sales for VAT purposes, the law provides a requirement to adher to industrial classification of all economic activities. However terms described in the VAT law are not well compatible with definition of work and services specified in the industrial classification as well as other sectoral laws concerned.

Recommendation: Revision to the industrial classification of all economic activities should reflect definitions to ensure consistencies with laws of Mongolia, and the definitions in the laws of Mongolia should be made in line with this classification if the classification follows international standards

-It appears that one time disposal of fixed assets by VAT-exempt taxpayers makes them obligated to register for VAT because of the sales. This creates complication to the taxpayers. Recommendation: Amend the law so that proceeds from sale of fixed assets held for own possession for less than a year should be excluded from the sales qualified for registration for VAT.-There are three conditions for registering on voluntary basis. First, sales from primary production, work and services should reach 8 million tugrugs; second, invested USD 2.0 million or more in Mongolia; third, the applicant should have proper bookkeeping practice in accordance with the international accounting standards. Those requirements however have become unable to met due to some factors including absence of definition delineating main production, work and services; inability to confirm investment due to unavailability of proper fields to enter investment data in the tax forms that were changed resulting from law changes despite the law requires investment be proved by corporate and individual income tax returns; and absence of clear provision on defining conditions to qualify if proper bookkeeping is kept. Recommendation: Incorporate some additional terms to the law, or get commentaries from the Supreme court-Group registration is an open option under the law. However qualifying persons as a group is still remains vague due to absence of clear definition of group of persons. Recommendation: Group registration should not be necessarily included in the law. Otherwise, it could be easier to abolish such provisions. -It is unsatisfactory to regulate VAT deregistration of a taxpayer through only one provision in the law. There is no conditions defined to confirm that the sales are expected to fall below 10 million tugrugs for the subsequent years. This leads tax authority and tax inspectors to decide on their private discretion. -Recommendation: Add a provision disallowing deregistration for 2 years of being registered for VAT and define conditions that sales are expected not to reach 10 million tugrugs, for instance, amount of goods, materials and fixed assets held in taxpayers possession have become below 10 million tugrugs etc.4.1.2. VAT imposition and exemptionVAT imposition pertains to definition of sales subject to VAT, credit of VAT and tax imposition procedures. The VAT law of Mongolia provides much precise definition of taxable items or sales. VAT applies to all, except for those subject to exemption, goods sold, works performed and services rendered in the territory of Mongolia, and importation and exportation thereof. However, -In case of importation of services, it faces problems in determining whether the services are provided in the territory of Mongolia. For instance, it needs clarifying circumstances such as, whether a company of Singapore will be deemed as provided service in the territory of Mongolia if a Mongolian taxpayer rents internet channels via satellite through Singapore; whether the VAT will be charged on payment paid to foreign countries for analyzing samples of mining field; whether the VAT will be charged on payment paid to foreign countries for drawing road trass map in computer graphic way based on data sent from Mongolia etc. Recommendation: Add definition for services rendered in the territory of Mongolia, or change the law so that no VAT will be charged on importation of services- Under VAT, the taxpayer involved in both taxable and exempt activities or zero rated activities is required to determine VAT based on a revenue based allocation formula. The taxpayers however do not use this method quite regularly and on the other side, administratively it is complicated for the tax adminstration to verify. Recommendation:Conduct broad advertising campaign to increase awareness of this allocation rule and calculation practice among all taxpayers- The law provides the time of recognizing taxable sales for VAT under which the time of imposition of VAT shall be the earliest of (similar to accrual basis of accounting): the day when the invoice is issued for goods and services sold, the day when the payment is received, and the day when the goods, work and services are delivered. On the other hand, crediting input VAT is only allowed at the time when VAT is actually paid (similar cash basis of accounting). This provision might be too severe causing regular accumulation of tax arrears and tension to taxpayers with paying interest and penalties. Recommendation: Amend the law so that taxpayers, other than those dealing with the State Budget Revenue and Control Division and Capital city tax office, are allowed to recognize both sales and purchases on cash based accounting principle for purposes of imposing VAT and crediting input VAT. - There is a provision required to impose VAT on its final sale in case of construction and assembly work. This provision contradicts general principle of accounting and VAT, and so is unnecessarily creating uncertain areas . Recommendation: Abolish this provsion-Radical increase in kinds of VAT exempt items over the recent years poses negative impact on tax basis and tax imposition. For instance, there are four groups of exemption were added in 2011in relation to grains and crops, vegetables, fruits cultivated domestically by agricultural farmers, home produced flour, carcass meat and meat removed from bone and sorted in a manufacturing way in the territory of Mongolia, unprocessed animal internal organs, byproducts, milk and milk products produced using domestic raw materials in manufacturing way and sold in the territory of Mongolia, equipment and spare parts for small and medium size industries manufactured and sold in the territory of Mongolia. These exemptions are likely to be practiced at manufacturing stage, but are complicated at subsequent stages of trade. Hence the exemptions should be avoided to a possible extent. Recommendation: Abolish these exemptions based on careful review and study on each exempt item that is of unsignificance. - When it comes to providing VAT exemption, it worth considering to explore the ways to reimburse taxes paid since such as system will create no distortions to overall system and is of more implication to controlling scheme.

4.1.3. Collection, overpayment and refund of VAT

This section concerns due dates for VAT filing and payment, offset of overpayment and refund. - Filing on monthly basis is effective for revenue purposes, but exerts pressure on small taxpayers. Because of this provision, X return submitted in each month accounts for larger portion of total VAT return. Therefore a quarterly return could be allowed to small taxpayers satisfying certain conditions. Recommendation:Amend the law so that taxpayers, other than those dealing with the State Budget Revenue and Control Division and Capital city tax office, are allowed to file VAT return and pay on quarterly basis similar to CIT - A provision under the General Law of Taxation stating filing and payment date will be the same creates a condition to suffer a serious cash deficiency particularly for small taxpayers who are required to pay taxes each month. As previously described previously, VAT has negative impact on cash flowand thus causes accumulation of tax delinquencies. Around 65-70 percent of taxes assessed by the return are normally paid on time while the remaining are prone to interest and penalties. Hence the filing and payment date could be set differently. Recommendation: Amend the law so that assessed taxes are paid within a month for which filing is due under the law. -It is natural that VAT has overpayment results and therefore any measures to decrease the excess credit should be terminated. These measures will not bring any possitive effects to overall taxation system. Current structure of verifying excess credit, offsetting, and refund mechanism employes relatively standard structure and design and so should be complied on long-standing basis. Recommendation: Curtail number of exemptions provided under the VAT law, terminate adopting separate laws, decrease measures restricting refunds and liberalize it i.e. reduce exemptions while relaxing refund procedures.

4.2. Administrative and Controlling system of Tax administration

As previously mentionedthe tax is for generating government revenue and serving as an instrument of the state to manage fair market. To this end the tax administration plays crucial role in objectively implementing principal roles of VAT while ensuring its equity, fairness and avoiding any negative impacts and disputes. Recommendation: Increase professional competencies of tax inspectors through advanced level of training. It includes: 1. Carrying out regular researches on compliance of VAT and ensuring utilization thereof a. Identifying reasons of disputes arising in relation to tax audit assessment report and eradicating their causesb. Performing associated estimations and attaching them to comments on draft laws2. Increasing services to taxpayersa. Publishing a list of VAT payers on regular basisb. Increasing accessibility and effectiveness of pamphlets, manuals and digital newspapers designed for use of taxpayersc. Strictly adhering to due dates for registration for VAT, deregistration, refund etcd. Preparing proposals towards reducing compliance burden and costs falling on taxpayers as obligated by law and submitting them to law initiators3. Facilitating procedures to administer VAT law within the scope of currently effective laws. It includes: - Obtaining commentaries from the Supreme court on some terminologies necessary to implement the law (main business, investment etc)-Removing the requirement to accompany the electronically submitted tax return with paper back-upthat is to be submitted within specified period, or change the requirement

-Entering the unique number of VAT invoice issued to VAT payers into the database for cross-checking purposes

-Clarifying which of the two laws either VAT law or General law of Taxation will apply to imposing responsibilities on offences identified by tax audit

-Giving the same treatment to payment slips of public services including heating, electicity, water supply, telecommuncation and internet as to VAT invoice for purposes of reducing taxpayers compliance cost. John Brondolo, Ron McMorran, Robin Adair, 1999, Mongolia: Improving the design and administration of the VAT IMF-World Bank

Jin Kwon Hyun, 2003, Tax Audit in Mongolian Tax Administration: Some Recommendations with reference to Korean Tax Administration Korea Institute of Public Finance Seoul, South Korea

RuphKhadka, 2004, Impact of the Mongolian tax regimeon the countrys competitiveness, USAID

YoshinobuWatabe, 2005, Establishment of tax education system, JICA

A special invoice issued for purpose of providing VAT exemption to projects implemented within funding of foreign aid and loan

John Brondolo, Ron McMorran, Robin Adair, 1999, Mongolia: Improving the design and administration of the VATIMF-World Bank

This result may be higher than 100 percent if tax is imposed on some purchases including investment in addition to all final consumption.

Katrhryn James, 2011, Exploring the origin and global rise of VAT, 15, Vat Reader, Tax analysts,

Dr Ken Henry report 2009, Australias future tax system

The SII Commissioner Julio Pereira,2011, 2010 Official Accounts address, Santiago

Alan Schenk, 2011, Prior US flirtations with VAT, VAT reader, Tax analysts,

Douglas Holtz-Eakin, 2011. The case against VAT, VAT reader, Tax analysts

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