TO ENHANCECOOPERATION IN TAX
MATTERS/JAPAN AND MONGOLIA/

By: Enkhbat Baasandorj

Tokyo, Japan
18th October 2023

CONTENTS
1. ABSTRACT................................................................................................................................ 3
2. BACKGROUND ........................................................................................................................ 3
3. GENERAL SOCIO-ECONOMIC SITUATION ........................................................................ 3
3.1. General comparison ............................................................................................................. 3
3.2. Economic growth ................................................................................................................. 3
3.3. Key sectors ........................................................................................................................... 4
3.4. Public finance....................................................................................................................... 5
3.5. Recent economic policies .................................................................................................... 5
3.6. Foreign direct investment .................................................................................................... 6
4. GOVERNMENT AGREEMENTS ............................................................................................. 6
4.1. Key agreements to promote economic activity.................................................................... 6
4.2. Existing bilateral agreements: .............................................................................................. 7
4.3. Other agreements in tax issues ............................................................................................. 7
5. GENERAL TAX ENVIRONMENT ........................................................................................... 7
5.1. Taxes and tax revenue .......................................................................................................... 7
5.2. Recent reforms ..................................................................................................................... 8
5.3. Lessons to be learned from Japanese experience ................................................................. 9
6. INTERNATIONAL TAXATION ISSUES................................................................................ 10
6.1. Types of taxes relevant for international businesses .......................................................... 10
6.2. Recent developments in international taxation issues ....................................................... 10
6.3. Income tax issues ................................................................................................................11
6.4. Tax treaties ..........................................................................................................................11
6.5. Transfer pricing................................................................................................................ 126.6. Exchange of information.................................................................................................... 13
7. CONCLUSION ......................................................................................................................... 14
Bibliography ................................................................................................................................. 15
List of persons met ........................................................................................................................ 16

2

1. ABSTRACT
Research Aim
The aim of this research is to analyze the current economic andbusiness environment between Japan and Mongolia, and toinvestigate potential tax-related areas of collaboration between thetwo countries to boost trade and investment. This is a timely andimportant research topic, as Japan and Mongolia are both looking tostrengthen their economic ties.
Key Research Questions•
What are the general socio-economic circumstances in Japanand Mongolia?
The answers to this question will provide a general overview of theeconomic and social conditions in both countries. This information
is important for understanding the context in which tax-related
collaboration can take place /Section 3/.
•

What role do the governments of Japan and Mongolia play insupporting business activities?

This question will examine the specific policies and programs that
the Japanese and Mongolian governments have in place to support
businesses, both domestic and foreign. This information is importantfor understanding the potential for government-to-government
collaboration on tax matters /Section 4/.
•

What good policies can Mongolia learn from Japan in thefield of taxation?

This question will identify specific Japanese tax policies andpractices that Mongolia could learn from to improve its own tax
system. This includes good policy and tax administration practices
for Mongolia to adopt in the future /Section 5/.
•

What are the key areas in the field of taxation where Japanand Mongolia can collaborate?

This question will identify specific areas of tax policy andadministration where Japan and Mongolia can work together toimprove the cross-border business environment. This could include
areas such as double taxation avoidance, tax information exchange,
and tax dispute resolution /Section 6/.
•

What actions should the governments of Japan and Mongoliatake to promote tax-related collaboration?

3.1. General comparison
Mongolia is much larger than Japan in terms of land size, with a total
area of 1,566,500 square kilometers, which is roughly four times
larger than Japan’s 377,975 square kilometers. However,Mongolia’s population is estimated to be 3.5 million (Mongolian
Population, 2023), which is roughly 37 times smaller than Japan’s
125.8 million (Japan Population, 2023).
The different land sizes and population densities of Mongolia andJapan have several implications. First, Mongolia’s large land sizeand small population make it difficult to develop infrastructure andprovide services to its population. For example, the average distance
between two neighboring villages in Mongolia is over 100
kilometers, making it difficult to build roads and schools. Second,
Japan’s high population density puts a strain on its natural resourcesand environment. For example, Japan imports over 60% of its food,making it vulnerable to food price shocks.
In addition to the differences in land size and population density,
Mongolia and Japan also have very different economies. Japan is ahighly developed country with a diversified economy, while
Mongolia is a lower-middle-income country with an economy thatis heavily dependent on mining.
In 2023, Japan’s GDP per capita is estimated to be $42,440 (Japan
GDP Per Capita, 2023), while Mongolia’s GDP per capita isestimated to be $4,210 (Mongolian GDP per capita, 2023). Thismeans that the average Japanese person is about 10 times wealthierthan the average Mongolian person. Japan’s economy is also muchlarger than Mongolia’s economy, with a GDP of $4.8 trillion in 2023
compared to Mongolia’s GDP of $15.7 billion.
The main industries in Japan are manufacturing, services, andconstruction. Japan is a major exporter of cars, electronics, andmachinery. Japan has a highly skilled workforce and a welldeveloped infrastructure.
On the other hand, the main industries in Mongolia are mining,
agriculture, and livestock. Mongolia is a major exporter of coal,copper, and gold. Mongolia has a young and growing workforce, but
its infrastructure is less developed.
Figure 1. General facts of Japan and Mongolia

This question will make specific recommendations for how theJapanese and Mongolian governments can work together to promote
tax-related collaboration. This could include recommendations forjoint studies, technical assistance programs, and capacity building
initiatives /Section 7/.
2. BACKGROUND
An important topic in the world economy today is international
taxation. Cross-border transactions are increasing in frequency as aresult of business globalization, necessitating greater international
cooperation and collaboration between nations to ensure that taxes
are applied correctly to international transactions and that tax
evasion and avoidance are kept to a minimum.
Japan is one of Mongolia’s top commercial partners, and the twocountries enjoy a strong economic partnership. Nevertheless,despite this connection, there is little cooperation between Japan andMongolia in terms of international taxation.
3. GENERAL SOCIO-ECONOMIC SITUATIONIn this section, the research intended to analyze the current socioeconomic situation from an economic growth and investment
perspective.

Overall, Japan has a much more developed and diversified economy
than Mongolia. However, Mongolia is a rapidly growing economy
with a lot of potential.
3.2. Economic growth
Japan’s economic growth has been relatively slow in recent years,
while Mongolia’s economic growth has been relatively fast. In thepast five years, Japan’s average annual GDP growth rate has beenaround 1%, while Mongolia’s average annual GDP growth rate has
been around 5%.

3

Graph 1. Japanese economic growth

Graph 2. Mongolian economic growth

Source: World bank (GDP growth - Japan, 2023)

Source: World bank (GDP growth - Mongolia, 2023)

Historically speaking, Japan’s economic growth since 1960 has
been remarkable. The country experienced a period of rapid
economic growth, known as the Japanese economic miracle, fromthe early 1960s to the early 1990s. During this period, Japan’s GDP
grew at an average annual rate of 7.2%. This rapid growth was
mainly driven by factors such as high investment, strong export
sector, developed workforce and proper economic development
policies.

Since the mid-1990s, Mongolia’s economy has recovered andgrown modestly. The country’s GDP has grown at an averageannual rate of around 5% since 1995. This growth has been driven
by the mining sector, which accounts for over 80% of Mongolia’s
exports.

However, Japan’s economic growth slowed in the early 1990s due
to major events and circumstances that happened in the 1980s.

Overall, the disparity in economic growth between the two nations
are generally influenced by the following three factors:• Different development level• Natural resources• Demographic profile.

For instance, Japan saw a tremendous asset price bubble in the late1980s, with stock and land values rising to all-time highs. But when
the bubble broke in 1990, asset values fell through the floor. As aresult, consumer spending and investment fell precipitously,
sending the Japanese economy into a recession.

Japan’s advanced economy and level of development are among thefactors. Consequently, Japan faces greater challenges in attaining
substantial rates of economic expansion. Mongolia, on the other
hand, is a developing nation with a lower middle class of income. It
so has greater potential for economic expansion.

Furthermore, the Plaza Accord was an agreement reached by the G5 countries (France, Germany, Japan, the United Kingdom, and theUnited States) in September 1985 to address the growing tradeimbalance between the United States and Japan. At the time, the US
dollar was overvalued, and the Japanese yen was undervalued. This
made Japanese exports more competitive and US exports lesscompetitive.

One further factor contributing to the disparity in economic growthis Mongolia’s abundance of natural resources, including gold,copper, and coal. Mongolia’s economy has benefited from the recent
surge in demand for these minerals. Conversely, Japan lacks
abundant natural resources. It is hence more reliant on imports andexports.

The Plaza Accord sought to address this mismatch by making theJapanese yen stronger and the US dollar weaker. The G-5 nations
decided to buy Japanese yen and sell US dollars to intervene in theforeign exchange market. The yen’s value compared to the dollar
increased as a result. The yen’s increase reduced thecompetitiveness of Japanese exports and negatively impacted thecountry’s economy. Japanese businesses saw a drop in profits
because of their inability to charge as much for their goods abroad.
As a result, Japan saw a decline in investment and employment
growth.
On the other hand, Mongolia has experienced uneven economic
growth since 1960. Under the socialist Mongol People’s Republic(MPR), the nation saw a period of exceptionally fast economic
growth from the 1960s to the 1980s. The GDP of Mongolia
increased at an average annual rate of more than 6% during this time.
The nation’s natural resources, including coal, gold, and copper, as
well as Soviet assistance, were the main drivers of this growth.
However, Mongolia’s economy began to decline in the late 1980s
and early 1990s due to the collapse of the Soviet Union, the end ofsocialist planning, and extreme weather conditions such as dzud.

Japan and Mongolia are two countries with very different
demographic profiles. Japan has an aging population and a shrinking
workforce, while Mongolia has a young and growing population.
For instance, Japan has one of the oldest populations in the world,with a median age of 48.6 years old in 2023. The country’s total
fertility rate (TFR) is also very low, at just 1.36 children per woman
in 2023 (Japan Population, 2023). Furthermore, Japan’s aging
population is putting a strain on its social welfare system. As more
and more people retire, the government will have to spend more on
pensions and healthcare. This will increase the government’s debt
burden and reduce its ability to invest in other areas, such as
education and infrastructure.
On the contrary, Mongolia’s median age, on the other hand, is just
29.3 years old, and its TFR is 2.75 children per woman (Mongolian
Population, 2023). This demographic advantage is a boon for
Mongolia’s economy. It provides businesses with a large andgrowing pool of workers.
3.3. Key sectors
Japan’s economy thrives on a diverse tapestry of industries,
including a robust services sector, manufacturing excellence, andtechnological innovation. The services sector reigns supreme,
accounting for over 60% of GDP, while manufacturing forms the
backbone of the economy, accounting for over 20% of GDP (Japan
GDP from Manufacturing, 2023). Japan is a pioneer in technologicalinnovation and research and development, with its expertise shining
through in various fields. Japan’s financial sector is well-developedand sophisticated, with Tokyo serving as a major global financial
hub. The country’s success is due in part to its ability to adapt tochanging economic conditions, innovate new technologies, and4maintain a strong focus on quality and efficiency. Big companies
play a pivotal role in the economy, contributing significantly toemployment, exports, investment, and technological innovation.

Mongolian economy. As global commodity prices have fluctuated,
Mongolia’s export earnings from mining activities have also varied,
leading to significant swings in government revenue.

In contrast, Mongolia’s economy is heavily reliant on the mining
sector. Mining and related activities contribute around 22% of GDP
and account for over 80% of the country’s exports (Mongolian
Export, 2023). While the mining sector provides significant revenue
for the Mongolian government, funding public services,
infrastructure development, and social programs, it is highly
vulnerable to fluctuations in global commodity prices, particularly
for copper and coal. This overdependence can make the economy
vulnerable to external shocks and limit its diversification potential.

Furthermore, Mongolia’s expanding social welfare programs haveplaced additional pressure on the budget. As the population ages andhealthcare demands rise, the government has been compelled toincrease spending on social programs, putting further strain on its
fiscal resources.

3.4. Public financeJapan has been facing significant budget deficits, with national debt
rising to over 261% of GDP in 2022 (Japan General Government
Gross Debt to GDP, 2023). The slow-growing economy, aging
population, shrinking workforce, and high debt burden are major
contributors.
Graph 3. Japanese budget deficit

Infrastructure development has also played a role in the widening
budget deficit. Mongolia has made significant investments ininfrastructure projects, such as roads, railways, and power grids, tosupport economic growth and improve connectivity. However, theseinvestments have come at a cost, contributing to the overall growthin government expenditures.
To address the growing budget deficit, the Mongolian government
has implemented a range of measures, including fiscal consolidation
efforts, tax reforms, and increased borrowing. However, thesemeasures have not been sufficient to fully eliminate the deficit, andthe government continues to face significant fiscal challenges.
The growing budget deficit poses several risks for Mongolia’s
economy. It could lead to higher interest rates, which would increase
the cost of borrowing for businesses and households, potentiallydampening economic activity. Additionally, if the government isunable to manage its debt effectively, it could face a credit
downgrade, making it more expensive for the government to borrow
in international markets.

Source: Trading Economics (Japan Government Budget, 2023)

The Japanese government has taken a number of steps to try toaddress these challenges. For example, it has raised the retirement
age and cut social security benefits. It has also tried to stimulate theeconomy through fiscal and monetary policies. However, thesemeasures have not been enough to eliminate the budget deficit.
The Japanese government has set a goal of reducing its debt-to-GDP
ratio to 200% by 2060 (Economic analysis, 2023). However, it isunclear whether this goal is achievable. If the government is unable
to reduce its debt burden, it will eventually be forced to make more
drastic cuts to spending or raise taxes.
In contrast to Japan’s long-standing budget deficit, Mongolia has
only recently begun experiencing this financial strain. Over the past
decade, Mongolia’s budget deficit has steadily increased, reachingan alarming 40% of GDP by 2022. This sharp deterioration in publicfinances is a cause for concern, as it threatens to undermine
Mongolia’s economic stability and long-term growth prospects.

3.5. Recent economic policies
The Japanese government has implemented a number of economic
policies in recent years to stimulate growth and address challenges
like an aging population and debt burden (Economic Policy, 2023).
Notable policies include:
New capitalism: Prime Minister Fumio Kishida’s initiative focuseson digital transformation, green growth, and inclusive capitalism.
Monetary policy: The Bank of Japan has maintained ultra-loose
monetary policy with near-zero interest rates and quantitative easing.
Fiscal policy: The government has implemented fiscal stimulus
measures, including tax breaks and subsidies.
Structural reforms: The government
deregulation and labor market reforms.

has

implemented

Japan’s recent economic policies have had some positive impacts,
such as economic growth and a low unemployment rate. However,challenges remain, including an aging population and high debt
burden. The long-term effectiveness of these policies remains to beseen.

Graph 4. Mongolian budget deficit
Similarly, Mongolia has also implemented economic policies tostimulate growth and address challenges like overreliance on mining,
an emerging middle class, and infrastructure needs. Key policies
include:Source: National Statistics Office of Mongolia (Mongolian Government
budget, 2023)

Several factors have contributed to Mongolia’s growing budget
deficit. One significant factor is the decline in revenue from themining sector, which has traditionally been the backbone of the

Economic Diversification: Mongolia is actively implementing
strategies to reduce its reliance on the mining sector. These efforts
include promoting agriculture, developing tourism, and encouraging
FDI. This shift in focus aligns with the government’s
decentralization efforts, aiming to distribute economic opportunities
and infrastructure across the country.
Infrastructure Development: Mongolia has made significant
investments in infrastructure, including transportation networks,
energy infrastructure, and telecommunications infrastructure.18 This
infrastructure development is crucial for supporting economic

5

growth, social progress, and improved connectivity in both urban
and remote areas.

collaboration can foster sustainable growth and prosperity for both
Japan and Mongolia.

Social Policies: Mongolia has implemented a range of social
policies to enhance citizen well-being.18 These policies include
expanding access to education and healthcare, establishing social
safety nets, and implementing recent tax reforms. These initiatives
aim to promote social inclusion, reduce poverty, and enhance theoverall quality of life for Mongolian citizens.

4. GOVERNMENT AGREEMENTS
4.1. Key agreements to promote economic activity
Bilateral treaties play a crucial role in promoting economic activity
between two countries by establishing frameworks and regulations
that facilitate trade, investment, and cooperation. There are
numerous bilateral treaties that countries can sign to enhance
economic ties (Investment Policy, 2023). These generally include:

While these policies strive to foster a more diversified, resilient, andinclusive economy, challenges persist, including the lingering
dependence on the mining sector and the inadequate infrastructure
in remote areas. The long-term effectiveness of these policies
remains to be seen.
3.6. Foreign direct investment
Japanese investment outside of Japan has witnessed a surge in recent
years, reaching a record high of over 20 trillion yen in 2021. This
expansion reflects Japanese companies’ strategic approach todiversifying their business portfolios and tapping into promising
global markets.
Japanese companies are actively investing across a diverse range ofindustries, including manufacturing, finance, and technology. The
United States, Europe, and Asia stand as key destinations forJapanese investment, driven by factors such as market access,favorable labor costs, and technological advancements.
A significant portion of Japanese overseas investment is directed
towards information and communications technology (ICT),
accounting for 14.3% of total investment. Manufacturing follows
closely with 12.7% of total investment, highlighting the continued
importance of Japanese manufacturing prowess in the global
landscape. Finance and insurance (12.2%), logistics andtransportation (10.1%), and real estate (8.5%) also represent
substantial areas of Japanese investment abroad.
In contrast, Mongolia’s outbound investment remains relatively
modest. While Japan ranks among Mongolia’s top investors, withan average annual investment of approximately 110 million USD,
there is ample room for further engagement.
Graph 5. Foreign direct investment to Mongolia
FOREIGN DIRECT INVESTMENT TO MONGOLIA /MILLION USD/

7000

10.0%
9.0%

8.9%

6000

8.0%
5000

7.0%

6.6%

6.3%

6.0%

4000

5.0%
4.4%

4.4%

3000
3.0%

2000

3.9%

4.0%

3.9%

3.0%

2.7%

2.4%

2.2%

1000
0

0.0%
2011

2012

2013

2014
Others

2015

2016

2017
Japan

2018

2019

2020

2021

Agreement for the Avoidance of Double Taxation and thePrevention of Fiscal Evasion with Respect to Taxes on Income
and on Capital (DTT): A DTT helps prevent double taxation ofincome and capital gains for individuals and companies operating inboth countries. It provides clarity on tax liabilities and promotes
cross-border investment.
Free Trade Agreement (FTA): An FTA eliminates or reduces
tariffs and non-tariff barriers on goods and services between thesignatory countries. This agreement aims to boost bilateral trade,enhance market access, and foster economic integration.
Preferential Trade Agreement (PTA): Similar to an FTA, a PTA
reduces tariffs on certain products between the participating
countries, but to a lesser extent than an FTA. PTAs are often used as
stepping stones towards full FTAs.
Customs Union: A customs union goes beyond an FTA as it not
only eliminates tariffs but also establishes a common external tariff
on imports from non-member countries. This promotes deeper
economic integration and a unified trade policy between the
countries.
Economic Partnership Agreement (EPA): An EPA is acomprehensive agreement that covers various aspects of economic
cooperation, including trade in goods and services, investment, anddevelopment assistance. It is often signed between developed anddeveloping countries to promote sustainable economic growth.
Bilateral Currency Swap Agreement: This agreement allows
central banks to exchange their currencies directly, facilitating tradeand investment by reducing currency risks and volatility.

2.0%
1.0%

0.9%

Bilateral Investment Treaty (BIT): A BIT aims to protect andpromote foreign investment between the two countries. It typically
includes provisions related to the protection of investments, nondiscrimination, repatriation of profits, and dispute resolution
mechanisms.

2022

Percentage

Source: National Statistics Office of Mongolia (FDI to Mongolia, 2023)

Mongolia presents attractive investment opportunities acrossvarious sectors, including mining, telecommunications, agriculture,and renewable energy. The country’s vast natural resources, andgrowing consumer market offer compelling prospects for Japanesecompanies seeking to expand their global footprint.
By leveraging their expertise and resources, Japanese companies
can play a pivotal role in Mongolia’s economic development,
contributing to infrastructure upgrades, resource exploration, job
creation, and technology transfer. This mutually beneficial

Mutual Recognition Agreement (MRA): An MRA establishes aframework for recognizing each other’s product standards andcertifications. This helps streamline trade by reducing the need forretesting and re-certification of products in each country.
Air Services Agreement (ASA): An ASA liberalizes air transport
services between the signatory countries, allowing airlines tooperate flights more freely, leading to increased tourism andbusiness travel.
Intellectual Property Rights (IPR) Agreement: This agreement
focuses on protecting and enforcing intellectual property rights,
encouraging innovation, and creating an environment that fosters
research and development collaborations.

64.2. Existing bilateral agreements:
In accordance with the 1972 Moscow agreement on diplomatic
relations, Japan and Mongolia have established diplomatic ties
(Bilateral agreements, 2022).
Since then, Japan and Mongolia has established various bilateralagreements:
•
•
•
•

•
•

•

•
•

•
•
•

Agreement on establishing cultural relations between Japanand the Republic of Mongolia, 1974.09.23. Ulaanbaatar city
Agreement on economic cooperation between the Republic of
Mongolia and Japan, 1977.03.17. Ulaanbaatar city
Intergovernmental Trade Agreement between the Republic of
Mongolia and Japan, 20.03.1990, Tokyo
Intergovernmental Agreement between the Republic of
Mongolia and Japan on the Acceptance of Volunteers Overseas
in Japan, Tokyo, March 19, 1991
Agreement between the governments of Mongolia and Japanon air communication, November 25, 1993. Tokyo city
Intergovernmental Protocol between Mongolia and Japan on
the reception of Japanese veteran volunteers, 1999.
Ulaanbaatar city
Agreement between the governments of Mongolia and Japanon mutual protection and promotion of investments,
2001.02.15. Tokyo city
Agreement between the governments of Mongolia and Japanon technical cooperation, December 5, 2003. Tokyo city
“Memorandum of defense cooperation between the Ministryof Defense of Mongolia and the Ministry of Defense of Japan”,
2012“Medium-term program of strategic partnership between
Mongolia and Japan (2013-2017)”, 2013
“Medium-term Program of Strategic Partnership between
Mongolia and Japan (2017-2021)”, 2017
“Inter-Governmental Agreement on Cooperation in the
Implementation of Training in the Field of Humanitarian Aid,
Disaster Relief and UN Peacekeeping Operations” wasestablished. 2015.

It is safe to assume that Japan and Mongolia have established manyof the key bilateral agreements that have been mentioned in theprevious section. However, the two countries have yet to establish
an Agreement for the Avoidance of Double Taxation and thePrevention of Fiscal Evasion with Respect to Taxes on Income andon Capital (hereafter referred to as “double tax treaty”).

Administrative Assistance in Tax Matters, which facilitatesinternational tax cooperation and helps combat tax evasion andavoidance. This convention provides a framework for countries toexchange information and cooperate in tax collection efforts, even
if they do not have a bilateral agreement in place.
5. GENERAL TAX ENVIRONMENT
5.1. Taxes and tax revenue
The Japanese tax system is a multi-tiered system consisting of
national taxes, prefectural taxes, municipal taxes, and special taxes.
The national government is responsible for collecting national taxes,
while prefectural and municipal governments are responsible forcollecting prefectural and municipal taxes, respectively. Special
taxes are levied for specific purposes. These include:
National taxes: Corporation tax, consumption tax, inheritance andgift tax, fixed assets tax, real estate acquisition tax, real estateregistration tax.
Prefectural taxes: Enterprise tax, automobile tax, mineral products
tax, tobacco tax.
Municipal taxes: Resident tax, business tax, light vehicle tax, city
planning tax.
Special taxes: Alcohol tax, gasoline tax, liquefied petroleum gas
tax, aviation fuel tax.
Graph 6. Japanese tax revenue composition /2022/

Source: Ministry of Finance of Japan (Tax Revenue, 2022)

Furthermore, Japan’s tax revenue is a significant source of funding
for the government’s budget. In 2022, tax revenue accounted forapproximately 83% of Japan’s total government revenue. The
majority of Japan’s tax revenue comes from income taxes, followedby consumption taxes and corporate taxes.

4.3. Other agreements in tax issues
Besides the double tax treaty, there are several bilateral andmultilateral agreements in the field of tax. These include:

On the other hand, the Mongolian tax system is a two-tiered system
consisting of national taxes and local taxes. These include:

Exchange of information agreements: to exchange information
about taxpayers for tax enforcement purposes.

National taxes: Corporate income tax, value added tax, Customs
tax, Mining royalty tax, Excise tax.

Assistance on collection of taxes: An agreement between two
countries to cooperate in the collection of taxes from their respective
citizens and residents.

Local taxes: Personal income tax, property tax, land fee, and otherstamp taxes.

Multilateral convention on mutual administrative assistance intax matters: to promote international co-operation for a better
operation of national tax laws, while respecting the fundamental
rights of taxpayers. The Convention provides for all possible formsof administrative co-operation between the parties in the assessment
and collection of taxes, with a view to combating tax avoidance andevasion.
While Japan and Mongolia do not have a bilateral agreement on
exchange of information or assistance on collection of taxes, they
are both parties to the Multilateral Convention on Mutual7Graph 7. Mongolian tax revenue composition /2022/
Extension of exercise period within stock option rules: The
Japanese government has extended the exercise period for stock
options from five years to ten years. This change gives employees
more time to exercise their stock options and benefit from any
potential gains.
Strengthened taxation on the income of high-net-worth
individuals: The Japanese government has strengthened thetaxation of the income of high-net-worth individuals. This includes
measures such as increasing the tax rate on capital gains anddividends for high-income earners.

Source: National Statistics Office of Mongolia (Tax Revenue, 2022)

Mongolia’s tax revenue is also a crucial source of funding for thegovernment’s budget. In 2022, tax revenue accounted forapproximately 70% of Mongolia’s total government revenue. Mostof Mongolia’s tax revenue comes from the mining sector.
The Mongolian government allocates its tax revenue to various
purposes, including infrastructure development, education,
healthcare, and social welfare programs. Infrastructure development
is a major priority for the Mongolian government, as it is essential
for economic growth and poverty reduction.
5.2. Recent reforms
Japan has implemented several tax reforms in recent years to address
the challenges of the Japanese economy and society. The focus ofthese reforms has been towards economic revitalization, promoting
investment and innovation, reducing inequality, and introducing
new rules against tax avoidance.
Figure 2. Key issues in the recent Japanese tax reforms.

Implementation of the OECD’s Income Inclusion Rule
(IIR): The IIR is a new international tax rule that is designed toensure that multinational companies pay a minimum level of tax on
their global profits. Japan has agreed to implement the IIR, and it
will come into effect on April 1, 2024.
Revisions to the R&D tax incentive: The Japanese government hasrevised the R&D tax incentive to make it more attractive tobusinesses and to encourage investment in research anddevelopment.
Introduction of a digital transformation and investment
promotion tax incentive: The Japanese government has introduced
a new tax incentive to promote investment in digitaltransformation. This incentive provides tax breaks to businesses thatinvest in DX technologies.
Introduction of a tax incentive to promote carbon neutrality
investments: The Japanese government has introduced a new tax
incentive to promote investment in carbon neutrality. This incentive
provides tax breaks to businesses that invest in carbon-neutral
technologies.
While Japanese tax reforms have been adjusting some factors in theoverall design, Mongolia has been carrying out major structuralreforms to promote domestic businesses and simplify tax services toreduce tax compliance burden. In this regard, the tax reform of 2019has been carried out introducing new sets of rules and regulations
which has been effective since 1 January 2020.

Source: Ministry of Finance of Japan (Tax Reform, 2022)

To elaborate on some noteworthy policy changes:
Expansion of NISA scope and duration: The NISA (Nippon
Individual Savings Account) is a tax-advantaged savings accountthat allows Japanese residents to invest in stocks, bonds, and otherfinancial assets without having to pay capital gains tax on theirprofits. The government has expanded the scope and duration of the
NISA program in recent years, making it more attractive to investors.
Revision of inheritance tax and gift tax: The Japanese
government has revised the inheritance tax and gift tax systems inrecent years, making them more progressive and reducing the tax
burden on middle-class and low-income families.
Revision of qualified invoice system: The Japanese government
has revised the qualified invoice system in recent years to make it
more efficient and easier to use for businesses.
Creation of tax incentive to spur re-investment in startups: The
Japanese government has created a new tax incentive to encourage
re-investment in startups. This incentive provides tax breaks toinvestors who reinvest their capital gains from startup investments
into other startups.

Under the tax reform, a new draft of General tax law, Corporate
income tax law and personal income tax laws have been
implemented. The reform had 3 main integral purposes:
1. Creating favorable tax environment for businesses
2. Digitalization of tax services
3. Implementation of international rules against tax avoidance.
Creating favorable tax environment: The recent tax reform inMongolia focused significantly on improving the business tax
environment, especially for small and medium enterprises (SMEs).
For example, the frequency of corporate income tax return filing
was reduced from quarterly to biannual for SMEs. Additionally, asimplified tax filing scheme was introduced for SMEs with grosstaxable revenue of less than 50 million MNT. This scheme offers
easy tax filing and a tax rate of 1% on gross income.
The Mongolian government has also made major changes topromote investment. For example, the depreciation period for fixed
assets in non-mining sectors has been reduced to 20 years.
Additionally, the loss carryover period has been extended from two
to four years. To promote the mining sector, the tax rate on income
from the transfer of mining licenses or land rights has been reduced
from 30% to 10%.

8

Figure 3. Major changes introduced under the tax reform inMongolia

to file separate tax returns for each subsidiary. This can savecompanies time and money.
The consolidated group tax regime can also improve a company’s
financial flexibility by allowing it to use the profits of its
subsidiaries to offset its own losses. This can make it easier forcompanies to borrow money and invest in new projects.
On the other hand, companies must meet stringent requirements,
including being 100% subsidiaries owned by a single Japaneseparent to qualify for group tax relief. The regime also imposes antiavoidance rules to prevent potential tax evasion, such as transfer
pricing and thin capitalization rules.

Source: Ministry of Finance of Mongolia (Tax Reform, 2023)

To activate the financial market, the tax rate on interest income frombonds or other financial instruments issued by domestic banks has
been reduced from 10% to 5%. Similarly, the tax on dividends andinterest income of investors (individuals or companies) from
Mongolian public companies has been reduced from 10-20% to 5%.
Additionally, several favorable changes have been made available
for all taxpayers. These include:••••

Raising the tax grace period from 2 months to 2 years.
Reducing the statute of limitations from 5 years to 4 years.
Expanding the scope of tax deductibles to include any costs
that meet certain legal requirements.
Allowing taxpayers to correct their annual tax return within 1
year after submission.

Digitalization of tax services: In a concerted effort to modernize
and streamline its tax administration, Mongolia has embarked on acomprehensive digitalization initiative. As a pivotal step, theGeneral Tax Authority of Mongolia launched the New Tax
Administration System on January 14, 2019. This system marks asignificant departure from Mongolia’s legacy tax administration
processes, ushering in an era of enhanced efficiency, transparency,
and taxpayer convenience.
The new tax administration system has revolutionized the taxpayer
registration process, enabling seamless 100% online registration of
taxpayers. Additionally, the system leverages data from the e-barimt
system (VAT receipts system), to assist taxpayers in preparing theirannual tax returns. This streamlined approach extends to tax return
submission and tax payment, which can now be completed entirely
online.

According to the Japan National Tax Agency, there were over
10,000 companies that filed consolidated group tax returns in Japanin the fiscal year 2021. This represents a significant increase fromthe 5,000 companies that filed in 2012.
Overall, the consolidated group tax regime can be a valuable tool for
reducing tax burdens, but it requires careful consideration of its
complexities and potential for tax avoidance.
As Mongolian companies adopt increasingly complex corporate
structures, including the formation of group companies, the issue of
economic double taxation at the group level has emerged under thecurrent corporate income tax law. This issue warrants carefulconsideration by Mongolian policymakers, as it can potentiallyhinder investment and business growth. By addressing economic
double taxation, Mongolia can foster a more conducive environment
for business activities and attract further investment.
Research and development tax incentive:
Japan has offered the R&D tax credit since 1967. It is a government
incentive designed to promote research and development in Japan.
It is available to corporations, partnerships, individuals, and nonprofit organizations that conduct R&D activities in Japan.
To qualify for the Japanese R&D tax credit, the R&D must be new
or innovative and conducted for the purpose of developing new
products, processes, or services. The R&D must also be conductedby a qualified taxpayer.
Graph 8. Number of Japanese R&D tax relief recipientsTax audits are now conducted entirely based on a risk-assessment
framework utilizing the comprehensive tax database. In this context,
the implementation of automatic exchange of information (AEOI)
will significantly enhance the Mongolian tax administration’s ability
to identify and address tax evasion and avoidance risks.
5.3. Lessons to be learned from Japanese experience
Upon taking a closer look at Japanese tax laws and related
regulations, the researcher has identified several notable concepts
that Mongolia could incorporate into its tax system in the future.
On tax policy:
Group tax regime: The consolidated group tax regime in Japan,
introduced in 2003 and revised several times since, offers a taxsaving opportunity for companies by allowing them to consolidate
their profits and losses. This can significantly reduce the overall tax
liability of the group.
Furthermore, dividends paid between group companies are
generally exempt from taxation, which eliminates economic double
taxation. The regime also simplifies tax compliance by allowing
companies to file a single consolidated tax return, rather than having

Source: OECD (R&D Tax Incentives: Japan, 2021)

The Japanese R&D tax credit is calculated as follows:•
Multiply the qualified R&D expenses by the applicabletax credit rate.
•
Subtract the resulting amount from the taxpayer’s
corporate income tax liability.
The applicable tax credit rate is 20% for most businesses. However,
the rate is 30% for businesses that conduct joint or contracted R&D
with universities or national research institutes.
To apply for the Japanese R&D tax credit, businesses must file a tax
return with the Japanese government. The tax return must include a
detailed description of the R&D activities that were conducted andthe expenses that were incurred.

9

The Japanese R&D tax credit is a valuable tool that can help
businesses to reduce the costs of R&D and make it more affordable
to innovate.
Mongolia is a developing country with a relatively small domestic
market. An R&D tax credit could make Mongolia more attractive to
foreign investors by reducing the cost of R&D activities. This could
lead to increased investment in Mongolia, which could create newjobs and boost the economy.
There are several lessons that Mongolia can learn from the Japaneseexperience. First, it is important to design the R&D tax credit systemcarefully to ensure that it is targeted at the right types of R&D
activities. The Japanese R&D tax credit system is designed toincentivize businesses to invest in basic research, applied research,and experimental development.
Second, it is important to set the tax credit rate at a level that is highenough to incentivize businesses to invest in R&D, but not so highthat it is a drain on the government budget.
Third, it is important to have a robust system in place for verifying
and approving R&D tax credits. The Japanese government has arigorous system in place for reviewing and approving R&D tax
credit claims. This helps to ensure that the tax credit system is notabused and that it is only used to fund legitimate R&D activities.
By carefully studying the Japanese experience, Mongolia can design
an R&D tax credit system that is effective and efficient and that will
help to promote innovation and economic growth.
On tax administration:
While Mongolia has made significant progress in simplifying tax
procedures and streamlining tax services, there remains a need forfurther adaptation to the unique needs of diverse taxpayer groups.
This is particularly relevant for foreign investors, including
Japanese investors, who may encounter challenges in accessing andcomprehending tax information tailored to their specificcircumstances.
The Japanese tax authority provides a comprehensive suite of
explanatory materials and consultation services to support investors
in navigating the complex landscape of Japanese tax regulations.
The documents are also translated into English.
This extensive array of resources caters to the diverse needs of both
domestic and foreign investors, ensuring that they have access to theinformation necessary to make informed tax decisions and comply
with all applicable tax obligations.

The types of taxes involved in cross-border transactions can vary
based on the nature of the transaction, the countries involved, andthe specific tax regulations in place. The common types of taxes that
may be relevant in cross-border transactions includes:
Customs Duties: Customs duties, also known as tariffs, are taxes
imposed on goods when they are imported into a country. Theseduties are typically based on the value of the goods, theirclassification, and their country of origin.
Value Added Tax (VAT): Many countries impose a VAT or GST on
the supply of goods and services. In cross-border transactions, thesetaxes can be complex, involving considerations such as the locationof the supplier and the recipient, as well as potential exemptions forexports and imports.
Corporate Income Tax: Companies engaging in cross-borderactivities may be subject to corporate income tax in the countries
where they operate or generate income. Tax treaties and the presenceof a permanent establishment can impact the taxation of businessprofits.
Individual Income Tax: Individuals earning income from crossborder activities, such as employment, investments, or consulting
services, may be subject to income tax in multiple jurisdictions.
Transfer Pricing Regulations: Many countries have transfer
pricing regulations that require related parties engaging in crossborder transactions to ensure that prices are set at arm’s length,reflecting market conditions. These regulations aim to prevent profit
shifting.
Capital Gains Tax: Cross-border capital gains can be subject totaxation, especially for real estate transactions, sales of businesses,
and certain investments.
Taxes on assets: When individuals have assets or beneficiaries in
multiple countries, estate and inheritance tax considerations canarise.
Local Taxes: Depending on the country and region, there may be
additional local taxes or levies that impact cross-border transactions.
Social Security Contributions: In some cases, individuals working
abroad may need to consider social security contributions in boththeir home and host countries.

Furthermore, the Japanese tax authority places a strong emphasis onbuilding and enhancing the expertise of its workforce through acomprehensive capacity-building strategy. This commitment toprofessional development is exemplified by the establishment of the
National Tax College, a specialized institution dedicated to training
and educating tax professionals at the highest level.

While domestic tax laws play a significant role in shaping many ofthese taxes, international considerations are also crucial indetermining income tax liabilities. Income tax issues, encompassing
both personal and corporate income taxes, are influenced by both
domestic tax laws and double tax treaties. Given that income tax is
a central issue in international taxation, this research will focus on
income tax issues from an international taxation perspective.

Drawing inspiration from Japan’s success in establishing the
National Tax College, Mongolia should proactively address futurechallenges by forming a dedicated institution, regardless of its initialsize, to nurture and enhance the expertise of its tax professionals.
This strategic move would lay the foundation for a skilled andknowledgeable tax administration capable of navigating thecomplexities of the ever-evolving tax landscape.

6.2. Recent developments in international taxation issues
Japan has been a leader in international taxation issues and has madesignificant advances in this area. The country’s commitment totransparency, fairness, and efficiency in its tax system and its active
participation in international organizations demonstrate its
commitment to promoting the effective functioning of theinternational tax system.

6. INTERNATIONAL TAXATION ISSUES
6.1. Types of taxes relevant for international businesses
Cross-border transactions involve various taxes that can impact bothindividuals and businesses engaging in international trade,investment, and other activities.

Japan has been actively involved in international tax issues and has
made significant advances in this area. Some of the key
developments in international taxation in Japan include:
Implementation of the BEPS Action Plan: Japan has fully
implemented the Base Erosion and Profit Shifting (BEPS) Action

10Plan including the measures such as the country-by-country
reporting and the transfer pricing rules.
Double Taxation Agreements (DTAs): Japan has signed 72 double
tax agreements applicable to 79 jurisdictions, to avoid double
taxation of income earned by residents of one country in the othercountry (The List of Japan's Tax Conventions, 2023).
Tax Reforms: Japan has implemented several tax reforms aimed at
improving its tax system and increasing revenue. The recent
international tax reform includes the introduction of the income
inclusion rule. The Income Inclusion Rule (IIR) is a key componentof the global minimum tax (Pillar Two) framework developed by theOrganisation for Economic Co-operation and Development (OECD).
It aims to ensure that multinational corporations (MNCs) pay aminimum effective tax rate of 15% on their global profits, regardlessof where they are earned.
Automatic Exchange of Information (AEOI): Japan has fully
implemented the Common Reporting Standard (CRS), which is theinternational standard for AEOI. This enables Japan to exchange tax
information automatically with other countries, improving its ability
to combat tax evasion and avoidance.
Participation in international organizations: Japan is an active
member of the OECD and has participated in its efforts to promoteinternational tax cooperation and the implementation ofinternational tax standards.
On the other hand, Mongolia began improving its foreign taxation
system and conforming to international standards in late 2017.
Recent changes in Mongolian international taxation include thefollowing:
Base Erosion and Profit Shifting (BEPS) Action Plan
Implementation: Mongolia has taken steps to execute the BEPS
Action Plan, to address tax evasion and avoidance by multinational
corporations. This includes actions like the implementation oftransfer pricing regulations and the establishment of country-bycountry reporting requirements.
Commitment to implementing Common Reporting Norm (CRS),
the global standard for automatic exchange of information(AEOI): Mongolia has committed to implementing the EOI
standards. Furthermore, Mongolia has recently become a member tothe multilateral Convention on Mutual Administrative Assistance in
Tax Matters. This would improve Mongolia’s capacity to fight tax
evasion and avoidance by enabling automatic exchange of tax
information with other nations.

income classification approach with different tax rates for each
income classification. Furthermore, Mongolia has different tax rates
for withholding taxes for residents and non-residents. The idea is topromote incorporation of investments.
In this context, both countries should thoroughly examine thepotential benefits and implications of establishing a new tax treaty
to facilitate effective taxation of cross-border businesses.
6.4. Tax treaties
Double tax treaties are designed to prevent double taxation ofincome and provide guidelines for allocating taxing rights between
contracting states which are parties to such agreements. In general,
double tax treaties cover issues such as taxation of business income,dividends, interest, royalties, capital gains, and more.
By reducing the risk of double taxation, DTTs make international
investment more attractive, encouraging businesses to expand theiroperations across borders. This leads to increased investment flows,
job creation, and economic growth in both the source and residence
countries.
Double tax treaties also facilitate the exchange of information
between tax authorities, enabling better identification andprevention of tax evasion and avoidance. This strengthens tax
compliance and promotes a more equitable distribution of tax
revenues.
Furthermore, double tax treaties establish mechanisms for resolving
tax disputes between countries, avoiding costly and lengthy
litigation. This enhances cooperation between tax authorities andpromotes a more efficient and impartial resolution of tax disputes.
Japan has an extensive network of double tax treaties thatencompasses 72 conventions applicable to 79 jurisdictions. As Japanis one of the OECD member states, Japanese tax treaties in generalfollow the OECD model convention.
Japan’s recent double tax treaty with Algeria, signed on February 7,
2023, stands out as a noteworthy example of a tax treaty between adeveloped and a developing nation. The ratification of this treaty iscurrently pending approval from both parties.
Graph 9. Japanese tax treaty network

Implementation of BEPS actions into its existing tax treaties:
Between 1990 and 2004, Mongolia signed 26 double tax treaties(DTTs) with a number of nations to prevent double taxation on
cross-border income and to encourage investment between thenations. To safeguard its network of treaties from aggressive tax
planning methods, Mongolia has pledged to join the Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting (hereafter referred to as “MLI”).
Mongolia has become the 100th country to join the MLI in Octoberof 2022.
6.3. Income tax issues
The income tax laws in both Japan and Mongolia share a strong
structural similarity, aligning with the fundamental principles ofincome taxation prevalent worldwide.
However, there are some distinguishing features regarding income
classification for corporations. While Japan maintains a
consolidated approach for corporate income, Mongolia employs an

Source: Ministry of Finance of Japan (Japan's Tax Convention Network,
2023)

Mongolia has established a substantial network of 30 tax treaties,
encompassing most of its key trading partners. This comprehensive
treaty network, relative to Mongolia’s economic size, effectively
eliminates double taxation and creates an attractive environment forforeign investment.

11Graph 10. Mongolia’s tax network

Source: Mongolian Tax Administration (Mongolian Tax Convention Network,
2023)

However, the evolving international tax landscape, the booming
mining sector, and the absence of source taxing rights in certain tax
treaties have made Mongolia vulnerable to aggressive tax planning
through tax treaty shopping. This would have resulted in substantial
revenue losses that have adversely impacted Mongolia’s budget. In
response, the Mongolian government has taken proactive steps toamend its tax treaties to safeguard its tax base.
Despite its efforts to renegotiate certain tax treaties, Mongolia
resorted to unilateral termination of four double tax treaties in 2013.
This decision was driven by the concern over zero withholding tax
rates on passive income sources such as dividends, interest, royalties,
and technical fees.
In the past decade, Mongolia has exercised caution in concluding
new tax treaties, recognizing that its current network is extensive fora developing country. Additionally, domestic tax loopholes havebeen identified that could enable multinational corporations,particularly in the mining sector, to engage in tax avoidance
practices.
Therefore, Mongolia has demonstrated a commitment tomodernizing its tax environment by adopting a range ofinternational tax developments, including the implementation of
BEPS actions. Further demonstrating its commitment tointernational tax cooperation, Mongolia joined the Multilateral
Convention to Implement Tax Treaty Related Measures (MLI) in
2021, with ratification expected by the end of 2024.
Mongolia’s tax treaty policy emphasizes source taxation, aligningclosely with the UN Model Tax Convention.
Tax treaty with Japan will be one of the first since then. This is why
this treaty is very important for us because it will determine the next
10 years of treaty negotiations. This is why we would like to alignthis potential treaty with our position.
Mongolia’s tax treaty position is heavily based on source taxation
thereby strongly aligning with the UN model.
To foster a favorable investment climate for Japanese businesses in
Mongolia, it is imperative for both countries to acknowledge eachother’s viewpoints and work collaboratively towards mutually
beneficial solutions. A comprehensive tax treaty could serve as thecornerstone of this cooperation, addressing taxation rights allocation,
information exchange, tax collection assistance, and a robust mutual
agreement procedure (MAP) for resolving tax disputes. The MAP
would play a crucial role in eliminating double taxation, especiallyin transfer pricing cases, thereby instilling confidence among
Japanese investors venturing into the Mongolian market.

6.5. Transfer pricing
While Mongolia has coded transfer pricing issues in its domestic
laws including general tax law and corporate income tax law on 22
March 2019, which has been implemented since 1 January 2020,
Japan already has vast experience in this field.
Furthermore, Japan’s Transfer Pricing Guidelines are fully alignedwith the OECD Transfer Pricing Guidelines, which serve as a global
framework for establishing appropriate transfer prices for various
types of transactions, such as the sale of goods, provision of services,and licensing of intellectual property. The guidelines provide
detailed methodologies for determining transfer prices and requirecompanies to maintain proper documentation supporting theirtransfer pricing practices.
The Japanese transfer pricing guidelines recognize various methods
for establishing arm’s length prices, including the Comparable
Uncontrolled Price (CUP) method, Resale Price Method (RPM),
Cost Plus Method (CPM), Transactional Net Margin Method(TNMM), and Profit Split Method (PSM). The appropriate method
depends on the specifics of the transaction.
Furthermore, the Japanese guidelines require taxpayers to consider
the functions performed, assets used, and risks assumed by eachparty to a controlled transaction when determining the arm’s length
price.
The Japanese guidelines require taxpayers to use the mostappropriate transfer pricing method, considering all of the relevantfacts and circumstances. This is also true with the OECD guideline,
where it encourages taxpayers to use the most appropriate transfer
pricing method, after carefully considering the effectiveness of
methods in that circumstance and the relative reliability of themethods under consideration.
The Japanese guidelines allow taxpayers to use the profit split
method in certain circumstances, even if the controlled transaction
does not involve the transfer of all or substantially all of the risks
and rewards of the business activity. The OECD guidelines
encourage taxpayers to use the profit split method if the controlled
transaction involves the transfer of all or substantially all of the risks
and rewards of the business activity. (Transfer Pricing Guidelines
for Multinational Enterprises and Tax Administrations, 2022)
The required retention period for transfer pricing documentation
varies by jurisdiction, with most aligning with the statute oflimitations for tax assessments. The OECD typically recommend
countries to keep documentation for a minimum of five years(Toolkit to support the successful implementation of effective
transfer pricing documentation requirements). In the case of Japan,
the documentation requirement is seven years from the fiscal year
end.
Furthermore, Japan is one of the most stringent countries when it
comes to transfer pricing. This is due to a number of factors,
including:A strong focus on protecting the domestic tax base: The Japanese
tax authorities are very concerned about ensuring that Japanesecompanies do not shift profits out of the country using transfer
pricing manipulation.
A well-developed transfer pricing framework: Japan has acomprehensive set of transfer pricing rules and regulations in place.
These rules are based on the arm’s length principle, which meansthat transactions between related parties should be priced as if they
were taking place between independent companies.

12

A strong enforcement record: The Japanese tax authorities have ahistory of aggressively enforcing their transfer pricing rules. This
has led to a few high-profile cases in recent years.
As a result of these factors, Japanese companies are subject to a highlevel of scrutiny when it comes to transfer pricing. This can make itchallenging for Japanese companies to do business internationally,
but it also helps to ensure that they are paying their fair share oftaxes.
Japan’s remarkable success in transfer pricing is evident in the
declining trend of total adjusted income and the rising number oftransfer pricing audits. This indicates that Japanese taxpayers havebecome increasingly compliant with transfer pricing guidelines,
leading to a more efficient and transparent tax system.
Graph 9. Japanese transfer pricing assessments

While the implementation of transfer pricing regulations has helped
Mongolia curb tax avoidance, particularly in the mining sector,
foreign investors, including Japanese investors, have raised
concerns about the clarity of Mongolia’s transfer pricing rules.
Many businesses contend that the Mongolian tax authority lacks
expertise in certain aspects of transfer pricing and exhibits anaggressive approach in conducting transfer pricing audits.
Additionally, some businesses allege that the tax authority is
demanding transfer pricing documentation for domestic transactions,which is not a standard practice.
Drawing from Japan’s extensive experience in transfer pricing
administration, Mongolia could enhance its approach in thefollowing ways:
The importance of documentation: Japan has strict
documentation requirements for transfer pricing, and taxpayers who
fail to comply with these requirements may be subject to penalties.
Mongolia can learn from this and adopt similar documentation
requirements to ensure that taxpayers are complying with the law.
The importance of advance pricing agreements (APAs): APAs
are agreements between taxpayers and tax authorities that set out thetransfer pricing methodology that will be used for a specifictransaction or group of transactions. APAs can provide certainty for
taxpayers and help to avoid disputes with tax authorities. Mongolia
can consider introducing APAs to provide certainty for taxpayers
and help to avoid disputes.

Source: PWC (Transfer pricing assessment, 2020)

Furthermore, Japan introduced Advanced Pricing Agreements(APAs) in 1987. This made Japan the first country in the world toimplement such a procedure. APAs are a form of tax agreement
between a taxpayer and one or more tax authorities that provide
certainty about the transfer pricing methodology that will be applied
to specific transactions between related parties for a fixed period oftime.
The introduction of APAs in Japan was a significant development in
the country’s transfer pricing regime. APAs have helped to reduce
tax uncertainty and compliance costs for Japanese taxpayers andhave also improved tax planning and investor confidence.
The Japanese APA program has been very successful and thenumber of APA cases are significant. For instance, the National Tax
Agency (NTA) received 188 new bilateral APA requests in 2021.
On the other hand, Mongolia has just implemented transfer pricing
since 1 January 2020. Mongolia’s guidelines are simple andgenerally in line with the OECD transfer pricing guidelines.
Figure 4. Mongolian transfer pricing documentation statistics

The need for cooperation between tax authorities: Japan has astrong network of tax authorities with which it cooperates ontransfer pricing matters. This cooperation helps to ensure that
taxpayers are complying with the law in all jurisdictions. Mongolia
can learn from this and develop similar cooperation arrangementswith other countries.
Capacity building: Building capacity in transfer pricing is essential
for ensuring fair, efficient, and sustainable tax systems that support
economic growth, promote responsible business practices, andcontribute to achieving global development goals. Mongolia should
undoubtedly draw upon Japan’s extensive experience in nurturing
and training tax officials to effectively address intricate matters suchas transfer pricing.
6.6. Exchange of information
Japan is an early member of the Global Forum on Transparency andExchange of Information for Tax Purposes, joining in 2009. As atestament to its commitment to international tax cooperation, Japan
has implemented the key measures to facilitate the exchange of
information for tax purposes and is one of the leaders on this issue
in Asia. This has made Japan a valuable partner in the fight against
tax evasion and avoidance.
Japan’s tax authorities are committed to exchanging information
with other countries to combat tax evasion and avoidance. Japan’s
tax authorities have a good reputation for being cooperative andefficient in exchanging information with other countries.
Furthermore, Japan has established robust systems that facilitate
seamless information exchange among all parties involved,
including regional and national tax agencies.

Source: Ministry of Finance of Mongolia (Transfer Pricing, 2022)

Since the introduction of transfer pricing regulations in 2020, theMongolian tax authority estimates an additional 400 billion MNT in
tax revenue.

13

Figure 4. Japanese EOI scheme

exchange of financial account information by the end of 2023
further underscores Mongolia’s dedication to these reforms.
In parallel to these legal amendments, Mongolia is also focusing ontechnological and administrative enhancements. This includes
developing secure data transmission systems and providing
comprehensive training to tax officials to effectively handle the new
AEOI mechanism.

Source: Ministry of Finance of Japan

In conclusion, Mongolia’s dedication to adhering to international tax
cooperation standards through the Convention on Mutual
Administrative Assistance in Tax Matters, EOIR, and the impending
implementation of AEOI, reflects a deep commitment to enhancing
tax administration and compliance. On this issue, Mongolia shouldseek Japan’s help for experience and guidance.

The exchange of information for tax purposes is a powerful tool thatcan be used to combat tax evasion and avoidance. The exchange ofover 2.6 million information items annually empowers Japan’s tax
risk analysis system to effectively identify and mitigate tax
avoidance risks.

7. CONCLUSION
Despite their close economic ties, with Japan being one ofMongolia’s largest trading partners and investors, there remains
significant untapped potential for further expanding economic
cooperation between the two countries.

Figure 5. Japanese statistics on exchanged information

One promising avenue to enhance economic activity is theestablishment of a double tax treaty, which would alleviate the tax
burden on businesses and individuals operating in both countries.
Such a treaty would provide clarity and predictability in tax matters,
particularly in the intricacies of transfer pricing. This, in turn, would
streamline tax planning for businesses and individuals, fostering
greater investment and trade.

Source: Ministry of Finance of Japan

Since ratifying the Convention on Mutual Administrative Assistancein Tax Matters in 2018, Mongolia has actively utilized the Exchange
of Information on Request (EOIR) mechanism, demonstrating
commitment to global tax cooperation. This proactive approach has
resulted in over 70 requests for information from other jurisdictions
and the successful recovery of over USD 2,000,000 in taxes.
Although this is insignificant in comparison to Japanese
accomplishments, the actions underscore Mongolia’s capability anddetermination to leverage international frameworks to enhance tax
compliance and counter evasion.
Another significant step for Mongolia towards global tax
compliance is the commitment to implementing the Automatic
Exchange of Information (AEOI) standard by 2026, in line with
OECD guidelines. This commitment will mark a substantial
advancement in Mongolian tax administration, ensuring seamlessand secure exchange of financial account information with otherjurisdictions, including Japan.
In this regard substantial legislative reforms are underway to meetthe objectives. These reforms include updating tax laws, enhancing
data protection standards, and establishing frameworks forautomatic information exchange. Our readiness to sign theMultilateral Competent Authority Agreement on the automatic

While the process of establishing a tax treaty between Japan andMongolia is undoubtedly complex, the potential benefits make it an
endeavor worth pursuing. A tax treaty would not only enhancecertainty and predictability but also promote cooperation between
the tax authorities of both countries, leading to improved tax
administration and reduced tax evasion.
In addition to pursuing a tax treaty, Mongolia should continue
refining its tax system to enhance transparency, efficiency, andfairness. A sound tax system is crucial for attracting foreign
investment and stimulating economic growth. Furthermore, a welldesigned tax system can contribute to poverty reduction andinequality mitigation.
To further facilitate economic growth, the governments of Japan andMongolia should strengthen their collaboration on tax matters. This
could involve sharing best practices and providing technicalassistance. Enhanced government collaboration would undoubtedly
improve the tax systems of both countries, making them more
attractive to investors and businesses.
In conclusion, there is immense potential for expanding economic
activity between Japan and Mongolia. A combination of a tax treaty,
improvements to the tax systems of both countries, and enhanced
government collaboration on tax matters could play a pivotal role inachieving this goal.

14

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List of persons met

N

Name

Title

1

Akira Matsuoka

Deputy Director, Collection Division, National Tax Agency

2

Akira Watabe

President, Policy Research Institute, Ministry of Finance Japan

3

Atsushi Kawamoto

Director, Management Division, Research and Administration Department, Policy Research Institute, Ministryof Finance Japan

4

Daisuke Ueda

Senior Advisor, International Cooperation Division, Policy Research Institute, Ministry of Finance Japan

5

Heihachiro Ono

Executive Vice President, Policy Research Institute, Ministry of Finance Japan

6

Hikari Uchida

Section Chief, International Cooperation Division, Customs and Tariff Bureau, Ministry of Finance Japan

7

Hiroki Ema

Section Chief, Exchange of Information International Operations Division, National Tax Agency

8

Hiromitsu Nishijima

Deputy Director, International Tax Policy Division, Tax Bureau, Ministry of Finance Japan

9Junji Ueda

Ph. D., Director – General, Research Administration Department Policy Research Institute, Ministry of Finance
Japan

10

Katsufumi Kurihara

Professor, University of Tsukuba, Graduate School of Business Sciences11

Kengo Hayashihara

Senior Deputy Director, International Cooperation Division, Customs and Tariff Bureau, Ministry of Finance
Japan

12

Kohei Akeyama

Section Chief, International Tax Policy Division Tax Bureau, Ministry of Finance Japan

13

Koki Harada

Tax Bureau Director for Tax Treaties and International Affairs, Ministry of Finance Japan

14

Saori Mogawa

Assistant Director, Office of International Cooperation Research Department, National Tax College/
International Operations Divisions, National Tax Agency

15

Sato Shinuya

Assistant director, Large Enterprise Division, National Tax Agency

16

Takahiro Kinjo

Section Chief, International Cooperation Division, Policy Research Institute, Ministry of Finance Japan

17

Yasushi Suzuki

Deputy Director (Exchange of Information), International operations Division, Commissioner’s Secretariat,
National Tax Agency

18

Yusuke Kamo

Official, International Tax Policy Division Tax Bureau, Ministry of Finance Japan

16