Wednesday, 26 December 2012


I have some sympathy for Sarah Armstrong, the corporate lawyer for South Gobi Resources who was refused permission to leave Mongolia while an anti-corruption investigation was underway (but who returned to Australia on Christmas Day).

I have no knowledge of the circumstances of this matter, and even if I had, it would probably be better not to comment.    But suffice to say, it's not always easy to do business in Mongolia.  There are a whole heap of reasons for this, but one reason is that, often, the rules aren't clear.   To take just one example - the tax law preventing the deduction of interest when a company is "thinly capitalised". 

The Mongolian provision is as follows:

14.3. A deduction shall not be made in the case of interest paid to the extent that the interest is paid in respect of the part the total debt owed to the recipient that exceeds three times the value of the capital invested by the recipient in the taxpayer.

That's it, just 3 lines.

Australia has a similar rule, but it  embraces pages of law in Australian tax statutes.  It's division 820 of the Income Tax Assessment Act 1997.   This has 16 subdivisions and 88 sections, and that's without including the provisions dealing with "foreign hybrids".    In this age of the internet, the pages aren't numbered, but if you printed out all this materials, there would be a lot of paper..

Yes, Australian legislation these days is unfortunately enormously complex.  Sure, it may meet some sort of "readability" test (euphemistically, "plain English"), but this doesn't simplify complex concepts.   But at least it addresses at least some of the inevitable "grey" areas. The Australian thin capitalisation provisions deal with situations such as what happens when the taxpayer is a member of a partnership or is some sort of hybrid entity, but the position in Mongolia regarding these isn't clear.   And, since the Mongolian rule only applies to loans from entities that invest in the taxpayer, what happens when the loan is made by a brother entity - literally, this wouldn't be caught, but if this were to be permitted,  wouldn't it defeat the whole purpose of the provision?  What about amounts that might be owing as a result of foreign currency transactions, or other short term arrangements?    How do you account for undistributed profits - and, if they are included as advances, when do they arise? 

It is the "grey" areas that are going to cause difficulty for investors (both local and overseas) in Mongolia, because ultimately the result of vague laws is that their interpretation  often comes down to bureaucratic attitudes.   What might be OK one day suddenly ceases to be OK when the political climate changes.

I have no idea if "grey" areas of the law have been relevant to Ms Armstrong's case, and of course there has been no suggestion that the tax laws have been relevant (I have merely quoted one provision as an example of the issues that may arise)  - but if the whole story ever comes out, I shall watch with interest.  In the meantime, no doubt there are other expatriate would-be investors who are thinking very carefully about their travel plans!
Ulan Bataar in the spring!

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