COMPARATIVE STUDY OF TAX
SYSTEMS :
JAPAN AND MONGOLIA
GANCHIMEG Perenlei (Mongolia)
Visiting scholar
OIRC, Policy Research Institute,
Ministry of Finance, Japan
June 7, 2007
COMPARATIVE STUDY OF TAX SYSTEMS:
JAPAN AND MONGOLIA
OUTLINE
I. COUNTRY BACKGROUND
II. RECENT ECONOMIC DEVELOPMENT
III. TAX SYSTEM OF MONGOLIA
IV. COMPARISIONS OF TAXES
V. LOCAL TAX SYSTEMS AND INTERGOVERNMENTAL
FISCAL RELATIONS
VI. TAX ADMINISTRATIONS
VII. POLICY IMPLICATIONS
VIII. CONCLUSION
I. COUNTRY BACKGROUND
•
•
•
•
•
•
•
LOCATION: CENTRAL EAST ASIA
AREA: 1.57 MLN SQ KM
POPULATION: 2.562 MLN
POPULATION DENSITY: 1.6 person per 1 sq km
CURRENCY TOGRIG (MNT) 100 ¥ = 983 MNT
GDP (current market prices): 2065.0 millions US$
GDP per capita, /2005/: 806 US $
II.RECENT ECONOMIC DEVELOPMENT
Real GDP Growth
12%
10%
• Favorable weather conditions
•
8%
6%
4%
2%
0%
00 001 002 003 004 005 006
0
2
2
2
2
2
2
2
•
•
•
and livestock increase
Higher commodity prices in the
world market, especially those
of gold and copper
Mining related foreign direct
investment
Inflows of worker’s remittance
Rapidly developing service
sector
Composition of GDP, Mongolia (2005)
Communication
3.0%
Service 13.2%
Agriculture
21.3%
• Agriculture at its peak in
Construc
tion 2.6%
•
nsport 9.7%
Trade 24.6%
Industry 25.6%
1995, constituted 40% of
GDP
Changes in economic
structure were
accompanied by changes
in employment and
substantial migratory
movements from rural to
urban areas
Trade in goods of Mongolia
Main destinations of export 2005:
Main destinations of import 2005:
-China (48.2%)
-Russia (35.3%)
-USA
-China (25.9%)
(14.3%)
-Canada
(11.4%)
-Japan (6.4%)
-UK (8.2%)
-South Korea (5.4%)
-South Korea (6.1%)
-Kazakhstan (3.4%)
-Russia (2.6)
-USA (3.4)
Principal exports 2005:
Principal imports 2005:
-Copper
-Petroleum
-Textiles
-Machinery & equipment
-Cashmere & Cashmere products
-Transport equipment
Fiscal Balance of Mongolia
10
50
9
8
6
40
4
3.2
2
30
0
-2.1
20
-2
-4.2
-4.5
-4
-5.8
10
-6
-7.7
-8
-10
0
2000
20001
Revenue
2002
2003
Expenditure
2004
2005
2006
Government deficit
( in percent of GDP)
Main factors of
improvement of fiscal
balance are:
• Jump in Government
revenues due to the
boom in copper and
gold prices
• Tighter budgetary
controls
• Imposition of windfall
tax on copper and gold
(in June 2006)
Revenue development of Mongolia
300.0
/ in %, base year-1999 (266.5 billions of MNT)/
250.0
243.0
200.0
165.6
150.0
97.3%
100.0
79.0%
50.0
31.7%
64.8%
2000
2001
2002
2003
2004
2005
Challenges in the Mongolia’s economy
• GDP growth
• Public debt became
• Narrow base of economy
• Heavy dependent on
•
•
•
•
manageable
Improved fiscal and
trade balance
Inflation remains low
Public financial
management reform
•
•
•
•
external market
Inadequate
infrastructure
Poverty
Unemployment
Urban migration
Environmental pollution
III. TAX SYSTEM OF MONGOLIA
• The tax system of Mongolia consists of 23 taxes, 6 of
•
•
them are state taxes and the others are local taxes.
The tax system includes not only taxes, but also fees
and payments such as payment for the use of natural
resources and license fee for hunting.
The most important direct taxes are Corporate Income
Tax and Personal Income Tax.
The most important indirect taxes are VAT and
Excises.
Tax burden of Mongolia
• Tax burden of the country is
Tax ratios
90
70
82.5
81.8
80
74.3
75.3
74.7
76
•
60
50
•
40
30
•
25.6
29.4
28.6
28.8
30.5
30.5
20
•
10
0
2000
2001
2002
Tax/GDP
2003
2004
2005
Tax/Total revenue
the highest in Asia
Tax revenue became the main
source of government’ revenue
Among taxes the VAT remains
main source of tax revenue
Corporate income tax revenue
has been increased mainly from
mining sector
Other taxes such as Royalty
payment and license fee have
been increased in last 2 years
Composition of Mongolia’s Tax
Revenue, 2005
Other taxes
13%
Income taxes
26%
Earmarked taxes 2%
Customs
8%
Excises
11%
SSC
14%
VAT
26%
Objectives of tax reform
• Increase country competitiveness by
lowering tax burden on business, enabling
job creation
• Relief tax burden on workers by reducing
the tax rate
• Support domestic investors by removing
discretionary tax provisions
• Simplify tax administration procedures by
focusing more on service to tax payers
Mongolia’s Recent Tax Reforms
1.
2.
3.
4.
5.
6.
Review the existing system of tax incentives
Reduce income tax rates
Raise the threshold for the higher rate from 100
million MNT to 500million MNT.
Remove the limits on legitimate expenses and
provide for carrying forward of losses
Improve the VAT including its provisions for
refunds, cascading under the VAT by providing
input tax credits for preproduction expenses and
pre-registration stock of goods
Make the tax laws simple, clear, consistent and
certain
IV. COMPARISONS OF TAXES
Main development indicators
Japan
Population (m)
Surface area (thousand sq. km)
Population density (people per sq.km)
Gross National Income ($ billions)
GNI per capita ($)
GDP growth (%,2003-2004)
Value added as % of GDP (2004):
-agriculture
-Industry
-Services
Life expectancy:
-Male
-Female
Source: WB. World Development Indicators. 06
128.0
378
351
4,734.3
37050
2.7
1
31
68
78
85
Mongolia
2.6
1567
1.6
1.8
600
10.7
21
30
49
62
68
Comparison of Fiscal Balances
(as a percentage of GDP)
1996FY
2000FY
2001FY
2002FY
2003FY
2004FY
2005FY
2006FY
-6.8
-8.0
-6.1
-7.7
-7.8
-6.2
-6.1
-5.6
-5.1
-7.5
-6.1
-7.9
-7.7
-6.5
-6.5
-6.0
-12.2
-7.7
-4.5
-5.8
-4.2
-2.1
+3.2
+9.0
Japan
Mongolia
Note: For Japan, the first row shows the general government balance
balance excluding social security funds. Hence,
the second row shows the fiscal balance including social security
security funds
Sources : Current Japanese Fiscal Conditions and Issues to be Considered.
Considered. 2006, MOF, Japan .
Statistical bulletin, 2005, SSO Mongolia, Budget execution 2006, MOF, Mongolia
Composition of Government’ revenue
( as % of GDP)
Developing Countries
Asia & Pacific
Mongolia (2004)
High Income Countreis
Japan (2004)
Total revenue
Tax revenue
Other revenue
22.1
16.6
37.3
32.8
31.0
17.6
13.2
30.5
27.5
26.4
4.5
4.3
6.8
5.3
4.6
Source: Keen & Simone (2005), OECD Revenue Statistics.1965Statistics.1965-2005, MOF. Mongolia (2005)
Breakdown of Revenues (FY 2006)
General Account Budget
Revenue of Japan (FY 2006)
Tax and
Stamp
revenue
38%
57%
5%
General Government Budget
Revenue of Mongolia (FY 2006)
0.4%
Tax revenue
18.1%
Non-Tax
revenue
Non-Tax
revenue
81.4%
Government
Bond Issues
Foreign
grants
Level of taxation (% of GDP)
Fiscal
year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Japan*
Tax revenue
18.0
16.0
15.6
14.5
14.6
14.6
14.8
14.3
13.9
14.6
14.4
13.3
13.1
13.8
Mongolia
Social Security
contributions
Total
10.7
11.0
11.5
11.8
12.3
12.3
12.4
12.6
12.6
12.5
12.9
12.9
12.6
12.6
28.7
27.0
27.1
26.3
26.9
26.9
27.3
26.9
26.5
27.1
27.3
26.2
25.7
26.4
Tax revenue
27.2
21.6
25.6
18.9
16.3
15.9
17.1
15.7
16.5
21.7
24.6
24.6
24.3
26.2
Social Security
contributions
Total
1.9
2.9
2.9
2.6
3.2
3.2
3.9
4.8
4.4
4.5
4.3
27.2
21.6
25.6
20.8
19.2
18.8
19.7
18.9
19.7
25.6
29.4
29.0
28.8
30.5
*Source: OECD revenue statistics,1965statistics,1965-2005. Statistical bulletin 1998, 2005, SSO, Mongolia
Composition of Taxation: central government
revenues, early 2000s, (% of total tax revenues)
Developing countries
Asia & Pacific
Mongolia
High Income Countries
Japan
Taxes on
income,
profit &
capital gains
Social
security &
payroll
taxes
Domestic
taxes on
goods &
services
International
trade taxes
Property
taxes
25.1
35.1
25.8
32.6
26.1
14.4
4.0
22.1
27.9
29.9
39.4
40.5
26.1
33.0
23.1
18.3
15.9
8.2
4.9
1.8
1.4
1.5
0.9
2.5
2.8
Source: Keen & Simone (2005), MOF, Japan (2005), MOF, Mongolia (2005)
(2005)
Sources of tax revenues of two countries
(selected years, %)
Year
1997
1998
1999
2000
2001
2002
2003
2004
Japan
Direct taxes
63.4
59.3
57.2
61.3
59.5
56.3
56.1
58.2
Mongolia
Indirect taxes
36.6
40.7
42.8
38.7
40.5
43.7
43.9
41.8
Direct taxes
51.2
43.9
38.1
39.3
36.6
36.2
39.8
39.8
Indirect taxes
48.8
56.1
61.9
60.7
63.4
63.8
60.2
60.2
Source: OECD Tax Statistics, 1965-2004; MOF, Mongolia 1996-2006 Budget data
Composition of Tax Revenues
FY2006 General Account Budget,
Japan
Others
12%
FY 2006 General Government Budget,
Mongolia
Others
8%
Income tax
29%
Roaylty 6%
Corpora
tion Tax
20%
Liquor 3%
Customs
8%
Gasoline
Tax 5%
Personal
Income Tax
8%
Excises
11%
Consumpti
on Tax
23%
Corpor
ate Tax
28%
Windfall
Tax 14%
VAT 25%
Main Statutory Tax Rates
Japan
Mongolia*
Individual Income Tax
5,10,20,23,33,40
10 (10,20,30)
Corporate Income Tax
22,30
10,25 (15,30)
5
10 (15)
VAT
Note: In Japan, in addition to Individual Income Tax at national level, inhabitant tax also applied
with flat 10% (prefecture level 4% municipality level 6%) flat rate starting from FY 2007
* Numbers in brackets are the tax rates applied until 1 Jan.2007
Individual Income Taxes
Japan
Mongolia
Income tax ratio to GDP(2004)
8.5%
2.4%
Income tax ratio to tax revenue (2004)
31.9%
7.8%
5,10,20,23,33,40*
10%
46.14million*
346,700
0.86 million yen
0.89 million yen
Tax rates
Number of taxpayers
Tax burden on individual an annual
employment income of 10 million yen
Source: OECD revenue statistics.1965-2005. Comprehensive Handbook of Japanese taxes 2006, Tax
Bureau, MOF Japan
*the new rate structure (national) applied to Income tax from FY 2007
Individual Income Taxes
In Japan:
In Mongolia:
• PIT has a small weight in the tax
• Tax base is narrow and yields low
revenue despite relatively high
statutory rates
• Wide brackets and generous
allowances
• PIT identifies 10 different kinds of
income that are taxed at different
effective rates
• Retirement and capital income are
taxed separately at lower rates
• Most of tax expenditure in the
system arise from the tax credit for
individual’s acquisition of dwellings
and deduction of contributions to
pension plans and life insurance
companies
revenue
• Unifies the tax rate on taxable
personal income at 10%, replacing
the existing three-tired rate of 10,20
and 30%
• Raises the tax credit on taxable
personal income from MNT 48,000 a
year to 84,000, statutorily
exempting from taxes below the
poverty line
• Permits sole proprietorship operators
to deduct more business expenses
• Defines fringe benefits and includes
them in taxable income
Corporate income taxes
Japan
Mongolia
Tax rates
22, 30
10, 25
Ratio to GDP as of 2004
3.8%
5.2%
Ratio to national tax revenue
23.8%
16.9%
2.90 million (as of 2003)
32.255
Tax burden
70% of corporations are report
making loss. Large companies
shoulder 2/3 of CIT revenue.
43% of the companies are 0 or
negative net income. Top 100
provided over 90% of CIT revenue
Depreciation
Straight-line and Declining balance
methods
Straight-line method
7 years
3 years
Number of taxpayers
Loss carry forward
Main features of the CIT
In Japan:
Mongolia:
• The CIT structure is unique
• Second largest revenue source
• Effective tax rates have been
• Reduces the lower rate from
•
•
•
•
reducing
Two depreciation scheme
Tax free reserves (for Bad
Debts and for Returned Goods)
Preferential tax terms
(allowances, credits, etc)
Tax credits
Privileges under the blue
return system
•
•
•
•
15% to 10%, and the higher
rate from 30% to 15% and
raises threshold from MNT 100
million to MNT 500 million
Permits business entities to
deduct more of their legitimate
business expenditures
Provides for an investment tax
credit
Provides for loss-carry forward
Eliminates most discriminatory
tax exemptions and holidays
Tax incentives for corporations
In Japan:
In Mongolia:
• Tax credits to promote policy
• The new CIT law abolished
objectives such as energy
conservation, pollution control,
promotion of small to mediumsized businesses and promotion
R&D
• Special depreciation measures
• Tax free reserves
• Income deduction
• The Blue return system: loss carry
back 1 year & loss forward for 5
years
provisions on tax holidays and
several exemptions
• The income tax of companies
engaged in manufacturing cereals,
potato and vegetables reduced
by 50%
• tax credit equal to 5% of the
total investment made in priority
sectors determined by the
Government
• Loss carry forward for 3 years
VAT rates, revenue and efficiency
Standard VAT
rate
Asia average
Bangladesh
Cambodia
China
Fiji
Indonesia
Japan
Korea
Mongolia
Nepal
Papua New Guinea
Philippines
Samoa
Singapore
Sri Lanka
Thailand
Vanuatu
Vietnam
Latin America average
CEE average
10.5
15.0
10.0
17.0
12.5
10.0
5.0
10.0
15.0
10.0
10.0
10.0
10.0
4.0
15.0
7.0
12.5
10.0
14.0
20.0
Other VAT rates
13.0
10.0
5.2
Source: IMF Country Report No.05/337, Grandcolas (PFTAC, 2003)
VAT
revenue/GDP
3.8
4.1
..
5.6
6.2
3.7
2.0
4.7
7.3
3.0
4.5
3.1
10.7
1.4
5.9
3.1
5.4
4.3
5.9
8.0
Efficiency
ratio
0.38
0.27
..
0.33
0.50
0.37
0.40
0.47
0.49
0.30
0.45
0.31
0.86
0.35
0.39
0.44
0.43
0.43
0.38
0.40
Applicable year
2003
2002
2000
2003
2001
2001
2001
2001
2003
2002
2003
2002
2001
2004
2002
2002
2002
Consumption Tax & VAT
Japan (Consumption tax)
Mongolia (VAT)
Tax rates
5%
10%
Threshold
Tax base
¥ 10 million
Deduction on taxable purchase
10 million MNT~ ¥ 1 million
Invoice
Non-taxable
Export
Land transfer or lease, housing lease,
interest on loans and insurance premium,
medical care, education, welfare service.
Financial services, housing lease,
medical care, education, religious
activities, public transportation,
newspaper and some other
imported goods.
exempt
“O” rate
Proportion to tax revenue
20.2%
26.1%
Ratio to GDP
2.5%
8.0%
2.027 thousand (tax returns in 2002)
6800 (2005)
Number of taxpayers
Main features of the VAT and
consumption tax
In Japan:
In Mongolia:
•
•
VAT is major source of revenue
•
VAT is based on tax invoice and input tax
credit system
•
One rate and zero rate on export
•
Threshold for registration is MNT 10 million,
threshold is in lower side to compare with
other countries
•
The VAT law provides a provision on
refunds to taxpayers in an excess credit
position.
•
The new law eliminates the majority of the
exemptions, however exemptions are still
wider than that of Japan.
The VAT is unique, and rate is one of
the world’s lowest
•
Single rate and export exempted
•
Few exempted goods and services
•
•
•
No invoices are provided for
Tax- exempted sales threshold of ¥10
million
A simplified VAT regime exists for small
businesses, whose sale is below ¥50
million
Other consumption taxes
Ratio to total tax
revenue
Japan
Mongolia
15.8%
11.4%
Liquor tax
Beer(per kl):¥134,250-178,125
Wine (per kl): ¥120,000
Whisky(37%): ¥370,000
Spirits(37%): ¥370,000
Beer(per liter): $ 0.20
Wine (per liter): $0,5- $1.5
Whisky (per liter): $4.5- $6.0
Spirits (per liter): $10.0
Tobacco tax
¥3,552 per 1000 pieces
¥820 per 1000 pieces
$0.60 per 100 pieces
(~ ¥700 per 1000 pieces)
Local taxes on tobacco
Prefectural tax: ¥1,074 per 1000
pieces
Municipal tax: ¥3,298 per 1000
pieces
Gasoline tax
¥48,600 per kilolitre
<90 octane: $11.0- $30.0
>90 octane:$12.0- $43.0
Main features of other consumption taxes
• In Japan, each commodities are
regulated by the separate laws, there is
no special law as excise.
• In Japan, excises on alcoholic
beverages and tobacco have
traditionally not been conceived in
relation to negative externalities, it is
generally accepted that alcohol and
tobacco taxes may be justified to
control the consumption of items that
are considered unhealthy.
• Mongolia imposes excise duties on few
goods like alcohol and tobacco products,
petroleum products and imported
passenger vehicles
• Starting from 2007, Mongolia imposes
excise duties on slop games in the
perspective of social justice.
• Excise duties are levied basically with
the specific rates in $ US
• Both national and local gov’s levy
• About 70 % of excise duties come from
• Most of taxes are earmarked for
• The excise tax is solely the national tax
commodity taxes.
specific purposes and designed as
service charges for the use of road,
airport, and power plants
excises on imported goods.
and its proceeds go to the national
treasury account.
V.LOCAL TAX SYSTEMS AND
INTERGOVERNMENTAL FISCAL
RELATIONS
Mongolia is Unitary state: 18 aimags, 362 soums
Intergovernmental fiscal
relations in Mongolia
Main issues are:
•
•
•
•
•
•
The sizes of local governments are small
The revenue raising capacity are different among aimags
Local governments lacks autonomy & accountability
Some of local taxes are still not been implemented
Assignment of some taxes are not appropriate
The size of funds for transfer not based on stable
institutional framework
Local taxes in two countries
• In Japan, 42.7% of total taxes collected from the local taxes, while
local government’ expenditures account about 63% of net national
and local expenditure.
• In Mongolia, only 6.8 % of taxes collected from the local taxes, local
government’ expenditures account only 9.2% of general
government current expenditures.
• In Japan, main local taxes are the enterprise tax (30% in 2004) in
prefectures and the property tax (45.7% in 2004) in municipalities.
• In Mongolia, generally main source of local taxes is the land fee
(25% in 2004) which is imposed on posses and use of state owned
land.
Local revenue sources
Sources of revenue, Japan
Total
¥ Bn
%
•Local taxes
•Local allocation taxes
•Local Transfer taxes
•Special local grants
•National Treasury Disbursement
•Local loans (bonds)
•Other revenue sources
35548.5
20349.8
624.0
901.8
14433
11816
16330.9
35.5
20.3
0.6
0.9
14.4
11.8
16.3
Total
100,004
100.0
Total
Sources of revenue,
Mongolia
MNT M
%
•Local taxes
•VAT transfer
•Non-tax revenue
•Other revenue source
•National Government
47468.0
11920.5
11580.4
2895.9
5947.9
59.5
14.9
14.5
3.6
7.5
79812.7
100.0
Disbursement
Total
Source: Ministry of Home Affairs, Japan (2003), Ministry of Finance, Mongolia (2005)
VI.TAX ADMINISTRATIONS
Japan
National tax
Tax policy &
reform
MOF/Tax
Bureau
Enforcement
NTA
Customs
MOF/Custom
s & Tariff
Bureau
Local tax
Social
insurance
Ministry of
Internal
Affairs
Ministry of H,
L,& W
Social
Insurance
Agency
Local Gov.
Local Gov.
Social
Insurance
Mongolia
State tax
Customs
Local Tax
Tax policy &
reform
MOF/Fiscal
policy
Department/
Tax policy
Division
MOF/Fiscal
policy
Department/
Tax policy
Division
MOF/Fiscal
policy
Department/
Tax policy
Division
Ministry of L
&W
Enforcement
MTA
General
Customs
Department
MTA
Social
insurance
agency
• In Japan, local tax and
social insurance are
collected by the local
governments.
• In Mongolia, state and
local tax are collected by
the tax authority and
social insurance collected
separately from the MOF.
Main features of two countries’ tax
administrations
Japan’s Tax
Administration:
• Self-assessment
system
• Blue return system
• Bookkeeping scheme
• The withholding tax
Mongolia’s Tax
Administration:
• Self-assessment
system
• Presumptive
taxation
• The withholding tax
Efficiency of the tax administrations
Number of personnel
Japan
Mongolia
56315 (end of
2003)
1372 (end of 2005)
By type of duty:
•Assessment of taxes
•Revenue management &collection
•General affairs & coordination
68%
15%
17%
83.2%
Personnel expenses out of total budget of
operating cost
78.7
49.2
2,9 million (2003)
46.14 million
32.3 thousand
346.7 thousand
¥ 1.78
1.51 MNT~¥ 15.0
•Number of corporations
•Individual income tax payers
Cost of collection
* Source: An outline of Japanese tax administration 2003. Budget Framework
Framework 20052005-2008 MOF Mongolia
Other main features of
Japanese tax administration
• Public relations & tax education
• Tax consultation
• Certified Public Tax Accounts
• Cooperative private Bodies
• Guidance and examination
• Revenue management & collection
• Effective withholding tax system
• Training for the NTA staff
• Human resource management
Features & challenges of
Mongolia’s tax administration
• Vertical structure of MTA
• The structure of GDNT is a mixture of “division by
•
•
•
•
•
•
function” and “division by taxpayer type”
Excessive focus on tax collection
Compliance rates are low
Tax avoidance and evasion appear to be common
Motivating and punishing measures are inappropriate
Luck of training and education for tax officials and
taxpayers
Needs more computerization
VII. POLICY IMPLICATIONS
• Tax reforms and tax policy in Japan considering
•
•
into account the economic conditions of the
country
Most of tax reforms were successful when a
cadre of policymakers and experts have a
detailed knowledge with the existing system and
take responsibility for the reform
In Japan, substantial effort have been made to
educate both the tax officers and the public and
to get the policy ready to support them
Cont-d:
• Annual tax reductions played a vital role in
•
•
encouraging private businesses which are closely
linked to tax incentives in order to achieve specific
policy targets, in particular capital accumulation,
saving increases, and export promotion and so on. To
introduce of inheritance and gift tax based on
Japanese experience
To broaden local tax base by implementing local tax
reform and introducing the new local taxes such as a
city tax.
The amount of shared taxes to local governments
should be defined in a law and determined according
to the law instead of discretionary decision of the
central government.
Cont-d:
• Tax administration should be reformed and
•
•
enhanced to build up fair, transparent, and
efficient administration system based on
Japan’s tax administration practices
Establishment of a “Blue Return” system
could be one of the effective measures for
preventing tax evasion
Establishment of system of Tax accountants
based on Japan’s experience
VIII.CONCLUSION
• Japan is a developed country with
comprehensive and complex tax system
and with effective Tax Administration
• Mongolia is developing country with
distorted tax system and inefficient tax
administrations
• Japanese experience in the area of
taxation could serve as a useful reference
for Mongolia’s economic development
Thank you for your attention