Special report: In tax case, Mongolia is the mouse that roared – By Anthony Deutsch and Terrence Edwards (Reuters India – July 16, 2013)

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AMSTERDAM/ULAN BATOR – (Reuters) – Turquoise Hill Netherlands is a little-known Amsterdam-based company with three employees, no office, and not even its own mailbox. To the government of Mongolia, though, the company represents billions in taxes that it will never see.

Turquoise Hill was created in 2009, five years after Mongolia and the Netherlands signed a tax treaty to avoid double taxation and boost investment in Mongolia. But in 2011, Mongolia decided to cancel the pact, arguing that it would cost the country income from one of the most lucrative gold and copper mines in the world.

The move was rare – tax experts say only a handful of such deals between countries have ever been cancelled – and it highlights a big contradiction.

The Netherlands, which has more than 90 such treaties globally, spent roughly 13 million euros ($17 million) on three aid programs to Mongolia in 2009 and 2010. Globally its aid budget is about $5.5 billion – the fifth most-generous rate among rich nations at 0.71 percent of Gross National Income, according to the OECD. At the same time, Europe’s fifth largest economy hosts some 12,000 companies like Turquoise Hill through which multinationals channel about $10 trillion both in and out of the country largely to avoid taxes, according to a June report by Amsterdam University.

The Netherlands may help countries like Mongolia with aid, but it also undermines development in poor countries by making it easier for companies to cut taxes.

In the Mongolia case, a big beneficiary was Anglo-Australian mining giant Rio Tinto. Toronto-listed Turquoise Hill Resources, named after the giant Oyu Tolgoi open pit mine in the Gobi Desert, is 51 percent owned by Rio Tinto. Oyu Tolgoi means turquoise hill, and the Toronto company in turn owns 66 percent of the project, with the government holding the rest.

The mining unit has so far spent $6.49 billion on the mine, which Rio Tinto believes will become the third largest for copper in the world. That investment amounts to more than half the size of Mongolia’s $10 billion a year economy.

Mongolia’s decision to unilaterally end its tax deal with the Netherlands – it also broke off similar deals with Luxembourg, Kuwait and the United Arab Emirates at the same time – was based on a reassessment of the fairness of the agreements. “We started to question why these countries would have greater advantages in Mongolia than us,” said Vice Finance Minister Surenjav Purev.

Under normal circumstances, Mongolia would levy a 20 percent withholding tax on dividends paid by mine companies. But the dual taxation agreement allowed Dutch-registered firms to channel income from dividends, royalties and interest earned in Mongolia through their Dutch company, so pay no withholding tax. Other Dutch treaties with states that charge little or no tax, such as Bermuda, let companies move that money on from the Netherlands to tax havens.

Terminating the treaty means firms that use countries like the Netherlands to channel tax-free earnings from Mongolia could lose the tax benefits, or be forced to seek a different low-tax route.

However, a Rio Tinto spokesman told Reuters in an email that the cancellation of the Dutch treaty will not affect Oyu Tolgoi’s use of its Dutch holding company, because the firm has a separate investment agreement with Mongolia which “stabilizes” treaties that were in force in 2009. Rio Tinto said it has and will continue to pay all taxes due under Mongolian law.

Mongolia’s termination was noticed in tax circles at the time but not more widely, and comes as developing nations are increasingly concerned about the help that rich countries give big firms to avoid taxes. Last year, Argentina terminated treaties with Switzerland, Spain and Chile. Zambia’s new government is also reviewing bilateral treaties.

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