Don’t blame the IMF.
True, one of their technical assistance teams,in a November 2012 report, completely rewrote Mongolia’s model tax treaty and cautioned that its existing treaties – in particular the one with the Netherlands – were “problematic” and recommended “immediate action” be taken because the agreements were costing the government much needed tax revenue; the IMF did not actually advise that the Dutch treaty, or any treaty for that matter, be unilaterally terminated.
Instead the IMF advisers suggested that Mongolia renegotiate those treaties prone to treaty shopping and providing too generous concessions to taxpayers accessing the provisions of its treaties with developed country partners.
So why has Mongolia not only cancelled its treaty with the Dutch but also approved the cancellation of three more agreements with Luxembourg, Kuwait and the United Arab Emirates?
About the Dutch treaty the government was clear and stated that it was because the country was the victim of tax evasion by multinationals using the treaty and Dutch tax laws to arrive at double non-taxation.
Indeed one government spokesperson referred to the Netherlands as a “hub” for companies seeking to evade taxes.
Interestingly, Mongolia is not alone in its recent treaty cancellation activity.
Argentina has done exactly the same thing with Switzerland – another European tax haven- citing its preference not for a new tax treaty but only a tax information exchange agreement or TIEA.
In this instance the Argentines fear that the inequality of bargaining power with respect to its former treaty partner would mean that in order to get access to tax information under a new tax agreement using the model template provided in the OECD model text, they would be forced to agree a further reduction in withholding rates on royalties and interest which were already quite low.
So back to the question.
Simply put we don’t know the details except the stated concern about the Dutch agreement; but as the Parliamentary action came at the same time that the IMF report called for “immediate action” it is possible that this is exactly what the Mongolian government interpreted “immediate action” to mean.