Nomad Engineering: Imported Services, Reverse Charge and Export Evidence
Nomad Engineering LLC is a Mongolian VAT payer. It wins a design contract with a Korean buyer. The design work is performed in Ulaanbaatar, but the drawings are used in a Korean power plant; revenue is MNT 600 million. Nomad also pays a Russian consultancy MNT 250 million for specialised software modelling. The Russian firm has no Mongolian establishment, charges no VAT, and the contract says 'all taxes borne by the buyer'. Nomad declared nothing on the Russian payment, arguing that a foreign supplier cannot charge Mongolian VAT and that the Korean revenue is an export, so no VAT is due. The tax office assesses MNT 25 million VAT on the Russian service plus a penalty, and accepts the Korean revenue as zero-rated only if documentation proves export. Nomad's input VAT for the quarter is MNT 18 million.
1. Is the Russian consultancy subject to Mongolian VAT, and who is liable?
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Yes. Mongolia taxes imported services that are consumed in Mongolia. The Russian firm has no Mongolian establishment and does not charge VAT, but that does not remove the tax; it shifts the liability to the Mongolian recipient under the reverse-charge mechanism.
Nomad is therefore the VAT payer on the MNT 250 million service: 250,000,000 × 10% = MNT 25 million. The contract clause 'all taxes borne by the buyer' is consistent with this result but is not what creates the liability; the statutory place-of-supply rule does. The clause may support a contractual claim against the Russian firm, but it does not affect the tax office.
At the same time, Nomad may credit the same MNT 25 million as input VAT if the service is used for taxable or zero-rated supplies, and if it holds the required documentary evidence (contract, invoice, payment record and reverse-charge declaration). The cash cost is often nil, but the reporting obligation is real. Failure to declare is a reporting offence, which is why the penalty can stand even where the net VAT effect is zero.
2. Is the Korean design revenue zero-rated, and what evidence must Nomad retain?
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The revenue is not automatically outside the scope merely because the buyer is Korean. The place where the service is performed and where it is used both matter. Nomad performs the design in Ulaanbaatar, which points to a Mongolian supply; the export concession depends on the service being consumed outside Mongolia and on proper documentation.
To support zero-rating, Nomad should retain:
- the contract identifying the Korean buyer and the Korean project site;
- invoices and payment records showing receipt of foreign currency or settlement from abroad;
- evidence that the drawings were delivered to and used in Korea, such as acceptance certificates, shipping or transmission records, and the client's confirmation;
- the export/zero-rate declaration in the VAT return.
If the documentation is incomplete, the tax office can reclassify the MNT 600 million as a standard-rated domestic supply, producing MNT 60 million of output VAT. The burden is on Nomad. A weak file is therefore a much larger risk than the MNT 25 million reverse-charge dispute.
3. Compute Nomad's net VAT position for the quarter and assess whether the penalty is defensible.
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Output VAT:
- Korean design revenue: MNT 600 million at 0% = MNT 0 (assuming valid export evidence).
- Imported Russian service: MNT 25 million reverse-charge output. Total output = MNT 25 million.
Input VAT:
- Reverse-charge input on the Russian service: MNT 25 million, if used for taxable/zero-rated supplies.
- Ordinary input VAT: MNT 18 million. Total input = MNT 43 million.
Net position: 25 − 43 = MNT 18 million credit. The credit is carried forward or refunded only under the refund rules for zero-rated exports; it is not an automatic cash refund.
The penalty for failing to declare the imported service is defensible because the return omitted a taxable import, even though the net tax was nil. The taxpayer can argue mitigation based on voluntary correction and lack of tax loss, but not that no reporting duty existed. If the Korean export evidence fails, the position changes dramatically: output VAT of MNT 60 million is added, turning the credit into a large payable.