At least $1.36 billion in evaded taxes was recovered by governments thanks to the Panama Papers leak of 2016, which unearthed millions of financial documents from the law firm Mossack Fonseca. An even bigger investigation into tax evasion is underway following the emergence of the Pandora Papers in October 2021.
Leaks like these show the complicated lengths that companies and ultra-wealthy people go to avoid paying taxes. They’re a gift to governments trying to crack down on the illicit practice, but tax agencies can’t simply wait for the next leak to shed light on prevailing routes of evasion.
Instead, they have to engage in time- and resource-consuming audits based on educated guesses or through random selection. In any given year, only a sliver of potential tax fraud can be investigated. When tax agencies are understaffed and underfunded, it becomes harder to carry out successful audits.
So it was a big deal when Mongolia — not long after a financial crisis — announced that it had recovered $228 million in owed taxes from a multinational mining giant in 2019.
The case happened to be the initial fruits of a campaign to strengthen the country’s tax system through a collaboration with the Organization of Economic Cooperation and Development, the United Nations Development Programme, and other groups.
The successful outcome shows that curbing tax avoidance can facilitate the global fight against poverty.
3 Key Things You Should Know About Mongolia’s Tax Win
Mongolia recovered $228 million in evaded taxes from the mining company Turquoise Hill and prevented the company from writing off $1.5 billion in taxes going forward.
If the $228 million was collected at the time it was owed, Mongolia could have doubled its spending on health care and education.
Global tax evasion costs countries more than $500 billion annually, with developing countries losing more than $100 billion. This deprives governments of money that would otherwise be spent on education, health care, transportation, electricity, shelter, and other services.
What Happened in Mongolia?
Mongolia is sometimes referred to as “Mine-golia” because the country possesses trillions of dollars worth of copper, gold, silver, and coal deposits, along with other minerals.
Despite having opened up its natural resources to multinational corporations for decades, the country has yet to reap the rewards. In fact, nearly one-third of Mongolians live in poverty, while another 15% are perilously close to falling below this line. An estimated 65% of families struggle with food insecurity and the government spends less than half the global average on health care.
In 2009, the Canadian mining company Turquoise Hill, which is owned by the conglomerate Rio Tinto, signed an agreement with the Mongolian government to manage and operate the Oyu Tolgoi mine, one of the world’s largest sites of copper and gold.
Mongolia would get a portion of sales generated from Oyu Tolgoi’s minerals, while also raising money through taxes on Turquoise Hill. If all things went according to plan, this revenue could boost public spending on things like education, health care, and poverty reduction.
But the mine failed to yield much financial benefit for the government over the next several years, despite Turquoise Hill eventually announcing more than $1 billion in annual revenue from the project.
Even when accounting for the loans Turquoise Hill provided to finance Mongolia’s share of the construction costs, things didn’t seem to add up. So Mongolia enlisted the help of various international tax groups to “modernize its legal framework, build capacity to tackle complex tax schemes and to implement the international standards on transparency and exchange of information (EOI) for tax purposes.”
One thing was clear from the start: Mongolia’s tax agency was underfunded, understaffed, and lacked the expertise to effectively oversee multinational corporations.
So the partnership first advised the government on how to build and staff tax departments dedicated to compliance, audits, and specific tax rules. Once these teams were in place, international experts trained members to look for, gather, and analyze different types of information.
In particular, they provided guidance on how to carry out transfer pricing audits, which is what ultimately led to the $228 million settlement. Transfer pricing is when a company sells goods or services to related divisions or companies under the same ownership umbrella at a manipulated price, or funnels revenue through a subsidiary set up in a tax shelter.
Carrying out a transfer pricing audit can take up to 18 months of rigorous work as auditors look through a company’s financial records, organizational charts, and other documents and gain access to international lending databases.
The Mongolian audit found that Turquoise Hill had funneled money related to Oyu Tolgoi through shell companies in the Netherlands and Luxembourg to heavily reduce its tax burden. The evidence was so cut-and-dry that the tax bill of $228 million was paid soon after it was brought to light.
With so many multinational companies operating in the country's mining sector, the tax team is preparing to carry out more transfer pricing audits in the months and years ahead. It’s unclear how much tax avoidance (which is distinct from tax evasion) has been going on in the country, but it’s likely that more money will be recovered as these investigations commence.
Additional structural changes have been made to the country's tax department. Mongolia enacted formal transfer pricing rules to deter the practice and joined 140 countries in signing the Convention on Mutual Administrative Assistance in Tax Matters (the MAAC), which will make it easier for the government to gain access to financial documents.
The country also enacted a law preventing companies from offsetting their current tax bills by pointing to ongoing investments and future expenses. This “ring-fencing” rule, which isolates taxable income, is what blocked Turquoise Hill from offsetting $1.5 billion.
Mongolia is now in a better position to benefit from its natural resources, hold corporations accountable, and generate revenue for public spending on things like education, health care, transportation, electricity, housing, and more.
Mongolia’s Financial Crisis
The economic crisis that engulfed Mongolia in 2016 was due to “government overspending and declining revenues from commodity exports,” according to CNBC.
That makes it seem like Mongolia has a bloated federal budget. But between 1981 and 2020, the government had an average annual budget of $750 million, with yearly expenditures reaching $2.1 billion in 2020.
The United States federal government, by comparison, spent $6.82 trillion in 2021.
A few hundred million in evaded taxes would hardly affect the US federal government. But for Mongolia, that’s a significant fraction of annual spending. And that’s just one company’s tax fraud.
Mongolia’s mining sector accounts for 94% of the country’s exports and 19% of gross domestic product and is dominated by multinational companies like Turquoise Hill that have the technical expertise and financial resources to manage projects. It seems possible that some of the companies operating mines are engaging in similar forms of tax avoidance.
If the ongoing audits recover more taxes, then a new picture of the financial crisis of 2016 could emerge. Was government “overspending” at the root of the problem, or was tax avoidance an instigating factor?
We won’t know for several years, but the initial audit’s tax haul would have been enough to double the country’s spending on health care and education during the years in which they were due, investments that experts say would have been profoundly helpful to citizens.
If the newly strengthened tax team roots out more tax avoidance, then it might be possible that the money for the budget was there all along; it was just being hoarded by the companies enriching themselves with Mongolia's natural resources.
The Vicious Cycle of Tax Evasion
Tax evasion occurs in large part because of power imbalances that exist between government tax agencies and the lawyers that corporations and wealthy individuals enlist to navigate tax law and exploit loopholes and weak spots.
If a country's tax agency had full oversight of the flow of money within its borders, then it would be able to collect all relevant taxes. But no country has that capacity.
As a result, tax evasion becomes a game of cat-and-mouse, with companies and the ultra-wealthy spending huge sums of money to launder and hide money in tax shelters, bribe and lobby officials, engage in transfer pricing, manipulate financial markets, and rewrite the rules. The Panama and Paragon papers show that these practices are happening at scandalous rates.
In fact, it’s estimated that $500 billion is lost annually as a result of tax evasion, with developing countries losing upwards of $100 billion each year. This is money that could otherwise be spent on education, health care, electricity, safety, and the effective functioning of tax departments.
But when taxes go uncollected, governments have less money to spend on these essential services, including effective tax collection. If too little money is being received, then tax departments may get reduced as part of downsizing efforts to limit "overspending," making it even harder for them to get a handle on the problem.
This is how tax evasion becomes a vicious cycle. When it becomes the norm, it signals to entire industries that it’s an easy way to save money, and companies running their cost-benefit analyses determine that it’s smarter to evade taxes than to play by the rules.
Unless a company or person is engaging in underground or informal activity, tax evasion can only really occur when there are different tax jurisdictions. That’s because the tax rules of one environment — say, Mongolia — are evaded by putting money in another environment with different tax rules — say, Luxembourg or the Netherlands.
Hence the proliferation of tax havens around the world that make these schemes possible. Luxembourg and the Netherlands, the countries that abetted Turquoise Hill, ranked as the sixth and eighth most sought-after tax shelters in the world, according to the Tax Justice Institute. The US alone is responsible for other countries losing $20 billion in taxes annually.
It's not like countries passively become tax shelters. In reality, they establish tax shelter laws and then allow financial and legal firms to actively market their services.
In developing countries with fledgling economies and rudimentary tax departments, the ways in which multinational companies take advantage of the tax system can be truly egregious, a modern-day form of imperialism, according to the Global Alliance for Tax Justice.
“The richest countries, much like their colonial forebears, have appointed themselves as the only ones capable of governing on international tax, draped themselves in the robes of saviors and set loose the wealthy and powerful to bleed the poorest countries dry,” Dr. Dereje Alemayehu, executive coordinator of the Global Alliance for Tax Justice, said in a statement.
“Rules on where and how multinational corporations and the superrich pay tax must be set at the UN in the daylight of democracy, not by a small club of rich countries behind closed doors.”
Who Are the Key Players in Creating a Future of Tax Justice?
Indignation about tax evasion and how it robs poor countries had been growing long before the Panama and Pandora papers. But these leaks helped governments crack down on the worst offenders, recover taxes, and enact fines in ways that may deter evasion in the future.
The leaks also helped to educate the public and build momentum for ways to fix the problem.
In recent years, countries have taken steps to ensure global tax fairness, transparency, and consistency. Currently, 136 countries representing 90% of the global economy have agreed to enact a minimum 15% corporate tax rate and change rules around where large companies pay taxes to ensure that the countries that foster corporate profit actually benefit.
The US, the world’s largest economy, is on the cusp of joining a version of this agreement, which would transform how companies engage in tax compliance worldwide, and the European Union seems poised to enact the rule if it can overcome resistance from Hungary.
Efforts are also underway to improve tax enforcement capacity in developing countries, similar to what happened in Mongolia. Various countries are currently being advised on how to expand and improve their tax departments, devise new rules in line with the global economy, and perform successful audits for a range of technical and challenging financial schemes.
Tax Inspectors Without Borders — a joint project between the Organization of Economic Cooperation and Development and the United Nations Development Programme — was instrumental in the restructuring and training of Mongolia’s tax department.
“Without borders” is a clear nod to Doctors Without Borders and all groups focused on international solidarity. Both groups deal with different kinds of crises, and both work to bring about justice.
In the case of Tax Inspectors Without Borders, justice means stopping tax fraud and enabling struggling governments to receive the funds that they're owed. In doing so, it’s helping to generate revenue that flows outward, funding government-wide operations and uplifting entire communities in the process.
What Does This Mean in the Fight to End Extreme Poverty?
We live on a planet with enough food, water, and shelter for everyone to live comfortably. Yet extreme inequalities exist worldwide, with billions of people struggling to secure the most basic of human necessities. More than one-third of people worldwide struggle to get adequate food, nearly half of people lack reliable access to clean water and sanitation, and 62% of people live on less than $10 a day.
Meanwhile, the world’s 10 richest men doubled their wealth to $1.5 trillion during the COVID-19 pandemic. The world’s billionaires — some of the primary beneficiaries of tax shelters — could fund the annual amount needed to end poverty and achieve the Global Goals in the poorest countries 30 times over. That estimated amount is $350 billion, less than recorded tax evasion each year.
Taxation is a powerful tool for combating poverty and injustice, and reining in runaway inequality like this. But it’s only effective when adequate resources are made available and countries cooperate to ensure transparency, accountability, and fairness.
Mongolia’s tax win shows that progress can be made to ensure tax justice. The odds are still stacked against developing countries, but as knowledge and expertise are shared and solidarity grows, those evading taxes will have fewer places to hide.