Court of Justice of Mongolia Declares that SouthGobi Sands and Three of Its Former Employees are Guilty of Tax Evasion - Seite 3

1. The experts' report alleges that SGS falsely increased its accounts payable balance in order to reduce its taxable income. This claim amounts to 70% of the overall tax evasion penalty recommended by the experts (MNT 24.3 billion out of MNT35.3 billion). This increase in the payable balance relates almost exclusively to unrealized foreign exchange losses which arose on MNT968.9 billion (US$693.9 million) in investments made into SGS by its parent company, SouthGobi Resources Limited, in US Dollar and translated into MNT. The loss itself resulted from the depreciation of the MNT against the US Dollar over the period being investigated. This significant investment made by the Company was for the development of the mining resource in the South Gobi region, directly for the benefit of the Mongolian economy. The Company notes that this investment is precisely the type of investment that Mongolia is currently trying to attract from overseas investors.

Under Mongolian tax law, unrealized foreign exchange losses cannot be used to reduce taxable income. SGS has precisely followed this regulation as shown in its tax statements that are available to the public and never deducted the foreign exchange losses from its taxable income in its tax filings. SGS is also required to file separately statutory financial statements with the Ministry of Finance of Mongolia. These statutory financial statements need to be done, by law in Mongolia, in accordance with IFRS. Under IFRS, unlike under Mongolian tax law, SGS is required to reduce its income by unrealized foreign exchange losses. The experts have therefore confused tax accounting rules with IFRS accounting rules that are used for statutory financial statements.

In order to assist the experts in understanding the difference between IFRS and tax accounting rules in Mongolia for the calculation of taxable income, SGS prepared and provided reconciliation statements to various experts and authorities throughout the investigation. The Company believes that the experts have failed to properly evaluate and assess the validity of the reconciliation statements.

2. As another example, the experts' report claimed that the Company should have paid value added tax ("VAT") on goods allegedly "transferred to other parties free of charge". These goods described in the experts' report are (i) mobile equipment owned by SGS and destroyed by an accidental fire at the mine site; (ii) fixed assets that are fully depreciated and still held at the mine site; (iii) equipment relating to expired exploitation requirements and still held at the mine site; and (iv) cash donations paid by SGS to local communities, including donations that contributed to the construction of a kindergarten. Paying VAT on these items, including donations, is strictly prohibited under the law on VAT in Mongolia.

The General Tax Law of Mongolia outlines precisely the process and which authorities should be responsible for the resolution of tax disputes. The Company has enquired and not received any explanation as to why this case is being treated as a criminal case as opposed to a civil case. Consequently, the Company disputes both the process as well as the conclusions of the investigations that led to the accusations and verdict against SGS and its three (3) former employees. No new evidence was presented during the latest Court hearing and the Company firmly considers these allegations were not proven.