* Rio Tinto says report flawed, makes unsubstantiated claims
* Turquoise Hill sends 14-page rebuttal to SOMO
By Barbara Lewis
JOHANNESBURG, Jan 31 (Reuters) - Rio Tinto on Wednesday denied allegations by a Dutch non-profit organisation that it had avoided paying $700 million of tax to Mongolian and Canadian authorities relating to its giant Oyu Tolgoi copper project.
Rio Tinto is investing about a $1 billion a year at Oyu Tolgoi in the Gobi Desert, where it operates a mine and is building an underground extension that would add approximately 500,000 tonnes of production a year in the next decade.
The Centre for Research on Multinational Corporations, known as SOMO, alleged in a report that Rio and its Canadian subsidiary Turquoise Hill used so-called mailbox companies in the Netherlands and Luxembourg to avoid $470 million in Canadian taxes and $230 million in Mongolian taxes.
Rio denied the allegations in a statement. Its shares were trading 0.5 percent lower at 1500 GMT.
"The flawed SOMO report contains a number of unsubstantiated and incorrect allegations regarding tax," Rio Tinto said.
It added Oyu Tolgoi's (OT) structure was agreed in advance with the governments of Canada and Mongolia and the tax outcomes were in line with those in Australia, Chile and the United States.
From 2010 to 2017, the company paid more than $1.8 billion in taxes and royalties, it said. By the time the underground project begins production in 2020, shareholders will have invested approximately $12 billion, while so far only the government of Mongolia has received any return.
In a 14-page letter to SOMO, dated Jan. 17 and reviewed by Reuters, Turquoise Hill CEO Jeff Tygesen issued a detailed rebuttal of the SOMO report and said the company's tax practices were compliant with local laws and international standards.
"The OT operation is substantially contributing to Mongolia's economy and long-term development," he wrote.
Analysts say Mongolia depends on foreign investors and needs the production of copper and other minerals if it is to meet the terms of an IMF bailout agreed last year.
At the same time, the Mongolian government has been looking to increase its income from its resource wealth.
It issued a tax bill for about $155 million to Turquoise Hill relating to an audit of payments made between 2013 and 2015, which Turquoise Hill earlier this month said it was evaluating.
Rio Tinto last week moved to strengthen its relationship with Mongolia, setting up a new office in the Mongolian capital, separate from Tolgoi, to focus on exploration and local ties.
The Oyu Tolgoi copper and gold mine is jointly owned by the government of Mongolia, with 34 percent, and Turquoise Hill Resources with 66 percent. Turquoise Hill is in turn 51 percent-owned by Rio Tinto.
Relations between the Mongolian government and Rio Tinto have been tricky in the past. They soured in 2013 during a dispute over costs and taxes related to the proposed expansion of Oyu Tolgoi. The matter was resolved in 2015. (Editing by Mark Potter)