By Mourad Chatar, Partner, Value Square, Dubai & Ismail El Koundi, Partner, Prokonect Consulting, Casablanca
On 13 November, Morocco’s House of Representatives (the upper chamber of the parliament) approved finance bill 2022. While the bill is still pending in the House of Councillors (the lower chamber of the parliament), it seems all lights are green for the adoption of the text with no disruption to the tax measures.
In a post-pandemic period with many uncertainties, the government intends to continue the implementation of structural social programs in alignment with the new development model presented to H.M. the King of Morocco on May 25. Mainly this includes the generalisation of social insurance and the strengthening of human capital, particularly through investments in the health and education sectors.
The bill’s ordinary expenses amount to MAD 270 billion (USD 29.4 billion), with a 6.4% increase compared to 2021. However, the budget deficit is set to decrease from 6.2% to a projected 5.9% in the coming year. Given that health and education are typically budget-hungry sectors, the focus will be on generating revenue and, more particularly, on tax collection. It is expected that 2022 will be the year of the audit in Morocco, with a twofold objective, i.e., ensuring compliance and securing state revenues to fuel its development plan.
Exceptional tax collection in Morocco
The government expects roughly a 14% increase in tax collected, driven mainly by the economic recovery and the exceptional tax collected through on-site audits and off-site checks. Regarding the economic recovery, the International Monetary Fund projected GDP growth in 2021 of 5.7% in Morocco – the highest in the Middle East and North Africa region – and 3.4% in 2022.
The tax collection performance will be enabled given the significant investments made in digital information systems. As an example, in 2020, the digitalization of the tax administration systems led to additional tax collected of MAD 7.2 billion (USD 782 million), representing 5% of global revenue in 2020, 36% of which corresponds to corporate income tax. The number of digital operations went from 2.65 million operations in 2016 to 14.25 million operations in 2020, allowing agents to focus on revenue-generating activities.
However, the increase in tax administration audits in recent years, in numbers but also in amounts collected, has led to an overall feeling of “confiscatory” taxation within the biggest contributors, who feel they are bearing excessive tax pressure. According to the economic, social, and environmental council report on the Moroccan tax system published in 2020, only 2% of enterprises contributed 80% of the corporate income tax collected. This highlights the important tax pressure on the category of large companies, which is composed mainly of local subsidiaries of multinational groups. In this respect, it should be noted that Morocco kept a relatively high corporate tax rate of 31%, while the general trend has been to reduce the corporate tax rate. This being said, as part of the Moroccan development plan, the corporate tax is set to be reduced to 25% over the next five years.
Recent tax audits conducted after a moratorium during the pandemic show that tax inspectors require transfer pricing documentation whenever there are indicators of foreign-related party operations, even though the transfer pricing documentation obligation is pending an enforcement decree that will be published in early 2022.
The massive recourse to the settlement of tax audits deprives the community of tax professionals, and companies as well, from an important source of legal jurisprudence on some contentious interpretations of tax law and tax administration practices. This is especially true in the context of transfer pricing (i.e., the use of hidden comparables or the reassessment of related parties’ transactions on the basis of historical margin rates with little regard to the nature of operations conducted, etc.). The recourse to out-of-court settlement should be an incentive to engage in an advance pricing agreement (APA), which is a pre-agreed settlement allowing for legal certainty.
Tax measures in finance bill 2022
When read carefully, the bill sends contradictory signals. On one hand, the increasing investment budget and the amount of public hiring and borrowing are consistent with a loose fiscal policy congruent with a recovery economic phase. On the other hand, the decrease in the budget deficit and optimistic provisional tax collection are more consistent with a restrictive fiscal policy.
This is also the case when it comes to tax measures. The bill proposes replacing the progressive corporate income taxation system, which is a taxation method unique to Morocco that applies an increasing tax rate to increasing net profit brackets, with a marginal tax rate of 31%. The effective tax rate is generally less than 31% due to the progressivity effect.
The bill would replace this progressive corporate tax with a proportional taxation regime, where the entire profit is subject to a unique tax rate depending on the profit bracket to which it pertains. This means that small and medium enterprises will no longer benefit from the progressivity effect, which has allowed them to pay lower corporate income tax.
Another less business-friendly measure consists of increasing the social solidarity contribution (a complementary corporate income tax introduced in 2020 to address the effects of the pandemic) on corporations and professional activities with a marginal rate of 5% on profits exceeding MAD 40 million (USD 4.4 million), instead of 3.5% in 2021. The tax rates actually increase also for all profit brackets lower than MAD 40 million.
On the other hand, the bill proposes to reduce the marginal tax rate of 31% to 26% for industrial companies with profits exceeding MAD 100 million (USD 10.9 million) instead of 28% in 2021. It also proposes to reduce the minimum taxation, which is paid even when no profits are generated, from 0.5% of annual revenues to 0.4%.
Concluding thoughts
Morocco is taking important actions toward a state of social welfare benefiting vulnerable social communities. Meanwhile, there are still some serious challenges to tackle, particularly the significant informal economy and the tax pressure it brings on a small portion of taxpayers.
The 2022 tax bill takes a step forward toward achieving social equality goals, even though many tax measures give contradictory signals. Notably, the tax bill kept silent on many subjects that were expected by economic agents, particularly the taxation of digital services.
Major enforcement decrees are still pending to implement the transfer pricing documentation obligation and country-by-country reporting – both introduced in the tax code and meant to be mandatory since 2019 and 1 January 2021, respectively.
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