Morocco sets tone in landmark transfer pricing audit case

By Mourad Chatar & Sarah Bahous, Partners, Value Square, Dubai

Moroccan tax authorities are pursuing a record-breaking tax adjustment of 1 billion Moroccan Dirham (USD 110 million) in a transfer pricing audit of a global player in the fast-moving consumer goods industry.

The tax authorities have rejected the transfer pricing methodology applied by the company to its goods and services flows, arguing that the company is intentionally reducing the taxable basis in Morocco for the benefit of the group’s headquarters or other related parties located in low tax jurisdictions.

After some back and forth between the tax administration and the taxpayer, the case has now been brought to the National Commission for tax appeals by the taxpayer who is rejecting the tax adjustment. This is the last step before court litigation if no agreement is reached.

Transfer pricing regulation & penalty regime in Morocco

To align with international practices, Morocco formally introduced in its 2019 Finance Bill the obligation for certain Moroccan taxpayers to prepare specific transfer pricing documentation justifying the arm’s length nature of their intragroup transactions.

Although the tax administration already had the ability to investigate and request general information on intragroup transactions, it can now directly require the taxpayer to share its transfer pricing documentation, and the taxpayer must comply within 30 days.

The 2021 Finance Bill also defined the scope of the transfer pricing documentation requirements and applicable penalties.

Transactions in scope of the transfer pricing documentation requirements are generally those entered by a Moroccan-based entity with a foreign-related party. The threshold for a company to be in scope of the transfer pricing documentation obligations is annual turnover (excluding VAT) of at least MAD 50 million (USD 5.5 million) or a gross assets value equal to or more than MAD 50 million.

Penalties apply if a taxpayer fails to provide the transfer pricing documentation in due time. Specifically, a penalty equal to 0.5% of the relevant controlled transactions for which documentation has not been submitted applies, with a minimum penalty of MAD 200,000 per year (USD 22,000).

Tax administration in Morocco

Morocco has a very well organized and structured tax administration, composed of a central and a regional organization.

At the central level, there is a dedicated directorate for audits, which includes the risk assessment division, the national division of large companies and the division for the follow-up of audits and appeals.

At the regional level, the tax administration is organized by type and size of taxpayer. Through this approach each type of taxpayer (individuals, professional businesses, small companies or large companies) has one single point of contact who will manage its tax file across all kinds of taxes – e.g., for large companies, value-added tax (VAT), withholding tax or corporate tax.

This approach is somewhat unique to Morocco and underlies the strength of the Moroccan tax administration, as it allows the tax auditor to have a helicopter view and to perform cross-checks and links.

The results speak for themselves. In its 2020 activity report, the Moroccan tax administrations states that it has achieved 113.5% of its budgeted revenue collection for corporate taxes. With almost five thousand civil servants, out of which 12.5% focus only on audits, the Moroccan tax administration is also one of the youngest, with a quarter of its employees being between 30 and 34. Its capacity-building program is also very well developed and focused on increasing the efficiency and core technical skills of its agents.

Last but not least, the tax administration is open to cooperation with the international community in fiscal matters. The tax administration has benefited from OECD trainings on tax audits, transfer pricing, tax treaties, information exchange, base erosion and profits shifting (BEPS) and taxation of the digital economy.

Advance pricing agreement (APA) & mutual agreement procedure (MAP)

It is not a coincidence that Morocco has introduced transfer pricing regulations, APAs and the MAP procedure in roughly the same period of time. There is no doubt that this is to align with international practices However, it is also, on the one hand, to give better tools to the tax administrations to perform risk assessments and, on the other hand, to give the opportunity to taxpayers to eliminate double taxation through MAP or to secure intragroup transactions in advance through APA procedures.

The APA program in Morocco is well framed and supported by a highly skilled team. They are business-minded and fully understand the transfer pricing technicalities of the APA. 

Concluding remarks

Transfer pricing controversy is on the rise in every country that has implemented transfer pricing regulations. For tax administrations, it is a soft target to increase revenues as the arm’s length principle could be subject to interpretation.

In most jurisdictions, strong transfer pricing documentation remains the best first line of defence to keep tax auditors at arm’s length, but in other jurisdictions this might prove insufficient to avoid litigation.

Although it has been newly introduced in Morocco, the APA program is probably the way to go for mitigating transfer pricing risk in the country. The present audit case further underlines the importance of securing intragroup transactions in advance.

— Mourad Chatar & Sarah Bahous are regional tax partners at Value Square, Dubai

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