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Policy, trends and developments

Government policy

Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?

According to Article 213(II) of the General Tax Code, where a company has dependent ties to companies located within or outside Morocco, any profits transferred indirectly (eg, by way of an increase or decrease in the purchase or sale price) will be included in the corporate results.

To this end, indirectly transferred profits will be determined by comparison with those of similar companies or by direct assessment based on information available to the administration.

Article 7 of Finance Act 40-08 for 2009 introduced an obligation for businesses which are taxable in Morocco to supply the tax authority, on request, with documents and information regarding transactions with related entities established outside Morocco. This obligation is now contained in Article 214(III) of the General Tax Code.

Trends and developments

Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?

Article 6 of Finance Act 100-14 for 2015 introduced two new articles (Article 234bis and 234ter of the General Tax Code) which provide the possibility to conclude an advance pricing agreement with the tax authorities for a period not exceeding four financial years.

Decree 2-16-571, published in the Official Gazette in August 2017, provides detailed rules for the implementation of the advance pricing agreement procedure.

Legal framework

Domestic legislation and applicability

What primary and secondary legislation governs transfer pricing in your jurisdiction?

Primary legislation is codified in the General Tax Code (Articles 213 and 214), while secondary legislation concerns only the advance pricing agreement procedure (Decree 2-16-571).

Administrative guidance on transfer pricing is set out in Circular Note 717 of May 24 2011 and Service Note CI2434/17/DGI of June 15 2017.

Are there any industry-specific transfer pricing regulations?

Not applicable.

What transactions are subject to transfer pricing rules?

Articles 213(II) and 214(III) of the General Tax Code apply to all transactions (eg, sale or purchase of goods, provision of services, payment of royalties and financial interests) carried out between related companies with no mention of any threshold based on turnover or balance sheet asset value.

How are ‘related/associated parties’ legally defined for transfer pricing purposes?

Article 213(II) of the General Tax Code refers to companies which have direct or indirect dependent relationships with businesses outside Morocco. The definition was refined by the tax authority in Circular Note 717 of May 24 2011. ‘Dependency’ is defined in terms of relationships between:

  • parent companies and their subsidiaries;
  • non-resident companies and their establishments in Morocco; and
  • companies and their branches.

According to the tax authority, a subsidiary is dependent on its parent:

  • in legal terms, by virtue of the number of shares held by the parent company, or when – either directly or through a third-party intermediary – the parent exercises decision-making power over the subsidiary; and
  • in economic terms, by virtue of the close links governing the relevant business activity, constituting dependency in terms of the supply of raw materials or spare parts, or the use of a brand or patents held by the economic partner.

Further, the tax authority refers to the indirect links of dependency that exist, in its view, between subsidiaries within the same group (especially financial dependency arising by virtue of reciprocal shareholdings).

Reference is made to de facto situations resulting from a monopoly or quasi-monopoly position or a common interest (especially where the management personnel of one company has an influence on the management of other companies).

The definition of ‘dependent businesses’ is therefore broad, and the tax authority considers that transfer pricing control applies both to transactions between parent companies and subsidiaries (ie, where there is a direct connection) and to transactions between sister companies (ie, where there is an indirect connection).

Are any safe harbours available?

There is nothing comparable to the EU Joint Transfer Pricing Forum guidelines on low value adding services. However, the Moroccan tax law determines fixed rates of return to compute the taxable basis of some activities (eg, Coordination Centre – which delivers management and corporate services – is taxable at the common corporate income tax rate but on a cost +10% basis). On a case-by-case basis, it may be appropriate for the Moroccan taxpayer to use such provisions to organise its defence or support its good faith.

Regulators

Which government bodies regulate transfer pricing and what is the extent of their powers?

The Direction Générale des Impôts is responsible for enforcing the transfer pricing rules when a tax audit occurs.

Under Article 214 (III) of the General Tax Code, documents relating to transfer prices must be sent at the request of the authority (in the form of a letter giving notice) within 30 days of receipt of the request.

International agreements

Which international transfer pricing agreements has your jurisdiction signed?

Morocco is not a member of the OECD, and is not yet a participant in the Inclusive Framework for Base Erosion and Profit Shifting (BEPS) implementation.

Consequently, Morocco has not yet implemented the BEPS project in its internal legislation and has not yet signed the multilateral instrument or the multilateral competent authority agreement on the exchange of country-by-country reports.

To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?

The Moroccan tax administration expressly refers to Article 9 of the OECD convention model and its commentaries in its doctrine. In this respect, it will not object to a comparable study performed in compliance with the OECD Transfer Pricing Guidelines.

However, while Morocco is no more than a special observer to OECD bodies, there is no guarantee that it will respect the methodologies described in the OECD Transfer Pricing Guidelines. In the event of a conflict, the Moroccan tax administration will not consider itself bound by the stated position of OECD members.

The approach of performing benchmarking in accordance with the OECD Transfer Pricing Guidelines may nevertheless strongly reinforce the position of the taxpayer in the framework of a negotiation with the Moroccan tax authorities.

Transfer pricing methods

Available methods

Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?

The Moroccan tax authority’s commentary remains relatively brief as regards the appropriate method for determining transfer prices between two companies in the same group. It does not go beyond stating the principle that the price should be at arm’s length.

In practice, four of the five methods recommended by the OECD (the comparable uncontrolled price, the resale minus, the cost plus and the transactional net margin methods) are globally understood and accepted by the tax authorities.

Preferred methods and restrictions

Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?

There are no specific rules for selecting a transfer pricing method. However, the methods used by taxpayers often relate to the result of a functional analysis (eg, cost plus for manufacturing entities or services providers).

From its side, the Moroccan tax administration tends to favour the comparable uncontrolled price method and the ratios analysis (similar to the transactional net margin method) in case of a tax audit.

Comparability analysis

What rules, standards and best practices should be considered when undertaking a comparability analysis?

There are no defined standards in the Moroccan approach. Nevertheless, it is recommended to carry out regional benchmarking (target region: Morocco, Maghreb or Africa) in accordance with the OECD Transfer Pricing Guidelines. This approach may strongly reinforce the position of the taxpayer in negotiations with the Moroccan tax authorities.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?

As mentioned above, the selection of a relevant transfer pricing method should be in line with the tax profiles of the companies involved in a specific transaction (eg, resale minus for limited risk distributor/cost plus for routine services providers).

The Moroccan tax administration sometimes bases its tax reassessment on the non-respect of profitability ratios (which is similar to using the transactional net margin method).

Documentation and reporting

Rules and procedures

What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?

There is no specific obligation to make transfer pricing documentation available to the Moroccan tax administration.

However, Article 214(III) of the General Tax Code covers the information that the Moroccan tax administration is entitled to require from the taxpayer in order to assess the compliance of transfer pricing with the arm’s-length principle (see below) and the short period that taxpayers have to provide such information (30 days). As a result, Moroccan companies engaged in intragroup transactions with associated companies located abroad should prepare such documentation in advance.

Content requirements

What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?

Article 214(III) of the General Tax Code stipulates that the authority may request all documents and information relating to:

  • the nature of the relationship connecting the company taxable in Morocco and the company located abroad;
  • the nature of the services provided or the products sold;
  • the method by which the price of transactions between the companies has been determined, and the supporting documents; and
  • the regimes and tax rates applicable to businesses situated outside Morocco.

The requirements of Article 214(III) are therefore quite similar to the local filing requirements. However, these requirements are not as precise as those described in Action 13 of the BEPS Project.

In practice, documents presented to the tax authority must be written in one of the two languages admitted in Morocco: French or classical Arabic. The majority of documents relating to Moroccan taxation are written in French.

Penalties

What are the penalties for non-compliance with documentation and reporting requirements?

In the event of breach of the provisions relating to the authority’s right to the documentation, a fine of DH2,000 (approximately €180) applies, as well as a late payment penalty of Dh100 (approximately €9) per day, up to a maximum of Dh1,000 (approximately €90).

Article 214(III) of the General Tax Code provides that in the absence of a response or in the event that the documentation is incomplete, a relationship of dependency is presumed to be established.

Thus, documentation which is incomplete or not submitted will not reverse the burden of proof in relation to the arm’s-length nature of the transaction, but will establish that the companies in question are dependent.

When the relationship of dependency is established in this way, the tax authority can invoke Article 213(II) of the General Tax Code, and thus adjust taxable profit by bringing in the profits it considers to have been indirectly transferred by means of increases or reductions in purchase prices or sales prices (or by any other means).

In such case, the remuneration and costs paid by the Moroccan entity will be subject to general corporation tax at one of the progressive rates, up to 31%.

The following penalties and late payment interest may be added to that tax:

  • an increase of 15% for failure to file or late filing of returns; and
  • a penalty of 10% and an increase of 5% for the first month of delay, followed by 0.5% for every further month or part thereof.

Best practices

What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?

Preparing transfer pricing documentation in advance:

  • allows the taxpayer to work upstream on its transfer pricing policy; and
  • indicates to the Moroccan tax authorities that transfer pricing is a well-known issue within the group, which may limit the tax risk.

Moreover, it allows the taxpayers to avoid the 30-day deadline, which is a short timeframe if the documentation has not already been prepared. It also ensures that the Moroccan tax administration will not apply penalties and late payment interest.

Advance pricing agreements

Availability and eligibility

Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?

Article 6 of Finance Act 100-14 for 2015 introduced two new articles (Article 234bis and 234ter) to the Moroccan General Tax Code. These provide the option to conclude an advance pricing agreement with the tax authorities for up to four financial years. The agreement concerns the pricing method of the transactions referred to in Article 214(III) of the General Tax Code.

Decree 2-16-571 published in the Official Gazette in August 2017 provides detailed rules for the implementation of the advance pricing agreement procedure.

Rules and procedures

What rules and procedures apply to advance pricing agreements?

Before submitting an application, the company may hold a preliminary meeting with the tax authorities to examine the conditions under which an agreement may be concluded – in particular:

  • the type and nature of the information necessary for the analysis of the pricing policy;
  • the schedule of meetings; and
  • questions regarding the arrangements for concluding the agreement.

The application must be submitted at least six months before the opening of the first financial year covered in the application.

The application should specify:

  • the companies associated with the applicant company;
  • the operations subject to the agreement;
  • the period covered by the preliminary agreement; and
  • the proposed transfer pricing methodology and its underlying assumptions. 

The application must be accompanied by documents that will allow the tax authorities to examine the request, in particular:

  • the general framework of the activities of the associated companies:
    • the organisational structure of all associated companies and their legal relationships, as well as the distribution of the capital of these enterprises;
    • the company’s business plan;
    • the financial and tax documents of the associated companies certified by the competent authorities and covering the last four financial years; and
    • the accounting standards applied by the associated companies that have a direct impact on the proposed transfer pricing method;
  • the activities of the associated companies;
  • the general description of the functions exercised, the assets used and the risks assumed by the associated companies;
  • the detailed description of the intangible assets held by the associated companies;
  • the description of the economic market and the scope of the activity of the associated companies and of all controlled transactions;
  • the contractual arrangements between the associated companies;
  • the cost-sharing agreements between the associated companies;  
  • the preliminary transfer pricing agreements entered into by the applicant with other foreign authorities and the tax consultations established by those foreign entities;
  • the identification, analysis and selection of comparables and the justification of possible adjustments of the comparability; and
  • the proposed transfer pricing methods and its detailed hypothesis as well as its adjustment conditions.

The company may support its request with any additional information or documents that it considers relevant.

The tax authorities may also request the applicant company to provide additional information on these documents in order to enable them to analyse the case.

In the parties concerned validate the terms of the agreement, the agreement must specify: 

  • the period covered by the agreement and the date of its entry into force;
  • the precise description of the operations covered by the agreement;
  • the description of the method used to determine the transfer price;
  • the arrangements for monitoring the agreement and the information to be provided in the follow-up report (see below);
  • the basic assumptions for the determination of the transfer price; and
  • the cases of revision and of cancellation of the agreement. 

The follow-up report must be filed annually at the head office of the tax administration and must include:

  • a detailed statement of the calculation of the transfer prices provided for in the agreement;
  • a summary statement of any changes made to the conditions of exercise relating to the transactions covered by the agreement;
  • a copy of the organisational structure of the associated companies and their legal relationships, as well as the capital allocation of such enterprises; and
  • a copy of the annual activity report of the associated companies.

Timeframes

How long does it typically take to conclude an advance pricing agreement?

As the procedure for the unilateral advance pricing agreement is relatively new, there is no available feedback at the moment. However, based on experience the Moroccan tax administration is unlikely to deliver such an agreement for several months.

What is the typical duration of an advance pricing agreement?

An advance pricing agreement is applicable for up to four years.

Fees

What fees apply to requests for advance pricing agreements?

No fee applies.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?

An advance pricing agreement concluded between a taxpayer and the local tax authorities is unilateral. In other words, there is no guarantee that the tax administration governing the non-Moroccan company will follow the position adopted by the Moroccan advance pricing agreement. Therefore, the risk of raising the tax base is not eliminated at group level.

Finally, in return for  the legal certainty conferred by the advance pricing agreement, the taxpayer commits to total transparency – which may be dangerous. Indeed, in most cases the applicant for an advance pricing agreement will aim to regulate an existing situation.

Consequently, in the event of a disagreement over interpretation leading to the failure of negotiations, it is possible that the tax administration will initiate a tax audit in order to adjust the applicant’s tax result and apply penalties for bad faith. 

Thus, the transfer pricing policy should be carefully documented.

Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

Compliance with the transfer pricing rules is assessed by the tax authorities under the general tax audits procedure. Tax audits are governed by the rules set out in Book II (Tax Procedures) of the General Tax Code.

In case of a tax audit, the taxpayer will be notified of the verification at least 15 days before the date of the audit (Article 212(I) of the General Tax Code).

The audit must be initiated no more than five working days from the date set for the start of the audit. The audit cannot last more than three months for companies with a turnover of less than Dh50 million, or six months for companies with a turnover of more than Dh50 million.

The inspector will notify the taxpayer of the reasons for the adjustment within three months of the audit ending. The taxpayer can submit comments within 30 days of the date of receipt of the notification.

More specifically, under Article 214(III) of the General Tax Code documents relating to transfer prices for transactions with companies located outside Morocco must be sent at the request of the authority (in the form of a letter giving notice) within 30 days of receipt of that request. This request may intervene within the audit process.

The burden of proof, which for transfer pricing purposes rests with the administration, is light. Article 213(II) of the General Tax Code provides that indirectly transferred profits are determined in comparison with those of similar companies or by direct assessment on the basis of information available to the administration.

The tax administration often takes refuge behind this article and the principle of professional secrecy in order to avoid communicating the comparable used.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

Apart from the rules set out in Article 214(III) of the General Tax Code (the obligation to transmit information within 30 days at the request of the tax administration), no specific rules govern transfer pricing audits. Transfer pricing audits must be conducted in line with the tax procedure rules set out in the General Tax Code.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

When dependence between a Moroccan company and another company is established, the tax authority can invoke Article 213(II) of the General Tax Code, and thus adjust taxable profit by bringing in the profits in the amounts it considers to have been indirectly transferred by means of increases or reductions in purchase prices or sales prices (or any other means).

In such case, the additional profit will be subject to general corporation tax at a progressive rate of up to 31%.

The following penalties and late payment interest may be added to that tax:

  • an increase of 15% for failure to file or late filing of returns; and
  • a penalty of 10% and an increase of 5% for the first month of delay, followed by 0.5% for every further month or part thereof.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

The Moroccan tax administration has complete freedom to adjust the results of related companies when the administrative side has demonstrated that profits have been indirectly transferred outside Morocco or between two entities located in Morocco.

It is therefore essential for a taxpayer to document its transfer pricing policy (by drafting a transfer pricing report) in order to limit the tax risk related to transfer pricing issues.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

The upstream preparation of both transfer pricing documentation and a benchmark will definitely make the challenge more difficult for the tax administration.

In addition, it is still possible to furnish technical studies within the opposition procedure to counter the arguments of the tax administration. These studies may allow a favourable opinion to be obtained from the local tax commission or the National Tax Commission, which will hear the case following the two rounds of the preliminary opposition procedure.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

Morocco has made its reservations known in regard to introducing a mutual agreement procedure. It has reserved the right not to include Article 9(2) of the OECD Model Tax Convention in its law.

Consequently, no matter whether penalties for absent or insufficient documentation are imposed, it is unlikely that the Moroccan tax administration will adjust the reconstituted profit for the amount of transferred profit already taxed abroad.

Only a few existing double tax conventions expressly provide for this possibility – for example, those entered into with Austria, Bulgaria, Denmark, United Arab Emirates, Poland, Portugal, Romania and Senegal. 

There is no specific published procedure on relief from double taxation. Therefore, a general claim would have to be introduced in front of the central Moroccan tax administration located in Rabat (with minimal chance of success).

Anti-avoidance framework

Regulation

What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?

Not applicable.

To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?

Morocco is not a member of the OECD, and is not yet a participant in the Inclusive Framework for Base Erosion and Profit Shifting (BEPS) implementation.

Consequently, Morocco has not yet implemented the BEPS project in its internal legislation and has not yet signed the multilateral instrument or the multilateral competent authority agreement on the exchange of country-by-country reports.

Is there a legal distinction between aggressive tax planning and tax avoidance?

Finance Act 73-16 for 2017 introduced the concept of tax abuse of right. Under a procedure for tax abuse of right, the Moroccan tax administration may be entitled to have its opinion backed by a special commission to qualify a tax planning scheme as abusive, and consequently to reassess the tax results of the taxpayer.

However, this procedure is not yet enforceable since implementing decrees need to be published.

The General Tax Code also makes reference to the concept of tax fraud when it comes to penalties.

Penalties

What penalties are imposed for non-compliance with anti-avoidance provisions?

In case of tax fraud, a penalty of 100% is applicable under Article 187 of the General Tax Code.