Broadening the base: The 2014 Finance Law is focused on redressing fiscal imbalances

Fiscal reform has long been a policy priority in Morocco, although with rural development, youth employment and trade balances also competing for attention, addressing the issue has always been rather tricky. While not revolutionary, the recently approved 2014 budget goes some way towards tackling a number of the more salient weaknesses in Morocco’s fiscal framework. Somewhat more austere in tone than in years past, with the majority of changes resulting in a higher tax bill for the average person, the 2014 Finance Law focuses on redressing the country’s fiscal imbalances, notably through enlargement of the fiscal base – something which is urgently needed. According to a report published by the Economic and Social Council in November 2012, 2% of Morocco’s registered companies are responsible for more than 80% of corporate tax receipts.

KEY TARGETS: Under its scenario for GDP growth of 4.4%, the government’s 2014 budget targets total revenues of Dh264.4bn (€23.5bn) and total expenditure of Dh306.2bn (€27.2bn). This would see the budget deficit fall from 5.4% in 2013 to 4.9% in 2014. The government has set a 2016 target to reduce the budget deficit to 3.5% and the current account deficit to 5%.

Morocco’s growth projections are supported by the resilience of sectors like textiles and telecoms, and perhaps more importantly, the high-growth manufacturing industries under the National Pact for Industrial Emergence (Pacte National pour l’Émergence Industrielle, PNEI), such as automobiles, aeronautics and pharmaceuticals. Moreover, while 2013 was a disappointing year for phosphates, which account for around a quarter of foreign trade, with exports falling 23% to Dh37.1bn (€3.29bn) due to a dramatic drop in the price per tonne from $181 to $101 over the course of the year, a rebound is expected over the next five years. Phosphate demand is forecast to grow by 2.4% per year until 2018, leaving Morocco, as one of the world’s largest exporters of phosphates, in a strong position.

Current expenditures continue to represent a significant portion of the budget. A large proportion of this relates to the planned creation of almost 18,000 new public sector jobs in part to help bring down youth unemployment, a hot topic in a country where 30% of the population is under the age of 24. This will increase the public sector wage bill by almost Dh6bn (€533m) to Dh103bn (€9.15bn). This leaves Morocco still in line with other North African markets, where the public sector is often a major employer, although the World Bank expressed concerns over sustainability in September 2013. Other measures to make this relatively austere budget more palatable include boosting the Social Cohesion Fund, which targets disadvantaged and underprivileged people, by some Dh4bn (€355m).

SUBSIDIES: Perhaps the boldest move the government made in the 2014 budget – although it was announced in mid-January, separately from the 2014 Finance Law – was the abolition of subsidies on high-octane petrol and fuel oil. These cuts facilitate Dh7bn (€622m) in savings, with the 2014 budget allowing for Dh35bn (€3.11bn) in food and energy subsidies, down from the Dh42bn (€3.73bn) spent in 2013. Subsidies will be maintained on wheat, sugar and cooking gas, in a bid to avoid unduly burdening disadvantaged households, who would be most vulnerable to rising prices. Similarly, diesel will remain indexed to international benchmark prices in an effort to gradually reduce subsidies on this much more widely used fuel.

AGRICULTURE: The agricultural sector will lose the tax exemption it has enjoyed. The law continues to provide an exemption for smaller farmers with revenues under Dh5m (€444,000) for at least three consecutive years, but larger producers must now declare and pay taxes. The implementation of the new tax system will be staggered according to revenue levels over the coming three years, with producers with revenues over Dh35m (€3.11m) paying in 2015, over Dh20m (€1.78m) in 2016 and over Dh10m (€888,000) in 2018. The sector will benefit from a lower tax rate of 17.5% during the first five years of declaring taxes, after which the rate will increase to the standard 30% corporate tax rate.

ENTREPRENEURS: Elsewhere, in continuing its efforts to cultivate the growth of small and medium-sized enterprises (SMEs) and entrepreneurs, the 2014 budget has introduced preferential procurement policies for local firms, stipulating that 20% of public works should be reserved for SMEs and the tender process simplified to help more SMEs apply. By some accounts, SMEs comprise roughly 95% of all registered businesses in Morocco, which means improving their performance is crucial (see analysis). Ongoing programmes such as the PNEI also provide support through a number of instruments, but in an effort to encourage more SMEs, micro-companies and entrepreneurs to formally register their businesses, the government also introduced new ultra-low tax rates for 2014. Companies in the retail, industrial or artisan sectors with revenues under Dh500,000 (€44,400) will only be taxed at 1%, while services companies with revenues under Dh200,000 (€17,760) will be taxed at 2%. Further efforts were also made to encourage more of the self-employed to enter the formal market and declare their revenues, with the 2014 budget requiring all self-employed people to now pay their taxes electronically.

OFFSHORE ASSETS: Despite being one of the most hotly debated proposals, the imposition of a tax on offshore assets held by Moroccans was ultimately approved, with some modifications. From 2014, assets (property, financial assets and financial securities) held abroad will be taxed at 10% of the acquisition value. Where foreign currency is repatriated to Morocco and held in a bank account, the value will be taxed at 5%, or at 2% where the currency is exchanged for dirhams in a Moroccan bank. The funds raised from offshore assets will be designated for the Social Cohesion Fund.

MISCELLANEOUS TAXES: There are a spate of other measures designed to widen the country’s tax base and reduce reliance on corporate taxes, which can be volatile. Starting in April 2014, airline passengers will be required to pay tax on their ticket of between Dh100 (€8.90) for economy class and Dh400 (€36) for business class. Half of the taxes collected under this new system will go toward the Social Cohesion Fund, and the other half will go to the National Office of Tourism for Morocco as part of efforts to boost revenues from tourism.

Other segments, such as automobiles, are set to be affected as well. “The high-end automotive retail segment may suffer in 2014 from the new taxation of luxury goods implemented by Finance Act of 2014, but we expect to see a slow recovery in 2015 when the higher rate has been absorbed by the consumer base,” Tarafa Marouane, CEO of SOMED, told OBG.

While the majority of fiscal changes in the 2014 budget were designed to enlarge the tax base, some incentives were also provided. In the construction sector, in an effort to promote construction of housing for the middle classes, property developers will be exempt from the registration fees and stamp duty on housing developments that target this segment.

The government has also introduced a number of incentives for transport companies to renew their fleet of vehicles and bring their policies and procedures up to international standards. With an estimated 700 buses in operation that are deemed a danger to both passengers and other road users, the first incentive offers Dh300,000 (€26,600) for the decommissioning of one vehicle, with Dh100,000 (€8900) offered for each vehicle removed thereafter, up to a maximum of three per year. Subsequently, a grant of up to Dh400,000 (€35,500) is offered toward the purchase of a new vehicle, capped at two per annum. A final grant for a maximum of Dh200,000 (€17,800) will be available for companies that adhere to international standards in terms of classification, management and control.

REACTION: Overall, the 2014 budget was surprisingly well received – particularly in light of the reactions seen elsewhere in North and West Africa over similarly dramatic fiscal policy proposals – given the number of new taxes proposed and, in particular, the annulment of subsidies on both petrol and fuel oil. When the government first proposed the gradual removal of subsidies (via benchmarking and lower quotas on subsidised wheat) earlier in 2013, it led to the dissolution of the ruling Justice and Development Party’s coalition with the Istiqlal Party. However, once a new coalition was formed with the National Rally of Independents the government pressed ahead with its progressive reduction of fuel subsidies through a system of indexation.

All told, the government appears to have successfully balanced meeting its budget deficit reduction objectives with remaining committed to improving social cohesion and youth employment, all within the framework of its strategy to continue to diversify and strengthen the economy, and attract foreign investment.

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The Report: Morocco 2014

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