Morocco's new finance law updates tax rates and exemptions

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Finance Law No. 70-19 (FL 2020), relating to FY 2020, was enacted by Dahir No. 1-19-125 on December 13, 2019 and published in Official Gazette No. 6838 bis on December 14, 2019. The provisions of the new finance law should be read in conjunction with the recommendations from the national tax conference that took place in May 2019, as well as the conclusions made by the European Commission that placed Morocco on the grey list of tax jurisdictions in non-EU countries. This article includes an overview of the main measures introduced by FL 2020.

Corporate income tax (CIT) and individual income tax (IIT) on professional activities are now subject to the standard regime.

Changes to the Standard CIT Rates

FL 2020 amended the progressive CIT rate that came into force in 2019, increasing the intermediary rate of 17.5% to 20% for companies having a taxable income between Dh300,000 ($13,300) and Dh1m ($104,000). In addition, the marginal rate of 31% was reduced to 28% for companies performing industrial activities with taxable income under Dh100m ($10.4m).

FL 2020 also extended the 37% flat rate currently applicable to insurance companies to takaful (Islamic insurance) insurance and reinsurance companies and takaful insurance and reinsurance funds. These new rates are applicable for financial years open as of January 1, 2020.

Minimum Contribution Rate

The Moroccan Tax Code provides for a minimum CIT contribution, notably for companies that are in a tax loss position after a 36-month exemption period. This contribution is calculated based on the turnover plus other income as defined by Article 144 of the tax code.

The finance law from 2019 increased the rate of these types of contributions from 0.5% to 0.75%. This rate was applicable for financial years as of January 1, 2019.

FL 2020 decreased this rate again to 0.5% but introduced an exception: where the current income, excluding capital allowances, of a company is declared as a loss position for two consecutive years beyond the exemption period mentioned, the applicable rate becomes 0.6%.

These new rates are applicable to declarations filed as of January 1, 2020, and therefore to financial years ending on December 31, 2019.

Changes to the Export Regime

Before FL 2020, the Moroccan Tax Code provided for a fiveyear CIT or professional IIT exemption, followed by a reduced CIT rate of 17.5% and professional IIT rate of 20% for export transactions. FL 2020 changed this by repealing the five-year exemption and increasing the 17.5% CIT rate to 20%.

Transitional measures were introduced along with this provision: enterprises that performed their first export transaction before January 1, 2020 are allowed to benefit from the five-year exemption until its expiry.

The new 20% rate is applicable to financial years that were opened on or after January 1, 2020, which means that the 17.5% is still applicable to financial year 2019.

Casablanca Finance City Tax Policies

Before FL 2020, two distinct regimes were applicable to companies benefitting from Casablanca Finance City (CFC) status:

• A five-year exemption followed by a permanent taxation rate of 8.75% for service companies applied to export transactions and foreign source capital gains on the sale of securities; and

• A permanent 10% taxation rate for regional and international headquarters of multinational companies. In addition to this reduced rate, companies were subject to a specific calculation of the taxable basis whereby it corresponded to a minimum of 5% of their operating expenses. FL 2020 repealed the specific regime for CFC companies applicable to regional and international headquarters and introduced a new 15% rate applicable to the whole turnover, with no distinction between local and export transactions. In addition, FL 2020 provides for a new exemption from withholding tax on dividends for companies benefitting from CFC status. This new regime is applicable to financial years open as of January 1, 2020.

A transitional regime was put in place for service companies that obtained their CFC status before January 1, 2020. Such companies will still benefit from the regime that applied before FL 2020 – a five-year exemption followed by a tax rate of 8.75% for export and foreign source capital gains – but they can opt for the new 15% flat rate as well as the withholding tax exemption previously mentioned.

Industrial Acceleration Zones

The CIT rate applicable until 2019 for companies located in industrial acceleration zones, previously named export free zones, was 8.75% for a 20-year period (with a 20% rate for professional IIT), after applying a five-year exemption. This rate and exemption was, in principle, not applicable to local turnover, only exports.

FL 2020 suppressed the 8.75% rate for companies setup in those zones as of January 1, 2021. Companies already established in such zones on or before December 31, 2020 will still benefit from the previous regime. Companies created after this date will benefit from a five-year exemption followed by a permanent 15% flat rate, with no distinction between local and export turnover.

Service Outsourcing Companies

FL 2020 introduced a new beneficial regime for companies performing service outsourcing activities inside or outside the dedicated offshoring zones ( Plateformes Industrielles Intégrées, P2I) in certain cities, such as Casablanca, Rabat or Fez. Such companies will benefit from a five-year exemption followed by a taxation rate limited to 20%. The definition of service outsourcing has yet to be clarified, in particular for companies outside P2Is, as those companies do not need to obtain specific licenses to perform their activities. This new regime is applicable to financial years open as of January 1, 2020.

Country-By-Country Reporting

Country-by-country reporting (CbCR) will now include a country-by-country split of tax and accounting figures for companies, taking into account the identity, place of exercise and nature of activities of a multinational group that a Moroccan company may belong to. This reporting must be submitted electronically within 12 months from the close of a financial year.

The new Moroccan CbCR will apply to Moroccan companies that:

• Directly or indirectly participate in one or more enterprises or establishments located abroad and that are required to prepare consolidated accounts in accordance with the applicable accounting standards or that would have been required if its participations were listed in Morocco;

• Have an annual consolidated turnover above Dh8.12bn ($845.9m), excluding value-added tax (VAT), in the financial year preceding the one for which the declaration is made; and

• Are held neither directly nor indirectly by any other enterprise located in Morocco or outside of Morocco. This obligation will also be applicable to any enterprise that fulfils one or more of the following conditions:

• Is directly or indirectly held by an enterprise located in a state that does not require CbCR and that would have been subject to such obligation if it was located in Morocco;

• Is directly or indirectly held by an enterprise located in a state with whom Morocco has not signed an exchange of information agreement for tax purposes; or

• Has been appointed for that purpose by the group of multinational companies it belongs to and has informed the Moroccan tax authorities accordingly. In addition, the CbCR applies to any enterprise subject to Moroccan CIT, directly or indirectly held by an enterprise that is located in a state that has an exchange of information agreement for tax purposes with Morocco and is required to submit a CbCR, but has failed to automatically share the CbCR it has in its possession.

Lastly, where two or more enterprises subject to Moroccan CIT belonging to the same multinational group are subject to the Moroccan CbCR, one of them can be appointed by the group to submit the declaration on behalf of the others to the extent it informs the tax authorities beforehand. Failing to declare or submit the CbCR is punished by a Dh500,000 ($52,100) fine. There have been additional changes to IIT.

Retirement Pensions & Life Annuities

Before FL 2020, a 55% tax deduction was applicable to retirement pensions and life annuities that did not exceed Dh168,000 ($17,500) per year, the surplus benefitting from a 40% tax rebate. FL 2020 increased the deduction to 60%.

Deduction of Retirement Insurance Premiums

Before FL 2020 only premiums relating to retirement insurance contracts valid as of January 1, 2015 were subject to a deduction cap of 50% of the net taxable salary. FL 2020 stipulates all retirement insurance premiums paid as of January 1, 2020 are subject to such limitation, whatever the date of the contract.

Neutrality Regime for Share Contribution

Under FL 2020, individuals that contribute all the equity securities they hold in one or several companies to a Moroccan holding company subject to CIT are not subject to tax on the net capital gain made on such contribution, to the extent they meet the following conditions:

• The value of the equity securities contributed must be assessed by a contributions auditor;

• The individual undertakes in the contribution deed to pay the IIT on capital gains made upon the contribution when he or she will totally or partially sell, redeem or cancel the securities received as a counterpart to the contribution; and

• In regards to the company benefitting from the contribution, the net capital gain resulting from the sale of the equity securities is determined by the difference between the sale price and the value of the equity securities on contribution date. A specific declaration should also be submitted no later than 60 days from the date of the contribution deed.

Takaful Investment Contracts

Until 2019 only income from life insurance and capitalisation contracts whose duration equalled or exceeded eight years were exempted from IIT. In the context of the development of new sharia-compliant investment contracts, thus exemption was extended to takaful investment contracts whose duration equals or exceeds eight years.

Change in IIT on Real Estate Income

The provisions of FL 2020 changed the triggering event of IIT on real estate income, which as of January 1, 2020 are on the payment of the income instead of the acquisition of the income.

As such, rental income relating to 2019 but which was actually received in 2020 will have to be declared – and the corresponding IIT will have to be paid – in 2021.

Taxpayers Subject to Audits

Article 29 of the Moroccan Tax Code provides a specific procedure for tax audits for individuals that consists of an audit of their whole tax situation, through which the tax authorities are able to compare annual expenses of an individual with his or her declared income.

Under FL 2020, this procedure can be undertaken only if the annual expenses of a taxpayer exceed Dh240,000 ($25,000), as opposed to Dh120,000 ($12,500) before the new finance law. In addition, FL 2020 included an obligation whereby tax authorities must conduct an oral and contradictory debate with the taxpayer before issuing any reassessment and to take the taxpayer’s comments into account, if relevant.

Lastly, FL 2020 included a new tolerance under which the tax authorities are not allowed to undertake this procedure where the amount of expenses exceed the declared income by less than 25%.

Several changes have also been made to the law regarding the application of VAT.

Small Companies

Before FL 2020 small manufacturers and service providers – those with an annual turnover below Dh500,000 ($52,100) – were excluded from the VAT. As of January 1, 2020, they will enter into the scope of the tax but will be exempt, with no right to deduct input VAT.

FL 2020 additionally states that this regime only applies to individuals, thus excluding companies from this exemption regime. Companies that perform manufacturing or service activities with a turnover below Dh500,000 ($52,100) will be subject to VAT.

VAT for Finance Products

In order to harmonise the tax treatment of sharia-compliant participative finance products with those of standard bank products, FL 2020 introduced the following provisions:

• VAT exemption on investment goods acquired through a Mourabaha agreement;

• 10% VAT on Salam and Istina’a agreements;

• Possibility to transfer the VAT deduction for those agreements; and

• Exclusion from the VAT deduction applicable to credit institutions acquiring goods for the purpose of selling them through Mourabaha, Salam and Istina’a agreements.

Inclusion of Goods Into the VAT

FL 2020 notably added a VAT to the following goods at a rate of 20%:

• Farm equipment with mixed usage; and

• Imported meat and fish for use in restaurants.

Change in VAT of Certain Goods

FL 2020 changed the rate of the following goods:

• Palm oil: from 10% to 20%; and

• Museum, cinema and theatre tickets: from 20% to 10%.

VAT Exemptions

New regulations in FL 2020 provided for the exemption from VAT of human and animal vaccines as well as certain medicines that are to be listed in a forthcoming decree. Water pumps working by renewable energy for use in the agriculture sector are also now exempt from import VAT.

VAT Rate for Wine , Alcoholic Beverages, & Gold & Platinum Artworks

Before the implementation of FL 2020, wine, alcoholic beverages and gold and platinum artworks were subjected to both a specific VAT rate computed based on their volume or weight, as well as the standard 20% VAT rate based on the sale price, or exempted. The specific VAT rate based on the volume or weight was removed from the tax code to become a new excise tax, while only the standard 20% VAT rate will now apply to such products.

Registration duties are to see different regulations under the new law.

New Registration Duty Exemptions

Moroccan registration duties apply to certain deeds that are subject to the registration formality and are generally based on the value mentioned in such deeds. FL 2020 introduced new exemptions from registration duty for the following deeds:

• Acquisition of immovable goods by persons benefitting from housing programs Villes sans bidonvilles (“Cities without slums”) or Bâtiments menaçant ruine (“Buildings threatening to collapse”);

• Acquisition of lands to be used to build social housing through a Mourabaha agreement; and

• Acquisition of developed lands whose constructions will be demolished for the purpose of building a hotel.

New Penalties For Registration Duty

Before FL 2020, significant uncertainties surrounded penalties for failing or delaying to register deeds needed to be registered but were exempt from the registration duty. This issue became particularly important for the exemption from registration duties applicable to the transfer of shares in non-predominantly real estate companies in Morocco.

Tax authorities adopted a challengeable position under which they computed penalties based on the theoretical rate applicable in the absence of an exemption, which was, according to tax authorities, 4% for transfers of the above mentioned shares, or the rate that was in force before the exemption came into effect. FL 2020 clarifies this situation and stipulates a 0.5% penalty, reduced to 0.25% in the event of a delay not exceeding 30 days, computed on the same basis as registrations duties, such as the sale price mentioned in the deed for the case of transfers of shares. This penalty cannot be lower than Dh500 ($52.09) and cannot exceed Dh100,000 ($10,400).

The new law also presents several changes to the common provisions.

The Intra-Group Transfer Regime

Finance Law 2017 introduced a tax neutrality regime for intra-group transfers of capitalised tangible assets, a group being constituted by a Moroccan parent company and its subsidiaries directly and indirectly held at more than 80%.

Despite the benefits of such provisions for restructuring transactions inside a group, the way it was drafted excluded certain transactions that were typically needed in the context of such restructuring, such as particular transfers of shares and patents. FL 2020 extended the scope of this tax neutrality regime to capitalised intangible and financial assets, including intra-group transfers of equity interests and patents.

Exclusions for Accounting Obligations

FL 2020 provides for the exclusion of individuals for whom professional income is determined according to the flat income or auto-entrepreneur regimes from the accounting obligations mentioned by Article 145 of the Moroccan Tax Code, including:

• Bookkeeping;

• Inventory count;

• Electronic invoicing; and

• Electronic mail address.

Automatic Exhange of Information

In accordance with OECD recommendations, FL 2020 introduced the Automatic Exchange of Information for Tax Purposes in Moroccan domestic law. Under this new provision, financial institutions are required to identify information relating to the tax residency of all financial account holders and, if applicable, their beneficiaries.

Such financial institutions should communicate to the tax authorities all information required for the purpose of applying treaties involving Morocco, allowing the automatic exchange of information for tax purposes. Such declarations include information relating to the identification of financial account holders and, if applicable, beneficiaries, as well as financial information relating to those accounts, including income from securities, account balance, redemption value of life insurance and capitalisation contracts, and capital gains from the sale or redemption of financial assets.

Failure to identify or declare such accounts, as well as incomplete or insufficient communication, is punishable by a Dh2000 ($208) fine per account.

A decree should clarify the practical modalities of this new provision, including the deadline of the first reporting. FL 2020 states that the first financial year to be reported will be 2020.

Several changes have also been made in the new finance law regarding procedures for regularisation and newly registered taxpayers.

First-Time Taxpayers

Taxpayers performing an activity subject to professional IIT and identifying themselves for the first time to the tax authorities as of January 1, 2020 will be taxed only on the income acquired and operations carried out after the start of 2020.

Voluntary Regularisation of Taxpayers

FL 2020 introduced a 5% contribution applicable to liquidities deposited in a bank account between January 1 and June 30, 2020. This provision covers Moroccan tax resident individuals for their income or profits relating to professional or agricultural activities that were not declared to tax authorities before January 1, 2020 and were compliant with their tax obligations.

The payment of these contributions will be such that the liquidities deposited will be excluded from the expense assessment made in the context of the audit of their whole tax situation.

Declaring Real Estate Income

Taxpayers that failed to submit their annual declaration of global income relating to non-statute-barred years for real estate income are allowed to regularise their situation by:

• Filing a declaration before July 1, 2020; and

• Paying, at the same time as the declaration, a contribution of 10% of the gross amount of real estate income relating to 2018. Such regularisation will exempt the taxpayer from paying IIT on real estate income and corresponding penalties relating to previous non-statute-barred years.

Amended Declarations

In the event a taxpayer identifies irregularities in their tax declarations regarding CIT, professional IIT, withholding taxes, stamp duties or insurance contract taxes, having as a consequence an underassessment of the turnover of taxable income, discrepancies can be resolved by:

• Filing an amended declaration for the 2016, 2017 and 2018 financial years before October 1, 2020; and

• Paying the additional taxes before September and December 2020. This procedure results in the automatic cancellation of penalties. In addition, the taxpayer may be exempted from an audit for the financial years regularised, if they consult the tax authorities beforehand on the information they have, and if an explanatory note made by the taxpayer with the assistance of a chartered or licensed accountant is filed along with the declaration.

Exemption from a tax audit may also be possible under conditions where a specific convention has been signed by a professional organisation with the tax authorities.

Assets & Liquidities Held Abroad

The spontaneous regularisation relating to assets and liquidities held abroad before September 30, 2019 and declared through the regularisation process before October 31, 2020 will allow the concerned taxpayer to benefit from the cancellation of tax and foreign exchange control-related penalties and fines. The contribution amounts to:

• 10% of the acquisition value of immovable goods, financial assets, securities and other equity or debt securities;

• 5% of liquidities in foreign currency transferred to a Moroccan bank account denominated in foreign currency; and

• 2% of liquidities in foreign currency transferred to a Moroccan bank account in dirhams.

OBG would like to thank EY Maroc for its contribution to THE REPORT Morocco 2020.

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The Report: Morocco 2020

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