Reforming legislation: A look at the kingdom’s new taxation law

The 2013 Finance Law has been adopted in a difficult economic context, which makes balancing the budget and accounts an absolute priority. This law demonstrates the preparedness of the Moroccan authorities to pursue fiscal reform spread out over several years. The fiscal measures that have been introduced by the 2013 Finance Law meet the demand to both maintain socio-economic stability and improve the effectiveness of Morocco’s fiscal administration by way of tax reductions, strengthened social cohesion and consolidating relations between taxpayers and the tax administration.

COMPLEX ENVIRONMENT: Even so, some of the measures that Moroccan businesses had expected to be included in the 2013 Finance Law and that enjoyed wide support, such as reforming the value-added tax (VAT) system, have been postponed due to certain budgetary consequences that could not be taken on at this time given the economic difficulties. Instead, measures have been adopted that draw on tax revenues. In effect, the government needs additional resources in order to finance its support programmes for the destitute and to fight poverty, as well as support the middle class.

In this context, three new taxes have been introduced: an environmental tax on the sale and import of plastics and products that include plastic; a special tax on the sale and import of reinforced steel; and a tax on the sale of sand, which is to be paid by permit holders who exploit quarries and produce sand.

Beyond instituting the contribution to the populace’s overall well-being through national solidarity programmes for the next three years, the finance law also revises certain tax ceilings. The withholding tax rate has been increased to 15%, from 10%, for income from stock shares and similar investments.

Additionally, the tax ceilings for profits earned from non-developed land will also be raised so as to make real estate speculation more difficult and costly. The state’s strategy to increase tax revenues is based on a need to achieve more equitable incomes, and is particularly pronounced in the introduction of a new fiscal regime for the transfer of second-hand goods that will henceforth be subject to VAT.

BALANCING NEEDS: In spite of the difficult economic juncture, the government has agreed on the need for greater tax relief for some categories of contributors, in particular the middle class, which now enjoys stimulus measures with regards to the acquisition of property. Small and medium-sized enterprises (SMEs) will also continue to enjoy special attention from the government. Beyond lowering the tax rate imposed on SMEs to 10% for those with revenues of Dh300,000 (€26,670) or less, smaller companies will also benefit from an extension of a reduced corporate tax in relation to increases in equity.

The fiscal policy is aimed at encouraging the restructuring of companies and improving access to the formal economy is being pursued by way of extending measures that encourage mergers and breakups of firms, as well as grant amnesty to newly identified tax contributors. Additionally, business assets contributed by a physical person to a company subject to income tax will continue to benefit from a tax-neutral rate until the end of 2014. A registration fee of of Dh1000 (€88.90) has been introduced for the purpose of establishing and increasing company’s private equity, in lieu of a proportional fee of 1% on equity positions that do not exceed Dh500,000 (€44,450). Difficult conditions have not prevented the government from either continuing its strategy to consolidate savings or spur activity on the stock market. In this way and through the effects of earlier incentives that were established in order to encourage savings plans for housing purposes, the 2013 Finance Law introduced a new fiscal regime i to spur savings deriving from employee salaries in the context of a company savings plan.

At the same time, the new law extended tax reduction benefits on corporate taxes, favouring firms with securities that are introduced on the stock exchange or that increase their equity positions before the end of 2016. The law also introduces tax neutrality for securities lending and securitisation by way of repurchasing operations.

SOCIAL COHESION: In terms of boosting employment and reducing social disparities, a number of socio-economic measures have been introduced: an extension of VAT exemptions until the end of 2016 granted to microcredit companies; an extension of exemption from internship allowance for up to the gross amount of Dh6000 (€533.40) until the end of 2016; an increase in the rate of abatement from 40% to 55% for retirement benefits; and an increase in the age limit for dependents from 25 to 27 years of age.

The desire to improve relations between the fiscal administration and taxpayers is further reflected in the 2013 Finance Law – in particular by the fact that the law institutes a procedure to apply sanctions in cases where tax declarations do not include projected indications as to revenues from asset-based capital and compensation transferred to third parties, and eliminates all increases and penalties for delays in relation to rights issued until December 31, 2011 in case of payment of principal. The fiscal measures that the 2013 Finance Law introduces are one component of the larger context of the economic and social strategy that the current government has adopted. In order to draw as much benefit as possible from these measures, it is necessary to implement these within the framework of good governance so as to optimise their impact.

KEY COMPONENTS: The most important tax measures and exemptions included in the 2013 Finance Law are summarised as follows: (1) Introduction of a new social solidarity contribution for companies and individuals:

• Social solidarity contribution for companies: A solidarity contribution tax will apply for a three-year period as follows: 0.5% on net profit of Dh15m25m (€1.3m-2.2m); 1% on net profits of Dh25m50m (€2.2m-4.4m); 1.5% for net profits of Dh50m100m (€4.4m-8.9m); and 2% for firms with net profits of more than Dh100m (€8.9m). The social solidarity contribution applies to all companies, excluding corporations permanently exempted from corporate income tax (CIT). The amount of the social solidarity contribution is not deductible from CIT.

• Social solidarity contribution for individuals: A solidarity contribution tax will apply for a period of three years on net incomes derived in Morocco starting on January 1, 2013. Individuals with incomes derived in Morocco that are equal to or more than Dh360,000 (€32,004) are subject to the social solidarity contribution tax; The social contribution tax rate is calculated by applying a proportional rate schedule on net income as follows: 2% on net income from Dh360,000 (€32,004) up to Dh600,000 (€53,340); 4% on net incomes from Dh600,000 (€32,004) up to Dh840,000 (€74,676); and 6% on net incomes more than Dh840,000 (€74,676;. The of the contribution must be withheld by employers who reside in or have established operation in Morocco on a monthly basis. (2) Regarding CIT the law includes the following:

• The withholding tax rate has been increased from 10% to 15% on dividends paid, recognised in a company’s accounts or made disposable to companies, whether they have their headquarters in Morocco or not, and subject to the provisions of the applicable double-tax treaty;

• The branch tax rate has been increased from 10% to 15%. The branch tax applies to after-tax profits paid, recognised in accounts or made disposable by the permanent establishment of a foreign firm and subsequently transferred to the foreign head office;

• The CIT rate has been reduced to 10% from 15% for firms with a taxable profit of less than Dh300,000 (€26,670);

• The following tax incentives available under Morocco’s General Tax Code have been extended for a three-year period: partial exemption (25-50%) from CIT for companies issuing shares on the Moroccan stock market by means of an initial public offering or by an increase in share capital; a preferential regime for mergers and demergers of companies; a reduction of CIT for companies operating with an increased share capital before December 31, 2013, provided they are compliant with certain conditions. The reduced rate is equal to 20% of the increase in share capital. (3) Regarding personal income tax (PIT) the 2013 Finance Law introduces the following provisions:

• The withholding tax rate has been increased to 15% from 10% for dividends paid, recognised in accounts or made disposable to individuals whether or not they are resident in Morocco, subject to the provisions of the applicable double-tax treaty;

• Disposable income from property is exempt from PIT if the property has been the owner’s main residence for at least six years;

• Introduction of a preferential tax regime for employee savings schemes that provides for exemption from PIT for the employer’s contribution to the savings scheme, with a limit set at 10% of annual income, and total exemption from PIT applicable to incomes and profits;

• Increase of the tax deduction applicable to pensions to 55% from 40% on the gross taxable amount, after deducting any contributions and bonuses that may apply;

• Readjustment of tax rates for the sale of undeveloped real estate to 20%, 25% and 30%, based on the duration of the holding. (4) Regarding VAT the following changes were introduced by the 2013 Finance Law:

• Tax on the sale and delivery of second-hand goods (the General Tax Code now makes a distinction between taxation of immovable and movable second-hand goods);

• Exemption from VAT for habitable properties constructed by the owner;

• The introduction of favourable measures for micro-credit associations and social housing works by means of an exemption from the VAT imposed on shipments and equipment acquired by such associations;

• The application of a reduced tax rate for agriculturalist raising livestock has been extended;

• Introduction of new measures related to livestock feed and farmyard animals. (5) In terms of registration fees the 2013 Finance Law introduces the following provisions:

• A fixed fees amounting to Dh1000 (€88.90) in the place of a proportional rate of 1% for capital increase operations, provided that capital equity does not exceed Dh500,000 (€44,450);

• An exemption in favour of companies that have established operations in Casablanca’s Finance City. (6) Regarding the relationship between the tax administration and taxpayers the 2013 Finance Law introduces the following measures:

• In cases where taxes have been filed incompletely, the tax authorities are required to send a letter requesting any missing documentation before applying any penalties. The taxpayer then has 15 days from the receipt of the letter to provide any missing information;

• Penalties for outstanding debts before 2012 are annulled if the taxpayer has paid the nominal amount of the tax before December 31, 2013. (7) The following new taxes has been introduced:

• A special tax on reinforced steel for concrete structures is applicable to the sale or import of reinforced steel. The applicable tax is Dh0.10 (€0.00889) per kg;

• A new tax on sand is applicable permit holders for sand quarries. The tax rate ranges between Dh50 (€4.44) and Dh20 (€1.77) per cubic metre;

• Introduction of an ecological tax applicable to the sale or import of plastic or plastic-containing products. The applicable tax rate is 1.5% ad valorem.