A guide to the main tax measures adoped by Morocco's new Finance Law of 2016

As part of the numerous reforms that have made Morocco an economic model in the region, the Finance Law for 2016 is the next step in the implementation of profound tax reforms initiated by the government following the work carried out during the national conference on taxation held in Skhirat in April 2013. As published in the Official Bulletin No. 6423, Finance Law 70-15 (Law 70-15), enacted by Decree No. 1-15-150 of December 19, 2015, aims, in particular, to:

• Strengthen tax fairness in Morocco;
• Improve company competitiveness; and
• Encourage investment in the country.

Corporate Income Tax

Law 70-15 also institutes a new scale for corporate income tax (CIT) rates. As regards CIT, the main measures adopted by Law 70-15 are the institution of a rate scale applicable on the net benefits of companies instead of the previous rates of 10% and 30%. However, credit institutions and assimilated establishments, Bank Al Maghrib, insurance and reinsurance firms are not included under this measure and remain taxable at the flat rate of 37%.

Changes

Amendments have also been made to some articles in the tax code. In order to clarify the meaning of some articles in relation to CIT, Law 70-15 included amendments to the General Tax Code of Morocco. These amendments particularly concern the following articles:

• Article 6-I-A;
• Article 6-I-C-1°; and
• Article 170-III.

Article 6-I-A provides that companies exempted from CIT are excluded from the benefit of a 100% tax deduction on received dividends and exemption of gains on securities sales. In 2016 the phrasing of the article was amended, and henceforth it stipulates that the companies concerned by the provisions listed above are those which benefit from a permanent exemption in terms of corporate tax and which benefit from 100% tax deduction.

Article 6-I-C-1° grants an exemption from withholding tax on dividends paid by offshore holding companies, up to the offshore turnover share. The new phrasing states that this exemption is granted to these companies, up to the income which corresponds to the activity eligible for the flat tax rate as provided for under Article 19-III-C of the General Tax Code, and the conditions as stipulated in Article 7-VIII of the aforementioned code.

Article 170-III concerns the calculation of tax instalments following the expiry of a tax exemption in terms of the minimum contribution or CIT. In order to avoid misinterpretations, this article henceforth specifies that tax instalments are calculated on the basis of corporate tax rates applicable to companies during the taxable year.

Income Tax

As regards income tax, Law 70-15 has set up a tax regime that is applicable for ijara mountahia bitamlik (IMB), an Islamic banking offer which is designed as a leasing contract covering properties intended for principal residential uses, with a purchase option, according to the provisions of Law No. 103-12 of December 24, 2014.w

IMB Contracts Tax Regime

The tax regime applicable as regards IMB contracts is the same as the one that was previously adopted regarding the Islamic banking offer known as mourabaha, which is a type of sale contract, particularly for real estate assets. Hereafter, the main tax incentives provided for IMB contracts include the following:

• Deduction with a ceiling of 10% of the total taxable income, and the amount of the rental margin paid by the taxpayer under an IMB contract;
• Deduction from wage income of the amount of cost acquisition and rental margin paid by the taxpayer, as part of an IMB contract for the purchase of social housing intended for principal residence;
• In terms of the exemption granted upon the sale gain, one must take into account the period of occupation of the house by the taxpayer contracting an IMB in his or her quality as a leaseholder; and
• For the calculation of the sale gain, the acquisition cost and the rental of the property acquired under an IMB contract must be taken into consideration.

Joint Possession Contracts

The tax code also offer procedures for joint possession contracts for properties acquired under mourabaha or IMB. In addition to the institution of the tax regime applicable to IMB offer, Law 70-15 cancelled deductibility limits for interest or remuneration agreed on in advance on loans contracted for the acquisition of properties as principal residence as part of joint possession contracts.

In fact, in accordance with Article 28-II of the General Tax Code, taxpayers contracting the type of loans mentioned above are now given the benefit of a deduction not exceeding 10% of their taxable global income for every contracting party of the acquisition agreement and up to his/her share in the property acquired. Therefore, the ceiling of 10% of interest deductibility is no longer applicable; a total deduction is granted instead. It should be noted that the tax incentive provided in Article 28-II is applicable to interest on loans contracted under a mourabaha contract or to the rental margin as part of an IMB contract as of January 1, 2016.

Professional Income

In terms of tax compliance, taxpayers having a professional income only – defined as following a flat profit regime and taxed on the basis of the minimum profit – are exempt from the obligation to submit an annual income tax return. This exemption is granted under the following conditions:

• The annual profit is taxed on the basis of the minimum profit and the notified payable tax, in principal, does not exceed Dh5000 (€458);
• The determination of the flat profit has not undergone any changes which might increase the taxable base initially retained; and
• The profit of this exemption is granted within the period when the business of the taxpayer is still being carried out.

Thus, this measure is not applicable to a taxpayer whose annual income is based only on the flat profit provided in Article 40 of the General Tax Code. Furthermore, in case of an interruption in the taxpayer’s activity, the latter will be required to comply with obligations stated in Articles 85 and 150 of the tax code. It should also be noted that the exemption from filing an annual income return for taxpayers with a professional income only is effective during the year that follows the one in which the conditions above are fulfilled.

Agricultural Properties

In order to align tax treatment applicable on rental incomes, Law 70-15 widened the 40% tax deduction to cover rental income issued from agricultural properties. Therefore, according to the new adopted measure, taxable rental income from these types of properties after the application of the 40% tax deduction is defined as following:

• The gross amount of the rent as stipulated in the contract;
• The gross amount obtained by multiplying the average price of the crop used by quantities specified in the contract, in the case of rentals paid in kind; and/or
• The share of flat farm income in the case of rentals share fruit.

This measure is applicable to income revenues from agricultural properties as of January 1, 2016.

Tax Collection

Law 70-15 also includes tax collection procedures that are applicable to taxpayers under a real/simplified net income regime. According to the Finance Law of 2016, the due tax on the professional income of a taxpayer under the real/simplified net income regime, as well as taxpayers practising independent professions, is no longer payable by assessment of the tax administration following the submission of an annual income tax return, but spontaneously to the tax collector of the tax administration. This measure is applicable in cases of minimum contribution as well, starting from January 1, 2016.

Legal Deadline

The new tax code also includes modifications of the legal deadline to submit an annual income return for taxpayers under the real/ simplified net income regime. Further to the measures detailed above, taxpayers under the real/ simplified net income regime that have professional and/or agricultural income are granted an extra month to submit their annual income return and to submit tax payments accordingly.

Instead of the legal deadline of April 1, these taxpayers have until May 1 to fulfil their obligations in terms of declaration and payment as regards income tax. Following this measure, Law 70-15 also amended the provisions of Article 44-I of the General Tax Code, providing the legal deadline during which the concerned taxpayers can choose the option of the simplified net income regime.

Value-Added Tax

In terms of value-added tax (VAT), the main measures that have been adopted under the Finance Law of 2016 concern, in particular, the introduction of new regulations regarding aircraft and railway transportation, second-hand moveable goods, and activities related to the agri-food sector. Other measures have been adopted in relation to VAT credits, refunds and the fixation of some tax rates.

Transport & VAT 

In order to align international tax treatment of aircraft imports Law 70-15 exempted any imported aircraft with a capacity of 100 seats, as well as equipment and spare parts intended to repair such aircraft, and cancelled the previous 20% VAT tax rate.

In addition, to promote aerospace industry, aircraft dismantling operations benefit from a VAT exemption as of January 1, 2016, since these segments are henceforth considered to be services related to international transportation.

The new taxation procedures also include railway transportation, which is certainly the main measure of Law 70-15 as regards VAT, where the applicable VAT has been revised upwards to alleviate the VAT credit allocated to the national railways agency, Office National des Chemins de Fer. Therefore, instead of 14%, railway transport is now subject to the normal VAT rate of 20%. However, other transport operations remain subject to the reduced rate of 14%. Another measure affecting the rail sector is the import of railway equipment, which is now exempted from VAT.

Other VAT Rules

While Article 125 of the General Tax Code allows for taxation of second-hand goods, this article has been amended by Law 70-15 to include the sale of second-hand moveable assets, along with the sale of the business capital.

Prior to 2016 agri-food business supported VAT without any possibility of deducting VAT from certain inputs since agricultural products are outside the scope of VAT, which led to an automatic sales tax and not a tax on the real value-added generated by a business. This situation has made the agri-food business in Morocco uncompetitive and caused overgrowth of informal businesses. In order to address this situation, Finance Law of 2016 introduced a tax on agricultural products intended for the agri-food sector in Morocco. Therefore, and notwithstanding the provisions of Articles 101 and 104 of the General Tax Code, even if it is not apparent in the purchasing price of locally obtained fruits and unprocessed vegetables, VAT is henceforth deductible.

VAT Refund

Currently, and in accordance with Article 103 of the General Tax Code, VAT refunds are granted to taxpayers performing operations that are tax exempt or in a tax-suspension period in compliance with Articles 92 and 94 of the General Tax Code. As part of VAT reform, the VAT refund process covers 2015, 2016 and 2017 for companies which have a cumulative VAT credit of between Dh20m (€1.8m) and Dh500m (€45.8m).

In addition, Law 70-15 widened the scope of application for items eligible for a VAT refund to cover investment goods, with the exception of equipment, office furniture and passenger transport vehicles, other than those used for the purposes of public transport or collective staff transport. Finally, Finance Law of 2016 modified the VAT rate applicable to IMB contracts to align their tax treatment with the terms of mourabaha contracts. Therefore, instead of a 20% rate applicable to the margin generated by such contracts, a reduced rate of 10% is henceforth in effect.

Registration Fees

The recent reforms also saw other specific measures concerning registration fees adopted under Law 70-15. The main measures can be summarised as the following:

• Exemption for the sale of collective lands located in an irrigation district and which were subject to registration fees under the common law regime;
• Bare-land acquisition or lands comprising buildings to be demolished, intended for construction projects, benefit from a reduced rate of 4%, but are limited to five times the covered area of the land(s); the application of this reduced rate was unlimited before 2016;
• Clarification of the taxable basis for mourabaha and IMB contracts, which is now the acquisition price of properties or business capital, instead of the higher amount calculated as provided in Article 132-II of the tax code; and
• Reduction of the taxable base regarding rental acts through emphyteutic leases from 20 times the annual rental price to just one annual rental price; this measure is limited to emphyteutic leases concerning state-owned lands intended for investment projects in the industrial, agricultural or services sectors.

Sanctions & Penalties

In addition to taxes, it is important for taxpayers to be aware of new measures adopted by Law 70-15 as regards penalties and surcharges in cases of non-compliance with tax regulations that are in effect. As such, the main amendments introduced by Article 8 of Finance Law of 2016 are summed up below.

Expenses & Deductibility 

To avoid the proliferation of informal businesses in Morocco, other measures have been adopted. In fact, in order to encourage companies to be more transparent in their transactions, Article 8 of Law 70-15 provides that expenses which are not paid by non-transferable crossed checks, commercial bills, magnetic means of payment or bank transfers are deductible from the taxable income of companies within the limit of Dh10,000 (€917) per day and per supplier, up to a monthly amount of Dh100,000 (€9170) per supplier, VAT included. It should also be noted that in terms of assets acquired and not settled following the above payment means the recorded depreciations on these assets are not considered deductible from taxable income of companies. As regards VAT, deductibility is no longer permitted for purchases of goods or services exceeding Dh10,000 (€917) per purchase and per supplier up to a monthly amount of Dh100,000 (€9170) per supplier, VAT included. These measures are applicable to financial years opened counting from 2016.

Company’s Common Identifier

Introduced by Decree No. 2.11.63 of May 20, 2011, ICE is a new common identifier for companies and is intended to be used by different authorities in Morocco. Following its effective application since 2014, Article 8 of Law 70-15 has amended the provisions of Article 145 of the General Tax Code to highlight taxpayers’ obligation to include in their invoices, or similar documents, as well as in the tax returns, this new common identifier. Therefore, invoices not containing the ICE do not give the taxpayer the right to deduct VAT from a purchase.

Tax Treaties 

Morocco has expressed over time its strong commitment to cooperation and development in Africa. The country has always attached special importance to building up strong relationships with other African countries through strengthened economic ties and the establishment of various partnerships relying on measures for promoting South-South cooperation. One of the leading measures is the conclusion of tax treaties that aim to avoid double taxation as part of business binding Moroccan and African companies. They are also meant to avoid fraud and tax evasion by providing administrative support for collection of taxes between signatory countries.

Morocco currently has tax treaties in effect with the Arab Maghreb Union, Egypt, Senegal, Gabon and Guinea, and agreements are at various stages of development with another 15 African countries. Given the few tax treaties in effect, efforts are still needed to support Morocco’s ambitions in terms of economic and social cooperation with African countries. It is important for Morocco today to implement an overall tax strategy in line with its expectations on the continent. This strategy is no longer an option; it is a necessity given the growing competitive environment in many African markets.