The Moroccan tax system has been completely revised over the last two years. The changes were initiated to reinforce the transparency and rational-ity of the tax system.
After the 2005 Finance Bill merged several legal texts into a single tax procedure book (Liure des procedures fiscales), the 2006 Finance Bill was a step toward a combined tax code (Official Journal No. 5382, Dahir 1-05-197, published December 29, 2005). The 2006 Finance Bill calls for a tax base and collection book (livre d’assiette et de recouvrement) that replaces several related sources.
That codification process will end soon with the 2007 Finance Bill, expected on December 30, 2006. If the bill becomes law, a general tax code combining all applicable legislation would be published and would be viewed as Morocco’s exclusive Tax Code.
Apart from the codification project, there were several changes in 2006 either through the finance bill or subsequent regulations. The main changes are business-oriented and highlighted below. 
Corporate Income Tax
A variety of tax exemptions are available for selected sectors. A full exemption is provided for the revenues of venture capitalists (organismes de placement en capital risque) and mutual funds. The exemption is restricted to profits derived from the funds or venture capital entities, exclusive of taxes on their subscribers.
A full exemption is also provided for revenues earned by real estate promoters on the construction and sale of public housing programs agreed to by the government. That provision is also applicable for the personal taxation of real estate promoters.
Companies that dispose of tangible or intangible assets will be entitled to a deduction of 25 percent to 50 percent of the net gain if the holding period for the asset is, respectively, between two to four years or four years or more. A full exemption is available if the company commas to reinvesting the proceeds in fixed assets within a period of three years. Those fixed assets must remain on the company’s records for at least five years.
Previous Tax Regimes
The full exemption for companies benefiting from EU subsidies in the services sector is no longer applicable. Those companies are now taxed under standard conditions.
The full capital gains exemption granted to non-resident companies on the sale of a Moroccan-based company’s stock is no longer applicable. The exemp­tion is now limited to the sale of shares listed on the Moroccan stock exchange. In practice, those restric­tions could be jeopardized by a tax treaty between the seller’s country and Morocco.
Other Corporate Measures
For 2006 the interest rate on shareholder loans was capped at 2.61 percent (Official Gazette No. 5404, March 2006). Interest paid in excess of the cap is deemed to be a constructive distribution of profits.
To be deductible, the reserve booked for investments should be limited to 20 percent of taxable profits before tax and after imputation of any losses carried forward. Also, the amount booked should be less than 30 percent of the full amount of the investment. The change for 2006 consisted of the computation of the losses carried forward in the 20 percent cap.
From now on, the deductibility of a bad debt reserve is conditioned on an action to be set off within a 12-month period following the booking of the reserve. The deductibility of an amortization allowance is now subject to recordation in the ac-counting statements of the corresponding fiscal year.
The prior ability to defer recordation to the following year is no longer available.
The finance bill eased the treatment of hidden distributions detected through tax reassessments. Those distributions are now subject to the 10 per­cent withholding tax applicable to regular distribu­tions.
Foreign currency gains or losses derived from recorded receivables or debts should now be viewed as either taxable (for gains) or deductible (for tosses). Overdraft bank charges are no longer tax deductible.
The 2006 Finance Bill exempted from VAT the import of some types of goods required for investment projects agreed to with the government for at least MAD 200 million (US 523.5 million). Those goods include equipment, tools, materials, machinery, and spare parts.
Since January 1, 2006, the general VAT rate has been increased from 7 percent to 10 percent for financial and banking transactions (including leas­ing, foreign exchange commissions, and interest on loans to the agricultural sector) and a few noncommercial activities (for example, the services of lawyers and interpreters).
Statute of Limitation
From January 1, 2006, the statute of limitation for registration duties has been reduced from 15 years to 10 years. On July 26, 2006, the tax authorities issued a statement of practice to comment on the new tax procedure book (Circulaire No.716).
Tax Treaties
The tax treaty between the Czech Republic and Morocco (signed June 11, 2001) entered into force on July 18, 2006. The tax treaty with the People’s Republic of China (signed August 27, 2002) entered into force on August 16, 2006. It follows the OECD model, with some differences in the definition of a permanent establishment.
The Moroccan government continued to be active in the tax treaty area in 2006. Tax treaties were signed with Belgium (May 31, 2006), Finland (April 7, 2006), Ivory Coast (July 20, 2006), Pakistan (May 18, 2006), and Qatar (March 17, 2006). Once in force, the Belgian treaty would replace the treaty signed May 4, 1972.
The government also started the first round of negotiations with Sweden (April 1, 2006) and Latvia (June 14, 2006) to replace or implement a new tax treaty.
Expectations for 2007
Those actions demonstrate that the Kingdom of Morocco has been active in the global tax arena and wishes to protect the tax transactions of its residents in their foreign relationships.
In the meantime, the extension of Morocco’s tax treaty network could ease the process of becoming an important investment platform for North Africa and the Middle East vis-à-vis its European or American tax partners.
Is all this a sign that Morocco is progressing in its globalization? Perhaps. But before reaping the re-wards, Morocco should settle a thorny issue that could jeopardize its advancement. While a strong tax treaty network could allow Morocco to attract foreign investment through special purpose vehicles (SPV), a major obstacle remains in domestic tax legislation.
The 2005 Finance Bill added a new provision affecting the return on investment of Moroccan corporations on foreign earnings (Section 6-1-C-1 and 10-1-1 of the “Tax Base and Collection Book”). If a Moroccan firm invests outside Morocco and receives dividends, those dividends will not benefit under the participation exemption regime that offers a 100 percent allowance for dividends between Moroccan corporations.
That means the dividends received will be taxable as profit at the standard corporate income tax rate of 35 percent at the level of the SPV receiving the dividends. That provision does not match with Morocco’s desire to become an important regional in-vestment platform, as illustrated below.
Let’s assume a Moroccan-based SPV is a subsidiary of a foreign company and invests in another country, say Libya, which is experiencing strong growth. The Moroccan tax treaty network could help foreign partners increase their exports to Libya. Although Libya owns 3.3 percent of all worldwide oil reserves, and it registered a growth of 3.5 percent in 2006, it still lacks a tax treaty with any EU member state (other than Malta) or the United States.
In the past these commercial opportunities were of little interest given Libya’s alleged ties with terrorism. But that restriction no longer exists. Since May 2006, the U.S. government has taken the position that Libya should no longer be listed as a country with links to terrorism. That new status has had a strong impact on foreign investors’ interest in rebuilding a country that had been written off for more than a decade.
Given Libya’s oil reserves and its need to rebuild its economic base, it’s certain the country will be-come an attractive market for European and U.S. investors. Morocco could be used as an interface for that purpose. Morocco, as a developing African country with similar characteristics to Libya and with a tax treaty still in force, remains a better route for EU investors to invest in Libya.
Perhaps the tax authorities will comment on the participation exemption in 2007, and consider ex-tending it to cross-border dividends. For the time being, tax advisers are inclined to offer ideas on how best to legally avoid this obstacle to Morocco’s economic development.
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