In 2005, Morocco’s tax administration began an overhaul of its tax legislation that is still underway. The 2007 Finance Bill (Dahir No. 1-06-23, published in the official gazette on December 31, 2006) was an essential part of that process, with all tax legislation being amalgamated into a single tax code. The 2008 Finance Bill, scheduled to be presented on December 31, 2007, is expected to follow the same path.
Corporate Income Tax
The 2007 Bill and Other Regulations
A corporate income tax (CIT) exemption of 25 percent to 50 percent has been granted, through December 31, 2009, for profits generated by companies that use the Moroccan Stock Exchange (MSE) to seek financing through an initial public offering or to increase their equity capital through the introduction of new listed shares.
The 2007 Finance Bill also extended from 10 years to 20 years the period during which companies located in the free zone area (zone franche) are subject to a reduced 8.75 percent CIT rate (as opposed to the general rate of 35 percent) following their initial five-year full CIT exemption. As of January 1, 2008, subject to lawmakers’ approval of the 2008 Finance Bill, those companies will be entitled to a 10 percent withholding tax on profits distributed to their nonresident shareholders, if the profits are derived from activities conducted outside the free zone area.
In 2007 the interest rate on shareholder loans was capped at 2.63 percent. Interest paid in excess of that cap is deemed to be a constructive distribution of profits. If Morocco wants to attract leveraged buyout transactions, that rule will have to be amended to allow higher interest rates. Also, Mo-rocco must implement the tax consolidation regime so as to allow pooling of the acquisition debt with the profits generated by the target.
The 2008 Bill
As proposed in the 2008 Finance Bill, the standard CIT rate would decrease from 35 percent to 30 percent, effective January 1, 2008. The special CIT rate applicable to financial institutions and insurance companies would decrease from 39 percent to 37 percent, ultimately settling at 35 percent on January 1, 2009.
However, under the current draft bill, that reduction would occur with an increase in the tax base through measures such as the repeal of the deductibility of noncurrent reserves, including reserves for investment, and the repeal of the capital gain exemption available if a company commits to reinvest its capital gain in the acquisition of fixed assets within a three-year period.
According to a Finance Ministry report, most of the state’s 2007 expenditure can be traced indirectly to the deductibility of the reserve for investments (at a cost to the Treasury of about MAD 1.4 billion, or approximately $179 million). Therefore, although the decreases in the CIT rate are indicative of the government’s desire to be on the same page as taxpayers, careful attention should be paid to the measures included in the draft bill that would in the meantime increase the tax base by an equivalent amount.
The second relevant provision in the draft bill is the broadening of the participation exemption regime, which grants a 100 percent allowance to the recipient of dividends distributed between Moroccan-based companies. As proposed, the benefit will be extended, effective January 1, 2008, to dividends derived from foreign subsidiaries. That change, which was demanded by Moroccan investors, would settle a thorny issue that started with the 2005 Finance Bill and affected the return on investment of Moroccan-based corporations and their desire to invest outside Morocco.
The change would facilitate the repatriation of Moroccan savings located abroad for reinvestment in Morocco or abroad by Moroccan companies. In the future, a Moroccan-based company could also be used as a special purpose vehicle by foreign investors seeking to enter new markets in countries that have no tax treaty with their home country. For example, the Moroccan tax treaty network could help EU or U.S. investors wishing to develop se-cured tax transactions with Libya.
Real estate developers’ profits derived from the construction of government-sanctioned public housing programs have been fully exempt since 2000. Under the 2008 Finance Bill, that exemption would no longer be applicable after January 1, 2009. Ac-cording to the Finance Ministry report, the exemption has benefited only real estate developers, and not home buyers. According to the draft bill, profits from the housing program would be taxed at a reduced CIT rate of 17.5 percent in 2008 and would be subject to the standard CIT rate of 30 percent in 2009. However, real estate developers involved in building on university campuses would continue to benefit from the full exemption.
Other measures in the draft bill include a reduction from five years to three years of the holding period for a stock option holder to benefit from the favorable tax regime, and changes to the eligibility conditions for some tax incentives for companies operating in disadvantaged zones that would limit the tax benefits to operations conducted in those regions.
The 2006 Finance Bill exempted the acquisition of some imported business assets from the 20 percent VAT for approved investment projects with a value of at least MAD 200 million (approximately $25.6 million). However, the exemption is limited to the first 24 months after the commencement of the business activity. The 2008 Finance Bill would ex-tend that period to 36 months.
In 2007 Morocco also initiated reforms to modernize the VAT and increase its efficiency. Other modifications proposed in the 2008 Finance Bill concern the VAT rate structure and the cancellation of some dispensatory regimes.
The draft bill calls for:
the taxation of credit leasing transactions at a standard rate of 20 percent, with the aim of preventing situations in which structural VAT credits are created by rate differentials;
a 20 percent tax rate for real estate transactions that are now subject to a rate of 14 percent, for the same reason; and
a reduction of the VAT reimbursement period to three months.
In 2007 Morocco signed tax treaties with Turkey, Singapore, Austria, Romania, Malta, and Malaysia. Other treaties are being ratified, including those signed with Jordan, Syria, Yemen, Qatar, and Fin-land. Morocco also started a first round of negotiations with Macedonia.
Morocco ceased negotiations with Sweden to replace the income and capital tax treaty signed on March 30, 1961. That treaty provides for a zero withholding tax on interest, dividends, and royalties, and has been of interest in tax planning schemes involving Morocco and EU member countries. The Moroccan government in 2007 decided to terminate the treaty effective in January 2008.
In October 2007 the Central Bank of Morocco authorized the country’s banks to market Islamic financing products (referred to as alternative products). Many details are still being discussed, but some widely accepted principles have been established for the purpose of Sharia-approved alternative products, including:
the prohibition of riba (usury), forbidding any kind of interest payments;
the prohibition of gharar (speculative investment), making the use of derivatives difficult; and
the prohibition of investment in unacceptable (haram) assets such as alcohol, prostitution, pork, and gambling-related items.
Since October 2007, Moroccan banks have been allowed to offer their clients alternative products, such as:
An ijara, the Sharia-approved equivalent of a conventional lease. An ijara is a contract under which the bank finances equipment, construction, and so on in exchange for a rental payment together with (or without) an agreement by the bank or the owner that the ownership will be transferred to the lessee at the end of the lease period.
A musharakah, the Sharia-approved equiva-lent of a joint ownership arrangement between a financial institution and another party to share profits and losses. The bank provides funds, as does the business, and profits are distributed in preagreed ratios. Losses are al-located in proportion to the allocation of capital.
A murabaha, a sale with deferred payment terms. In a murabaha, clients ask the bank to purchase an item for them at a defined price, which includes a profit. The purchase is repaid in installments, and the ownership passes to the client, but the bank holds the collateral.
Another Sharia-approved product, sukuk bonds, are not yet mentioned in the Central Bank’s recommendations, but will be developed. As was stated during the First International Forum on Islamic Finance, held in Paris on December 6, 2007, and sponsored by the French-Arab Chamber of Commerce, sukuk bonds are among the most used instruments in Islamic financing. Introduced in varied structures and sizes, sukuk bonds worth $20 billion hit the market in 2006 and were expected to surpass $50 billion in 2007.
The tax treatment of those financial products has not yet been defined by the Moroccan tax administration. However, based on a review of international tax practice, the most common tax issue associated with them concerns transaction taxes due on the first sale, the leaseback, and the ultimate repurchase of the underlying assets financed, as well as the deductibility of the alternative return (replacing interest, which is forbidden under Sharia rules). Therefore, the Moroccan tax administration should provide guidance to prevent double taxation.