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Doing business in Morocco

Kamal Nasrollah, Casablanca Office EMEA Tax Conference 12 June 2014 | Amsterdam

I. Business environment in Morocco

Africa: strong economic growth supported by positive factors 51% average annual GDP growth between 2000-2010 1. Growing population

 Booming working age population

 600m currently  Growing at 2.4% per year to reach 1.1 bn in 2040  Will outnumber China’s and India’s by 2030

 Increasing urbanisation

 +150m city dwellers by 2030

Africa: strong economic growth supported by positive factors 2. Massive infrastructure needs  Africa’s infrastructure needs require spending of over $90 bn per year over the next decade  $30bn p.a funding gap vs. current level  main gap in power and water equipment

3. Abundant natural resources  Oil & Gas  Gas: 7% of world production and 8% of reserves  Oil: 12% of world production and 10% of reserves

 Raw materials  20-30% of world production of gold, uranium, manganese phosphate

Africa: strong economic growth supported by positive factors 4. Strong education improvement  Increasing education level  Number of persons completing tertiary education has doubled since 2000

5. Population economic development  Emerging middle class  140m in 2009  +60% by 2020, +150% by 2030  oubled since 2000

Greater North-West Africa (GNWA): one of the Africa’s three key economic areas

Kingdom of Morocco: Main facts and figures Land area

710 850 km²

Neighbouring countries

Mauritania to the South and Algeria to the East and Southeast; Spain is 14 km across the Mediterranean

Geographical characteristics

Morocco’s geography is diverse: – Mountains constitute a large part of the Moroccan territory with two mountain ranges: the Atlas mountains (center and north) and the Rif mountains (bordering the Mediterranean from the northwest to the northeast) – 2 390 km coastline: 1 890 km on the Atlantic Ocean and 500 km on the Mediterranean Sea – Sahara desert constitutes most of the southeast portion

Kingdom of Morocco: Main facts and figures Capital

Rabat

Population

Around 32 million 27.1% under 14 years 41.7% between 25 and 54 years growth rate of 1.4 %

Languages

Arabic and Berber (official), French often used as language of business, government and diplomacy. English is much less common than French in business. However, English use has been increasing over past decade as many multinational companies have set up in Morocco.

Religion

99% Muslim (Sunni Malekite rite), 1% Christian, 600,000 Jewish

Urbanization

58% of the total population

Main cities

Casablanca (3.2 million) , Rabat (1.7 million) , Fes (1.04 million) , Marrakech (909,000) , Tangier (768,000)

ÂŠ 2014 Baker & McKenzie LLP

Kingdom of Morocco: Main facts and figures Health

Maternal mortality rate: 100 deaths/100,000 live births (70th) Infant mortality rate: 26.49 deaths /1,000 live births (74th) Life expectancy at birth: 72 years Health expenditures: 5.2% of GDP (2010) Hospital beds density: 1.1 beds/1,000 population (2009)

Education

Literacy: 56.1% School years (primary to tertiary education): 10 years

ÂŠ 2014 Baker & McKenzie LLP

Kingdom of Morocco: Main facts and figures Economy overview

Morocco has capitalized on its proximity to Europe and relatively low labor costs to build a diverse, open, market-oriented economy. Since taking the throne in 1999, King Mohammed VI has presided over a stable economy marked by steady growth, low inflation, and gradually falling unemployment, although a poor harvest and economic difficulties in Europe contributed to an economic slowdown in 2012. Industrial development strategies and infrastructure improvements - most visibly illustrated by a new port and free trade zone near Tangier - are improving Morocco's competitiveness. Morocco also seeks to expand its renewable energy capacity with a goal of making renewable 40% of electricity output by 2020. Key sectors of the economy include agriculture, tourism, phosphates, textiles, apparel, and subcomponents. To boost exports, Morocco entered into a bilateral Free Trade Agreement with the United States in 2006 and an Advanced Status agreement with the European Union in 2008.

ÂŠ 2014 Baker & McKenzie LLP

Kingdom of Morocco: Main facts and figures Economy figures

GDP (purchasing power parity): $ 171 billion (2012 est.) GDP (official exchange rate): $ 97.17 billion (2012 est.) Real growth rate of GDP: 2.9 % (2012 est.) GDP per capita (purchasing power parity): $ 5 300 GDP â&#x20AC;&#x201C; composition per sector: Agriculture: 14.7% Industry: 32.8 % Services: 52.6 % Labor force: 11.78 million Unemployment rate: 8-9% 15-24 years unemployment rate: 20-22%

ÂŠ 2014 Baker & McKenzie LLP

Kingdom of Morocco: Main facts and figures Political regime

Constitutional monarchy ruled by the Alaouite dynasty since 1659. The King, Mohamed VI, came to power in 1999 after Hassan IIâ&#x20AC;&#x2122;s death. Morocco is making strong headway in its democratic transition with landmark reforms such as the new constitution and the coming into power of the opposition party. The monarchy is hereditary. The Prime Minister is appointed by the king following legislative elections. Currently, the Prime Minister is Abdelilah Benkirane, head of the former opposition party. Morocco has significant political pluralism as more than 30 political parties are in operation.

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A dynamic economic landscape dominated by small-sized companies â&#x20AC;&#x2019;

The number of legal entities registered in Morocco is continuously increasing (3.4% in 2010). The last census was conducted by the High Commissioner for the Plan in 2002. At that time, the government counted more than 750,000 establishments. 10 years later, this figure has at least doubled.

Distribution of the entities created in 2010 per sector 6% 3%

29% 62%

Trade and services Building and real estate works Industry Agriculture/Fishing/Mining/Energy

ÂŠ 2014 Baker & McKenzie LLP

A dynamic economic landscape dominated by small-sized companies ‒

‒

Implementation in 2002 of a streamlined process for the creation of a legal entity or registration of a branch (regional investment center – Centre Régional d’Investissement) which has improved timing and efficiency of incorporations. 95% of businesses are small companies incorporated as limited liability companies (SARL). 1/3 of the companies are registered in the region of Casablanca. M&A transactions are relatively limited in Morocco: between 10 and 20 major transactions per year.

Available infrastructure and short term projects Tetuan Nador

Tangier

Mohammedia

Rab at

Al Hoceima Fez

Oujda

Casablanca

Atlantic Ocean

El JadidaJorf lafar Essaouira

Agadir

Marrakech Errachidia

â&#x20AC;&#x2019;

The port network consists of 12 ports across the country including Tanger Med port, the biggest port in North Africa.

Ouarzazate

Laayou ne

Dakhla

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Highway Main ports

Available infrastructure and short term projects ‒

‒ ‒

Tanger Med entered into service in 2007 and offers a capacity of 3.5 million containers (forecasted to be 8 million in 2016) divided into two terminals. The operation of the first one has been granted to Maersk for a thirty-year period while the second one is operated by a consortium consisting of Eurogate-Contship/MSC/CMA-CGM for a similar period. With an the Open Skies policy, the Kingdom has 15 international airports and is the largest airport hub in the region. With the completion of the supplemental program, the highway network will increase from 1500 km in 2010 to 1800 km in 2015, connecting all cities exceeding 400,000 residents.

Available infrastructure and short term projects ‒

‒

The country offers a wide network of Economic Activities Zones (Integrated Industrial Platforms, free zones, clusters, offshore logistic and export areas) . Telecommunications infrastructure meeting international standards. Three full-service operators (fixed line, mobile, internet and data), the telecommunications sector in Morocco is well developed: 97% mobile penetration and 13 million Internet users (September 2010).

II. Standard tax system overview

Key elements ‒

‒

Moroccan tax regulation is codified under the Moroccan tax code (since January 1, 2007) and Law 47-06 concerning local taxation. Taxation system is relatively simple in Morocco consisting of two (2) main tax groups: direct and indirect taxes. Indirect taxes, primarily VAT, represent the most significant proportion of tax revenues for Morocco (56,4% in 2011). Tax burden is unequal in Morocco as 82% of corporate income tax revenues are paid by 2% of the legal entities and 73% of personal income tax revenues are paid by salaried employees.

Key elements ‒

‒

Reform of the tax system is a priority for the Moroccan government. A national meeting (“assises de la fiscalité”) was organized by the Ministry of Finance in 2013 with the major actors (including professional associations and tax experts) to define a tax strategy for Morocco. Following this event, many tax reforms have been initiated (e.g. taxation of agricultural sector). Transparency of Moroccan tax administration has been improving over last decade in particular through the publication of regular guidelines and tax rulings.

Key elements ‒ ‒

‒

Moroccan tax regulation provides various incentives enacted by the legislature to benefit specific sectors. Moroccan tax law is increasingly sophisticated and tends to be in line with recently implemented international practices (in particular regarding transfer pricing). Moroccan government is attempting to eliminate the problem of the undeclared sector, which still represents more than14% of the Moroccan economy.

Overview of the direct taxes 22

Corporate income tax “CIT” ‒

‒

Companies are subject to corporate income tax on their taxable income. The standard CIT rate is 30%. However, financial institutions (insurance companies and banks) are subject to a 37% CIT. Taxable income is the difference between total revenues and expenses incurred for business needs. Calculation of taxable income is based on financial statements prepared in accordance with Moroccan accounting principles as adjusted in accordance with provisions of Moroccan Tax Code.

Corporate income tax “CIT” ‒

Companies must pay four CIT installments for the fiscal year in progress corresponding to 25% of CIT amount for previous fiscal year, paid at the initiative of the company to the tax authorities at the end of each trimester. Within three months following close of fiscal year, companies must submit their tax declarations to the tax authorities and pay corresponding CIT taking into account CIT installments already made.

Witholding tax “WHT” ‒

A WHT applies to the following amounts when paid by a Moroccan company to a nonresident entity (subject to double tax treaties where applicable):   

‒

15% on dividends 20% on interest (10% when paid to a non-resident entity) 10% on revenues paid for any service provided by a non resident entity to a Moroccan company

Payment of WHT is effected by the company making the payment to the beneficiary within one month following the month payment has been made.

Personal income tax “PIT” ‒

Moroccan tax residents are taxable in Morocco on their worldwide income and non residents are taxable in Morocco only on their Moroccan source income (subject to tax treaties provisions if applicable). Income is treated according to its nature as follows:     

professional income agricultural income income from employment and similar income estate income investment income

Personal income tax “PIT” ‒ ‒ ‒

PIT is calculated at progressive rates. Marginal rate is 38% starting from MAD 180,001 per year (approx. EUR 16,000). However, certain sources of income are subject to specific tax rates (e.g. tax on capital gains on share transfers). Personal income tax is paid yearly based on tax declaration submitted by tax payer. However, personal taxes on salary are withheld by the Moroccan employer on a monthly basis.

Professional tax “PT” ‒ ‒

‒ ‒

PT is due on any professional activity carried out in Morocco. Rate varies between 10% and 30% depending on nature of activity. PT is established on normal and current annual rental value of stores, shops, factories, workshops, warehouses, building sites, storage and all places and sites used for taxable professional activities. For fixed assets owned by the company, minimum rental value is 3% of gross book value. Total value of taxable fixed assets is capped at 50 million dirham (approximately 4.5 million euros). PT is due on annual basis upon receipt of a payment request issued by local tax administration.

Solidarity contribution ‒

Solidarity contribution for legal entities   

Companies which do not benefit from a permanent CIT exemption are required to pay the solidarity contribution. The contribution applies to companies making annual profits equal to at least MAD 15 million (approximately 13,5 million euros). Such contribution is calculated at proportional rates from 0.5% to 2% and must be paid simultaneously with end-of-year CIT payment and declaration.

Solidarity contribution ‒

Solidarity contribution for natural persons 



Solidarity contribution applies to natural persons on their business, salary and real estate income where such income exceeds 360 000 dirham per year (approximately 32 000 euros). Contribution on salary is calculated on gross salary reduced by personal income tax, mandatory levy for pension plans and social security costs. Such contribution is calculated according to proportional rates from 2 to 6%. Employers are required to withhold the solidarity contribution on a monthly basis simultaneously with personal income tax withholding.

Overview of the indirect taxes 31

Value added tax ‒

‒

VAT applies to all industrial, commercial, and handicraft activities performed in Morocco and on import transactions. The standard rate is 20%. However, lower rates of 7%, 10% and 14% apply for certain specific transactions and activities. The MTC provides two systems for determining taxable basis for VAT:  

cash collection system (standard regime): output VAT is declared the month when the related invoice is actually paid to the company; debits system (optional regime): output VAT is declared and paid when invoice is issued.

Value added tax ‒ ‒

VAT on sales (output VAT) is computed on VAT paid on expenses (input VAT). During first year of activity, VAT returns and payment must be made on a quarterly basis. Beginning in the second year, where annual turnover exceeds MAD 1 million, VAT returns and payment must be carried out on a monthly basis.

Value added tax â&#x20AC;&#x2019;

According to the MTC, any services used in Morocco are subject to Moroccan VAT. Hence, nonresident service providers are subject to Moroccan VAT when the services they provide are used in Morocco. In such case, under article 115 of the MTC, the non resident services provider must appoint a tax representative to carry out Moroccan VAT obligation (declaration and payment). In the event of failure to appoint a representative, the Moroccan customer remains liable for payment of the VAT as well as for any applicable penalty. As from January 1st, 2014, a reverse charge mechanism has been introduced into the MTC allowing Moroccan customers to declare and pay VAT collected by their foreign customers on their own VAT returns).

ÂŠ 2014 Baker & McKenzie LLP

Import duties â&#x20AC;&#x2019;

Import of goods is in principle not subject to restrictions. However specific goods may be subject either to license, control or conformity to standards certification.

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Import duties ‒

Importation in Morocco is subject to the following taxes: 



Customs duties are calculated ad valorem based on declared transaction value, i.e. price actually paid or to be paid increased by costs. Customs tariffs are set in accordance with the Harmonized Customs System. VAT applies on the import of equipment at the standard rate of 20% (reduced rates exist for specific products) with payment handled in Morocco by the custom authorities and paid upon clearance of goods through customs. The tax is due on declared value of the goods increased by the amount of the applicable customs duties and parafiscal tax. 0.25% para fiscal tax is due ad valorem at the clearance of the goods by the customs authorities.

Registration duties ‒

Registration duties are due on all written deeds relating to:   

‒

property transfer of real estate at 6% shares or certain property interests at 3% Paid in capital for establishment of companies and capital increase at 1%

Basis for registration duties is the transfer price or value.

III. Incentives

Different incentives mechanisms available for investors 39

Investment agreements with the Moroccan government ‒

Specific financial and customs benefits are offered to investors through investment agreements entered into with the Government, including:  



subsidies for certain expenditures through the Investment Promotion Fund for investments exceeding MAD 200 million subsidies for expenditures in defined industrial sectors and new technology development through the Hassan II Fund for Economic and Social Development for investments exceeding 10 million dirhams and 5 million dirhams for capital equipment (excluding taxes and import duties) Exemption of import duties on capital equipment and goods for a 36month period

International and bilateral investment treaties ‒

Conclusion of international treaties relating to investment guarantees and protection providing for: 



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Treatment of qualified investments (each contracting party undertakes to ensure fair and equitable treatment of investments in its territory by nationals or companies of the other contracting party) Settlement of disputes with referral to internal courts or to international arbitration, depending on investor’s choice

Conclusion of 36 tax treaties.

Export free zones ‒

Export free zones have been introduced into the Moroccan business environment by Law 19-94 related to export processing zones. Pursuant to article 3 of the Law, any export activities of an industrial or commercial nature as well as related services may be carried out from an export free zone. These areas offer many advantages, including: 

Tax incentives Export activities carried out from export free zones benefit from the following exemptions: 

exemption from CIT for first five years of activity followed by a reduced tax rate of 8.75% for following 20 years (under the ordinary regime, export activities benefit from an exemption of CIT for first five years of activities followed by reduced rate of 17,5%);

Export free zones



permanent VAT exemption for sale of goods and services;



exemption from registration duties applicable to paid-in share capital and capital increases as well as acquisition of land needed to carry out the investment.

Customs duty regime 



Under the Moroccan customs code, export free zones are considered as offshore zones. Hence, goods entering and exiting from export free zones are not subject to customs regulation.

Foreign exchange regime 

According to article 17 of Law 19-94, commercial and industrial activities as well as related services are not subject to foreign exchange regulations.

Focus 44

Casablanca Finance City – – –

Financial institutions –

Financial and non financial decision centers supervising and coordinating activities undertaken in at least one foreign country Regional headquarters of multinationals

– –

Casablanca Finace City

Professional Services –

Investment banking Corporate banking Asset management/Private equity Private banking Insurance/Reinsurance

–

Specialised financial services (financial rating, research, market data provision, etc.) Strategic, legal, financial and tax consulting services, audit, HR services 45 Financial offshoring

Morocco is the most credible candidate to act as a hub for GNWA

ÂŠ 2014 Baker & McKenzie LLP

Direct connections from Casablanca to 28 destinations in Africa Connection to 25 countries…

Kinshassa Lagos Cairo Libreville Lome Luanda Malabo

and 28 cities …

Monrovia Niamey Nouakchott Oran Tripoli Tunis Yaoundé 48

Casablanca Finance City Tax incentives ‒

For financial institutions and professional services, the CFC tax rates for foreign sales and net chargeable gain from foreign sources are:  

‒

First 5 years: No tax After 5 years: 8.75% (in lieu of 17.5% for export activities and 30% for onshore operations)

For regional & international headquarters, the CFC tax is the greater of:  

0.5% of operating expenses 10% of adjusted profit before tax

Casablanca Finance City Foreign Exchange facilities ‒ ‒ ‒

Complete freedom to open foreign currency accounts and convertible MAD accounts Complete freedom to manage funds received from abroad Simplification of procedures for transferring abroad amounts received for technical assistance and services rendered by parent and/or affiliated companies

Casablanca Finance City Doing business facilities â&#x20AC;&#x2019;

Simplification of procedures for incorporating a company (48 hours), hiring non-resident employees and obtaining work permits or obtaining authorization for opening financial institutions.

ÂŠ 2014 Baker & McKenzie LLP

Thank you!

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