In brief: The deficit explanatory statement is a mandatory document that Moroccan companies must file with the DGI when declaring a nil or deficit tax result. Failure to submit it can result in a 2,000 MAD fine and increased risk of a tax audit.
Deficit Explanatory Statement - A Tax Obligation in Morocco
The deficit explanatory statement is a mandatory tax document that every company subject to corporate income tax (IS) in Morocco must file when declaring a nil or deficit tax result. In effect since 2013, this obligation aims to strengthen tax transparency and enable the General Tax Directorate (DGI) to understand the economic reasons that led the company to report a deficit.
For business owners and chartered accountants in Morocco, mastering this obligation is essential to avoid penalties and reduce the risk of a tax audit.
Legal Basis: Article 20 of the General Tax Code
The deficit explanatory statement finds its legal basis in Article 20 (2026 version) of the General Tax Code. This article states:
“Companies are required to attach to any nil or deficit tax return an explanatory statement of the origin of the deficit or nil result declared, prepared on or based on a standard form provided by the tax administration and signed by the legal representative of the company concerned, under penalty of the application of the provisions of Article 198 bis below”.
This statement must therefore be attached to the annual tax returns. See our article on year-end tax returns.
Furthermore, this declaration, introduced from January 1, 2013, must be filed electronically through the DGI’s SIMPL platform.
When Must the Deficit Explanatory Statement Be Filed?
The deficit explanatory statement must be submitted at the same time as the annual corporate tax return (tax package). For companies whose fiscal year coincides with the calendar year, the filing deadline is March 31 of the following year. For staggered fiscal years, the filing must take place within three months of the close of the fiscal year.
This obligation applies not only to companies reporting a deficit but also to those declaring a nil result. The DGI considers a nil result just as suspect as a deficit and requires an explanation.
What Are the Deficit Reasons Covered by This Statement?
The official deficit explanatory statement template, provided by the tax administration, covers several categories of explanations:
- Sales at a loss: the company must specify the reason for sales at a loss in a free-text comment field. This may include the liquidation of obsolete inventory or the need to enter a new market.
- Price reductions to clear inventory: this situation is common in highly seasonal sectors or commercial activities dealing with unsold goods.
- Insufficient or declining sales volume of goods, products, and services due to:
- Start-up phase
- Major investment
- Industry crisis
- Increased competition
- Temporary cessation of activity
- Increased purchase prices of goods or raw materials, squeezing the company’s margins.
- Maintaining staff despite a decline in business activity, reflecting a social choice by the company.
- Other reasons:
- Provisions: specify the event that led to the recognition of provisions
- Inventory shortage from physical stock count
- Loss on disposal of fixed assets
In addition, the statement also includes a free-text field under the heading “Other - please specify,” which allows the company to detail any particular situation not covered by the predefined categories.
Common Legitimate Reasons for a Tax Deficit
Certain reasons for a deficit are perfectly understandable and accepted by the tax administration. Among the most frequent causes:
- Start-up phase: a newly created company often invests heavily in its early years (fit-out, recruitment, marketing) before generating sufficient revenue.
- Major investments: the acquisition of equipment, premises, or the development of new products can temporarily weigh on results, particularly through depreciation charges.
- Unfavourable economic conditions: a sectoral or general recession can explain a decline in turnover.
- Internal restructuring: costs related to a reorganization, merger, or digital transformation can generate a temporary deficit.
Red Flags That Trigger a Tax Audit
The DGI closely monitors companies that report recurring deficits. Several situations constitute red flags:
- Deficit for more than two consecutive fiscal years: a chronic deficit is one of the primary criteria for selecting a company for tax audit. The administration considers that a company cannot sustainably operate at a loss without suspicious motivation.
- Inconsistency between the directors’ lifestyle and the reported deficit: high personal expenditure while the company is in deficit draws attention.
- Stagnant turnover with constantly increasing expenses: this pattern may suggest overcharging of expenses or fictitious charges.
- Lack of supporting evidence: a vague or insufficiently documented explanatory statement may prompt the DGI to deepen its examination.
Deficit Explanatory Statement - Penalties
Article 198 bis of the General Tax Code provides a two-step penalty procedure:
First, when the taxpayer does not submit the deficit or nil result explanatory statement provided for in Articles 20-IV and 82-IV, they are invited by letter, in the forms provided for in Article 219, to file said statement within fifteen (15) days following the date of receipt of said letter.
Second, if the statement is not submitted within the specified deadline, the tax administration informs the taxpayer by letter of the application of a fine of two thousand (2,000) dirhams. This fine is issued by way of tax roll.
Beyond this fine, failing to submit the deficit explanatory statement can have more serious consequences. The tax administration may consider the absence of an explanation as an indication of non-compliance and initiate an accounting audit procedure. In extreme cases, the DGI may proceed with a reassessment of the declared result and reconstruct a taxable profit.
The Link with Reportable Deficits (Article 12 of the CGI)
The deficit explanatory statement is closely linked to the reportable deficits regime provided for in Article 12 of the General Tax Code. This regime allows a company to carry forward its tax deficit against profits of subsequent fiscal years, within a limit of four fiscal years following the deficit year.
However, there is an important exception: the portion of the deficit corresponding to regularly recorded depreciation can be carried forward indefinitely. This distinction is crucial for companies that have made significant investments.
To benefit from the deficit carry-forward, the company must have correctly completed and filed its deficit explanatory statement. A failure to file could weaken the company’s position in the event of an audit and call into question the right to carry forward the deficit.
How to Properly Draft the Deficit Explanatory Statement
To maximize the credibility of your explanatory statement and reduce the risk of a tax audit, here are the recommended best practices:
- Be precise and factual: avoid vague wording. Quantify the causes of the deficit (for example: “25% decline in turnover due to the loss of client X, which represented 30% of revenue”).
- Attach supporting documents: financing agreements, expert reports, minutes of general meetings, investment decisions.
- Link the deficit to your strategy: demonstrate that the deficit is part of a coherent economic logic (development plan, commercial repositioning).
- Anticipate the DGI’s questions: put yourself in the tax auditor’s shoes and provide the elements that address probable concerns.
- Engage a chartered accountant: a professional will know how to structure the explanatory statement in a way that meets the administration’s expectations while protecting the company’s interests.
The consultants at Upsilon Consulting, led by Salaheddine Yatim, Chartered Accountant and member of the OEC, are at your disposal to assist you in drafting your deficit explanatory statement and for any other tax consultation.
Frequently Asked Questions
What is a deficit explanatory statement in Morocco?
A deficit explanatory statement (note explicative de l’origine du déficit) is a document that Moroccan companies must submit to the DGI when they report a tax loss. It explains the reasons for the deficit and provides supporting evidence to justify the company’s financial situation during the fiscal year.
When is a deficit explanatory statement required?
The statement is required whenever a company files a corporate tax return showing a deficit. It must accompany the annual tax filing submitted to the DGI. Failure to provide a clear and well-documented explanation significantly increases the risk of a tax audit targeting the company.
What should a deficit explanatory statement include?
The statement should include a quantified analysis of the causes of the deficit (such as revenue decline, exceptional expenses, or investment costs), supporting documents (contracts, invoices, board minutes), a link between the deficit and the company’s business strategy, and a realistic forecast for returning to profitability.
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