In brief: Rejection of accounts under Article 213 of the General Tax Code (CGI) gives Morocco’s DGI discretionary power to reassess tax bases when accounting records contain serious irregularities. It reverses the burden of proof onto the taxpayer. Compliance with the CGNC and proper record-keeping is essential to avoid this outcome.
The rejection of accounts by the tax authorities during a tax audit can have serious consequences. Indeed, under the provisions of Article 213 of the General Tax Code:
“When the accounting entries for a fiscal year or a tax period contain serious irregularities likely to:
- call into question the probative value of the accounts,
- resulting in an understatement of turnover or taxable income,
- or preventing the accounts presented from justifying the declared results,
the tax authorities may determine the tax base using the information at their disposal.”
This article clearly establishes that the rejection of accounts gives the tax authorities a discretionary power over the tax base. Furthermore, Circular 717 specifies that this situation reverses the burden of proof. Indeed, it falls upon the taxpayer to prove the inaccuracy of the administration’s assessments.
In practice, the rejection of accounts almost systematically leads to an upward adjustment of the declared turnover. In some cases, it leads to a reassessment of the declared net margin.
Grounds for rejection of accounts
Under Article 145 of the General Tax Code (CGI), taxpayers must maintain proper accounts in accordance with Moroccan regulations. It is this regularity that gives the tax authorities the ability to carry out the audits provided for in the General Tax Code.
What constitutes proper accounts?
Proper accounts are those that the taxpayer maintains in compliance with the provisions of:
- Law 9-88 on the accounting obligations of merchants;
- Law 15-95 forming the Commercial Code;
- CGNC: the General Code of Accounting Standards;
- Articles 145, 146, and 147 of the General Tax Code (CGI).
A business (and more generally a merchant) must comply with both substantive and formal rules.
Substantive rules to avoid rejection of accounts
Maintaining accounting books
-
First, record all accounting entries for transactions affecting the company’s assets;
-
Second, verify the existence and value of the active and passive elements of the assets. This verification must be carried out through physical inventory at least once per fiscal year;
-
Third, prepare sincere annual financial statements reflecting, at the close of each fiscal year:
the assets,
-
the financial position,
-
and the operating results.
-
Fourth, ensure that the financial statements reflect the accounting entries in the:
-
and inventory book.
The financial statements that a business must produce include:
- First, the balance sheet;
- Second, the income statement (CPC);
- Third, the statement of management balances (ESG);
- Fourth, the cash flow statement (TF);
- Finally, the supplementary information statement (ETIC).
The tax authorities may reject the accounts if any of these books are missing or insufficient. They may also reject the accounts if the accounting books are not properly maintained.
Reliability of accounting books
When the declared figures are insufficient, the tax authorities may proceed with a rejection of the company’s accounts.
This insufficiency may be established by the authorities through various means, including:
-
Cross-referencing the declared turnover with deductions claimed by clients;
-
Internal reconstruction of turnover through:
quantitative and/or material audits;
-
use of manufacturing constants and parameters.
When the tax authorities challenge the reliability of the books, they may reject the accounts.
Formal rules to avoid rejection of accounts
Accounting rules
In terms of accounting entries, businesses must:
-
First, produce a journal of accounting entries. Indeed, the journal allows entries to be recorded:
chronologically and in aggregate,
-
day by day,
-
in compliance with accrual accounting principles.
-
Second, produce a general trial balance and a subsidiary trial balance. Indeed:
-
On one hand, the general trial balance records receivables and payables in aggregate at the close of the fiscal year;
-
On the other hand, the subsidiary trial balance provides a detailed list showing the identity of clients and suppliers and the amounts of their debts;
-
Third, produce a general ledger of entries. Indeed, the general ledger presents the detail by chart of accounts that justifies the balances shown in the general and subsidiary trial balances;
-
Finally, the business must have all supporting accounting documents for the entries, namely:
-
Proper supplier invoices for purchases;
-
Cash slips and vouchers for cash expenses;
-
Copies of cheques and transfer orders;
-
Bank statements and bank reconciliation statements;
-
Sales invoices issued in a continuous sequence and in chronological order
-
…
Legal books
In terms of form, businesses must also present to the Tax Inspector:
- An accounting procedures manual describing the accounting organization of their business. This is mandatory for any business with turnover exceeding 10 million dirhams;
- The inventory book. This is a book that must be numbered and initialed by the judge of the competent court before use. Indeed, this document must contain an estimated and descriptive statement of the active and passive elements of the business;
- Special payroll book. Mandatory under Article 80 of the General Tax Code, this book summarizes the totals of payroll records. This requirement also arises from Article 371 of Law No. 65-99 on the Labour Code. The business may request an exemption from maintaining a manual register from the labour inspector if it keeps a computerized book.
Failure to comply with formal rules, or the absence of any book required by law, may constitute grounds justifying the rejection of accounts by the tax authorities.
Consequences of rejection of accounts
When the tax authorities reject the accounts, the provisions of Article 213 apply. This gives the administration a discretionary power.
The tax authorities may then establish taxation on bases different from those declared by the taxpayer.
This right arises, according to the provisions of Article 213 and Circular 717, in the following cases:
- Non-compliant accounts: failure to present accounts maintained in accordance with legal provisions (substantive and formal);
- Missing inventories: absence of the inventories required by the same article;
- Concealment: purchases or sales hidden from the tax authorities;
- Repeated errors: serious and repeated errors, omissions, or inaccuracies in the recording of transactions;
- Missing documentation: absence of supporting documents depriving the accounts of all probative value;
- Unrecorded transactions: failure to record transactions carried out by the taxpayer;
- Fictitious entries: recording of fictitious transactions.
The rejection of accounts, when established by a tax audit, leads to a reversal of the burden of proof.
Indeed, when the accounts contain serious irregularities, the burden of proof falls upon the taxpayer.
Conclusion
The rejection of accounts is a powerful tool available to the tax authorities in the context of a tax audit.
It is the responsibility of the business to ensure that no substantive or formal grounds could justify this procedure.
We strongly recommend testing your accounts beforehand through a tax audit.
Frequently Asked Questions
What is the rejection of accounts in Moroccan tax law?
The rejection of accounts occurs when the tax authorities determine that a company’s accounting records contain serious irregularities that undermine their probative value. Under Article 213 of the General Tax Code, this gives the administration discretionary power to determine the tax base using information at its disposal, and reverses the burden of proof onto the taxpayer.
What are the most common grounds for rejection of accounts?
Common grounds include the absence of mandatory accounting books (journal, general ledger, inventory book), failure to present proper financial statements, concealment of purchases or sales, serious and repeated recording errors, absence of supporting documents, and recording of fictitious transactions.
How can a company avoid having its accounts rejected?
Companies must maintain proper accounts in compliance with Accounting Law 9-88, the General Code of Accounting Standards (CGNC), and Articles 145-147 of the General Tax Code. This includes keeping all mandatory books, ensuring chronological and complete recording of transactions, retaining all supporting documents, and conducting at least one physical inventory per fiscal year.
READ ALSO
Provisions of Article 213 of the General Tax Code
