In brief: Transfer pricing in Morocco requires companies with cross-border related-party transactions to maintain documentation (master file + local file) justifying arm’s length pricing. The obligation applies to entities with turnover or gross assets of MAD 50 million or more.
Transfer pricing in Morocco is one of the most important tax issues to manage within a group.
Every company (group) operating in multiple countries with related parties is affected by this issue.
Transfer pricing is also a central concern for tax authorities. Multinational agreements signed by various countries aim to address this issue, notably the agreements under the OECD framework.
What Is Transfer Pricing?
In Morocco, as elsewhere, transfer pricing in tax terminology refers to the price that a group entity charges for its sales or services to a company within the same group located in another country.
For example, when a company headquartered in France delivers goods to its Moroccan subsidiary, it might want to reduce its prices. Obviously, the interest here could be to enable a subsidiary to generate higher profits due to a favourable tax regime. This interest could lie in the fact that the effective Corporate Tax rate in Morocco, compared to France, is more advantageous.
Imagine an IT company that has outsourced part of its production to Morocco. Companies operating in service offshoring benefit in Morocco from a five-year exemption followed by the standard rate for Corporate Tax in Morocco.
It is easy to understand that by having its Moroccan subsidiary charge an inflated hourly rate, the company can deduct from its taxable income in France an equivalent amount per hour worked. If that hour is tax-exempt in Morocco, the group’s overall tax burden is reduced.
Through this operation, the group achieves a tax saving for every hour. The Corporate Tax rate in France ranges between 28% and 31%.
Transfer pricing can also work in the opposite direction. A French company that manufactures machinery, for example, might want to lower its selling prices for the same reasons.
Transfer Pricing Regulations in Morocco
What Is the Transfer Pricing Documentation Requirement in Morocco?
The General Tax Code provides in Article 210 as follows:
”(…) Companies having direct or indirect dependency relationships with companies located outside Morocco and with which they carry out transactions must make available to the tax authorities documentation justifying their transfer pricing policy, as referred to in Article 214-III-A below, by the start date of the accounting audit (…)”.
What Must the Transfer Pricing Documentation Contain in Morocco?
The documentation must include, according to Article 214, the following elements:
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A master file containing information relating to:
The overall activities of related companies,
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The global transfer pricing policy applied,
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The worldwide allocation of profits and activities.
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and a local file containing specific information on transactions carried out by the audited company with companies having the aforementioned dependency relationships. According to the same article, this obligation applies only to companies with turnover excluding VAT OR total gross assets equal to or greater than 50 million dirhams.
What Is the Procedure for an Advance Pricing Agreement on Transfer Pricing in Morocco?
In Morocco, Article 234 bis of the General Tax Code has, since 2015, introduced the possibility of entering into an advance pricing agreement with the Moroccan tax authorities.
This article stipulates that “companies having directly or indirectly dependency relationships with companies located outside Morocco may request the tax authorities to conclude an advance agreement on the pricing method for the transactions referred to in Article 214-III above for a period not exceeding four (4) fiscal years. The terms of conclusion of said agreement are set by regulation”.
The Procedure for an Advance Pricing Agreement in Morocco
The company must submit to the tax authorities a request for a transfer pricing agreement. Before this request, the company may request preliminary meetings. The purpose of these meetings is to discuss the conditions under which the agreement may be granted.
Following these meetings (optional), the company must submit a request summarising:
- First, the associated companies with which transactions are carried out;
- Second, the nature of the transactions covered by the agreement;
- Third, the fiscal years covered by the agreement;
- Finally, the methods selected to justify the transfer price and their calculation assumptions.
The basic principles in the circular are those internationally recognised (notably in OECD standards). Below, we outline the international standards on transfer pricing.
How to Justify Transfer Pricing to Tax Authorities?
Multinationals must develop a transfer pricing policy based on the arm’s length principle. A transfer price is fair when it corresponds to the amount that would have been charged to an independent company:
- In an arm’s length situation
- Under similar contractual conditions
Therefore, any price applied may be challenged by tax authorities if they consider it deviates from this principle.
However, in practice, despite the simplicity of the principle, implementing this rule is not straightforward. It requires an analysis structured around three levels.
Functional Analysis of the Group
Functional analysis is used to identify the subsidiary’s role within the group. It involves listing in detail all the functions performed by the subsidiary within the group structure. This method takes into account:
- The share of “work” performed by the subsidiary (commercial, production, marketing, after-sales service, organisation, administration, logistics, etc.);
- The risks the subsidiary bears externally: it is widely accepted in the market that the more risks a company bears, the greater its share of the margin should be;
- The tangible and intangible assets it uses: the more a subsidiary is committed in terms of resources and investments, the more justified it is for it to receive a larger share of the margin.
If we imagine an extreme example where a company in Morocco has only one employee:
- who manages the relationship with an external logistics company
- while the parent company designs, tests, produces, and promotes the product
It would be difficult to argue, at least before the jurisdiction where the parent company is located, that the subsidiary should receive a share of profit greater than or even equal to that of the parent company.
Once the functional analysis is completed, the next step is to choose a transfer pricing method.
The Main Commonly Accepted Methods
The choice of transfer pricing method will determine a price that meets the “arm’s length” rule.
Therefore, it is essential to make an appropriate choice when determining transfer prices. The chosen method must take into account the specificities of each company based on the information collected in the first phase: the functional analysis.
Moreover, no single method can effectively set the “arm’s length price” for all transactions. Each situation is unique.
In its practical guide, the OECD proposed several methods for determining transfer prices. There are five (categorised into two groups):
- Traditional methods for determining transfer prices: Cost Plus, CUP, and Resale Price
- Transactional methods for determining transfer prices: TNMM and Profit Split
The company must choose from these methods the one that is most appropriate to the nature of its transactions. Obviously, none of these methods is perfect and each has its advantages and disadvantages. The company must then prepare transfer pricing documentation explaining the criteria it used in making its choice.
Traditional Methods for Determining Transfer Prices
Cost Plus Method
Also known as the “cost plus margin method”. This method involves first determining the cost of goods sold for the selling company. Then, a “fair margin” is applied. This fair margin is determined by comparison with the margins applied between two independent companies in the same market.
The transfer price thus equals the sum of the cost and the margin. It is clear that implementing this method first requires the company to be able to effectively determine its costs. A cost accounting system must therefore be put in place.
CUP Method
Also known as the “comparable uncontrolled price method”. In this case, rather than comparing margins, the approach involves directly comparing the selling price applied. The transfer price corresponds to the price that two independent companies apply under competitive conditions. In practice, it is difficult to find perfect comparables. Adjustments can be made when this can be done based on reliable criteria.
Resale Price Method
Also known as “Resale minus”. It involves applying a gross margin discount to the final selling price charged by the buyer. This method is based on the selling price to the end customer. The question is what “fair margin” competitors would apply when purchasing from an independent supplier. This margin is considered fair in the transaction carried out within the group.
Conclusion on Traditional Methods
In conclusion to this section, it is clear that the above methods are limited to gross margin analysis. They do not take into account structural costs to arrive at the “Bottom Line”. Therefore, the next two methods help address this difficulty.
Transactional Methods for Determining Transfer Prices
TNMM Method
Also known as the “transactional net margin method”. As with costs, the focus is on the margin achieved by each company in the group. However, the analysis concerns the final net margin achieved on the transaction in question. This margin, as in the other methods, must be comparable to the margins achieved by similar companies under conditions of pure and perfect competition. The reliability of this margin depends largely on a sound functional analysis.
It involves comparing the net margin that the group achieves on a transaction with the net margins achieved by an independent company (a comparable). There is no comparison of prices but rather of net margin levels. This method is complex to implement and its reliability can be debatable. However, it remains widely used by companies and tax authorities.
Profit Split Method
Also called the “profit sharing method”. It involves determining on a consolidated basis the overall margin achieved by the group on a transaction. Then, this margin is allocated among the parties involved based on each one’s contribution. The allocation must take into account the results of the functional analysis.
Finally, Confirming the Model Through Benchmarks
Benchmarking involves building a sample of comparables to support the transfer pricing policy. It should be noted that the group must select comparables carefully. It is not a straightforward task.
The group must ensure that the selected comparables carry out transactions comparable to the transaction being analysed. In addition, the sample elements must operate in a similar competitive environment. When these conditions cannot be met, adjustments must be made in a justifiable manner.
Not all competitors are comparable, and vice versa.
Comparables can be internal or external. An internal comparable may be a group company or a contract with another client. An external comparable typically corresponds to an independent company.
The next step is to compare the results obtained through the chosen method with the results of the sample.
The analysis aims to prove that the price the group applies is effectively comparable to what is practised in arm’s length situations.
Upsilon Consulting’s Expertise
Upsilon Consulting can support your subsidiary in Morocco in the following areas:
- Assistance with preparing transfer pricing documentation: We can help you draft documentation and carry out the various preparatory work (cost calculations, benchmarking, etc.)
- Assistance with establishing an advance pricing agreement: including preparing the file and negotiating the approval procedures
- Assistance during tax audits: Our assistance can cover the preparatory phases, the conduct of the audit, and the preparation of responses
To contact us: Contact form.
Frequently Asked Questions
What methods are accepted for transfer pricing in Morocco?
Morocco accepts the five OECD-recommended methods: the Comparable Uncontrolled Price method, the Resale Price method, the Cost Plus method, the Transactional Net Margin Method, and the Profit Split method. The choice of method must be justified in the transfer pricing documentation.
Is it possible to obtain an advance pricing agreement in Morocco?
Yes, since the 2015 Finance Law, Moroccan tax legislation allows companies to request advance pricing agreements from the tax administration. This procedure provides legal certainty on the transfer pricing policy for a defined period, typically three to five years.
What triggers a transfer pricing audit in Morocco?
The Moroccan tax authorities typically target companies with significant intercompany transactions, recurring losses despite belonging to profitable groups, or inconsistent profit margins compared to industry benchmarks. The existence of transactions with entities in low-tax jurisdictions also increases the likelihood of scrutiny.
How does transfer pricing interact with Casablanca Finance City status?
Companies benefiting from Casablanca Finance City (CFC) status enjoy a preferential corporate tax rate, which makes their transfer pricing practices particularly scrutinised by the Moroccan tax authorities. Transactions between CFC entities and related parties must strictly comply with the arm’s length principle, and the tax administration pays close attention to ensure that profits are not artificially shifted to take advantage of the reduced tax rate. Proper transfer pricing documentation is therefore essential for CFC-status companies to substantiate their intercompany pricing and mitigate the risk of adjustments during tax audits.
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