In brief: The VAT prorata deduction is a mechanism under Articles 104-105 of the General Tax Code that limits input VAT recovery for businesses with mixed taxable and exempt activities. The prorata percentage is calculated annually and must be filed before March 1. Learn about the full VAT scope of application in Morocco.
The VAT prorata deduction means that certain taxable persons may only deduct a fraction of the VAT charged on their purchases. This tax mechanism, governed by Articles 104 and 105 of the Moroccan General Tax Code (CGI), primarily applies to businesses carrying out mixed activities in Morocco.
Indeed, VAT operates on the principle of fractional payment. Each participant in the economic chain remits only the difference between the VAT collected on its sales and the VAT paid on its purchases. The prorata deduction limits this right for taxpayers whose turnover is partially outside the scope of VAT.
Learn more about Value Added Tax in Morocco (VAT).
What Is the VAT Prorata Deduction?
The VAT prorata deduction is a coefficient that determines the proportion of input VAT a partially taxable person can recover on their expenses. It is a percentage applied to the VAT borne upstream, reflecting the share of activity subject to VAT relative to the overall activity of the business.
This deduction coefficient is essential for companies that simultaneously carry out transactions entitling them to deduction and transactions that do not. Without this mechanism, these businesses could recover VAT on expenses used to generate non-taxable revenue, which would violate the principle of VAT neutrality.
What Are the VAT Deduction Rules?
The deduction or refund of VAT in Morocco may be made up to:
- On one hand, the VAT whose payment on importation can be documented for direct imports;
- On the other hand, the tax paid as shown on purchase invoices or statements for processing, work and services carried out domestically by entities liable for VAT.
However, in certain cases VAT deduction can only be partial. This is particularly the case where a VAT prorata deduction must be applied.
The Prorata Deduction: Who Is Concerned?
The prorata deduction applies to taxable persons who simultaneously carry out taxable transactions and transactions that are:
- Either outside the scope of VAT;
- Or exempt under the provisions of Article 91 of the General Tax Code.
Since these operators do not collect output VAT on part of their activities and do not have the right to a refund, they lose part of the right to deduct the VAT charged on their purchases.
Note: Certain taxpayers, although exempt, have the full right to deduction (case of transactions listed in Article 92 of the General Tax Code, notably exports).
Sectors Most Affected by the VAT Prorata
Certain economic sectors are particularly impacted by the VAT prorata deduction in Morocco:
- Banks and financial institutions: certain operations (interest on savings deposits, student loans) are VAT-exempt, while interest on loans and commissions are taxable at 10%;
- Insurance companies: insurance premiums fall outside the scope of VAT, but certain ancillary services are subject to it;
- Real estate developers: social housing sales may be exempt while other real estate transactions are taxable;
- Private educational institutions: tuition fees are exempt, whereas other services may be taxable;
- Clinics and healthcare facilities: medical procedures are exempt, but equipment or space rentals may be subject to VAT.
Legal Basis of the Prorata Deduction (Articles 104-105 CGI)
The legal foundation of the VAT prorata deduction lies in Articles 104 and 105 of the Moroccan General Tax Code. Article 104 defines the principle of the right to deduction and its limits, while Article 105 specifies how the deduction percentage is calculated.
These provisions state that the prorata deduction is determined based on transactions carried out during the previous calendar year. For new businesses, a provisional prorata is established based on operating forecasts, then regularized at the close of the first fiscal year.
How Is the Deduction Percentage (Prorata) Calculated?
The amount of deductible or refundable tax is subject to a VAT prorata deduction. The prorata is a percentage that the business must calculate as a fraction:
Prorata formula:
Prorata = (Taxable revenue + Revenue exempt with right to deduction + Export revenue) / (Total revenue), rounded up to the nearest whole number.
More specifically:
- In the numerator: the amount of turnover subject to VAT for taxable transactions, including those carried out under the exemption or suspension provided for in Articles 92 or 94 of the CGI;
- In the denominator: the amount of turnover shown in the numerator, plus the amount of turnover from transactions exempt without the right to deduct or outside the scope of the tax.
The business must apply the prorata percentage to the deductible VAT it pays to suppliers. The result of this multiplication determines the effectively deductible VAT.
Types of Expenses and VAT Treatment
To correctly apply the prorata deduction, three categories of expenses must be distinguished:
- Fully deductible expenses: costs exclusively allocated to the taxable activity (raw materials for taxed products, for example) — VAT is 100% recoverable
- Fully non-deductible expenses: costs exclusively allocated to the exempt or out-of-scope activity — VAT is not recoverable
- Mixed expenses: costs common to both types of activity (office rent, telephone, electricity, office supplies) — the prorata deduction applies to these expenses
Practical Application of the Prorata Principle
Under the above provisions, two types of situations can be distinguished.
Taxpayers Fully Subject to VAT (100%)
These are taxpayers whose activity is entirely taxable. In this case, the VAT charged on purchases is fully deductible.
It should be noted that this full right to deduction also applies to taxpayers exempt with the right to deduct, such as exporters (Article 92 of the CGI).
In summary, the amount of deduction authorized for fully subject taxpayers is obtained by totaling:
- all taxes charged on cost components,
- up to the amount of tax due on taxable transactions carried out during the period,
- and taking into account the exclusions provided for by law.
Partially Subject Taxpayers
Partially subject taxpayers are those who carry out taxable transactions alongside out-of-scope or exempt transactions without the right to deduct. These taxpayers must deduct VAT within the limits applied to fully subject taxpayers, after applying the prorata percentage.
Detailed VAT Prorata Calculation Example
A taxpayer makes the following sales during year N:
- MAD 7,000,000 in taxable product sales;
- MAD 1,000,000 in export sales (exempt with right to deduction, Article 92 CGI);
- MAD 2,000,000 in sales of products exempt without right to deduction (flour, for example).
The deduction percentage is calculated as follows:
- Numerator: 7,000,000 + 1,000,000 = MAD 8,000,000
- Denominator: 7,000,000 + 1,000,000 + 2,000,000 = MAD 10,000,000
- Prorata: 8,000,000 / 10,000,000 = 80%
If this taxpayer receives a telephone bill of MAD 10,000 excluding tax (MAD 2,000 of VAT at 20%), they will be entitled to a deduction of: 2,000 x 80% = MAD 1,600.
The non-deductible VAT of MAD 400 becomes an operating expense for the business.
Annual Calculation and Prorata Regularization
The prorata applied during a year is the one resulting from the annual prorata declaration that must be filed before March 1 of each year (Article 113 of the General Tax Code). This prorata is calculated based on the turnover from the previous calendar year.
Regularization When the Prorata Varies
When the VAT prorata deduction varies by more than 5 percentage points from one year to the next, the business must carry out a regularization. This rule particularly concerns fixed assets for which VAT was deducted based on a previous prorata.
For example, if the prorata drops from 80% in year N to 72% in year N+1 (a variation of 8 points, exceeding 5), regularization is mandatory.
Impact on Fixed Asset Acquisitions
For capital goods (fixed assets), the prorata deduction is particularly important. The VAT deducted at the time of acquisition is subject to a 5-year regularization period. If the prorata varies by more than 5 points during this period, the business must repay a portion of the VAT initially deducted or, conversely, may recover an additional deduction.
Regularization formula: Regularization = Initial VAT x (Initial prorata - New prorata) / 5
Common Errors in VAT Prorata Calculation
Several errors frequently occur among Moroccan businesses:
- Forgetting exports in the numerator: export turnover, although exempt, entitles the taxpayer to deduction and must appear in the numerator;
- Including fixed asset disposals: exceptional sales of capital goods should not be included in the prorata calculation;
- Failing to round up: the percentage obtained must always be rounded up to the next whole number (e.g., 73.2% becomes 74%);
- Confusing provisional and final prorata: the provisional prorata at the start of the year must be regularized as soon as the definitive prorata is known;
- Neglecting the annual declaration: failure to file the prorata declaration before March 1 exposes the business to penalties.
Declaration Requirements for the VAT Prorata
Partially subject taxpayers must comply with the following filing obligations:
- Annual prorata declaration: must be filed before March 1 of each year with the tax office to which the business is attached;
- Separate accounting records: taxable and non-taxable transactions must be clearly distinguished in the accounting records;
- Record retention: all supporting documents (invoices, revenue statements) must be kept for 10 years.
Failure to comply with these obligations may result in the tax authorities challenging the right to deduction during a tax audit.
Frequently Asked Questions
What is the VAT prorata deduction in Morocco?
The VAT prorata deduction is a mechanism that allows partially taxable businesses to determine the recoverable portion of input VAT. It applies when a business simultaneously carries out taxable and exempt or out-of-scope transactions. The prorata percentage determines what fraction of input VAT can be deducted.
How is the prorata percentage calculated?
The prorata is calculated as the ratio of taxable turnover (including exports and exempt-with-deduction operations) to total turnover. The resulting percentage is rounded up to the next whole number. For example, if the prorata calculation yields 73.2%, the applicable percentage is 74%.
When must the prorata declaration be filed in Morocco?
The annual prorata declaration must be filed before March 1 of each year with the tax office to which the business is attached. Failure to file this declaration on time may result in the tax authorities challenging the right to deduction during a tax audit.
Does the prorata apply to capital goods purchased by the business?
Capital goods purchased by a partially taxable business are indeed subject to the prorata rule. The deductible VAT on such assets is determined by applying the prorata percentage in effect at the time of acquisition. Furthermore, if the definitive prorata varies by more than five percentage points compared to the initial deduction, a regularization must be carried out, spread over five years for equipment or twenty years for real property, in accordance with Moroccan tax regulations.
Tools
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