The Ultimate Guide to Transfer Pricing in Morocco for International Businesses

By Khalil HALOUI, CEO and Co-Founder of Tax Cluster.

In 2019, Morocco joined the OCDE/G20 Inclusive Framework on the BEPS (Base Erosion and Profit Shifting) project – an international initiative aimed at combating base erosion and the shifting of profits for tax avoidance purposes. This framework enables over 140 jurisdictions, including developing countries, to collaborate on implementing BEPS actions such as improving tax transparency, strengthening transfer pricing rules, and fighting base erosion through abusive practices.

In 2021, Morocco introduced new measures under the Finance Law 2021 aimed at tightening transfer pricing rules.

It is important to note that transfer pricing applies to companies with operations in multiple countries or members of a multinational group. It refers to the price charged by one company to a related foreign entity for a good or service.

The transfer pricing policies followed by companies are primarily based on economic data but can also be influenced by tax considerations:

• Transfer pricing allows multinational enterprises (MNEs) to allocate income and expenses between their different subsidiaries. By adjusting these prices, MNEs can influence the amount of profit reported in each country, thereby optimising their overall tax burden.
• MNEs can use transfer pricing to take advantage of differences in tax rates between countries. For example, they may reduce transfer prices to shift profits to low-tax jurisdictions.

In the Moroccan context, tax authorities have indicated that new regulations require multinational enterprises to provide more detailed documentation on intercompany transactions, including country-by-country reports. This reform aims to improve transparency and prevent tax avoidance practices by ensuring that transactions between affiliated companies are conducted at market terms.

Indeed, Morocco has engaged in a series of reforms to attract foreign investment and strengthen its integration into the global economy. Clear and transparent transfer pricing rules are essential to reassure foreign investors about the predictability of Morocco’s tax framework and to avoid fiscal adjustments and disputes detrimental to stakeholders.

In this article, we will analyse the new transfer pricing rules in Morocco. We will also discuss strategies to optimise these transfer prices in order to better manage the fiscal and legal risks associated with transactions between related entities. The following points will be covered:

1. Regulatory context in Morocco
2. Methods for determining transfer prices
3. Documentation requirements
4. Compliance and business obligations
5. Strategies for optimising transfer pricing

Let’s start by examining the basics of transfer pricing in Morocco.

1. Regulatory Context in Morocco

1.1. Brief History of Transfer Pricing Rules in Morocco

Transfer pricing rules in Morocco have evolved gradually to align with international tax standards. Here is a brief history outlining the development of these rules:

• Before 2019: Morocco did not have specific transfer pricing legislation. However, tax authorities could adjust the reported results of companies if there was suspicion of manipulation of transfer prices under the “discretionary power of the administration” (Article 213 of the General Tax Code – CGI).
• 2019: Morocco introduced formal transfer pricing rules for the first time in the General Tax Code (Article 210 of the CGI), aligning them with the OCDE’s arm’s length principle. These rules aimed to regulate transactions between related companies, especially in terms of documentation and justification of transfer prices under the tax administration’s right to request information (Article 214 of the CGI).
• 2020: Morocco strengthened the legal framework on transfer pricing with the Finance Law 2020. This law introduced new requirements, such as the obligation to provide detailed documentation (local file and master file) for audited companies (Article 214 of the CGI).
• 2021: The regulatory framework continued to evolve with the Finance Law 2021, which imposed more extensive documentation obligations for companies exceeding a revenue threshold of 50 million dirhams (excluding VAT) and increased penalties for non-compliance, including a fine of 0.5% of the amount of transactions concerned by missing documentation (Article 185-IV of the CGI).

These changes are part of Morocco’s commitment to following the OCDE/G20 Inclusive Framework on BEPS to combat base erosion and profit shifting.G20 sur le projet BEPS afin de lutter contre l’érosion de la base d’imposition et le transfert de bénéfices.

1.2. Current Legal Framework for Transfer Pricing

The current legal framework for transfer pricing in Morocco is primarily regulated by the General Tax Code. It incorporates the latest provisions of the 2020-2021 Finance Laws, which have tightened documentation and transparency obligations and increased sanctions for non-compliance. The aim is to ensure that transactions between related companies are conducted according to the arm’s length principle.

1.3. Adaptation to International Standards

Morocco follows the OCDE guidelines to determine whether transfer prices comply with the arm’s length principle. This principle means that transactions between related companies should be conducted on terms similar to those that would be agreed between independent companies. This legal framework aims to enhance transparency, prevent tax avoidance, and ensure a fair allocation of tax bases across jurisdictions where MNEs operate.

2. Methods for Determining Transfer Prices

2.1. Accepted Methods

The OCDE/G20 Inclusive Framework on BEPS defines several methods for determining transfer prices, which are also followed by Morocco. These methods aim to ensure that transactions between related companies are carried out according to the arm’s length principle as mentioned above.

Here are the main price-based methods:

• Comparable Uncontrolled Price (CUP) Method

This method compares the price of a transaction between related companies with that of a comparable transaction between independent companies. It is the most direct and reliable method when comparables are available and is particularly suitable for standard goods or services where comparable data is easily accessible.

• Resale Price Method (RPM)

This method determines the transfer price by subtracting an appropriate resale margin from the price at which a product purchased from a related entity is resold to an independent entity. The margin reflects the functions performed, risks assumed, and assets used by the reseller. It is suitable for distributors or resellers who do not make substantial modifications to the products before reselling them.

• Cost Plus Method (CPM)

This method adds an appropriate profit margin to the costs incurred by a supplier of goods or services in a transaction between related companies. The margin should reflect the one an independent company would apply under similar conditions. It is commonly used for transactions involving manufactured goods, services, or subcontracting agreements.

Other methods may be used that are based on profit or margin comparisons rather than price, such as the profit split method or the transactional net margin method (as a last resort).

2.2. Choosing the Method

Morocco has integrated these methods into its legal framework following the recommendations of the OCDE/G20 Inclusive Framework on BEPS.

Companies operating in Morocco must choose the most appropriate transfer pricing method based on the specific circumstances of their transactions with related entities.

The chosen method must be justified in the transfer pricing documentation that companies must make available to the tax administration. 

3. Documentation Requirements

3.1. Necessary Documents

Under Moroccan regulations, related companies are subject to strict transfer pricing documentation requirements, which align with international standards under the OCDE/G20 Inclusive Framework. These requirements are aimed at ensuring transparency and confirming that transactions between related companies comply with the arm’s length principle.

Here are the main documentation requirements (Article 214-III-A of the CGI):

• Master File

This document provides an overview of the multinational group to which the Moroccan entity belongs. It includes:

• The organisational and legal structure of the group;

• A description of the group’s main economic activities;

• Significant intangible assets (patents, trademarks, etc.);

• The group’s general transfer pricing policy;

Cost-sharing agreements, intra-group financial arrangements, and significant financing agreements.

The Master File allows tax authorities to gain a comprehensive view of the group’s operations and understand the transfer pricing policy applied internationally.tions du groupe et de comprendre la politique de prix de transfert appliquée au niveau international. 

• Local File

This document is specific to the Moroccan entity and covers:

• A detailed description of the intra-group transactions conducted by the Moroccan entity;

• Functional analyses of the transactions (functions, assets, risks associated with each entity);

• The transfer pricing methods used for these transactions and their justification;

Financial information specific to the transactions carried out by the Moroccan entity.

The Local File demonstrates that the prices applied to transactions between related companies comply with the arm’s length principle.que les prix appliqués aux transactions entre entreprises liées respectent le principe de pleine concurrence.

3.2. Documentation for Advance Pricing Agreements (APA)

When companies seek an APA (Advance Pricing Agreement) with the Moroccan tax administration, they must provide detailed documentation justifying the proposed transfer pricing method and its application.

The goal of this procedure is to obtain agreement on the transfer pricing method to be used for a future period, thus reducing the risk of tax disputes.

3.3. Documentation Based on Revenue Threshold

Documentation obligations may vary depending on the amount of intra-group transactions. Companies with revenues exceeding 50 million dirhams are subject to more detailed documentation requirements, including geographic allocation of profits, cost and revenue allocation among group entities, and transfer pricing agreements in place. (See above for Documentation Requirements).

4. Compliance and Business Obligations

4.1. Reporting Transfer Pricing Methods

Companies must indicate the transfer pricing methods used to assess transactions with related entities and justify these methods in relation to the arm’s length principle. The goal here is to ensure that the prices applied to intra-group transactions are comparable to those that would be used between independent companies under similar conditions.

4.2. Investigations and Audits: Process by Moroccan Tax Authorities

Companies engaging in transactions with related entities are subject to specific tax audits under the tax administration’s right to inspect (Articles 210 and 212 of the CGI). These audits aim to verify the compliance of these transactions with transfer pricing rules:

• Transfer Pricing Compliance Check:This involves analysing the transfer pricing methods used by the company, comparing them with similar transactions between independent companies, and evaluating the supporting documentation provided in the transfer pricing files (Local File and Master File);
• Documentation Review: The tax authorities may require the company to present its documentation for a given fiscal period. If the company does not have the required documentation, or if it is deemed insufficient, the company may be subject to tax adjustments and penalties;
• Tax Return Review: The tax authorities examine tax returns to identify any inconsistencies with the information provided in the transfer pricing documentation or with market practices;
• Advance Pricing Agreements (APA) Review: The tax authorities assess whether the company is adhering to the terms of an active APA. If the company deviates from the agreed terms, tax adjustments may be applied, and the APA may be revoked;
• High-Risk Tax Evasion Transactions Review: This audit may focus on transactions involving intangible assets, intra-group services, or complex financial arrangements and may lead to the use of in-depth control methods such as margin comparison analysis or profit split.

In all these cases, the authorities may adjust the transfer prices to reflect those that would have been applied between independent companies in a contradictory adjustment procedure (Section 220 of the General Tax Code). These adjustments can lead to corporate tax reassessments with additional VAT liabilities.

4.3. Sanctions and Penalties: Consequences of Non-Compliance

The objective of the tax authorities is to impose financial penalties for non-compliance with transfer pricing obligations. These sanctions may include fines for failure to present the required documentation (Section 185 of the General Tax Code), surcharges for underreporting profits (Section 186 of the General Tax Code), and late payment penalties on amounts due after tax adjustments (Section 184 of the General Tax Code).

These audits aim to prevent and rectify transfer pricing manipulation practices that could lead to erosion of the local tax base.

5. Transfer Pricing Strategies

5.1. Tax Planning: Techniques for Effective Transfer Pricing Tax Planning

Effective transfer pricing tax planning involves the use of legal strategies to optimise tax liabilities while complying with international tax regulations. Some common techniques include:

• Market and Comparability Analysis:

– Market Studies: Using comparative studies to determine market prices for transactions between related entities.

– External Comparables: Identifying and using similar transactions between independent companies as a benchmark.

• Documentation and Pre-Arranged Agreements:

 – Transfer Pricing Documentation: Maintaining detailed documentation to justify transfer pricing policies and demonstrate compliance with local and international rules.

– Advance Pricing Agreements (APA): Negotiating agreements with local tax authorities to establish in advance the applicable transfer pricing methods, thereby reducing the risk of tax adjustments

5.2. Transfer Pricing Policy Review: Importance of Periodic Review of Policies

Periodic review of transfer pricing policies is essential for effective tax management. Here are the main reasons why this review is important:

• Compliance with Evolving Tax Regulations

Compliance with Evolving Tax Regulations: Tax laws and transfer pricing rules are regularly updated both internationally and nationally. Periodic reviews ensure that transfer pricing policies remain compliant with new requirements, thereby reducing the risk of penalties.

• Preparation for Tax Audits

Tax authorities regularly conduct compliance audits of transfer pricing. A regular review ensures that documentation is up to date, thus facilitating responses to tax authority requests for information

• Review of Intangible Asset Transactions

Transactions involving intangible assets are complex and often subject to high tax risks. Regular review ensures that their valuation is appropriate and remains in line with current tax standards.

5.3. Engaging Transfer Pricing Consultants: When and Why to Seek Expert Advice

Engaging transfer pricing consultants can be a crucial decision for businesses conducting transactions with related entities. Here’s when and why their services should be sought:

• When to Engage Transfer Pricing Consultants:

— During a tax audit or in anticipation of one : If a company is subject to or anticipates a tax audit for transfer pricing compliance, a consultant can assist in preparing the required documentation, responding to tax authority requests, and defending the company’s policies.

— For Complex Transactions : For transactions such as the transfer of intangible assets, corporate restructurings, or intra-group financing, a consultant can provide specialised expertise to ensure these transactions are correctly valued and documented.

— To Obtain Advance Pricing Agreements : Companies seeking to secure APAs with tax authorities can benefit from a consultant’s expertise to negotiate and structure these agreements favourably.

• Why to Engage Transfer Pricing Consultants:

— Compliance with International Regulations : Due to the increasing complexity of international tax regulations, consultants help companies comply with both local and international requirements while optimising their tax position. 

— Strategic Support in Tax Negotiations : During negotiations with tax authorities, consultants can play a key role by providing strong technical arguments and assisting in securing favourable agreements.

For all these reasons, engaging transfer pricing consultants is particularly useful in managing the growing complexity of intra-group transactions.

Conclusion

In conclusion, transfer pricing rules in Morocco are increasingly aligned with international standards, notably those set by the OCDE.

Related companies operating in the country must not only understand these obligations but also ensure the compliance of their intra-group transactions with the arm’s length principle. Complete and up-to-date documentation is essential to justify the prices applied.

Non-compliance with these rules can lead to severe consequences such as significant tax adjustments and financial penalties.

With increased scrutiny from Moroccan tax authorities, it is crucial for affected companies to prepare thoroughly and seek the advice of transfer pricing experts to navigate this regulatory complexity.

Furthermore, these companies must remain attentive to future developments in transfer pricing rules in Morocco, especially in the context of potential tax reforms and increased integration of international standards. By adopting a proactive approach and regularly updating their policies, affected companies will not only remain compliant with applicable rules but also optimise their tax position.

In this way, they will be better equipped to handle today’s and tomorrow’s tax challenges while minimising transfer pricing risks.