Moroccan Taxation of International Agreements International Commercial Agreements

The formation, execution, and termination phases of international agreements necessitate careful consideration of the mandatory tax implications during these distinct periods of contractual relations between the contracting parties. In this context, the key element to scrutinise across these three stages pertains to the financial flows associated with the underlying economic operation. Moreover, the economic reality of a commercial transaction or investment, if legally mischaracterised, may lead to a detrimental tax reclassification of the entire agreement, particularly concerning unforeseen financial considerations affecting the rights and obligations of the involved parties. Consequently, the commercial transaction or investment operation may assume a financially precarious dimension.

The analytical approach adopted in this study is based on selected agreements used illustratively to examine the potential tax impact of certain clauses within the international agreement on the contracting parties, in accordance with applicable tax provisions across different jurisdictions, notably those of Moroccan origin, which appear to have reached a considerable level of sophistication. Generally, international agreements related to trade and investments are governed, within each concerned jurisdiction, by a complex tax framework that combines domestic law—including international conventions when they take precedence over the aforementioned law—and administrative practices that collectively form what is commonly referred to as tax doctrine.

Commercial Agreements vs. Investment Agreements

A necessary distinction must be made between the two primary types of international agreements: those related to international trade and those pertaining to international investment. This differentiation is not straightforward. On one hand, the rules applicable to international trade agreements for goods or services fall under the law chosen by the parties or conflict-of-law rules in case of disputes, as well as the body of private law rules forming the lex mercatoria, which refers, for example, to Incoterms, uniform rules applicable to various payment methods such as documentary credits, the Vienna Convention of 11 April 1980 on the International Sale of Goods, and, without limitation, the notable 2016 UNIDROIT Principles applicable to international commercial agreements.

On the other hand, international investment agreements concluded between private investors from different countries or between private investors and states or public entities often involve the application of public international law rules arising from bilateral or multilateral international investment protection conventions, with specific dispute resolution mechanisms. These mechanisms, through arbitral awards rendered notably by renowned arbitral institutions such as the International Centre for Settlement of Investment Disputes (ICSID) or the International Court of Arbitration of the International Chamber of Commerce (ICC), form a rich and useful source of case law for a better understanding, particularly of the fundamental legal principles applicable to these commercial or investment operations. The aforementioned general observations present a genuine challenge for legal and tax practitioners, which must undoubtedly be well assessed to attempt to address it effectively.

Practically and with respect specifically practical cases involving a Moroccan party, the taxation of international agreements presents significant particularities to consider during the negotiation and drafting of these commercial or investment agreements. All else being equal, the overall objective is twofold: first, to examine how Moroccan tax law perceives international commercial and investment agreements, and second, to assess the impact of the choice of applicable law—or even the absence of such designation—on said international agreements involving Moroccan interests  

Partie I — INTERNATIONAL COMMERCIAL AGREEMENTS

The boundless diversity of unnamed commercial agreements, which are thus not governed by specific legal provisions, surpasses that of named agreements such as the sale agreement or the agreement for work or services. Two illustrative examples chosen to facilitate this reflection in Moroccan law are: firstly, the emblematic international sale of goods agreement, including international commercial rules such as those related to the DDP Incoterm (“Delivered Duty Paid”) (International Commercial Terms of the International Chamber of Commerce: ICC – ICC Incoterms 2020) and the uniform customs and practice applicable to documentary credits (ICC Rules, brochure 600); secondly, an exclusive distribution agreement for products and services in the form of an international franchise, which notably involves the payment by the franchisee to the franchisor of royalties subject, of course, to a specific tax regime.  

A Variable Taxation

The application of taxation varies depending on whether the Moroccan party is, for example, an importer of products or services, particularly when specific and derogatory rules apply under preferential agreements concluded between the Moroccan state and other states from which the exporting counterparts of the aforementioned products and services originate, in the fields of trade, investments, or taxation. A Value Added Tax (VAT), with a standard rate of 20%, would normally be applied, and customs duties would be calculated according to the applicable nomenclature on imported goods. For imported services, a Withholding Tax generally at a 10% rate, would be levied on cross-border payments, particularly concerning royalties. In terms of exports, Moroccan companies benefit from significant tax advantages that may lead to partial or total exemption on profits derived from these export operations. However, taxation in the country of delivery of the products or services must be considered, and similarly, the applicable duty rates also vary depending on the provisions enacted by foreign tax and customs authorities.

The Aggravation of Tax Treatment

Tax treatment of the aforementioned operations could take on a different dimension if these same transactions are regularly and consistently concluded under suspicious financial conditions between entities belonging to the same international group. Such operations could trigger, in the event of a tax audit, adjustments to taxable bases with very detrimental tax penalties for the concerned contracting party (Cf. Khalil Haloui, https://tax-cluster.ma/ultimate-guide-to-transfer-pricing). Additionally, a foreign company providing services to a Moroccan company under conditions that correspond to the definition of a permanent establishment, as specified in a Double Taxation Treaty (DTT) between the countries of the contracting parties, could be subject to taxes on the profits realised, primarily corporate tax at standard rates, with the possibility of mitigating the tax cost according to the provisions of the same convention. Similarly, payments of royalties for the use of technology or know-how may be reclassified as service fees by the tax administration, leading to a different, more punitive tax rate.

The specific case of international commercial franchise agreements, whereby the franchisor, generally foreign, requires the payment of periodic royalties based on the gross turnover achieved by the local franchisee, raises the issue of local taxation applied to such transfers, notably the withholding tax that the domiciliary bank should apply to execute the bank transfer on its client’s instruction. Generally, a contractual clause known as a “Gross-up clause” is included so that the franchisor can receive the full amount of the contractual royalties without suffering any withholding tax applicable in the franchisee’s country of residence. This type of agreement often requires the franchisee to maintain accounting records of its commercial activities in accordance with foreign standards prescribed by the franchisor, which inevitably raises difficulties in determining the value of royalties, primarily calculated on the sales achieved by the franchisee. Thus, any inconsistency between the accounting and tax components related to the turnover achieved by the franchisee could lead to friction with the tax administration during audits of the franchisee’s accounts.

One of the significant tax risks lies in the potential reclassification of the international franchise agreement by the tax authorities as a partnership agreement or even an employment agreement due to excessive and permanent interference by the franchisor in the commercial and financial management of the franchisee. Indeed, taxes applicable to partnership activities or service provision exceed those applied to simple commercial sales operations and become critically significant during the termination phase of activities between the contracting parties.

Legal Control of Tax Effects

An important point to consider is the accurate and appropriate drafting of essential clauses in international commercial agreements, based on a thorough understanding of the rules applicable to these agreements, which naturally fall under the applicable law, whether chosen or not determined by the contracting parties, as well as international commercial rules forming the lex mercatoria, which can have significant legal and tax consequences on the implementation of these agreements.

Thus, the drafting of clauses with tax content or tax effect in international commercial agreements should ensure a clear and precise allocation of tax obligations between the contracting parties, notably to avoid any risk of increased tax burden, such as double taxation, and to organise and anticipate the consequences of possible changes in tax legislation when these agreements are to be executed over medium or long durations.

The Dilemma of Choosing Contractual Terms

A typical case is that of an international commercial agreement for the supply of mining products by a Moroccan exporter over a medium duration of three years, which would include the Incoterm Delivery Duty Paid (DDP) or translated into French as “rendu tous droits acquittés“, with payment by irrevocable and confirmed letter of credit required by the Moroccan party. This raises numerous legal questions, each of which could lead to unforeseen tax consequences that may be detrimental to the contemplated export operation.

 The DDP clause means that the exporter must deliver the goods on the contractual dates at its expense while assuming all risks related to transport and then the transfer of the goods in favour of the importer up to the destination indicated by the latter in the importing country. The Moroccan exporter must also handle all port and customs formalities, including the payment of all applicable duties and taxes, including local VAT if applicable. A careful reading of the DDP Incoterm as defined in the 2020 version (ICC), which outlines the 10 main obligations of the seller, notably A9 – e, specifies that “the seller must pay: where applicable, the duties, taxes, and all other costs related to customs clearance...”. This suggests that, contrary to abundant professional literature, the payment of duties and taxes by the seller is not certain and depends on the will of the contracting parties. Nevertheless, usage places this obligation on the seller to pay duties and taxes in the buyer’s country.  

This ambiguity represents a major legal and tax risk that the party bearing the consequences should carefully assess before committing to the choice of this Incoterm. Generally, all costs to be borne by the exporter under a DDP sale should be perfectly identified and calculated to be detailed in its pro forma invoice and fully charged to the importer in the final invoice. Similarly, the international sale agreement should also include a hardship clause, allowing the parties to renegotiate the agreement if an unforeseen event alters the economic balance of the agreement, notably in the event of changes in tax laws impacting the costs or benefits of the parties.

Contractual recharacterization

However, it is very important to note that by carrying out all of the aforementioned services—including the loading and transportation of the goods, and the possible subscription to an insurance policy to cover the risk of damage or loss of the goods—the seller acquires the legal status of agent of the buyer, since he performs these operations complementary to the sale agreement in the name and on behalf of his principal, who is the importer. Moreover, and considering that he has committed to carry out all of these services over a relatively long period due to successive deliveries, there is no longer any doubt that the exporter, whose initial obligations were simply to produce and deliver the goods, acquires, in the fiscal sense of the term, the status of a permanent establishment in the importer’s country, with an obligation to register for local taxes, notably those relating to corporate income tax and VAT, although with possible relief where a DTT exists between his country of origin and the jurisdiction of the importer. It is undeniable that the fiscal consequences become entirely different from those initially envisaged under the international sale agreement, and the entire economic rationale of the transaction initially considered could seriously be called into question.

The difficulties would increase further if, for instance, the exporter required from the importer the issuance of an irrevocable and confirmed letter of credit, allowing him to obtain payment for each of his goods’ shipments upon presentation of compliant documents to the confirming bank of the documentary credit. This dual contractual arrangement, combining a DDP Incoterm and the aforementioned letter of credit, could create a genuine legal and fiscal imbroglio, since the seller would benefit from payment by the buyer well before the actual performance of the obligations under the said Incoterm. The transfer of ownership of the goods, which would occur in accordance with the law applicable to the sale agreement—unless otherwise agreed between the parties—would trigger duties and taxes, including VAT, at the time of payment by the confirming bank of the letter of credit, even though the obligations linked to the DDP Incoterm, particularly those of a fiscal nature, would not yet have been performed by the seller.

Mutatis mutandis, a tax analysis equivalent in approach but opposite in consequences should be considered by the foreign importer where the Moroccan exporter requires a sale under the EXW Incoterm (Ex Works), and for which the foreign importer commits to go to the industrial premises of the Moroccan exporter to take delivery of the goods, under the same terms, but with roles reversed between the contracting parties. It should also be noted that the use of service providers such as freight forwarders by both exporters and importers does not exempt the latter from tax risks such as those previously mentioned, for illustrative purposes only.

In general terms, the anticipation of tax risks as well as the resulting costs should be reflected during the negotiation phases of international commercial agreements. A pre-contractual analysis, including a complete tax review particularly in the jurisdictions of the foreign contracting parties with close consideration of the provisions of any applicable DTTs, is essential to secure the tax costs related to the contemplated commercial transaction. The usual contractual technique to try to counteract any unforeseen tax impact in the contractual documentation would be to include renegotiation clauses to adapt the agreement to developments in the international tax framework.

Choice of governing law and its tax implications

It is understood that by virtue of the internationally recognised principle of the fiscal sovereignty of States, and notwithstanding the contractual freedom enjoyed by the parties to an international agreement to determine, notably, the law applicable to their agreement, a choice-of-law clause in an international sale agreement that differs from the law of the country in which such duties and taxes apply cannot derogate from domestic law, except where a tax treaty is in force between the countries of which the contracting parties are nationals.

In the event of a tax dispute between the contracting parties, it would be necessary first to verify the applicable legal provisions in the country of performance of the said agreement to resolve the dispute according to the chosen method of dispute resolution, whether judicial or arbitral. Likewise, account must first be taken of the jurisdiction elected or the one to which the international arbitration clause might eventually refer, in order to determine the jurisdiction in which a final court judgment or arbitral award would need to be enforced through the exequatur procedure.In this respect, certain jurisdictions—such as Morocco—do not recognise, on public policy grounds, the resolution of tax disputes outside the courts. Nonetheless, disputes concerning purely financial matters linked, for instance, to a fiscally derived obligation could, in principle, be resolved by means of arbitration.

In conclusion, the choice of the law applicable to an international commercial agreement involving a Moroccan party must incorporate thorough reflection on the tax aspects. A proactive approach and careful drafting of tax clauses, as well as of contractual terms and conditions that may have direct or indirect fiscal effects, would help secure the tax treatment of the operations and optimise the overall tax burden of the international agreement.