A Moroccan subsidiary that buys goods from its parent company, invoices it for services, or pays it royalties or head-office fees carries out intra-group transactions. The price of these transactions determines where the group’s profit is taxed. That is why the tax authority pays particular attention to them.
The arm’s length principle
The price charged between two related companies must be the one two independent companies would have agreed in comparable conditions. This is the arm’s length principle, recognised internationally by the OECD guidelines and reflected in the General Tax Code.
When the tax authority finds that a price departs from it and that part of the profit has been shifted out of Morocco, it can adjust the taxable profit of the Moroccan company.
Who is concerned?
Any company with dependency links, direct or indirect, with businesses located outside Morocco, and which carries out transactions with them.
The formal documentation requirement applies to companies whose annual turnover excluding VAT or total gross assets reach at least MAD 50 million.
What must be documented?
Documentation has two levels, following the OECD model:
| Document | Content |
|---|---|
| Master file | Overview of the group: activities, organisation, transfer pricing policy, allocation of profits and functions |
| Local file | The Moroccan company’s transactions with related entities: nature, amounts, contracts, functional analysis, method chosen and price justification |
This documentation must be available and provided to the tax authority on request during an audit. It is much easier to prepare it every year than to rebuild it in a hurry.
Recognised methods
To show that a price is at arm’s length, the method best suited to the transaction is used:
- traditional methods: comparable uncontrolled price, resale price, cost plus;
- transactional methods: transactional net margin, profit split.
The cost plus method is widely used by Moroccan companies that provide services to their group, particularly in offshoring: the subsidiary recharges its costs plus a margin, which must itself be justified.
Securing in advance: the advance pricing agreement
A company may ask the tax authority for an advance pricing agreement. It sets the method applicable to certain transactions for up to four financial years. It is a demanding process, reserved for large recurring flows, but it removes uncertainty.
Points to watch in an audit
- Management fees and head-office costs: the tax authority asks for proof of the services rendered and their benefit to the subsidiary.
- Royalties: classification, rate, withholding tax and the applicable treaty. See our article on paying foreign providers.
- Recurring losses in a subsidiary that bears little risk.
- Abnormally low distribution or subcontracting margins.
- Intra-group financing: interest rates on current accounts and loans.
In short
- Transactions with the group must respect the arm’s length price.
- Documentation is mandatory from MAD 50 million of turnover or gross assets.
- It comprises a master file and a local file.
- An advance pricing agreement can secure large flows for four financial years.
Ascensu helps subsidiaries of foreign groups document their intra-group flows and defend their pricing policy, as part of its support for foreign investors.
Official sources
This article is provided for general information, as at its publication date. It is not personalised advice: the rules change and every situation must be reviewed on its own facts.