Morocco Transfer Pricing: Nestlé Maroc hit with a billion dirhams claim.

Morocco Transfer Pricing: In an unprecedented move, the Directorate General of Taxes (DGI) sent a “historic” tax reminder to the Swiss agri-food group, Nestlé Maroc, for the handsome sum of one billion dirhams (USD 110 million)

As per an article published in Financial Afrik this week, an audit was reportedly carried out by the DGI, and the subsidiary of the Swiss agri-food group was sent a tax reminder of a proportion, simply unheard of in Morocco.

The tax authorities rejected the method of calculating transfer prices applied by Nestlé Maroc. Transfer pricing is an accounting and taxation practice that allows for pricing transactions internally within businesses and between subsidiaries that operate under common control or ownership. The transfer pricing mechanism is mostly a way that enables companies to shift tax liabilities to low-cost tax jurisdictions. Nestlé Maroc is accused of improperly organizing a transfer of profits to its parent company by reducing the taxable income in Morocco by manipulating transfer prices

Negotiations with the Authorities.

The Nestlé group sent tax lawyers who joined with local consultants from the EY firm to assist its subsidiary in the proceedings before the National Commission for Fiscal Appeal to contest this amount, and find an amicable agreement. According to Nestlé Maroc, “the method used by Nestlé Maroc is a global scheme implemented in all the group’s subsidiaries”.

It is unclear whether the Tax Authorities will concede to this explanation. According to Moroccan law, in matters of transfer pricing, a discount on the amount of tax adjustments can only relate to questions of interpretation and not of law. Basically, it is not possible to reduce the unpaid VAT bill to the Treasury, but the tax authorities can concede a reduction on the amounts of late penalties or the level of royalties that a company has paid to its parent company for technical assistance. 

In the tax audit operations of subsidiaries of multinationals in Morocco, transfer pricing is the focal point on which tax inspectors concentrate during the operations of auditing company accounts. In this area, this is the doctrine issued by the OECD with the arm’s length principle at the heart, which is authoritative in all countries. But not everyone, businesses and tax administrations alike, read it the same way. To prevent litigation and give companies more visibility, the Moroccan legislator has instituted the mechanism of “prior agreements on transfer pricing”. This consists of having the General Directorate of Taxes validate the method of calculating transfer prices in advance. The agreement is valid for five years.  

Combating Transfer Pricing, a crucial fight against poverty

Aggressive tax avoidance by foreign corporations has long been a sore point of contention in Africa. By avoiding paying taxes in the countries in which they do business, and shifting profits in tax havens, corporations are depriving governments of the resources they need to provide public services and critical infrastructure such as roads, hospitals and schools.

Governments end up either providing substandard services, or or make up the shortfall by collecting higher taxes from everyone else. Both options further deepen the inequality gap.

But the impact is even more devastating on poorer countries:

According to Oxfam,

  • Corporate tax dodging costs poor countries at least $100 billion every year. This is enough money to provide an education for 124 million children and prevent the deaths of almost eight million mothers, babies and children a year.
  • Africa alone loses $14 billion in tax revenues due to the super-rich using tax havens. This is enough money to pay for healthcare to save the lives of 4 million children and to employ enough teachers to get every African child into school.

In Morocco, the situation is just as bleak. According to a 2020 report by the Tax Justice Network, Morocco loses $521,534,833 per year to tax evasion, of this sum, $69,923,248 is lost to offshore tax evasion. 

Morocco Transfer Pricing/Tax Evasion. Source: Tax Justice Network

Morocco loses $451,611,585 per year to corporate tax evasion specifically, making the country the eighth-highest corporate tax loss in Africa. The African country with the highest losses from corporate tax evasion is Nigeria, losing $10.57 billion per year. Following are South Africa ($2.71 billion), Egypt ($2.12 billion), and Angola ($2.05 billion). 

While Morocco loses a substantial amount to corporate tax evasion, contrary to other countries, it does not inflict any loss on other countries by enabling corporate tax abuse.

The Tax Justice Network report calculated Morocco’s corporate tax loss amounting up to 20.24% of its public health budget, or the average salaries of 130,186 nurses. 

It is therefore encouraging to see Morocco taking stricter dispositions against abusive corporate tax practices.

The outcome of this case remains however to be followed.

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