In brief: The overall tax situation review (ESFE) is a procedure under Article 216 of the General Tax Code (CGI) allowing the DGI to verify the consistency between an individual’s declared income, on the one hand, and their expenses and liquid assets, on the other. An unexplained inconsistency may trigger a reassessment with surcharges and penalties; only expenses exceeding 240,000 MAD per year are taken into account (Art. 29).
Overall Tax Situation Review of the Taxpayer
The overall tax situation review of the taxpayer (ESFE Morocco) is one of the most dreaded procedures during a tax audit of an individual.
This review, carried out by the Tax Administration, aims to determine whether an individual’s lifestyle is consistent with the income they declare.
It is a complex procedure that can have significant consequences on a taxpayer’s assets and finances.
This article aims to:
- Demystify this review and explain who is concerned
- Explain the procedure and how the tax administration compares income to expenses
- Provide practical advice to navigate this process effectively and safely
Whether you are an individual or a professional, a clear understanding of this review is essential to avoid unpleasant surprises and ensure optimal tax compliance.
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Introduction to Tax Audits and Their Importance
Before discussing the overall tax situation review of the taxpayer, it is important to demystify the concept of tax audits in Morocco.
Tax audits are a crucial process for both individuals and businesses. Understanding their importance and knowing how to navigate this process is essential to ensure tax compliance and avoid potential penalties.
Overview of the Tax Audit Process and the Overall Tax Situation Review
The tax audit procedure in Morocco is a structured and regulated process aimed at ensuring taxpayer compliance with applicable tax laws. The overall tax situation review is just one of several procedures available to the Tax Administration.
Here are the key steps and important aspects of this procedure:
1. Selection for Tax Audit
The procedure generally begins with the selection of a taxpayer for an audit. This selection may be random or based on specific criteria, such as inconsistencies in tax returns, deviations from industry standards, or reports.
2. Audit Notification
Once selected for an audit, the taxpayer receives a notification from the tax administration. This notification specifies the nature of the audit, whether it is a desk audit (review of returns and accounting documents) or an on-site audit (visit by tax inspectors to the company’s premises).
3. Preparation Phase
Before the audit begins, the taxpayer has the right to prepare. This generally involves collecting and organizing all relevant accounting and tax documents, such as account books, invoices, prior tax returns, and payment receipts.
4. Conduct of the Audit
During the audit, tax inspectors examine the accounting documents and records in detail. They may ask questions, request clarifications, and verify the consistency of tax returns with accounting records.
5. Right of Reply
The taxpayer has the right to respond to the observations of tax inspectors. This may include providing additional justifications, clarifying certain transactions, or correcting potential errors.
6. Audit Report and Reassessment Proposal
At the conclusion of the audit, the tax administration prepares a report that may include reassessment proposals. This report is sent to the taxpayer, who then has the opportunity to accept it, challenge it, or request a meeting to discuss disputed points.
7. Challenge and Negotiation Phase
If the taxpayer challenges the audit results, they may initiate a negotiation or challenge phase. This may involve additional discussions with the tax administration, presentation of supplementary evidence, or even an appeal before the competent legal authorities.
8. Conclusion of the Audit and Payment
Once the audit process is complete and tax adjustments are finalized, the taxpayer must pay any additional amounts due, including any penalties and late payment interest.
A tax audit may involve a review of accounts, an analysis of tax returns, and an assessment of compliance with tax regulations. It is important to know the steps of this process to better prepare for it.
The overall tax situation review of the taxpayer concerns only individuals. However, we explain some important concepts related to tax audits as a whole.
The Overall Tax Situation Review (ESFP) in Morocco
This procedure, particularly for individuals, is established by the Moroccan tax administration. It aims to assess the consistency between the taxpayer’s lifestyle and their declared income. Here are the key aspects of this review:
Objective of the Overall Tax Situation Review
The main objective of the ESFP is to ensure that taxpayers declare all their income and pay the corresponding taxes. This includes not only professional income but also other potential sources of income.
Selection Criteria for the Overall Tax Situation Review
Taxpayers may be selected for an overall tax situation review based on various criteria, such as significant expenses relative to declared income, acquisitions of real estate or valuable vehicles, or outward signs of wealth that do not match declared income.
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What is the Overall Tax Situation Review of the Taxpayer?
Article 216 of the General Tax Code:
“The administration shall review the overall tax situation of individuals in order to verify the consistency between their income and their expenses and liquid assets. To this end, it may assess the overall annual income of an individual, taking into account the liquid assets deposited in their bank accounts or in the bank accounts of any other person linked to them, where that individual is the beneficial owner of those accounts, and their expenses as defined in Article 29 above, for all or part of the non-prescribed period (…)”.
The overall tax situation review of the taxpayer is a tax procedure conducted by the Moroccan Tax Administration. Indeed, it aims to assess whether an individual’s lifestyle is consistent with their income. This review is based on Article 216 of the General Tax Code.
During this review, the Tax Administration takes into account:
- The individual’s declared income,
- Their liquid assets deposited in their bank accounts or in those of any linked person of whom they are the beneficial owner,
- Their expenses as defined in Article 29 of the General Tax Code.
If an individual’s expenses appear too high relative to their declared income, this may trigger an overall tax situation review.
The main objective of this review is to verify that taxpayers correctly declare their income and pay the taxes they owe.
If the Tax Administration determines that an individual’s lifestyle exceeds what their declared income would allow, it may trigger a reassessment action, which may include surcharges and late payment penalties.
It is important to note that only expenses exceeding 240,000 MAD per year are taken into account in this assessment (Art. 29 of the General Tax Code), and that the administration must take into account expenses financed from resources accumulated over several years, retaining only the fraction corresponding to the non-prescribed period (Art. 216-I).
Furthermore, the administration initiates the procedure by serving the taxpayer with a notice of review specifying the period concerned, accompanied by the taxpayer’s charter; before the review is closed, it must invite the taxpayer to an oral and adversarial exchange regarding the comparison elements on the basis of which it intends to assess their overall annual income.
Who is Concerned by This Procedure?
Tax audits generally focus on professional activities, such as companies or individual traders. That said, these audits can also target private individuals.
Either directly, or following an extension of the company audit to the individual who is a shareholder of the company.
This type of review, called “overall tax situation review of the taxpayer,” can be triggered by various factors, such as:
- Acquisition of real estate;
- Holding a significant current account in a company;
- Ownership of shares, bonds, or other financial products;
- Possession of significant bank assets, in Morocco or abroad;
- Notable activity on social media (for example, YouTubers have recently been reassessed);
- Other unpredictable elements such as significant expenses that are not in line with declared income.
What Income is Covered by the Overall Tax Situation Review?
Excerpt from Article 216
”(…) it may assess the overall annual income of an individual, taking into account the liquid assets deposited in their bank accounts or in the bank accounts of any other person linked to them, where that individual is the beneficial owner of those accounts, and their expenses as defined in Article 29 above, for all or part of the non-prescribed period (…)”.
Reading this excerpt, it is the individual’s overall annual income that is reconstructed. The portion whose source is not justified is taxed as “other income and gains” (Art. 70 bis-1°). The taxpayer may justify their resources by any means, in particular by exempt income (provided the related returns have been filed), investment income subject to final withholding tax, proceeds from the sale of assets or loans taken out for non-professional purposes.
The Overall Tax Situation Review Procedure
In the case of a personal tax audit, it is important to note that the tax administration follows a procedure defined by law, in accordance with Article 216 of the General Tax Code.
Article 216 refers to Article 29 of the General Tax Code, which sets the list of expenses taken into account when they exceed 240,000 MAD per year, and adds the liquid assets deposited in the bank accounts of the individual or of relatives of whom they are the beneficial owner. The expenses listed in Article 29 include:
- Size of your housing;
- Number of vehicles you own;
- School fees for your children;
- Other significant expenses you may have.
Then, the tax authorities compare this lifestyle with the income declared during the audited period, while assessing the evolution of your financial situation over the same period. The equation applied is as follows:
| **Assets at end of period + lifestyle - assets at beginning of audit = theoretical income to be declared** |
The Administration takes into account the taxpayer’s observations during this exchange, if it accepts their basis. Furthermore, the taxpayer may justify their resources by any means of proof.
Conclusion
As tax experts, we have an obligation to alert you to potential tax risks that may affect both your professional activities and your personal situation.
Frequently Asked Questions
What is the Overall Tax Situation Review (ESFE) in Morocco?
The ESFE is a tax procedure carried out by the Moroccan Tax Administration to assess whether an individual’s lifestyle is consistent with their declared income. It aims to ensure that all income is correctly declared and taxed.
Who can be subject to the ESFE?
Any individual may be subject to the ESFE, including an unidentified person to whom the administration may assign a tax identifier ex officio (Art. 216-I). This includes individuals whose expenses appear disproportionate relative to their declared income.
What elements are taken into account during the ESFE?
The tax administration compares declared income, on the one hand, with the liquid assets deposited in the bank accounts of the individual or of relatives of whom they are the beneficial owner and their Article 29 expenses exceeding 240,000 MAD per year, on the other.
How does the ESFE procedure work?
The procedure begins with the service of a notice of review specifying the period concerned, accompanied by the taxpayer’s charter. The administration may request any justification, to which the taxpayer replies within 30 days; the review may not last more than 6 months. Before closing, an oral and adversarial exchange takes place on the comparison elements; the administration then notifies, within 3 months of closing, the bases it retains, and the taxpayer has 30 days to submit observations.
What are the consequences of an ESFE?
If the tax administration determines that the taxpayer’s lifestyle is not consistent with their declared income, this may result in a tax reassessment, with surcharges and late payment penalties.
How can a taxpayer prepare for the ESFE?
It is advisable to keep accurate financial records, and retain supporting documents both for significant expenses and for the origin of liquid assets.
Can a taxpayer challenge the results of the ESFE?
Yes, the taxpayer has the right to challenge the results of the ESFE. They may present additional evidence or request a review of the tax administration’s conclusions.
