Transfer pricing in Morocco, as elsewhere, is one of the most challenging tax issues a group has to deal with.

Indeed, every company that operates in several countries through transactions with counterparts belonging to the same group, faces this issue.

Companies are not the only one facing this challenging issue. Actually, transfer pricing is a key concern even for tax administrations. Several multinational agreements signed by different countries aim to address this issue, such as the OECD Transfer Pricing Guidelines.

What is transfer pricing ?

Transfer pricing refers to the price that an entity of a group charges for its sales or services to a company of the same group located in another country. The main issue with transfer pricing is that companies can use the different tax regimes to shift profits towards countries with more beneficial tax rates.

For example, when a company located in France delivers goods to its Moroccan subsidiary, it may want to reduce its rates. Obviously, the underlying objective is to profit from the Moroccan tax regime, since the effective tax rate in Morocco is more advantageous compared to France.

Now imagine a French IT company that has outsourced part of its operations to Morocco. Keep in mind that Corporate Income Tax in France varies between 28% and 31%. Also, note that in Morocco, offshoring companies benefit, regarding C.I.T., from a five-years tax exemption and from of a reduced rate of 15% afterwards. As such, if the Moroccan subsidiary charges its parent company an overpriced amount, the IT company can deduct, from its taxable income in France, that same overpriced amount. Given the Moroccan tax incentive, the global tax cost for the group is thus reduced.

Of course, depending on the tax regimes, companies may also benefit from charging lower prices.

In other terms, as long as countries have different tax regimes, companies of the same group can profit from manipulating transfer pricing.

Transfer pricing regulations in Morocco

Transfer pricing documentation in Morocco

The Moroccan General Tax Code specifies in Article 210 that:

“(…) Companies that have direct or indirect non-arm’s length relationships with companies located outside Morocco and with whom they carry out transactions, must provide the tax authorities with documentation to justify their transfer pricing policies, referred to in section 214-III-A below, at the commencement of the operation of accounting verification (…)”

What is the transfer pricing documentation in Morocco

According to the Article 214, transfer pricing documentation in Morocco must include the following items:

  • A master file that details:
    • First, the overall activities of related companies
    • Second, the overall adopted transfer pricing policy
    • Finally, the overall profits and activities distribution worldwide
  • A local file containing information specific to the transactions that the audited company carries out with companies with whom is has non-arm’s length relationships.

According to the same article, the obligation of transfer pricing documentation in Morocco only concerns companies which have a turnover tax excluded or a total gross assets equal to or higher than MAD 50 million.

Transfer Pricing in Morocco: Advance Pricing Agreement

In Morocco, Article 234 bis of the General Tax Code has introduced since 2015 the possibility to enter  an Advance Pricing Agreement (APA) with the Moroccan tax authorities.

This article states that “companies that share non-arm’s length relationships with companies located outside Morocco may ask the tax authorities to conclude a prior agreement on the method of determining the prices of the operations mentioned in Article 214-III above for a period not exceeding four (4) financial years. The terms and conditions for the conclusion of the said agreement shall be laid down by regulation”.

Procedure for entering an Advance Pricing Agreement in Morocco

The company must submit an application for a transfer pricing agreement to the tax authorities. Applicants may request preliminary meetings prior to their application. The purpose of these meetings is to discuss the conditions under which the agreement can be granted.

Following these optional meetings, the company must submit an application that summarizes:

  • First, the related companies with which transactions are carried out ;
  • Second, the nature of the transactions covered by the agreement ;
  • Third, fiscal years covered by the agreement;
  • Finally, the adopted methods used to justify transfer pricing as well as their calculation assumptions.

The core principles used in Morocco are those internationally recognized (in particular by the OECD standards). In the following, we refer to the international standards on transfer pricing.

Justifying transfer pricing to tax authorities

Multinational companies should design a transfer pricing policy based on the  arm’s length principle. A transfer price is fair when it corresponds to the amount that would have been charged, under similar conditions, to an independent company in an arm’s length situation.

As a result, any price charged may be questioned by the tax authorities if they consider that it deviates from this principle.

However, despite the apparent simplicity of the principle, putting it into practice is not an easy matter. To do so, a 3-level analysis is required.

Functional analysis of the group

The functional analysis helps situating the subsidiary’s function within the group. In fact, it is a matter of listing in detail all the functions that the subsidiary performs within the group structure. This method takes into account:

  • The portion of “work” done by the subsidiary: sales, production, marketing, after-sales service, organization, administration, logistics …
  • External risks to which the subsidiary is exposed: the more risks a company incurs, the larger share of the margin it can claim ;
  • Tangible and intangible resources used: using more resources and investments justifies obtaining a larger share of the margin.

Imagine an extreme scenario where a Moroccan company has only one employee who manages the relationship with an external logistics company while the parent company designs, texts, produces and promotes products.

In such a case, it would be difficult to argue, especially in the jurisdiction where the parent company is located, that the subsidiary receives an even or a larger share of the profit.

Once the functional analysis has been completed, a transfer pricing method must be chosen.

Most commonly adopted methods

The chosen transfer pricing method will determine an arm’s length price.

Therefore, it is crucial to make a calculated choice when determining the transfer price. The chosen method must take into account the specificities of each company as well as the relating information collected through the functional analysis.

Furthermore, a sole method cannot effectively set the “arm’s length price” for all transactions, given the  uniqueness of each and every situation.

In its practical guide, the OECD has proposed several methods for determining transfer pricing. These five methods, divided into two groups, are:

  • Traditional methods of determining transfer pricing : Cost Plus, CUP, and Resale Price
  • Transactional methods of determining transfer pricing : TNMM and Profit Split

The company must choose the method best suited to the nature of its transactions. Obviously, none of these methods is flawless as each has its own merits and limitations. The company must then prepare transfer pricing documentation that explains the criteria used to make its choice.

Traditional methods of determining transfer pricing

Cost Plus Method

Also referred to as “cost plus margin method”, this method consists in determining first the cost price for the selling company. Then, a “fair margin” is applied to said cost price. This fair margin is determined by comparing margins that apply between two unrelated companies operating in the same market.

The transfer price is thus the sum of the cost and the margin. It is obvious that the implementation of this method requires the ability to determine these costs efficiently. A cost accounting system must therefore be put in place.

Comparable Uncontrolled Price Method ( CUP  Method)

In this case, instead of comparing the realized margins, it is a matter of directly comparing the actual selling price. The transfer price is the price that two unrelated companies charge under competitive conditions. In practice, it is difficult to find perfect comparatives. Corrections can be made where solid and reliable criteria are found.

Resale Price Method

Also called « Resale minus », this method consists in applying a discount on the final selling price. This method focuses on the sales price to the final customer. The idea is to determine the “Fair Margin” applied by competitors who buy from an independent supplier. This margin is considered to be fair in the transaction carried out within the group.

Traditional Methods: Conclusion

To conclude this section, we should highlight that the previous methods are limited to the analysis of the gross margin. Indeed, they do not take into account the structural costs incurred to reach the bottom line. The next two methods overcome this limitation.

Transactional methods of determining transfer pricing

Transactional Net Margin Method (TNMM)

This method is also called “global margin method”. Its aim is to determine the margin achieved by each of the companies in the group. However, the analysis focuses on the final net margin achieved on the transaction in question. This margin, as in the other methods, must be comparable to the margins achieved by similar firms within the arm’s length principle. The reliability of this margin depends heavily on a good functional analysis.

The objective is to compare the net margin that the group achieves on a transaction with the net margins achieved by an independent company (a benchmark). There is no comparison of prices but of net margin levels. This method is complex to implement and its reliability may be questionable. However, it remains widely used by companies and tax authorities.

Profit Split Method

Also known as the “profit sharing method”, this method determines the overall margin achieved by the group on a transaction on a consolidated level. Then, this margin will be distributed between the stakeholders based on each one’s contribution. The results of the functional analysis must be factored into the distribution.

Finally, confirming the model through Benchmarks

Benchmarking entails developing a sample of comparable companies to support its transfer pricing policy. The group must choose these benchmarks carefully.

The group must ensure that the selected sample carries out transactions that are comparable to the transaction under analysis. In addition, the sample components must evolve in a similar competitive context. When these conditions are not possible, the figures must be adjusted in a justifiable manner.

Note that not all competitors can be used for benchmarking, and not all benchmarks are competitors.

A benchmark can be internal or external. An internal benchmark can be a group company or a contract with another customer. An external benchmark is an independent company.

The results obtained with the chosen method are then compared with the results of the sample.

Finally, the analysis aims to prove that the price the group charges is indeed similar to what is practiced in arm’s length situations.

Upsilon Consulting : Our expertise

Upsilon Consulting can assist your Moroccan subsidiary with the following :

  • Assistance in the preparation of transfer pricing documentation : We can accompany you in the preparation of a documentation and in the completion of the various preparatory works (Calculation of costs, Benchmarking,…)
  • Implementing an advance pricing agreement : preparation of the dossier and the negotiation of the approval procedures
  • Assistance during tax audits : Our assistance can cover the preparatory phases, the conduct of the audit and the preparation of responses

Contact us.


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