Alumni Insights

A Fair Tax System for an Effective Social Protection in Morocco 

Abderahim Azzara, Class of 2013

Morocco has recently decided to extend social protection to all its citizens including those with no guaranteed revenues to ensure a monthly contribution. As a matter of fact, this decision has been taken in the aftermath of Covid health crisis, which has revealed that almost 2/3 Moroccan households, most of which are making their living in the informal sector, were left with no revenue whatsoever during the lockdown. In the absence of the state’s direct financial aid, the health crisis would have inevitably turned out into a serious social crisis. Being aware of this reality, top decision makers have committed to implement this revolutionary social public policy, which would require a significant annual budget, a great part of which would come directly from the state’s budget. However, the sources of financing this social protection is a big question that is left with no concrete and credible answers. Unluckily, Morocco’s limited natural resources are pouring insignificant financial contributions into the State’s budget. In addition, debt cannot be considered as an option for a long-term financing. Actually, debt’s sustainability is becoming a serious issue as the overall stock (treasury and guaranteed) is almost matching 100% of the GDP and its annual servicing is weighing heavily on the state’s budget. For this reason, a fair tax system, capable of generating additional financial resources on the long run, is the only resort and the sole solution to ensure a good quality and sustainable social protection for all Moroccans. 

AN UNFAIR TAX SYSTEM WIDENING INEQUALITIES AND DISCOURAGING HIGH VALUED-ADDED INVESTMENTS 

Morocco’s current tax system is very unfair as the tax burden weighs heavily on a very limited population while few privileged others are taking advantage of low rates and unjustified tax exemptions. In fact, the logarithmic form of the Personal Income Tax (PIT) with a very low threshold makes those with low and medium revenues carry a heavier tax burden than those at the top of the revenue’s distribution. Also, PIT revenues are mostly coming from public and private employees, while independent professionals, whose average revenues are 6 times higher than private employees, pay a share of no importance. Regarding Corporate Income Tax (CIT), it is very concentrated on a narrow base: 3% of corporations pay 90% of CIT revenues. This is mostly due to tax fraud, but also tax avoidance since large corporations are well staffed (legal and tax experts) to take advantage of various legal/tax loopholes. Last year, the government introduced a fiscal measure to progressively implement a unified proportional CIT with a rate of 20% for all companies. This fiscal measure has penalized small and medium companies, previously taxed at a rate of 10%, and benefited to big ones who used to pay a 31% CIT. Moreover, the Value Added Tax (VAT) is blindly disregarding citizens’ revenues and their capacity to contribute to the State’s expenses. Unjustly, current VAT system makes a Maserati holder living in luxury villa and a rickshaw user living in a cottage pay the same normal rate of 20% and the same reduced rates of 10% for gaseous hydrocarbons, 7% for sugar...! The ongoing discussions at the parliament (PLF24) regarding the VAT reform would indeed simplify the system, but high rates on luxury goods and services could have been introduced to make wealthy individuals pay their fair share. 

On another hand, around 30 Moroccan Billion, Dirhams are annually budgeted as tax exemptions to achieve di- verse social and economic objectives. Unfortunately, the impact of this crucial budget loss, which is 2 times the budget of a strategic ministry (high education, scientific research and innovation), is not assessed to make sure the established goals are effectively reached. Moreover, as the primary beneficiaries from these tax exemptions (by sectors) are investors in real estates and agriculture, the capital has been steadily flying from innovative and high-value added sectors (Industry, IT...) with a greater potential of stable jobs creation. 

A VERY PROGRESSIVE TAX SYSTEM TO GENERATE SUFFICIENT FINANCIAL RESOURCES IS URGENTLY NEEDED. 

Following the 3rd national conference on taxation held in May 2019 and the publication of the New Development Model (NDM) in April 2021, the newly adopted Fiscal Framework Bill (FFB #_69.19) listed among its priorities (art-2) and fundamental objectives (art-3) reinforcing social and economic justice, reducing inequalities, streamlining tax-exemptions, combating tax fraud and evasion...etc. Moreover, to make sure the FFB’s pro- visions enter into force in a reasonable timeline, article 19 of the same bill required the implementation of all the provisions related to VAT, PIT and CIT (art-04), local taxation (art-09) and para-fiscal levies (art-13) during a period of 5 years (2022 – 2026) following the entry into force of the FFB. Nevertheless, the implementation of the FFB requires profound amendments of the general code of taxation (GCT) via Annual Finance Bills (AFB) to make sure Moroccans are being taxed according to their financial capacity (art-39 of the constitution). Limiting ourselves to the changes made to CIT last year and the ongoing discussions regarding VAT, it looks like the government has forgotten art-39 of the constitution, as special treatments are still reserved to both wealthy individuals and big corporations. 

In a more concrete way, art-73 of the GCT needs to set a higher PIT threshold to make sure employees with very low revenues are exempted. At the top of the distribution, new brackets with higher rates need to be created. For CIT, articles 6 & 19 need to be modified so that oligopolistic companies (Energy, banking, insurance, cement...) are taxed at an exceptional rate. In addition, a multi-actors platform built on a centralized database should be created to make sure tax fraud (Fake invoices...) and planned tax avoidance (Business splitting...) is efficiently addressed. Astonishingly, the supreme financial court has revealed in its 2020 report that 96% of contributors subject to CIT are (manage to be.) taxed at the lowest rate of only 10%! To efficiently address CIT fraud and planned avoidance, the recommended platform needs to provide accounts for all stakeholders involved in the commercial cycle and allows the tracking of financial transactions. Afterwards, financial penal articles must be amended, in an acceptable timeline, to consider new financial crimes (Transactions outside the platform, value reduction...). For VAT, articles 98 and 99 need to extend the normal rate of 20% to a larger list of goods and ser- vices so that wealthy citizens are paying their fair share instead of taking advantage of reduced rates (Sugar: : 7%; gaseous hydrocarbons: 10%...). Subsequently, an efficient Unified Social Register (USR) can allow the targeting of poor households for direct financial aid. Indeed, this is indispensable to compensate the cancellation of reduced VAT rates applied currently to products largely consumed by the bottom 50% of the population (Sugar, canned sardines...). 

WEALTH AND WIND PROFIT TAXATION ARE INEVITABLE TO EFFICIENTLY ADDRESS WEALTH AND REVENUES INEQUALITIES. 

For the tax system to fully play its redistributive role in reducing inequalities and poverty, new forms of taxes with high rates should be implemented on wealth (net of all liabilities) and wind profits. As a matter of fact, a good number of Moroccan wealthy individuals have made their fortune because of unfair mobilization of domestic resources coupled with unjust distribution of public expenses. The list of examples is very long, but we can limit ourselves to the following: big farmers and social housing promoters benefiting from public subsidies and tax exemptions; exploitation of price fluctuations by energy distributors and Covid lockdown by insurance companies; protected oligopolies in high profit generating sectors: banking, energy, insurance, cement... opacity in the distribution of lands recovered from the French settlers; opacity in granting rights to exploit natural resources for many decades: metals extraction, fish, water...Etc. Consequently, wealthy individuals should prove their patriotism in this critical period by contributing to the state’s efforts to ensure a long-lasting social cohesion. To this end, high rates must be applied on inheritance, non-productive assets serving only as wealth stores (Unoccupied residences, unused lands...) , luxuries (Cars, yacht...) , unrealized capital gains...Etc. Also, wind profits made by sectors taking advantage of exceptional circumstances (Energy, insurances...) and left with no regulations by the current legal corpus, should be taxed at rates high enough to take back the realized profits, which remains unjustified by the rules of a free and fair market.