Tax system

Since 1990, the VAT system has been strengthened further through a reduction of the rates, a broadening of the base, and a consolidation toward the “normal” VAT rate at 20 percent. With the elimination of the 12 and 30 percent rates in 1992 and 1993, respectively, the VAT rates were reduced to three rates (7 percent, 14 percent, and 20 percent). However, the 1996/97 budget reintroduced a new intermediate rate, at 10 percent, applicable exclusively to the tourism sector. Since 1993, a number of exemptions were abolished (such as for animal skins, pasta, and soap), while the rates for some products (tea, rice, animal drippings) were moved closer toward the normal rate; VAT on interest on financial instruments was reduced from 14 to 7 percent. The VAT base has been broadened further in the 1996/97 budget law, with the extension of the VAT to retailers with turnover exceeding DH 2 million per year.

While the normal VAT rate is relatively high and applies to more than 75 percent of the products subject to VAT, total VAT collection reached less than 6 percent of GDP in 1995, reflecting the large number of exonerations and exemptions as well as weaknesses of tax administration and collection. Small retailers and producers of goods and services (with turnover below DH 2 million and DH 180,000, respectively) remain exempt from VAT. For political and social reasons, a small number of basic consumption goods, such as milk, sugar and flour, as well as construction of social housing, are exempted. Through 1995, the sectoral investment codes granted various exemptions and exonerations from VAT for strategic sectors (such as exports, handicrafts, industry and mining, maritime transport and tourism). These exemptions and exonerations were generalized with the introduction of a unified investment charter in December 1995 (see below and Annex 1). As regards tax administration, the introduction of the VAT has been associated with an important program of computerization to facilitate the verification of the tax returns and enhance tax collection. However, certain restrictions relating to the system of deductions (règle du butoir) do not allow for an immediate VAT refund when the deduction provided by the tax paid at earlier stages is larger than the tax collected on the sales of the taxpayer, impeding the overall efficiency of the VAT system.

Since 1990, the authorities have pursued a policy aimed at reducing the corporate profit tax (IS) rate, with a view to encouraging more transparent and spontaneous profit declarations and stimulating investment. The corporate tax rate was gradually reduced from 44 percent in 1988 to 38 percent in 1993, 36 percent in 1994, and 35 percent in 1996. The possibility to opt for an accelerated depreciation with respect to the amortization of equipment and other investments was introduced in 1994. At the same time, the tax was extended to profits from the sale of securities, participations, and other financial assets.

In 1989, the individual general income tax (IGR) introduced the concept of a global income and eliminated the separate tax treatments of income originating from different sources.⁴ The IGR rate structure has five brackets. The maximum marginal rate on individual income tax had been gradually reduced from 52 percent in 1990 to 44 percent in the 1996 transitory budget law, and the minimum personal exemption raised from DH 12,000 to DH 18,000 over the period. However, income tax rates differ for certain categories; these include in particular incomes of certain foreign companies involved in public works in Morocco, temporary workers, and fixed-term teachers, who are taxed at flat rates of 10 percent, 30 percent, and 17 percent, respectively.

The control of tax fraud and evasion remains an important issue and a priority for the authorities. Although a minimum corporate tax was introduced to palliate the fraud problem and secure some tax payments from the “informal” corporate sector, there is ample scope for further reinforcement of tax control in this area. The need for enhanced controls is compounded by the heavy reliance of the tax system on self-assessment without sufficient adequate auditing. However, following the campaign against fraud and evasion in early 1996 (campagne de normalisation), the collection of corporate profit and individual general income taxes increased substantially during the first semester of 1996, as tax liabilities were regularized. Tax administration has been further reinforced by the elimination of certain privileges regarding payment of import duties by the government and public enterprises and also by legislation passed together with the 1996/97 budget, introducing specific legal provisions penalizing tax fraud and evasion.

Trade taxes, notably import duties (droits d’importation) and an import levy surcharge⁵ (prélèvement fiscal à l’importation (PFI)) have been reduced in recent years. In particular, in late 1994, tariffs on 400 consumer items not locally produced were reduced to 5 percent; and in the context of the 1996 transitory budget, this category was extended and duties consolidated at 10 percent while exonerating such items from the PFI; in addition the number of tariff categories was reduced from 13 to 6, with rates ranging from 2.5 percent to 45 percent. However, the 1996/97 budget law added two new tariff rates at 24 percent and 43.5 percent. Higher rates (up to around 300 percent) apply to certain agricultural, subsidized products such as edible oils, sugar, and cereals and derivatives, following the replacement of QRs on such products by tariffs. Total import taxes on industrial products are bound under the WTO at 55 percent, including the import surcharge.

Tariffs are widely dispersed, with higher rates on locally produced goods and lower rates on inputs, equipment goods, and nonlocally produced goods. About one third of imports are subject to a zero tariff rate. As a result, effective protection rates vary widely; according to a recent WTO report,⁶ the average weighted tariff was 11.4 percent in 1994. Import reference prices⁷ apply mostly to textiles and cars, raising the effective rate of taxation on imports of such items. Morocco is committed under the GATT/WTO (Tokyo Customs Valuation Code), as well as under the AAEU, to abolishing reference prices by 1998.⁸

The agenda for tax reform in the coming years will be largely set by the need to replace tax losses resulting from the gradual dismantling of import duties on goods imported from the EU, the tax relief already granted under the Charte de l’investissement, and the intended further reduction in income tax rates. This will require notably: (i) a further broadening of the taxable base through the reduction of tariff and tax exemptions; (ii) a modernization of the VAT to enhance its effectiveness and neutrality; and (iii) the restructuring, reorganization, and modernization of the tax administration, with a view to improving efficiency and productivity.

Tax incentives for investment: Charte de l’investissement

A system of investment incentives consisting of eight separate sectoral investment codes covering industry, handicrafts, tourism, the maritime sector, real estate, mining, young entrepreneurs, and the export sector prevailed through 1995. All codes provided ad-hoc fiscal incentives through preferential tax treatment and exemptions, without follow up controls, and used different criteria for approval. Benefits varied according to regions where the projects were located, the scale of the investment, and the activity concerned.⁹

After various attempts to rationalize investment incentives within the framework of the existing codes, in December 1995 a new legal framework (Loi cadre formant Charte de l’investissement), valid for 10 years, replaced the various sectoral investment codes. The new charter seeks to promote investment in Morocco across all nonagricultural sectors through the provision of homogenous fiscal incentives and a streamlining of administrative procedures, and aims at: (i) encouraging exports; (ii) promoting employment; (iii) reducing the cost of investment and production; (iv) rationalizing water and energy consumption; and (v) protecting further the environment. Agriculture remains outside this new framework.

To these ends, the new charter includes essentially a number of fiscal incentives, including exemptions for VAT, PFI, and registration fees, as well as tax breaks on the corporate profit and income taxes, which generalize across sectors the tax incentives that were previously granted under the sectoral investment codes. The new fiscal incentives were mostly implemented with the 1996 transitory budget law (as detailed in Annex 1). However, the new charter also includes a number of initiatives to encourage investment, notably: (i) promotion of financial offshore places, free zones for exports, and customs free industrial warehouses; (ii) enhanced administrative assistance and guidance to potential investors; and elimination of the administrative approval for investment compliance (Certificat de conformité); (iii) establishment of a special fund in the central government budget to promote investments; (iv) government’s participation in the development of industrial zones, particularly in the less developed areas; and (v) more generally, government’s commitment to participate in expenditure on infrastructure; education (including vocational training); land acquisition for certain large investment projects, particularly those favoring job creation and regional development; diffusion of high technology and know-how; and protection of the environment.

Privatization

The Privatization Law, promulgated in 1990, authorizes the government to privatize a portfolio of 112 state-owned enterprises, composed of 37 hotels and 75 companies over a period of six years.¹¹ In early 1995, the privatization law was amended to incorporate two oil refineries and to extend the privatization period until end-1998. The list was based on a number of specified criteria. Eligible firms had to: (i) have the legal status of corporations (Sociétés anonymes); (ii) operate in a competitive environment; (iii) be profitable or potentially profitable; (iv) have no overstaffing problems; (v) have no public service (or utility) role; (vi) have a significant share of state ownership; and (vii) contribute to regional development.

The privatization process is carried out by three institutions: the Ministry of Privatization manages the evaluation and sale of companies; the Evaluation Commission--seven “wise men” nominated by the King--sets a minimum price for the sale of a company; and the Transfer Commission-an interministerial committee of five members--advises the Minister of Privatization, and approves the actual transfer in the case of direct negotiations. While ensuring transparency, this arrangement at times has also slowed the process. A number of companies, for example, have elicited no interest at the minimum price set by the Evaluation Commission. The government is currently considering proposals to streamline the privatization procedures, notably through greater flexibility in setting the minimum price.

Actual privatization started in earnest in late 1993. As of mid-1996, a total of 39 public entities had been sold (22 companies and 17 hotels for proceeds totaling 3.2 percent of 1995 GDP), while some others were closed. The major firms privatized to date include a large financial holding company (SNI) in 1994 and Morocco’s second largest bank (BMCE) in 1995; in each of these two cases, the initial public offering was substantially oversubscribed, and the shares of the companies performed well on the Casablanca stock exchange market after privatization. In early 1996, BMCE was the first Moroccan company to issue equity abroad through global depositary receipts (GDR) in the London market. Other major transfers included the largest intercity bus company (CTM-LN); the biggest cement manufacturer (CIOR), the first tranche (30 percent) of Morocco’s largest oil refinery (SAMIR), and a large chemical producer (SNPE). For large enterprises, majority of control has typically been sold to a core of “strategic” shareholders having the required financial capabilities and technical know-how, and the remaining capital through public offerings. The program has led to an increase in the number of individual Moroccan shareholders to 288,000 individuals. Total foreign participation (mainly from Switzerland, the United Kingdom, the United States, and France) accounted for almost 30 percent of the privatization proceeds. The program has also been instrumental in activating the stock exchange, whose market capitalization rose tenfold during 1989-95.

To give a new impetus to the privatization program, the authorities started issuing privatization bonds in January 1996. These bonds give priority to buy shares of future privatization through public offerings on the stock exchange. The zero-coupon bonds pay annual interest rates of 8 percent at conversion to shares or 8.5 percent at redemption on December 31, 1998; this compares with a 9.5 percent interest for traditional treasury bonds of comparable maturity. The first privatization bond issue of DH 1.5 billion was oversubscribed by more than 25 percent, and in the event the issue was raised to DH 1.76 billion. A second issue of DH 1 billion, which was launched in May 1996 and targeted to institutional investors, was also oversubscribed, although to a lesser extent. Both issues were mainly sold to Moroccan residents and nonresidents.

The privatization program for fiscal year 1996/97 (July-June) provides for the completion of the sale of SAMIR to a core group of investors and the sales of the smaller oil refinery (SCP), the leading laminator (SONASBD) and distributor of fertilizers (FERTIMA), three sugar producers, a gaz storage company (SONAS), two financial institutions (the largest deposit bank (BCP) and the development bank (BNDE)). SONAS has been transferred to the private sector in May 1996, and the government successfully floated 35 percent and 30 percent of its stake in SONASID and FERTIMA on the stock exchange in June and October 1996, respectively. The privatization of the sugar companies faced difficulties, owing to uncertainties in the regulatory regime following the liberalization of imports and the move to a new unitary subsidy scheme; a main concern of potential buyers is uncertainty pertaining to the future evolution of trade protection and domestic price control regulations.

The government is currently preparing a second list of companies for future privatization, possibly including firms in the telecommunications and transport sectors. The government is also encouraging private sector concessions (“concessions”) in the public utilities sector, and is preparing new legislation to set up a proper regulatory framework for privatized companies and monitoring concession obligations, including through the establishment of a regulatory agency. Other purposes of this new regulatory framework would be to secure a credible and coherent investment environment, provide arbitration between operators and users and among different operators, and define the general principles (such as cost-based pricing, nondiscriminatory access, protection against unfair competitive practices) to guide regulation in a competitive environment. As of November 1996, the government has been negotiating build-operate-own (BOO) and build-operate-transfer (BOT) contracts (concessions) with private firms in the water and the electricity sectors and the motorway system. In particular, the electricity enterprise, ONE, has concluded contracts with private firms for the construction and operation of two new thermal generating plants (the Jorf Lafsar power plants); and the water distribution and sewerage systems in Casablanca is to be operated by a French private firm, under a 50-year BOT contract.

While the process of privatization and the granting of private concessions has gained momentum and seems based on a broad consensus, a number of remaining difficulties and impediments will need to be addressed to ensure continued progress. These and related policy issues include: (i) the privatization process is likely to be more difficult in the period ahead, as some of the remaining firms on the initial list may be less attractive; (ii) labor redundancies will become a more serious problem with the privatization of the larger and less profitable firms, given the rigidities of the current labor regulation and practices, including legal obstacles to reassign workers from one public enterprise to another; and (iii) administrative procedures will need to be effectively streamlined as soon as possible.

Restructuring of public enterprises

Major reforms were undertaken during 1985-93 to improve public enterprises’ financial performance and develop their administrative autonomy and accountability, with a view to shifting the government’s role from one of controlling public enterprises’ functions to one of holding management responsible for achieving the performance objective.¹² Since 1994, the government has strengthened the role of the executive boards, negotiated a number of new performance contracts, and established a list of public enterprises to be liquidated or restructured during 1996-2000. A new company law adopted in 1996 imposes on all firms, including public enterprises, regular auditing and company disclosure requirements.

Despite these actions, the financial burden imposed by public enterprises on the budget has not significantly declined since 1990. Total current and capital transfers from the government to public enterprises increased from 1.1 percent of GDP in 1990 to 1.7 percent of GDP in 1993 but declined thereafter, to 1.2 percent of GDP in the first semester of 1996. Also, large amounts of cross-arrears persist. On the one hand, the government has accumulated substantial arrears to the public enterprises, mostly related to payments for utilities, including electricity, water, transport services, and fuel. On the other, public enterprises have also accumulated arrears vis-à-vis the government, largely related to tax payment and to the service of treasury-guaranteed external debt. The implementation of an arrears clearance program beginning in 1993 has helped reduce the stock of arrears several times but has failed to prevent its periodic reemergence. Total government outstanding arrears rose to DH 12.7 billion (4.6 percent of GDP) by end-1995, well above the “normal” payment float of around DH 4-5 billion. As a result of the improvement in the fiscal accounts during the first semester of 1996, they were reduced to DH 9.7 billion (3 percent of GDP) by end-June 1996.

Policy issues in this area relate primarily to: (i) full autonomy to adjust prices to reflect true production costs; (ii) promulgation of a new code of public enterprise management and governance, which would emphasize profit maximization as an important objective of public enterprises; and (iii) annual assessment of public enterprises’ management performance on the basis of fulfillment of readily measurable objectives. The government is currently preparing, in collaboration with the World Bank, a new public enterprise reform operation, which will focus on systemic issues, such as pensions, arrears, and financial autonomy.

Pricing policies

The 1971 basic framework law governing domestic pricing, which gives broad powers to both the central and local governments in controlling prices and/or profit margins, remains in force. However, following the major reforms initiated in the mid-1980s, the government continued to reduce price controls and subsidies during 1990-94. The remaining price controls at the national level relate mainly to foodstuffs and pharmaceuticals, as well as utilities (see below). Other price controls are mostly applied at the local level by the municipalities, and affect retail selling prices and margins. At the provincial level, the wholesale prices of fresh food and vegetables and meat are generally fixed by regional authorities.

The authorities are currently working on a draft price and competition law (Projet de loi sur la concurrence et les prix) that would establish the principles of free and market determined prices as well as the framework for addressing monopolistic practices. To address the deficiencies in the existing legal framework, the new law would also need to: (i) ensure that the more serious types of anti-competitive behavior, including business practices that are also potentially anti-competitive (like franchising and exclusive sales) are adequately taken into account; (ii) introduce executory powers for the proposed anti-cartel commission; and (iii) introduce effective provision for civil suits by consumers or producers for damages incurred by anti-competitive behavior.

Petroleum prices

In early 1995, direct controls on domestic petroleum prices were replaced by a mechanism to fully pass through the fluctuations in international petroleum prices to domestic prices whenever changes in international prices exceed 2.5 percent; retail margins remain, however, fixed.

Water

Water tariff rates at both the production and distribution levels are set by government decree and vary widely across regions and according to the final user (households or enterprises). In 1994, the World Bank estimated¹³ that the marginal cost associated with investment in conveyance and distribution to sustain and extend water supply to households and businesses in the Casablanca area over the period 1994-2000 averaged some DH 6.1 per cubic meter as compared to the average tariff of DH 4.3 per cubic meter prevailing in 1993; to keep tariffs in line with long-run marginal costs, the average tariff over the period would thus have to increase by about 30 percent in real terms from its 1993 levels. Price distortions as regards irrigation water are even higher. As a first step, in early 1996, tariffs in the first bracket (“tranche sociale”) were raised by 30 percent, and tariffs in the higher brackets by 36 percent. The additional charge for the rehabilitation of the Casablanca network was also raised.

With half of the population dependent on agriculture and production largely relying on erratic rainfall, Morocco has since independence pursued an ambitious program of extension of irrigated areas. Morocco has a relatively strong legal framework for recovering operating and maintenance (O & M) costs and a share of investment costs for irrigation water. Cost recovery has improved in the past decade and is estimated to broadly cover O & M costs, but only a fraction of investment costs.

The growing scarcity of water is a major constraint for Morocco, and is already reflected in indicators such as the decline in per capita supplies and exhaustion of available resources in a number of key basins, the degradation of water quality, and limited access of the rural population (14 percent) to potable supplies, compounded by the deterioration of existing infrastructure and the silting of dams. Thus, there is an important need for reform of the legal and regulatory system to rationalize water management and to address incentive issues, such as: (i) the rapidly rising marginal cost of water and sharp increases in investments costs, which are not matched by cost recovery; and (ii) the inadequate demand management, as reflected in losses of irrigation water and urban potable water supplies.

Electricity

The public enterprise for electricity generation (Office national de l’électricité, ONE) shares the legal monopoly for distribution of electricity with a few regional public companies; its former monopoly on electricity production has effectively been abrogated by the authorization of private producers (see below). ONE is confronted with financial difficulties, arising notably from a distorted cost and pricing structure, which has hampered timely completion of planned investment and reduced maintenance outlays.¹⁴ In particular, following a very severe drought in 1995, larger fuel consumption necessitated by increased use of thermal plants to compensate for the shortfall in hydroelectric generation aggravated further ONE’s financial problems, in the absence of commensurate electricity tariff increases. These difficulties have led to the accumulation of substantial domestic arrears, in particular vis-à-vis the petroleum refineries and the Treasury with respect to debt service and payment of taxes, as well as to the postponement of the planned expansion of generating capacity.¹⁵ As a result, electricity generation fell substantially short of demand in 1995, and might again have been--as in some earlier years--a binding constraint on industrial production.

Tariffs, fixed by government decision, vary by type of consumer (industrial users pay higher rates than households), but also reflect other considerations.¹⁶ In 1994, the overall tariff levels were estimated to have fallen short of economic costs (based on c.i.f. fuel prices) by about 10-15 percent.¹⁷

A new tariff structure was introduced in January 1996, which increased tariffs by 17-20 percent for largest household consumers; tariffs for users of low tension (up to Kwh 100), however, ware kept unchanged. In addition, the new tariff structure eliminated the distinction made in the past between contracts that incorporated a minimum energy consumption per month and those that did not. As regards nontariff policy, ONE is to halve its own production of electricity and treble the amount it buys from private sources by the year 2000. The first build-operate-transfer (BOT) project involving also the leasing of some existing plants has already been signed with ABB Asea Brown Boveri and the U.S. CMS Energy Corporation, and the construction of two additional 330-MW units is to start at the end of the year. Tenders for a 300-650 MW combined cycle power station in Mohammedia are to be issued soon; this project is to be followed by a 300-500 MW combined-cycle plant at Kenitra. In addition, a 50 MW wind power station in Tetouane is being financed by Electricité de France and other private investors.

Consumer subsidies

Although a range of subsidies was abolished in the 1980s, Morocco has continued to maintain consumer subsidies for certain edible oils, sugar, and flour, essentially for social reasons. Under this system, prices for oils, sugar, and certain low-quality variants of wheat flour are controlled; and producers and distributors receive subsidies to compensate for the difference between costs and prices. The subsidies are paid by the price stabilization fund (Caisse de compensation), which receives tariff revenue from the import of the subsidized items, and transfers from the central government budget for the balance. While limiting the subsidy to low-quality variants implies an element of self-targeting, it is estimated that only a fraction of the subsidy actually reaches the poor. In mid-1996, the government liberalized imports of cereals, edible oils, sugar, and derivatives; and replaced open-ended subsidies for edible oils and sugar by a system of fixed unitary subsidies for these products. Reform of the wheat flour subsidy is currently under consideration. However, prices for these three items remain controlled.

Land market and housing

The major constraints to efficient land use and development generally vary from urban to rural areas. In urban areas, the main problem is the incentive structure and lack of transparency in the real estate market (including land reserved for industrial zones). In rural areas, the main problem is the lack of an integrated market for land use as property rights are not well defined (the land is collectively owned or not registered).

Key objectives of planned reforms in this sector include: (i) increasing the pace of land registration in rural areas to allow the transfer and consolidation of land as desired by farmers, and the use of land as collateral to obtain credit; (ii) simplifying the process of transferring land titles in both rural and urban areas; (iii) increasing transparency of the real estate market by publishing zoning plans and sales prices, and increasing the availability of publicly held land to the private sector; (iv) changing the favorable taxation of land relative to other assets; and (v) providing appropriate public infrastructure and support services for the development of industrial zone and housing lots.

Labor market

The labor market faces significant rigidities, mainly as a result of the enforcement of stringent labor regulations, which have exacerbated urban unemployment and stimulated development of the informal economy (see also Section II).²² Despite relatively high government expenditures on education (over 5 percent of GDP), employers face shortages of certain skills (particularly in the managerial and technical fields). At the same time, greater emphasis in the provision of higher education has been at the expense of the promotion of basic education; illiteracy at about 55 percent on average is comparatively high.

Three main features of the regulatory system have contributed to rigidities in the labor market: (i) the minimum wage policy; (ii) mandated nonwage labor costs; and (iii) regulations governing hiring and dismissals.

All firms are required to apply the minimum wage law enacted by the Dahir of June 18, 1936 for the agricultural sector (Salaire minimum agricole garanti, SMAG) and the nonagricultural sector (Salaire minimum interprofessionel garanti, SMIG). The SMIG, which appears to affect a large share of urban employment, has been rising in real terms by about 7 percent between 1989 and 1995, contributing to the high rate of registered unemployment in the urban area. By raising total labor costs contributing in the formal sector, the SMIG may have also encouraged the shift of production into the informal sector²³ and the use of relatively more capital intensive techniques, and contributed to the decline of Morocco’s competitiveness in international markets.²⁴ The gap between the SMIG and the SMAG (the latter being 35 percent lower) may partly explain the rural-urban migration. In August 1996, the government agreed to wage and salary increases in the public sector, as well as to an increase in the SMIG and SMAG of 10 percent, as part of the social pact.

Social charges levied by the mandatory social security organization, Caisse nationale de sécurité sociale (CNSS), represent about 19 percent of the take home pay. Firms also pay a levy (1.6 percent) for vocational training, and additional charges for various types of insurance (accident) which are not compulsory. These charges have driven a wedge between the cost of labor and the net take-home pay in the formal sector of the economy that varies between 20 percent and 35 percent.

The Moroccan system constrains the freedom of employers to discuss worker dismissal, and as a result discourages labor mobility and employment. Individuals may not be fired for economic or technological reasons. Collective layoffs are permitted for economic reasons only with prior approval by regional authorities. In addition, the labor code emphasizes severance pay and judicial recourse. By raising exit costs, these features have made it harder for firms in need of restructuring to adjust. The rigidity in firing has also affected hiring practices. Firms either tend to hire temporary workers or base their hiring decisions on personal contacts. Labor market intermediation (e.g., employment agencies) is not allowed under the present code, but firms have been able to rely on information provided by “consulting” firms to base their hiring decisions.

To eliminate a number of these rigidities, the authorities submitted a new draft labor law to Parliament in May 1996. To address existing deficiencies, the new labor code would need to liberalize substantially the provisions relating to: (i) dismissal on the basis of economic reasons; (ii) fixed-term employment; (iii) the scope of applying minimum wages; (iv) eligibility for severance pay; (v) collective bargaining procedures; and (vi) allow fully autonomous employment agencies.