Interview: Issam El Maguiri dissects the tax system without compromise
Meticulous in his choice of words and vocabulary, and employing accessible technical language, Issam El Maguiri, president of the Order of Chartered Accountants, dissects the current tax system frankly and without mincing words, revealing its shortcomings and proposing avenues for reflection on a reform that has been eagerly awaited for years. He believes it is high time to question the tax system's capacity to stimulate economic development and generate the resources necessary for the functioning of the state apparatus. For him, the system must be reformed to move towards a clear, simple, and stable tax framework that provides the necessary legal certainty for taxpayers.
What is the starting point for your contribution to tax reform?
Our thinking stems, first and foremost, from the fact that we are the primary experts in taxation. This contribution stems from the mission entrusted to the Order of Chartered Accountants by the law establishing it: to support public authorities on matters relating to tax, economic, and legal issues. Furthermore, this work, undertaken in preparation for the National Tax Conference, is based on our years of experience assisting the tax administration in drafting finance laws, technical notes, and circulars related to taxation. Moreover, it is crucial to remember that the accounting profession is a partner and interlocutor in the collection of taxes from SMEs. Indirectly, by performing accounting work for this sector of businesses, chartered accountants are a vital link in the collection process. Finally, reflecting on the reform of the Moroccan tax system is part of the civic duty that the Order must fulfill in supporting, training, and disseminating tax information to various categories of taxpayers.
What is the context of this 3rd National Tax Conference?
The National Tax Conference is taking place at a time marked by reflection on the new development model. A reformed tax system can be a prerequisite for this new model. It is therefore necessary to begin by establishing a tax system that is fair, transparent, simple, and effective. Some believe that the development model must be defined before choosing the appropriate tax system. We, however, believe that a modern tax framework can be suitable for all development models. Furthermore, tax reform is also linked to economic and social constraints. It is time to consider the tax system's capacity to stimulate economic development and generate the resources necessary for the functioning of the state apparatus.
So, what is your assessment of the current tax system?
Several studies have shown that our tax system contains inefficiencies and dysfunctions that make it inequitable and complex. This begins with a tax burden that falls on a limited fraction of taxpayers, making it relatively high and unfairly distributed. Furthermore, the development of tax regulations does not follow a prior consultation process. In addition, government agencies, especially at the local level, are insufficiently equipped to ensure fair and efficient large-scale tax collection. Finally, numerous exemptions, complexities, and imperfections prevent the tax system from fully playing its redistributive role and exacerbate the low level of public support or consent to taxation. In this regard, we believe there is a close link between the degree of tax compliance and the level of trust in public institutions.
Do you have an overall vision of the framework to be established?
In general, we need a clear, simple, and stable tax system that provides taxpayers with the necessary legal certainty. It must be fair (through a streamlining of all tax exemptions and tax levels for different types of income and gains), neutral and incentivizing (to stimulate productive investment and improve Morocco's attractiveness by ensuring healthy competition), and finally, efficient (allowing for tax control and collection while respecting taxpayers' rights). To move towards such a system, we must consider establishing the principle of prior consultation. This consultation allows legislators to make informed decisions and prevent difficulties in applying tax law. The examples of Canada, the Netherlands, and the United Kingdom can serve as inspiration.
Corporate taxation remains poorly adapted to the realities of the economic landscape. What do you propose to remedy this?
We propose the establishment of two systems. A standard tax regime for all large, medium, and small businesses (both legal entities and individuals). This regime remains based on the accounting standards and rules applicable to each sector, ensuring alignment between accounting and tax regulations. Any potential differences (which may prove necessary) should be limited and explicitly and unambiguously stipulated by law to reduce the risk of discrepancies and disputes. In contrast, a second, "super-simplified" regime for very small businesses (whose turnover is yet to be defined) applies only to individuals (as is the case with the current flat-rate system). This super-simplified system must be based, at a minimum, on cash receipts, with the eventual requirement of maintaining a revenue register, or alternatively, a cash register system with mandatory regular purchase invoices and a simplified annual revenue declaration. The tax would be based on a percentage of actual revenue depending on the nature of the activity, the geographical location, the number of employees and the size of the premises operated.
There are many sectors whose taxation is out of step with the realities on the ground...
Indeed. In this regard, it seems necessary to review the exemption threshold for the agricultural sector for greater consistency and tax fairness. However, for operators who remain exempt, a reporting obligation should be instituted, with an exception for small farmers (natural persons) who have no other income and whose turnover is below a threshold to be determined (a maximum of 2 million dirhams in our opinion).
What about the treatment of tax expenditures?
In our view, tax incentives that are justified by their relevance should be limited in time and granted according to the sector or geography, without distinction between taxpayers or between exports and local businesses, to ensure fairness and level playing field. All other exemptions should be eliminated. Therefore, we recommend ending tax exemptions for the real estate sector, implementing direct aid to eligible households where necessary. We also see no benefit in granting exemptions to associations whose purpose often extends to activities that compete with the commercial sector and whose relevance is unproven (e.g., associations focused on real estate). Regarding the agricultural sector, if we consider broadening its scope to include medium-sized farms (by lowering the current threshold), we suggest that it be included among the strategic sectors to benefit from reduced taxation, similar to export sectors, given its specific characteristics (its cyclical nature heavily dependent on weather patterns, its major role in job creation, and its contribution to the stability of the rural population).
In conclusion, we recommend that any incentive be limited to a total exemption for a maximum period of 3 to 5 years, followed by the application of a proportional rate of 20%, without distinction between export and local activities, for activities or geographical areas where the incentive is justified, including export processing zones and offshoring activities.
There are other irrelevant provisions that complicate the code and create a burden on administrative management…
You are right. For example, the 20% withholding tax on interest paid to companies subject to corporate income tax is no longer justified for this category of taxpayers subject to a system of quarterly advance payments. This is especially true given that its refund is subject to difficulties and delays. Failing its elimination in the very near future, it is essential to at least provide the taxpayers concerned with the option of deducting it indefinitely until it is refunded.
A second example is the minimum tax liability. This tax should not persist in the long term in the absence of taxable profit or capital gains. Therefore, it cannot be considered normal and fair for a company or individual who actually incurs losses to be subject to a tax on profits or capital gains. Its continuation, if necessary, should be temporarily limited to certain categories of activities.
While corporate taxation should better reflect the realities of the economic fabric, labor and capital should also be taxed in a harmonious and fair manner. What do you recommend in this regard?
First, we believe it is necessary to adjust the tax levels on labor and capital income to make them fairer. In this respect, it is recommended to consider implementing the following adjustments over a period of two to three years:
• Increase the tax-exempt threshold for salaries to 36,000 DH per year.
• Increase the ceiling for professional expenses to 60,000 DH per year.
• Introduce a tax allowance for the unemployed spouse,
• Increase the tax credit for dependent children in school or grant a deduction for school fees,
• Restructure the tax brackets by adjusting the intermediate brackets.
Exempt items must be better defined and explicitly regulated without any ambiguity, taking into account the specific characteristics of different sectors.
And what about capital gains?
Regarding capital gains, it is important to harmonize the level of taxation on capital gains to make it consistent with the taxation of corporate profits for income of the same nature. The Order recommends either taxing the total income of individuals, encompassing all income and gains, according to the progressive tax scale with the possible application of allowances to be determined, or setting the withholding tax rates at more consistent levels close to 25% for all income and capital gains (except for dividends, where taxation constitutes a supplementary tax).
Still on the subject of income, how should the tax on rental income be adjusted?
In our opinion, it would be wise to extend taxation as rental income to income from furnished rentals by non-professional individuals, including seasonal or occasional rentals, while excluding it from the scope of VAT. If the flat-rate tax is maintained, a rate of 10% to 15% would be consistent and fair given the absence of deductions for expenses and depreciation. This tax should be quickly extended to rentals via online platforms. Similarly, capital gains acquired through inheritance should be taxed in the same way as any other capital gain realized upon the sale of property, excluding the primary residence.
Isn't it economically sound today to introduce a wealth tax?
Given the difficulties in its implementation and its potential negative effects on investment and the risk of capital flight, in addition to the limited success and yield this tax has generated in the countries that have experimented with it, we believe it is preferable to institute a solidarity contribution on the total income of individuals (including dividends) exceeding a threshold to be determined (2 million dirhams in our opinion). The rate could be progressive, ranging from 2% to 5%, to remain at a manageable and acceptable level.
Consumption taxation and VAT were the focus of much hope at the last National Conference. In your opinion, how can this tax be made more effective?
The prerequisite for any VAT reform is to redefine its scope to encompass almost all economic activities, including agricultural products. The scope of application must encompass as many activities as possible and must be regularly updated and adapted to take into account new activities, particularly those related to the digital economy and those of a specific nature, sometimes involving several foreign territories, drawing on recent international practice in this area. Furthermore, exemptions must be streamlined as much as possible with periodic evaluation. For certain consumer goods with a social purpose, a super-reduced rate of 5% could be considered to avoid substantially impacting citizens' purchasing power, also including agricultural products. For these latter products, VAT collection at the wholesale market level could be considered. For the remaining activities, we recommend two rates: an intermediate rate of 10% or 12% and a standard rate of 20%, with the right to deduct input tax for all activities within the scope.
Finally, we recommend that justified VAT credits be systematically refunded according to a well-defined and expeditious procedure.