Applying Transfer Pricing Policies to Prevent Double Taxation and Stimulate International Trade: Insights for Morocco and Africa

1. Introduction

Transfer pricing (TP) policies are critical to preventing profit shifting, ensuring fair allocation of taxing rights, and stimulating international trade. For developing economies like Morocco and its African peers, TP compliance safeguards domestic revenues while fostering investor confidence. However, the application of TP principles faces significant challenges, including valuation complexities, lack of comparables, and disputes over profit allocation. This article provides a comprehensive analysis of TP policies in line with international standards, focusing on their role in preventing double taxation and stimulating trade. Special emphasis is placed on Morocco’s alignment with OECD^[1] and UN principles, as well as practical solutions for overcoming local challenges.

2. Legal Framework of Transfer Pricing

International Principles

The OECD Transfer Pricing Guidelines and the UN Model Convention establish the arm’s length principle as the global standard for intercompany transactions. Both frameworks aim to prevent profit shifting by ensuring that related-party transactions mirror those of unrelated parties. Thus, The OECD states that “The arm’s length principle is the cornerstone of transfer pricing, ensuring that profits are taxed where economic activities and value creation occur.”^[2]

Moroccan Regulations

Morocco introduced TP-specific provisions in Article 214 of the General Tax Code (CGI) in 2021.^[3] These regulations mandate MNEs to document their intercompany transactions and justify compliance with the arm’s length principle.

Morocco’s TP framework reflects its commitment to aligning with international standards while addressing local economic realities.

Alignment with BEPS

Morocco’s participation in the OECD BEPS framework since 2019 highlights its commitment to curbing base erosion and profit shifting through robust TP policies. In this regard the BEPS Action Plans ensure that profits are taxed where substantial economic activities occur, reducing opportunities for tax avoidance.^[4]

3. Preventing Double Taxation Through TP Policies

Double Taxation Risks

Intercompany transactions often result in disputes over taxing rights, leading to double taxation. This occurs when two jurisdictions tax the same income due to differences in TP interpretations.

Proposed Solutions:

• Mutual Agreement Procedures (MAPs): Treaties should include MAP provisions to resolve double taxation disputes amicably.
• Advanced Pricing Agreements (APAs): These pre-empt disputes by securing agreements on TP methodologies for future transactions.

Both MAPs and APAs could provide certainty and reduce the likelihood of prolonged disputes over intercompany pricing.^[5]

African Context

African nations face unique challenges in preventing double taxation, including resource constraints and limited capacity for treaty negotiation and enforcement.

Proposed Solution:

• Establish a regional MAP mechanism under AfCFTA to harmonize dispute resolution across member states in light of the ATAF tax policy framework.^[6]

4. Case Studies: Moroccan and International Contexts

Moroccan Case Study:

In a case involving a multinational pharmaceutical company, the Administrative Court of Rabat upheld adjustments to intercompany royalty payments due to insufficient documentation. The court emphasized the need for robust functional analyses and comparables.^[7]

International Case Study:

In Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, the Federal Court of Australia rejected the taxpayer’s TP analysis, favoring a profit split approach to address intangibles.^[8]

Lessons for Morocco:

• Enhance local capacity for TP audits.
• Invest in regional benchmarking databases to improve comparables.

5. Stimulating International Trade Through TP Policies

TP policies not only prevent abuse but also create a transparent environment that fosters trade and investment. For example, Morocco’s DTAs with countries like France and Spain include TP provisions that reduce withholding taxes, promoting cross-border financing and IP transfers. Consideration should be positioned toward the following steps:

• Encourag APAs to build investor confidence.
• Integrate TP frameworks into regional trade agreements under AfCFTA.

The Ministry of Economy and Finance in Morocco expressed that “Transparent TP policies reduce trade barriers and encourage foreign direct investment in emerging markets.”^[9]

6. Challenges in Applying TP Policies in Morocco and Africa

1. Limited Comparables and Benchmarking Issues

Africa’s economic landscape offers fewer uncontrolled transactions for benchmarking, forcing reliance on global comparables that may not reflect local realities.

Solution:

• Develop African-specific comparability databases through regional cooperation.

2. Valuation Complexities for Intangibles

Valuing IP and other intangibles is particularly challenging due to their unique and non-physical nature.

Solution:

• Use hybrid valuation models combining CUP and profit split methods.

3. Capacity Constraints

African tax administrations, including Morocco’s, often lack the expertise and resources to enforce TP regulations effectively.

Solution:

• Invest in training programs for tax auditors.
• Leverage technology, such as AI, to streamline compliance processes.

7. Proposed Solutions and Innovations

1. Leveraging Technology:

• Use AI-driven benchmarking tools to enhance functional analyses.^[10]
• Implement blockchain for tracking intercompany transactions.

1. Regional Collaboration:

• Create an African Tax Treaty Network to standardize TP enforcement.
• Share resources and expertise under AfCFTA frameworks.

1. Policy Reforms:

• Integrate arbitration clauses into Moroccan DTAs for efficient dispute resolution.
• Promote APAs to provide certainty for taxpayers.

8. Conclusion

Applying transfer pricing policies in line with internationally recognized principles is vital for preventing double taxation and stimulating trade in Morocco and Africa. While challenges such as valuation complexities and resource constraints persist, solutions like regional collaboration, technology-driven compliance, and advanced pricing mechanisms can significantly enhance TP frameworks. By aligning with global best practices while addressing local needs, Morocco can strengthen its position as a leading investment destination in Africa.

1. OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations para. 1.1 (2022). ↑

2. OECD, Model Tax Convention on Income and on Capital art. 9 (2017). ↑

3. Code Général des Impôts [CGI] art. 214 (2021) (Morocco). ↑

4. OECD, BEPS Action Plan Overview (2015). ↑

5. OECD, Transfer Pricing Guidelines para. 4.1 (2022). ↑

6. ATAF, Tax Policy Frameworks for Africa (2022). ↑

7. Tribunal Administratif de Rabat (First Instance), Decision n° 78/2022 (2022). ↑

8. Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, [2017] FCA 109. ↑

9. Ministry of Economy and Finance (Morocco), Annual Tax Policy Report (2023). ↑

10. ATAF, Technology in Tax Administration for Africa (2023). ↑