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Join on Telegram Casablanca – On April 6, the French National Financial Prosecutor’s Office announced the launch of a preliminary investigation for “aggravated tax evasion laundering” against McKinsey, alarming Moroccan tax officials.
The decision followed the launch of an investigation on March 31, which was prompted by the release of a Senate report detailing — and condemning — “a widespread issue” of McKinsey tax evasion.
Just as McKinsey has not paid taxes on profits for 10 years in France, it turned out the multinational consulting firm has been using the same tactics in Morocco.
McKinsey & Co in Morocco
McKinsey & Co is a global management consulting firm. Its Morocco branch, which opened in Casablanca in 2004, has earned the sought-after Casablanca Finance City (CFC) classification. CFC serves as a regional center for French-speaking Sub-Saharan Africa.
In 2020, the group’s Moroccan branch had a substantial turnover of about MAD 287 million ($29 million), but spent abundantly, resulting in a negative net result of nearly MAD 34 million ($3.46 million).
As a result, McKinsey Morocco does not pay company tax, excluding the 0.5% minimum contribution on turnover, operational revenue, and financial income, which amounts to around MAD 565,000 ($57,691).
Under the category of “other external costs,” the company’s figures indicate an extravagant total of MAD 206 million ($21 million).
Recent McKinsey turnover
In 2019, McKinsey achieved a record turnover of MAD 421 million ($42 million), including MAD 198 million ($20 million) in Morocco, and MAD 222 million ($22 million) abroad. Despite a net profit before taxes of more than MAD 17 million ($1.7 million), the taxes on profits paid to the state that year were just MAD 1.1 million ($112,319).
The following year, McKinsey had a record turnover of MAD 287 million ($29 million), which included MAD 110 million ($11 million) in Morocco and MAD 183 million ($18.6 million) across Africa. Regardless, the taxes on earnings paid to the Moroccan state were a minimal contribution of MAD 565,209 ($57,712).
Based on previous reports, particularly those from 2017 and 2016, McKinsey consistently employs the same tax evasion strategies and justifications to only pay the minimum contribution.
As the French National Financial Prosecutor’s Office showed in its April 6 announcement, however, McKinsey’s justifications do not hold water. The expansion of its workforce from 66 employees in 2016 to 111 employees in 2020, suggests that the business is exceptionally successful, or at the very least not sinking.
McKinsey’s tax evasion tactics
McKinsey follows in the footsteps of several multinational firms throughout the world that have used tax optimization tactics to avoid paying taxes.
In general, McKinsey’s tax-evasion strategy is to exaggerate expenses as much as possible, particularly external costs, as evidenced by data from McKinsey & Co.’s summary statements. Then, it declares a “chronic deficit.”
At McKinsey, senior foreign consultants’ massive responsibilities are justified on the basis of their specialist knowledge. And they are usually paid a “fortune.”
According to McKinsey’s annual summary statements, an amount of MAD 104 million ($10.6 million) was paid in compensation to foreign staff, whereas Moroccan personnel expenditures were merely MAD 118 million ($12 million).
Using the same pattern observed by the senatorial commission in France, the remuneration of the foreign staff — MAD 76 million ($7.7 million) — at McKinsey Morocco is once again almost equal to that of the Moroccan staff, namely MAD 79 million ($8 million).
To justify the huge and “exaggerated” employment of international staff, McKinsey claims that the Paris office is a net importer of expertise to carry out its objectives, which is usually the only excuse the firm presents in all cases.
Additionally, the firm also uses the missions, travel, and other costs to justify its expenses, which total MAD 61 million ($6 million), excluding Studies and Services at MAD 76 million ($7.7 million), and supply purchases total roughly MAD 78 million ($7.9 million).
Under the category of “other external expenditures” — which is equivalent to the well-known “transfer price” — Mckinsey’s figures usually indicate unreasonably high amounts. But transfer pricing is the courteous phrase that has vanished in the name of billing services from the parent firm to its subsidiary.
At McKinsey, the amount of “other external expenditures” is usually hefty. In 2020, and despite the coronavirus pandemic (travel and gathering instructions), the amount stood at MAD 65 million ($6.6 million), which was 22.6% of the firm’s turnover.
Compared to the past, this percentage is “fair.” In 2017, the “other external expenditures” amount at McKinsey accounted for 49% of the total turnover of the firm, standing at MAD 159 million ($16 million).
In 2018, it was 65% of the turnover of the firm, totaling MAD 230 million ($23 million), and in 2019 it was 48% of the turnover of the firm, reaching MAD 206 million ($21 million).
While “viewed as a legitimate business opportunity by transnational corporations,” as the researcher and Management Accounting professor, Mehafdi Messaoud, has explained, “transfer pricing … is often used to misrepresent financial success and evade taxation.”
Messaoud added, “unethical transfer pricing behaviour consumes scarce resources, causes costs but does not create value.”
The suggestion, then, is that governments (including Morocco’s, in this case) must enact harsher laws than ever before in order to preserve national financial interests.
