The signing into law on Monday of the Finance Bill 2019 has brought a sigh of relive to insurance companies in Nigeria, as this has removed certain clauses in the tax law that were unfair tax burdens to their operations.
With this Bill now into law, insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place.
Life and non-life businesses would no longer be liable to special minimum tax provision and all wholly, exclusively, reasonably and necessarily incurred expenses will be tax deductible.
Furthermore, “taxable investment income” would be limited to “income derived from the investment of shareholders’ funds”. This seeks to clarify taxable income and limits it to income accruing to the insurance company as against income accruing to the insurance fund., according to experts analysis.
According to experts, this is game changer in ensuring the fair taxation of insurance companies.
Insurers in the course of pushing for this amendment had engaged KPMG to help resolve tax burdens placed on insurance companies operations by section 16(2)(a) of the Companies Income Tax Act (CITA).
This taxation analysts believed had undermined the insurance sectors capability to pay dividend to shareholders, improve profitability and achieve expected growth.
They also believe that taxation on insurance premium, commission to brokers and agents, as well as claims and management expenses amounts to multiple taxation, and lacks merit when you consider what obtains in other market.
With KPMG professional services, the industry got the listening ear of the Federal Inland Revenue Services that temporarily suspended that section of the law pending before its final amendment in the new Finance BILL 2019.
Below were the relevant sessions of the tax law that were pushed for amendment.
In Section 16(2)(a) of the CITA, the profits of a life business insurance company are calculated by taking management expenses, including commission, subject to subsection (8)(b) of the Act from gross income (investment income and revaluation surplus).
For non-life businesses, section 16(1)(b) states that profits will be calculated for tax purposes by deducting the reinsurance cost and a reserve for unexpired risk (the premium corresponding to the time period remaining on an insurance policy), subject to subsection (8)(a) of the Act from a gross premium, interest and other income receivable in Nigeria.
The relevant subsections of CITA are listed below “(8) An insurance company, other than a life insurance company, shall be allowed as deductions from its premium the following reserves for tax purposes:
(a) for unexpired risks, 45 percent of the total premium in case of general insurance business other than marine insurance business and 25 percent of the total premium in case of marine cargo insurance;
(b) for other reserves, claims and outgoings of the company an amount equal to 25 percent of the total premium, so that, after allowance under the Second Schedule to this Act as may be restricted, has been allowed for in any year of assessment, not less than amount equal to 15 percent of the total profit of the company for tax purposes.
(9) An insurance company, in respect of its life insurance business shall be allowed the following deductions from its investment incomes and other incomes:
(a) an amount which makes a general reserve and fund equal to the net liabilities on policies in force at the time of an actuarial valuation;
(b) an amount which is equal to 1 percent of the gross premium or 10 percent of profits (whichever is greater) to a special reserve fund and accommodation until it becomes the amount of the statutory minimum paid-up capital;
(c) all normal allowable business outgoing, except that after allowing for all the outgoing and allowance under the Second Schedule to this Act as may be restricted under the provisions of this Act for any year of assessment, not less than an amount equal to 20 percent of the gross incomes shall be available as ‘total profit’ of the company for tax purposes.”
For both life and non-life insurance businesses, the basis for computing minimum tax seems punitive at 20 percent of gross income and 15 percent of total profit, correspondingly. To compound the tax burden little solace was given to the industry when they suffer losses.
A thorough review of subsection (8) in the CITA Act exposes the inadequacy of parts (a) and (b). The former imposes a limit on unexpired risk while the latter restricts the deductibility of expenses. Section 16 (9) (c), in the case of life insurance business, introduces a new basis for minimum tax. In practice, the newly introduced minimum tax usually exceeds the minimum tax provisions of section 33 in the CITA. This puts the insurance industry in an unfair situation of paying a higher minimum tax than their peers in other industries in cases when the loss or a total loss of profits result in no tax being payable, or a tax charge that amounts to less than the minimum tax.
Section 16(7) of the CITA restricts insurance companies to carrying forward tax losses for a maximum of four years. Losses that are not fully relieved after four years by an insurance company cannot be carried forward. Companies are made to pay taxes irrespective of the losses accumulated from preceding years.
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