Insurance

FIRS suspends controversial insurance tax law

From left: Partner & Head,Tax,Regulatory & People Services, Wole Obayomi; President, Chartered Insurance Institute of Nigeria, Mrs Funmi Babington-Ashaye, former President, Ogala Osaka and Deputy Director, Office of the Executive Chairman, (FIRS) Abolade Kehinde at the event.

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Chuks Udo Okonta

The Federal Inland Revenue Service (FIRS) has technically suspended the controversial insurance tax law, which over the years has remained a burden on underwriters.

The Partner & Head,Tax,Regulatory & People Services, Wole Obayomi, disclosed this today at the VAID Scheme Awareness Lecture, organised by the Chartered Insurance Institute of Nigeria (CIIN) in Lagos.

According to him, the Chairman, FIRS, Babatunde Fowler, had mandated staff of FIRS to halt the implementation of the sections of the controversial law which the insurance industry over the years has being engaging the FIRS on how to amend sections of the tax law that placed huge tax burden on insurance companies.

President, CIIN, Mrs Funmi Babington-Ashaye, said essence of the lecture is to create awareness amongst CIIN’s stakeholders such that they (i.e., defaulters, if any) can leverage the opportunity to make it up to government by paying their tax obligations. She added that penalties for not taking advantage of this window for those that will be caught, will be very severe. It is therefore important that we spread the word to encourage more tax compliance.

“What the government has done with the VAID Scheme, therefore, is to provide a window for all tax defaulters or evaders to voluntarily declare their hidden or previously undeclared assets and income over which they have not paid taxes so that they can be appropriately taxed.

“In taking this decision, the government wants to forgive their previous sins of not paying taxes as well as waive the associated sanctions. It is more like a tax amnesty. The window which was opened on July 1, 2017 for 9 months will close on March 31, 2018. The message is very simple, declare previously undeclared assets and income, pay appropriate taxes on them and you are good to go,” she said.

In the controversial law, some sections compelled insurance companies to pay out their capital in the form of a minimum tax because they are almost always in a never-ending refund cycle with the tax authorities. Originally, the CITA was meant to amend and simplify controversial aspects in its policy, instead it has made it more obscure particularly for the insurance sector.
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% of gross income and 15% 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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