To ease the tension caused by a controversial provision of a tax law on insurance companies for over 10 years, the Federal Inland Revenue Service (FIRS) has asked its tax auditors to stop demands on the companies pending the amendment of the law.
KPMG Head,Tax,Regulatory & People Services, Wole Obayomi, who spoke on the law, said FIRS Chairman, Babatunde Fowler broke the news at a meeting on the flawed law with the accounting firm.
The flawed law is contained in Section 16(2) of the Company Income Tax Act (CITA) 2007.
Some sections compelled the 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.
The controversial law has over the years remained a burden on underwriters and have severally called for a review of the (CITA) 2007, to relieve the heavy tax burden enshrined in the law. Specifically, National Insurance Commission (NAICOM) and the Nigerian Insurers Association (NIA) appealed to the Federal Government to suspend or waive some sections of the Act considered to be business unfriendly.
Obayomi said KPMG has been acting for the NIA on the controversial law with the FIRS.
He, however, disclosed that despite the instruction of the Chairman on the staff of FIRS to halt the implementation of the sections of the controversial law, the staff are still making demands from the companies.
He said: “We met with the FIRS Chairman some few days ago and he told us that they know how onerous the provision is in the law and they support the call by the NIA to ensure that the industry is not destroyed by tax.
“He told us that he has instructed the tax auditors not to make a demand on insurance companies based on the flawed provision. But we told him that this is not what is hopping on the field and that he need to call his team to order. So really, it is a case of the leadership giving order and the operatives doing something different.
“What he finally said is that if the demand is made again, we should escalate it to him on company by company basis. This, he said, is pending the time that the law will be amended. He has assured us of his support and we believe him”, he added.
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.
