FIRS Halts Implementation of Controversial Insurers Tax Law

The Federal Inland Revenue Service (FIRS), has mandated its staff to halt the implementation of the sections of the controversial tax law that has brought untold hardship to insurers.

The Partner & Head, Tax, Regulatory & People Services, Wole Obayomi, disclosed this at the recent Voluntary Assets Declaration (VAID) Scheme awareness Public Lecture organised by the Chartered Insurance Institute of Nigeria (CIIN) in Lagos.

Obayomi disclosed that 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 operators over the years, have been lobbying the authorities to amend as it placed huge tax burden on insurance companies.

To the insurers, this was cheering news as some underwriters had often complained about the huge taxes imposed on insurers by both federal and state governments, make firms to shy away from paying their taxes.

In her speech, President, CIIN, Mrs. Funmi Babington-Ashaye, said that essence of the lecture was to create awareness amongst CIIN’s stakeholders such that they 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, further adding that it is important 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.

Some sections the controversial law 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.

Section 16(2)(a) of the CITA stipulates that 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 that “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, 45per cent of the total premium in case of general insurance business other than marine insurance business and 25per cent of the total premium in case of marine cargo insurance; (b) for other reserves, claims and outgoings of the company an amount equal to 25per cent 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.

The law also provides that 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.