Chief Executive Officer of National Insurance Commission, Naicom/ Commioner For Insurance, Mr Sunday Olorundare Thomas; Chairman, Nigerian Insurers Association, NIA, Mr Olusegun Omosehin, Cheid Executive Officerr of Federal Inland Revenue Services, FIRS, Mr Muhammad Nami and the Group Managing Director of Africa Reinsurance Corporation, Africa Re, Mr Ken Aghoghobvia
Multiple Taxation: A Worm Eating Insurance Industry Deeply Away
patomabusinessonline.com takes a deep look at the stress multiple taxation is putting on operators in the insurance industry in Nigeria, and reports that its elimination across the industry’s value chain is pivotal to its growth and survival.A local proverb says that he who wears the shoes know where it pinches him.True to this adage, insurance practitioners in Nigeria , like their counterparts in the other key economic sectors (manufacturing, telecom, aviation,etc) have been lamenting bitterly about the damage multiple taxation is doing to their businesses, making some companies in this industry not to perform to their potential and have even forced some out of business. Insurance operators lose about N23 billion to N36billion on yearly basis paying taxes.Tax and multiple taxes
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or national
On the other hand, multiple taxation is the imposition of different types of taxes that could have come under one major tax form on businesses by the various tax authorities and revenue agencies of the governments.
President Buhari had on January 13, 2020, signed into law the Finance Bill 2019. The new act amended the Customs and Excise Tariff Tax Act, the Petroleum Profit Tax Act, the Company Income Tax Act (CITA), the Personal Income Tax Act (PITA), the Value Added Tax (VAT) Act, the Stamp Duty Act and the Capital Gains Tax (CGT) Act in order to enhance their revenue generation potentials for the country.
There are nine major types of taxes in the country. They are: Companies Income Taxes (CIT); Value Added Taxes (VAT); Withholding Taxes (WHT); Petroleum Profits Taxes (PPT); Personal Income Taxes (PIT); Stamp Duties (SD); Capital Gains Taxes (CGT); National Information Technology Development Levy (NITDL) and Tertiary Education Taxes (EDT).
There are over 200 taxes currently being collected by federal, states and local governments agencies from companies operating in the country.
These types of taxes include but not limited to the waste treatment charge (paid by firms operating in Lagos); 1kobo telecommunications tax, advert and signage taxes; right of way charges; radio and television charges; business premises levy; National Health Insurance Levy; Nigeria Police Trust Fund Levy, as well as the recently introduced N10 per litre sugar tax on carbonated sugar drinks and beverages and several others.
Investigation by patomabusinessonline.com shows that in addition to battling with some unethical practices that have stained the image of the industry for decades in the eyes of the insuring public, such as premium rate cutting, delayed premium remittance, fake documents, etc, multiple taxation from the government agencies is yet another heavy load on the genuine operators in the industry.
Simply put, 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,” he said.
Income taxation of companies in Nigeria is imposed by the Companies Income Tax Act 2007 (as amended). Section 16 of this Act provides guidelines for the taxation of life and non-life insurance companies in Nigeria.
Unfortunately, the current tax regime in Nigeria appears to be unduly unfair to insurance companies when compared with other companies in the financial service sector (such as banks).
Investigation further reveals that beyond the payment of Companies Income Taxes (CITA) ; Value Added Taxes; Withholding Taxes; Petroleum Profits Taxes; Personal Income Taxes; Stamp Duties; Capital Gains Taxes; National Information Technology Development Levy and Tertiary Education Taxes; funds mobilises by the operators are also being eaten up through multiple taxation which some of the operators have tagged as ” A worm eating deeply” into the large chunk of their revenues generated and which should have been used for expansion, investment in technology and innovation of new products, staff capacity building,etc .
Deduction of withholding tax from re-insurance commission
Commenting on the issue, the
Executive Director, General Insurance, Leadway Assurance Plc , Adetola Adegbayi, argued that the insurance industry currently suffers from a complex tax structure that has always resulted in multiple taxation without understanding the complexity of insurance placements.
She cited the example of deduction of withholding tax from re-insurance commission as a fundamental problem because the practice did not recognize the fact that such commissions are not earnings but a reserve against reinsurance credit risk for premium liabilities passed through the books of the insurers.
Adegbayi said, “Brokers, agents, insurers and re-insurers pay different taxes, all of which principally come from the premium paid by one entity, the insured, due to the nature of the insurance value chain.”
Adegbayi, therefore, cautioned that unless all stakeholders came together to collate the entire structure of the tax burden along the insurance value chain, multiple taxation would continue to pose a threat to the well-being of the industry.
Mr. Taiwo Oyedele, Partner, West Africa Tax Leader at PricewaterhouseCoopers, takes it further by calling on the government to lighten the tax burden on the insurance industry through a review of the specific tax regime that concerns the sector.
“The industry is saddled with bearing the nation’s risks, it should not also be burdened with taxes”, he said.
Corroborating to this, Adebayo-Begun Oluwatomisin, Senior Adviser at KPMG Nigeria, sees multiple taxation in the insurance industry in Nigeria as an unfair and overburdening tax liability.
Sharing his perspectives during KPMG’s Webinar on Nigeria’s 2022 Budget and the Finance Act 2021, recently, he said that there was a need for the government
to provide a tax structure that supports the industry.
” If risk is like a smouldering coal that can spark a fire at any moment, then insurance is our fire extinguisher,” he said.
Furthermore, the Group Deputy Managing Director of Africa Re, Mr. Ken Aghoghobvia, noted that international businesses ate also being affected with issues of double taxation.
He explained that income may be taxed in the country where it is earned, and then taxed again when it is repatriated in the business’ home country.” In some cases, the total tax rate is so high, it makes international business too expensive to pursue,” he said .
Aghoghobvia mentioned that there are three ways to tackle harmful tax competition.
Tax harmonisation eliminates interactions between countries. Three elements describe tax harmonisation: an equalisation of tax rates, a common definition of national tax bases, and a uniform application of agreed rules. The latter is particularly important since tax competition can take the form of lax application of tax rules, such as low audit rates.
Second, he explained that tax coordination is used when the set of countries which coordinate is given, and in which the coordination concerns only some tax policy instruments.
Third, he noted that tax cooperation is used when the set of countries is endogenously determined and is designates on situations where only some countries cooperate on tax policy and issues.
FIRS Response To Complaints
We spoke with the Executive Chairman of the Federal Inland Revenue Service (FIRS), Muhammad Nami, on what has FIRS being done to address these challenges?He said that the issue of multiple taxations in Nigeria has been put to rest with the amendment to Section 68 of FIRS Establishment Act by the Finance Act 2021.The complaints from taxpayers about multiple agencies of government demanding payment of tax from them had been addressed.
He said that multiple taxations were never in line with the national tax policy thrust and was causing confusion for taxpayers and increasing their cost of compliance.“However, the amendment to Section 68 of the FIRS Act by the Finance Act 2021 has made it clear that FIRS is the only agency responsible for tax assessment, collection and enforcement.As such, taxpayers are to expect a streamlined tax administration regime going forward,” Nami said.
He said FIRS would use the instrumentality of the Finance Act 2021, through collaboration with taxpayers and key stakeholders to ensure adequate funding of the country’s budget and raise the requisite financing for national development.
He also noted that the Act provided a framework for equitable treatment, automation and deployment of ICT infrastructure, a single agency for tax collection and taxation of the digital economy among other critical interventions for improved tax administration in the country.
On equitable treatment, Nami said that in the past, situations abound where certain goods or services streamed into Nigeria by non-resident companies, especially to consumers (B2Cs), were not subject to VAT. This raised the issue of equity, as goods and services offered by domestic companies are subject to VAT.
“With the amendment of Section 10 of the VAT Act and our publication of the ‘Guidelines on Simplified VAT Compliance Regime for Non-Resident Suppliers,’ there is now a mechanism for applying VAT on such goods or services, affording the same tax treatment to both local and foreign supplies.
Similarly, companies deriving income from Nigeria without physical presence can now be assessed, like other companies with physical presence, on fair and reasonable percentage of their turnover in line with Section 30 of Companies Income Tax (CITA) .
Regarding the automation of tax processes, the FIRS Executive Chairman noted that “with the amendment of Section 25 of the FIRS Establishment Act, the Service can now deploy either proprietary or third-party developed technologies for tax administration.
Those that may still stand in the way of achieving this objective will now be liable to a daily penalty of N25, 000.
Restriction on carry forward of tax losses Section 16(7) of CITA places a limit of four years on insurance companies to carry forward their tax losses.
Through amendments made in 2007, other companies (including banks) can carry forward their tax losses indefinitely until they can be utilised against taxable profits.
However insurance companies can carry forward their tax losses for four tax years (i.e. years of assessment).
There is no obvious reason for the restriction of carry forward of tax losses for insurance companies since historically, insurance companies have not been the most profitable in the financial services industry.
Cap on deductions for unexpired risks
The unexpired risk reserve is required to cover the claims and expenses that are expected to emerge from an unexpired period of cover. As long as the period of insurance cover has not expired, companies are required by the Insurance Act to anticipate and make a reserve for possible claims against premiums received.
Section 16(8) (a) of CITA stipulates a cap on deductions for reserves, claims and outgoings for general insurance business. It limits the amount of deduction for unexpired risks to 25% of total premium for marine cargo and 45% of other classes of general insurance business. This is inconsistent with Section 20(1) (a) of the Insurance Act which prescribes time apportionment as a basis for determination of the provision of unexpired risks.
Also, FIRS 4 paragraph 15 requires an insurer to assess at the end of each reporting period whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts.
Minimum taxable profit
Section 16(8) (b) limits the deduction allowed for an general insurance company such that after the deductions are made and capital allowances claimed, there will be an amount of “not less than 15% of taxable profit for tax purposes”. This phrase means nothing and has been redundant since its introduction in 2007. It has been rightly ignored by insurance companies in respect of their general business. It should therefore be deleted due to the confusion it could create. Section 16(9)(b) suggests that after all limited deductions have been granted to life insurance companies, the company must have 20% of its gross income available as taxable profit. This is a type of minimum tax provision different from the general minimum tax provision in Section 33(1) of the CITA which is computed roughly as 0.5% of the higher of a gross profits, net assets and paid-up capital plus 0.125% of turnover above N500,000. This effectively means that life insurance companies are almost always subject to a higher basis of minimum tax compared to other companies, including banks and financial institutions. The restriction on minimum taxable profit for life insurance companies creates a competitive disadvantage and therefore should be removed through a legislative change.
Earned investment income for life insurance business for tax purposes
Under Section 16(5)(b) of the CITA, the income of a life insurance company which are subjected to tax include the whole income and other incomes. This raises an ambiguity on whether income earned from investment of life policy holders’ funds and annuities are taxable, even though these funds include undistributed amounts that would only be distributed upon maturity of the policy. Due to the nature of life insurance business, it is logical for investment income from such policy holder funds and annuities to be taxed only to the extent that they are distributed during the year. The provisions of Section 16(5) will therefore need to be amended to reflect this deferral and to remove the ambiguity.
Payment of value added tax (VAT) on commissions paid Another challenge faced by insurance companies in Nigeria is the practice of the FIRS requiring insurance companies to account for VAT on commissions paid to brokers and agents. Based on the VAT Act, all companies are only required to charge and pay VAT on their output or supplies, except in a few instances such as oil and gas companies that account for VAT on their input or purchases. In this regard, an insurance company is required to charge and remit VAT on their commissions earned and have no legal requirement to account for VAT on commissions paid. Any insurance company that goes the extra mile of deducting VAT on commissions paid is simply doing the FIRS a favour.
However, there should be no exposure for the company if it accounts for VAT on only its commissions earned. It would appear that a requirement for insurance companies to account for the VAT on behalf of its brokers and agents only exist because the insurance companies are easier targets for revenue collection than broker/ agents who may not be properly registered for taxes. However, there must be a legislative mechanism for the FIRS to impose this additional obligation on the insurance companies. A way forward will be for the key stakeholders in the insurance sector to have discussions with the tax authority, agree on a position based on the realities of the current business model and propose the required legislative change.
We are strong believers in the growth prospects of the insurance sector in Nigeria. Its enormous potential however requires growth focused economic and fiscal policies to be unleashed.
The government and regulatory bodies should also be engaged by industry stakeholders to consider tax incentives which will deepen the market for performing insurance companies e.g. companies that pay a minimum percentage of claims submitted for processing while concerted effort is made to educate the public on the immense benefits of insurance in this age.
Insurance is Precious industry
Let me conclude this write-up with the words of Tony Elumelu, the Chairman of Heirs Holdings Ltd, which he said recently during the 60th Anniversary of the Nigerian Council of Registered Insurance Brokers (NCRIB).
” We all understand the pivotal role insurance plays in any society.
Our industry provides the much-needed safety and security.
We allow our people to save, to think ahead, to secure their futures – what we do is precious.
funds they mobilise, they should be allowed to deploying those funds for the broader benefit of our economy, and not to be eaten away by multiple taxes.