The government’s multiple taxes have directly and indirectly stunted business development in Nigeria, just as the Companies’ Income Tax (CITA) Act 2007, is further crippling performance in the insurance sector.
CITA imposes minimum tax on companies where they have no taxable profits or taxable profits resulting in lower than minimum tax
This minimum tax also applies in different forms to some specific sectors such as insurance, which effectively means that companies would have to pay taxes out of their capital.
This has become a major concern in the sector, as operators are fighting for reduction of unfair and overburdening tax liabilities. The Senior Adviser at KPMG Nigeria, Adebayo-Begun Oluwatomisin, highlighted the issues and what ought to be done to address these challenges in the country.
According to him, “if risk is like a smouldering coal that can spark a fire at any moment, then insurance is our fire extinguisher. The institution is as old as human existence with the first insurance policy being written in ancient times on a Babylonian obelisk monument with the code of King Hammurabi carved into it. It was practiced by early Mediterranean sailing merchants and Chinese traders, who sought methods to minimise risks.”
The concept of insurance has expanded and become more refined over the ages, its successes and travails have become more symmetrical to a country’s economic growth (or lapse). Because of the peculiarity of insurance and its relevance to an economy, the Nigerian government has put a lot of effort into making the industry what it is today.
These efforts are showcased by the implementation of numerous Acts over the years, such as the National Insurance Commission Act 1997, and the Nigerian Council of Registered Insurance Brokers Act 2003, (to ensure proper administration and functioning of the sector), as well as the passing of several reforms.
However, amendments made in the CITA Act 2007, have created changes within the sector that have led to an unwelcome higher tax burden for insurance companies, which in turn, led to a fall in the number of businesses operating in the industry.
Nigeria’s insurance sector has undergone two rounds of recapitalisation over the past 14 years to restructure companies’ debts and equity mixture, aimed at making them more capitally stable.
The first round of recapitalisation was in 2003, when the Insurance Act was passed, which required companies to increase their capital bases from N20 million ($65,000) to N150 million for “life businesses”. In this circumstance, the named beneficiary would receive the proceeds and would thereby be safeguarded from the financial impact of the death of the insured.
Similarly, “non-life businesses,” was increased from N70 million to N300 million for companies that provide payments depending on the loss from a particular financial event.
Reinsurance businesses rose from N150 million to N350 million for which is a company accepts a portion of the potential obligation in a contract in exchange for a share of the insurance premium. This is to help reduce the likelihood of the firm paying a large obligation resulting from a claim.
The 2003 changes led to the liquidation of 14 companies out of 117 registered firms.
In September 2005, another capitalisation requirement was announced to increase the capital base to N2 billion for life businesses, N3 billion for non-life businesses and N10 billion for reinsurance. This, again, resulted in numerous consolidations that led to the number of insurance companies falling from 103 to 49.
Assets base, taxation
In the first quarter of 2014, the total assets and liabilities of insurance companies was N517.2 billion. The asset base has continued to dwindle every year because of some sections in the CITA that affect it.
For instance, sections 16(2)(a) subsection (8)(b) life business, and for non-life businesses, section 16(1)(b) subsection (8)(a) refer to how companies’ profits should be taxed. These sections have 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.
As with any other business, the tax liability of an insurance company is based on figures contained in its annual published accounts, subject to similar assessment and collection procedures by the tax authorities. However, certain special features arising from the nature of the industry mean that profits are taxed slightly different than other sectors.
For both life and non-life insurance businesses, the basis for computing minimum tax seems punitive at 20 per cent of gross income and 15 per cent of total profit, correspondingly. To compound the tax burden little solace is given to the industry when it suffers 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.
But this is not so in other climes. In the U.S., the Internal Revenue (IR) Code successfully created a more friendly terrain for its insurance industry that permits growth and expansion.
Firstly, there is no minimum tax that applies to insurance companies. There is also an alternative minimum tax (AMT) that applies across all industries in addition to other incentives.
In South Africa and Brazil, there are no restrictions placed on provisions for unexpired risks, provisions for other reserves, claims and outgoings, and periods for the recovery of losses. Both economies also do not have a minimum taxable profit for their insurance companies.
Although India has no restrictions on provisions for unexpired risks, but it does apply a minimum tax on the profits of insurance companies on provisions for other reserves, claims and outgoings.