Multiplicity of taxes have directly and indirectly affected business development in Nigeria, but the Companies Income Tax Act 2007 is further crippling the insurance sector performance, Chika Izuora writes
The Companies Income Tax Act (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 companies. This effectively means that such companies would have to pay taxes out of their capital.
According to Taiwo Oyedele, Partner and Head of Tax and Regulation at PwC Nigeria, “It is like forcing a man who is suffering from excessive loss of blood to donate some blood. This increases the risk of failure for such companies. If there are issues concerning the genuineness of losses being declared by some companies, it should be addressed as a separate issue through tax audit and transfer pricing rather than paint all companies with the same brush”.
The CITA was first enacted in 1961 and have undergone many amendments, the latest being that of April, 2007.
CITA sets out some rules for the taxation of a company during commencement of business.
But experts say these rules are unnecessarily complicated and result in double taxation of such companies during their start-up phase.
They argued that companies should be made to pay tax only on their actual profits on a preceding year basis right from start to finish (in the event of cessation of business).
Nigeria business operators are currently contending with multiplicity of taxes and there are also multiple agencies that businesses have to deal with outside those required by the constitution.
It also means multiple audits from different agencies that lack coordination and collaboration thereby increasing the cost of doing business and on the part of government, cost of revenue collection is unnecessarily high given that tax revenue collection structures are duplicated rather than centralised and strengthened.
The Nigeria Insurers Association (NIA) has criticised certain provisions of the CITA and has challenged it seeking its review.
Director General (D-G) of NIA Sunday Thomas told LEADERSHIP that CITA is about crippling insurance business in the country.
Thomas said that the Association has made presentation to the Federal Inland Revenue Service (FIRS).
“We have approached all relevant government agencies and made our submission.
We provided them with facts and figures as well as statistics of what obtains in other climes and from the discussion we had we foresee a review of that position”.
In a similar posture, Shareholders of insurance companies under the aegis of Progressive Shareholders Association of Nigeria (PSAN) have condemned the CITA arguing that such taxes are disincentive to the sector.
President of PSAN, Mr Boniface Okezie argued that the amended Company Income Tax Act 2007 is punitive to insurance companies, as the provision for unexpired risks (Section14 (8)(9) and provision for other reserves, claims and outgoings, section 14(8)(b) are restricted.
“While we agree that sanity is required, it shall not be at the expense of growth. The reality is growth comes at a risk. The key objective in regulation is to understand these risks and manage them. It also means developing policies to allow insurers to meet the needs of various customer groups,”.
According to him, “Despite the insignificance of profit before tax (PBT) of insurance companies in comparison to the banks, the minimum tax payable by both is comparable. In reality, it shows lack of understanding of insurance business.
The Company Income Tax (CITA) limits unearned premium reserve. Claims paid are management expenses, all of which are reasonably incurred in the insurance ordinary course of business.
Therefore, insurance companies are penalised when paying claims. Ordinarily, these expenses should be considered as cost of sales and treated as allowable expenses.
Okezie, expressed concern about the low level of insurance penetration in the country and its not-too impressive contribution to the Gross Domestic Product (GDP), and warned that further disincentive will affect its growth.
He noted that this accounted for the below par value at which most of the listed insurance stocks are being sold on the Nigerian Stock Exchange (NSE, cautioning NAICOM against excessive regulation of the risk underwriting entities.
Oyedele however opined that government revenue may be down in the face of crashing oil price but the good news is that the most impactful changes do not require money, rather they are systemic, structural and institutional and what the country needs is a shift in mind-set to drive reforms that are designed to address the fundamental issues and a political will to implement.
Some of the tax changes required to make Nigeria conducive for foreign and local investments include simplification of the tax system, better clarity about taxes that are payable and removal of excess dividend tax, minimum tax and commencement rule.