Nigeria: Taxation Of Insurance Business – Restating The Case For Legislative Review

Last Updated: 23 February 2017
Article by Deloitte Nigeria

Most Read Contributor in Nigeria, October 2018

One of the major objectives of the National Tax Policy (NTP) is to ensure fairness and equity, in order to imbibe a tax culture where taxpayers are regarded as the custodians of our commonwealth and enhance the Nigerian business environment. With such laudable goals, the question begs to be answered, why the reality on ground is quite different from Nigeria's prime policy document on tax. This may be due in part to an apparent disconnect between the NTP, our current tax laws and tax administration in Nigeria.

A review of the provisions of the tax laws on taxation of insurance businesses may suggest that insurance companies in Nigeria have their profitability, viability and global competitiveness threatened. We have highlighted some of such provisions below:

Restriction, to four years, of tax loss carry forward

Generally, for Nigerian companies other than those involved in insurance business, Companies Income Tax Act (CITA) provides that tax losses of current and preceding periods may be used to offset the assessable profits of future years of assessment (YOA), provided

  • the Federal Inland Revenue Service is satisfied that the loss was incurred by the Company in any trade or business during any preceding YOA
  • the aggregate deduction from the assessable profits does not exceed the actual loss incurred
  • the deduction does not exceed the assessable profit for the YOA (if any) for the trade or business in which the loss was incurred

This implies that where a company makes a tax loss in one year, it can legally minimise its tax expense by booking a deferred tax credit for the tax loss, which it can use to offset profits of future years. The unutilized portion of the tax losses can be carried forward indefinitely except for losses made during the commencement period of such company which cannot be utilised beyond the fourth year from the year of commencement of such business.

Section 16(7) of CITA states "...the loss shall be available to be carried forward against profits' from the same class of insurance business and, in all cases, the period of carrying forward of a loss shall be limited to four years of assessment".

This implies that losses incurred by an insurance company in any year of assessment can be carried forward for only a maximum period of four years after which such loss would lapse.

When one considers that a fundamental principle of a good tax system is the fairness and equality of the system, the above position becomes difficult to justify as insurance businesses in Nigeria are made to pay taxes even when they have accumulated losses from prior years. This is an aberration and does not encourage investment in the industry.

Limitation on deductibility of otherwise qualifying expenses

Insurance companies are on the receiving end of other tax avoidance rules in the area of deductibility of operating expense. Generally, expenses that are wholly, exclusively, necessarily and reasonably incurred for the purpose of generating assessable profits are tax deductible. This is popularly referred to as the WREN test. However, for insurance companies, a school of thought argues that such expense deduction is restricted to 25% of the total premium written, whether or not such expenses pass the WREN test.

Again, this provision is untenable and violates the principle of fairness, equity and certainty in taxation because the WREN test should ordinarily suffice in determining tax deductibility of all operating expenses for companies in all industries. The fact that the tax authorities are not consistent in how they apply these provisions further emphasises the disharmony between the NTP, tax laws and tax administration when it comes to insurance companies. As a nation, we need to arrest this situation in order to increase investor confidence in this industry.

Imposition of additional minimum tax provision

CITA seeks to impose an additional layer of minimum tax on insurance companies by specifying that life and non-life businesses must have taxable profits of at least (20% of gross income and 15% of total profits, respectively). There are very strong arguments against these provisions, particularly the one relating to non-life insurance businesses. The tax as computed based on these provisions typically exceeds the minimum tax payable by all companies (including insurance companies) under section 33 of CITA.

This goes to buttress the fact that this additional layer of minimum tax is punitive, unfair, and disadvantageous for insurance companies. Again, this is an anomaly and a deviation from the general direction of the NTP.

This puts the insurance industry in an unfair situation of paying a higher minimum tax than their peers in other industries, and as such does not create a level playing field.

The insurance industry in Nigeria has long campaigned to correct this inconsistency but the campaign is yet to yield the desired result. During the review leading to the recently published revised NTP, one of the initial recommendations of the committee that was set up to carry out the review was to amend our tax laws to clarify that tax losses can be carried forward indefinitely and to deal with ambiguities relating to the taxation of the insurance industry in Nigeria as this is not the case in many other jurisdictions. The expectation is that such amendments would be effected to give the insurance industry a fair chance.

In a standard system, companies are not set up to make losses. But where this happens, tax laws should be fair enough to provide certain tax breaks to such companies. This is not asking for much, it is simply a sound economic and policy decision. If the Nigerian insurance industry were to develop to a stage where it can favourably and effectively compete with other industries as well as with its international counterpart, there has to be coherence between the NTP, our tax laws and administrative practice of the tax authorities. This, we can achieve. This we must achieve.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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