Companies Income Tax Act, Cap C2, LFN 2004 (“CITA”) is the general income-tax administrative framework for companies in Nigeria.
However, due to the peculiarity of the insurance business, Section 16 of CITA is particularly dedicated to companies operating in the insurance sector. Section 16 of CITA explicitly addresses the specific income-tax administrative needs of the insurance companies.
Finance Act 2021 (“The Amendment Act”) revised the entire Section 16 of CITA, and the following are the highlights of its emendations:
- Classification of Insurance Companies:
The Amendment Act classified insurance business into “Life insurance company” and “General insurance company”. The tax treatment of Hybrid companies that carry out both businesses is further discussed in (4 below).
- The Basis of Determining Taxable Profit:
Taxable profit for General Insurance Company is gross premium and other receivables, less reinsurance, and unexpired risk. While for Life Insurance business, is investment income derived from the investment of shareholder’s fund, less management expense (including commission).
- Taxation of Dividend Distribution Arising from Revaluation:
Dividend distribution arising from revaluation (including actuarial valuation of unexpired risks) is taxable and constitutes parts of taxable profit. The insurance company is also required to provide details of revaluation and revaluation certificate within three months following such valuation.
- Treatment of Hybrid Insurance Company:
The amendment Act also requires hybrid insurance Companies (companies carrying out both life and non-life insurance business) to keep separate accounting records and file separate Companies Income Tax (“CIT”) returns for each line of business. Moreover, unrelieved losses from one line of business cannot be utilized against the other line of business.
- Allowable Deductions for Life and General Insurance Company:
To further buttress the provisions highlighted in ‘Basis of Determining Taxable Profit’ in (2 above), apportioned reserve for unexpired risk and all utilized outgoing claims are allowable deductions against premium for General insurance business. While For life insurance, revaluation on ‘reserve, funds, and liabilities on policies’ are allowable deductions against investment income.
More also, all regular allowable deductions, as well as the higher of ‘1% of gross premium’ and ‘10% of the profit of any special reserve fund’ (subject to being a statutory minimum paid-up capital) are also allowable deductions from income of a life insurance business.
- Allowable Deduction for Reinsurance Company:
As for Reinsurance company, ‘up to 50% of annual profit’ where general reserve fund is lesser than initial statutory minimum authorized share capital, and ‘up to 25% of annual gross profit’ where funds are not less than initial statutory minimum authorized share capital is allowed as a deduction against gross profit, provided it was credited to general reserve.
- Taxation of Services Rendered by Insurance Agent, Broker, and Loss Adjuster:
Companies that use insurance agents, loss adjusters, or insurance brokers, are required to include a schedule of relevant disclosing of such service in their annual tax return. Required disclosure includes name, address, date of commencement and termination of service, and payments for such service.
- Minimum Tax
This is calculated on Gross turnover in respect to Sec.33 of CITA. However, for the general insurance business, gross turnover refers to ‘gross premium (total premium written, received and receivable, excluding premium returned to the insured and unearned premium) as well as other income, excluding frank investment income.
On the other hand, gross income for life insurance business is the Gross turnover (encompassing all income including investment income, fees, commission, etc, excluding frank investment income and premium received/claim paid by re-insurers.