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Multiple Taxation: Threat To Insurers’ Profitability

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Stakeholders posit that exposure of insurance companies to multiple taxation by tax agencies is threatening the profitability of underwriters, hence, the need to amend the tax code in order to relief players in insurance industry of the tax burden. ZAKA ABD-KHALIQ writes.

Tax has remained one of the unique sources of revenue for governments all over the world.

Both developed and developing economies have put systems and processes in place to ensure that people and businesses pay taxes, in most cases, on an annual basis.

Nigeria, as one of the developing economies of the world, is not an exemption. The federal government has succeeded in persuading and making people and companies to pay tax.

Tax is money that people have to pay to the government, while government uses the money it gets from taxes to pay for its expenses, such as salaries, provides education, healthcare, providing roads, electricity and so on, from the taxes.

But, findings have shown that lack of coordination in the collection of these taxes by agencies and tiers of government is exposing businesses to multiple taxation. It was learnt that the way federal, state and local government agencies do besiege companies for taxes that are somehow identical, has been having negative effect on businesses, especially, small and medium enterprises.

The 58 insurance companies in the country are facing a hard time from tax authorities as they were subjected to multiple taxation that has made insurers cough out about N23billion as taxes in the previous and the current financial year, LEADERSHIP can exclusively reveal.

Investigation has shown that in the 2016 financial year, insurance companies paid N11 billion as taxes from a Profit Before Tax(PbT) of N29.4 billion declared and were left with Profit After Tax(PAT) of N18.3 billion, after the taxes have been deducted.

Moreover, in the current financial year, market observers expect underwriters to pay as much as N12billion as taxes for the 2017 financial year end, a picture that will become clearer  by the time the remaining underwriters release their 2017 accounts.

Apart from paying tax on management expenses, short term lending, among others, insurers were also mandated to pay tax on claims, which is the core business of underwriting, meaning that, the higher the claims paid by an underwriter, the higher the tax to be paid on such claims.

The federal, state and local governments had embarked on aggressive revenue generation, picking on corporate bodies of which are insurance firms, as the major source of their tax revenue. Enforcement of these taxes reached a stage in 2017 and in the current year with some insurance companies being shut down by the Federal Inland Revenue Services (FIRS), until they were made to clear off their outstanding taxes.

While the situation has thrown the books of struggling insurers into negative, some had their profit cut short by these taxes, while the big underwriters were equally suffocating from this multiple taxation.

Experts said as insurance operators continue to be subjected to arbitrary charges and levies by federal and state tax agencies, the situation is making the operating environment uncomfortable for underwriters, thereby, increasing their operating expenses in the long run.

However, the major surprise is the payment of tax on claims, which, according to insurance business, is an expenses, yet, tax authorities are categorising it as income. According to the head of Retail Business, AIICO Insurance PLC, Mr Sola Ajayi, “In other countries, such as India, South Africa, among others, companies can keep deferred tax as long as the business exist, but not in Nigeria. Moreover for the non-life business, we have issues with the tax code. For example, if you pay claims of any amount, the law does not allow claims as expenses, they only allow 25 per cent of it.”

“So, why are we in operation? Is it not to pay claims and the tax man is saying, no matter the claims you paid, you can only relief 25 per cent of it. That is really hard on us. That is why you see some insurance companies are not willing to pay claims. At the end of the day, it is tax liable expenses,” he added.

Stating that the tax code in Nigeria is too hard on both life and non-life insurance companies as they were not allowed to take advantage of deferred tax, especially, for life business, he said, “We cannot take advantage of those taxed assets because of Section 33 and Section 16 of the tax code. Section 33 is saying, we must pay minimum tax, while Section 16 is saying, even when you have a tax exempt income, you must still  come back and pay something. So, you cannot exempt paying tax on the life business where some are even incurring losses and you cannot fully take advantage of all your reliefs.”

However, there are ongoing discussion between the Nigerian Insurers Association (NIA) and FIRS to review the provision that mandates underwriting firms to pay tax on their claims, among others. Moreover, the operators have also approached the Ministry of Finance through the National Insurance Commission (NAICOM) to find a lasting solution to the issue. 

Speaking on this development, the past chairman, NIA,  Mr. Eddie Efekoha, said, insurance industry is subjected to multiple taxation that is gradually eroding the profits of insurance companies, thereby, affecting their ability to give good returns on investment to shareholders as well as stakeholders.

Stating that some of its members offices were closed down by agents of Federal Inland Revenue Services (FIRS) for tax defaults, Efekoha, who is also the managing director of Consolidated Hallmark Insurance Plc, noted that NIA has intervened and is already having a mutual understanding with FIRS to soft-pedal on this issue. He, however, believes the permanent solution lies in amending the tax code which takes some times to amend, as it has to be amended by the National Assembly.

“’Giving returns on investment to shareholders and stakeholders has a lot to do with how much you make as profit but in a scenario like ours, where we are subjected to multiple taxation, it becomes difficult to pay dividend to shareholders. The more tax we pay, the more the returns to our stakeholders diminish. If you are to pay tax on claims and on management expenses, what this means is that you have little or nothing left to pay dividend to shareholders,” he pointed out.

Following excessive taxing of insurance companies by the federal government during the recapitalisation exercise in insurance industry in 2007, underwriting firms have now gotten N1 billion tax refund from FIRS, 10 years after.

It was learnt that the tax agency collected the tax from insurance operators erroneously, and when the industry realised that they have been erroneously taxed, they engaged FIRS on how to get a refund, which later materialised at the end of last year.



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