Govt proposal to tax life insurance sparks debate

Uganda’s life insurance industry is booming. Premiums are outpacing claims by large margins, but new tax proposals in Parliament now threaten to undermine the best parts of their appeal of being tax-free, something that industry players fear could negatively impact public acceptance of policies and their returns on investment.

The use of life insurance as a substitute for building wealth has become popular recently, especially among Generation Z. This indemnity is a contract between an insurer and a policyholder wherein the insurer pays a regular premium and the policyholder’s designated dependents receive a benefit in the event of the policyholder’s death.

The “endowment” or savings component of it is what has the government interested, though. In most cases, this offers the policyholder savings in the event that the policy expires.

In doing so, the researchers working for the government are making the case that payouts are a regular business expense of a life company and ought to be deductible.

In addition, unlike general insurance, the government contends that issued life policies are non-deductible since there are no particular regulations governing the deduction of reserves established by life companies.

Reserves of life insurers refer to the funds set aside by insurance companies to cover future obligations to policyholders.

They are essentially financial cushions designed to ensure that insurers can fulfil their promises to policyholders, such as paying out death benefits, annuity payments, and other contractual obligations.

This indicates that when this future income is received, it should be fully taxable as regular income. And that the payments made during the premium-paying cycle ought to be deducted as a regular and essential outlay for the generation of future revenue.

This would also mean that every penny of interest received on a life insurance policy would be subject to taxation, which is how banks are taxed.

“Uncertainty as to the calculation of the chargeable income of life insurance companies was expressed by both the Uganda Revenue Authority (URA) and the advisory firms [of government]. The proceeds of a life insurance policy by a life insurance company is exempt income.  The taxation of life insurance should be reviewed as part of a holistic review of long- term savings,” government documents seen by Sunday Monitor show.

Govt plans

As of 2022, 0.876 percent of Ugandans were covered by insurance of any kind—a statistic that the Insurance Regulatory Authority’s chief executive officer, Mr Ibrahim Kaddunabbi, attributed to “the spread effect of double rebasing of the national gross domestic product (GDP) over the last 10 years.”

This means that GDP has been recalibrated twice over the past decade, posing significant adjustments in how the economy is assessed. Observers say this is something that could have introduced uncertainties or complexities that might have impacted the insurance sector’s growth trajectory.

But the government does not abandon its argument that a life insurance policy must include a tax-savings component.

This policy, the government adds, has frequently benefited from tax breaks, which have provided it an incentive for long-term saving which has compelled many nations to reduce or eliminate the tax breaks associated with it.

“This in turn has seen a move away from endowment policies to pure risk policies [mostly payable in death],” government tax advisers emphasise.

The government now seeks to connect the payout under an endowment policy on the policyholders’ premium and the insurers’ investment income with the taxation of life insurance, specifically on superannuation.

It also considers bonus payments given to the policyholder of an endowment policy during the policy’s term. But some of these suggestions—such as the aforesaid—are not part of the bills that have been sent to Parliament for debate. Specifically, this is a suggestion for incorporation into the Income Tax Act.

Growing fears

There is, however, growing concern that these proposals, if there is no precarious supervision, could be enshrined in parliamentary acts without any debate. This has also caused the members of the House Finance Committee to set a precedent during talks with the Treasury to stop talking about tax Bills if they do not receive government research papers to back up the Treasury’s essence of some of these proposals.

Some members of the Finance Committee have observed that this has occurred particularly with regard to the Income Tax Act. An amendment was brought up subsequent to the Act’s submission on the floor of Parliament, but the committee decided to examine it and make the necessary corrections during the second reading.

“When the Bill has been presented on the floor of Parliament, we expect that what has been presented is what should be presented in the committee for processing and further consideration. But in the event that the [Finance minister] identifies an item that he thinks he should bring, there has been a precedent,” Mr Enos Asiimwe, a member of the Finance Committee and Kabuula lawmaker, opines, adding, “It’s not legally or procedurally right but there has been a precedent that if there is an item that they have missed out, they can bring it before the final decision of the committee, meaning that the committee can process it as part of what was presented on the floor of Parliament but then it would be absolutely wrong if the [Finance] minister tries to smuggle in an item at a later stage of the second reading of the Bill.”

The Kabuula lawmaker proceeded to tell Sunday Monitor thus:  “If that item was not introduced at the time of presenting the Bill on the floor in the first reading or it was never introduced during the processing of the Bill by the committee, for you to bring it at the time of second reading is wrong.”

It appears that the country’s thriving life insurance industry may be threatened if the taxation linked to life insurance is taken into consideration and passed by Parliament.

Booming life insurance

According to data from audit and advisory firm Deloitte, the life insurance market in Uganda contributes approximately one-third of all insurance market premiums.

This business has been growing steadily since 2016, with an average annual growth rate of 24 percent. Its premium revenues increased from Shs420.3 billion in 2021 to Shs507.3 billion in 2022, a 21 percent increase.

This expansion is credited to the economy opening up after Covid-19’s detrimental effects that persuaded a large number of people to purchase life insurance policies. Data also shows that the net incurred claims have also risen, averaging 29 percent over the eight-year period from 2015 to 2022 and ranging from four percent to 72 percent.

“The movement of net premium income and the incurred claims have largely been in line. We note a sharp increase in the movement of incurred claims over the period 2019 to 2021,” Deloitte notes.

“Should the reduction in incurred claims continue as net premiums rise, insurers should take advantage and develop long-term growth strategies,” it adds.

Formulation of tax policies

Critics say if the Treasury can persuade the August House to tax life insurance, then this opportunity could be threatened. Some tax experts have already shown concern that Uganda’s approach of looking for cash to close its budgetary financing gap is simply not working as it should and needs a revamp.

For example, on April 18, a group of economists and tax specialists from the Civil Society Budget Advocacy Group (CSBAG) made a proposal to the Parliament that variations in definitions and interpretations of tax policies in the region’s member states need to be harmonised because they continue to cause distortions in cross-border transactions and investment decisions undermining Article 83(2)(e) of the 1999 Treaty establishing the East African Community (EAC).

The East African Legislative Assembly (Eala) discussed and approved a motion on March 13, 2024, asking the EAC Council of Ministers and Partner States to expedite the harmonisation of tax policies within the EAC Region in order to close these gaps.

“We urge the Government of Uganda to ensure that as it formulates tax proposals, they are in line with the principles of tax harmonisation within the East African Community (EAC) region,” several Uganda’s tax and economic non-profits noted in a joint report.