Recently at a public seminar it was asserted that the tax regime for insurance companies operating in Nigeria as contained in the Companies Income Tax Act as amended puts insurance companies at a disadvantage relative to other companies operating in the financial sector. The challenges were narrowed down to four namely: (i) deductibility of expenses; (ii) payment of minimum tax; (iii) basis for calculating unexpired risk; and (iv) carryforward of losses.As a panellist at the session, I differed on the point that insurance companies could carry forward losses only for a period of four years whilst other companies could carry forward losses indefinitely. The purpose of this article is to shed more light on the rules on the carry forward of losses and how it does not discriminate against insurance companies alone.
The rules that govern the deduction of loss relief and the period for which a company can carry forward such relief are contained in S. 31(2)(a) of the Companies Income Tax Act, LFN 2004 (formerly S.27(2)(a) of Companies Income Tax Act, LFN 1990) (“CITA”). Before attempting to clarify the current position of the law on the rules that govern loss relief it is useful and necessary to review the amendments that have been made to the rules on loss relief from when the 1990 Laws of the Federation were published, to date.
Section 27(2)(a) of the Companies Income Tax Act Cap 60 LFN 1990 states as follows:
(2) Subject to the provision of subsection (4) of this section, there shall be deducted-
(a) the amount of a loss which the Board is satisfied has been incurred by the company in any trade or business during any preceding year of assessment:
Provided that –
(i) in no circumstances shall the aggregate deduction from assessable profits or income in respect of any such loss exceed the amount of such loss, and
(ii) a deduction under this section for any particular year of assessment shall not exceed the amount, if any, of the assessable profits, included in the total profits for that year of assessment, from the trade or business in which the loss was incurred and shall be made as far as possible from the amount of such assessable profits of the first year of assessment after that in which the loss was incurred and , so far as it cannot be so made, then from such amount of such assessable profits the next year of assessment, and so on; but such deductions shall not be made against the profit of the company after the fourth year from the year of commencement of such business,
(iii) the period for carrying forward any loss in sub-paragraph (ii) of this paragraph shall be limited to four years after which period any such loss shall lapse;
The implication of this provision is that losses incurred by a company in any year of assessment could be carried forward for only a maximum period of four years after which such loss relief would lapse. The only exception to this rule was in relation to companies engaged in agricultural trade or business. This provision is repeated verbatim in Cap C-21 of LFN 2004 until amended in 2007 as we shall discuss later.
In 1995, the FIRS published a compendium of tax laws titled “The Nigerian Tax Laws.” The CITA contained in the compendium was cited as Cap 60 of the LFN 1990. This citation presupposes that the CITA as quoted in the compendium is a replica of Cap 60, LFN 1990. This however, is not the case.
S. 27(2)(a)(ii) of the CITA in the Nigerian Tax Laws omits the last sentence in S. 27(2)(a)(ii) of Cap 60 LFN 1990. Thus S. 27(2)(a)(ii) of the CITA in the FIRS “Nigerian Tax Laws” states as follows:
(2) Subject to the provision of subsection (4) of this section, there shall be deducted-
(a) the amount of a loss which the Board is satisfied has been incurred by thecompany in any trade or business during any preceding year of assessment:
Provided that –
(i) in no circumstances shall the aggregate deduction from assessable profits or income in respect of any such loss exceed the amount of such loss, and
(ii) a deduction under this section for any particular year of assessment shall not exceed the amount, if any, of the assessable profits, included in the total profits for that year of assessment, from the trade or business in which the loss was incurred and shall be made as far as possible from the amount of such assessable profits of the first year of assessment after that in which the loss was incurred and, so far as it cannot be so made, then from such amount of such assessable profits the next year of assessment, and so on;
(iii) the period for carrying forward any loss in sub-paragraph (ii) of this paragraph shall be limited to four years after which period any such loss shall lapse.
On its own, paragraph (ii) suggests that a company may carry forward its losses indefinitely. However, when read in conjunction with paragraph (iii) it becomes clear that there is a four- year restriction.
The basis of omitting the last sentence of paragraph (ii) is not clear. In the FIRS “Nigerian Tax Laws” there is an annotation on the margin beside paragraph (iii) that refers the user to Decree No. 4 of 1985, which is the Finance (Miscellaneous Taxation Provisions) Decree.
Section 25 of Decree No.4 amends S. 26 of CITA of 1979 (which later became S.27 in LFN 1990 after the insertion of a new Section 22 by the Finance (Miscellaneous Taxation Provisions) Decree No. 55 of 1989) by inserting paragraph (iii) and giving it retroactive effect from 1976.
In other words, the reference to Decree No.4 of 1985 in the FIRS tax compendium did not explain the omission of the last sentence in paragraph (ii). A review of the statutory amendments made to the CITA did not reveal any statutory basis for the omission of the last
sentence in paragraph (ii). Presumably, the FIRS omitted the sentence because it was in effect a repetition of the provision of paragraph (iii), which restricts the carry forward period for losses to four years.
The implication of the deletion of the last sentence in S. 27(2)(ii) does not become an issue until when the Companies Income Tax Amendment Act was promulgated in 2007 (“CITAA”).
Section 8 of the 2007 CITAA deletes Para (iii) of S. 27 of the “Principal Act.” The “Principal Act” being CITA (Cap 60 LFN 1990). This deletion was effected in the 2004 LFN by the amendment of S. 31(2)(a), resulting in the following provision:
(2) Subject to the provision of subsection (4) of this section, there shall be deducted-
(a) the amount of a loss which the Board is satisfied has been incurred by the company in any trade or business during any preceding year of assessment;
Provided that –
(i) in no circumstances shall the aggregate deduction from assessable profits or income in respect of any such loss exceed the amount of such loss; and
(ii) a deduction under this section for any particular year of assessment shall not exceed the amount, if any, of the assessable profits, included in the total profits for that year of assessment from the trade or business in which the loss was incurred and shall be made as far as possible from the amount of such assessable profits of the first year of assessment after that in which the loss was incurred and , so far as it cannot be so made, then from such amount of such assessable profits the next year of assessment, and so on: but such deductions shall not be made against the profit of the company after the fourth year from the year of commencement of such business;
(iii) (deleted by 2007 No.56, S.8)
The implication of the deletion of paragraph (iii) from the above provision does not change the substance of the provision in that the last sentence in paragraph (ii) already states that a company cannot deduct its losses after the fourth year from when it commenced the business.
However, when reading the CITA contained in the FIRS Nigerian Tax Laws, which omits the last sentence in paragraph (ii) of the 1990 and 2004 versions, the deletion of paragraph (iii) by CITAA 2007 changes the substance of the provision to the extent that a company can carry forward its losses indefinitely!
Consequently depending on the version of CITA that a practitioner refers to, there can be two different conclusions. This then begs the question of which law is the correct law. Is it Cap 61 LFN 1990 or Cap C-21 LFN 2004 or the CITA contained in the FIRS Nigerian Tax Laws or other tax law compendiums in circulation?\
My humble submission is that only the provision in Sections 31(2)(a) of Cap C-21 of LFN 2004 and S .27(2)(a) of Cap 61 of LFN 1990 as amended by the CITAA 2007 can be relied upon as the correct law. This is firstly because the omission of the last sentence from paragraph (ii) by the FIRS in its tax law compendium has no statutory backing. Secondly, the duty to make and amend laws so made belong exclusively by constitutional arrangement to the legislature under S.4 of the 1999 Constitution as per Onnoghen, J.S.C. in the Supreme Court case of Amoshima v. State (2011) 14 NWLR Part 1268 at p. 551. The FIRS, therefore, cannot amend the law. Consequently S. 27(2)(a)(ii) of the CITA in the FIRS publication cannot be relied upon and lacks legal effect. The current position of the law on loss relief under the Companies Income Tax Act as amended by the Companies Income Tax Amendment Act of 2007, therefore, is that losses cannot be carried forward indefinitely except by companies in agricultural business.
Finally, whilst the tax regime for insurance companies as contained in the Companies Income Tax Act puts insurance companies at a disadvantage, the assertion that the restricted carry forward of losses is a disadvantage exclusive to insurance companies is incorrect. The intention of the legislature for deleting of paragraph (iii) of S. 31(2)(a) under CITAA 2007 however is also not clear. The Legislature should therefore consider amending the rule on loss carryforward to enable all companies in Nigeria, including those in insurance business to carry forward losses indefinitely. Such an amendment would go a long way to cushion the effect of the astronomical cost of doing business in Nigeria, and it would boost domestic investment.
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Lolade Ososami is a Partner in Abraham & Co. and is a Solicitor in Corporate Law and Taxation.
