INSURANCE BUSINESS AND TAXATION IN TANZANIA ~ :: Habari Duniani

Meaning and basic concepts of Insurance

General Meaning and Concepts: Insurance means a promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured (the person, group, or property for which an insurance policy is issued.) and the insurer (the party to an insurance arrangement who undertakes to indemnify for losses). In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of the specified event.

Insurance Meaning and Concepts Provided by the ITA, 2004

The ITA does not provide a meaning of the word insurance; it is presumed that the word has the meaning as used in the general sense. However it gives us a meaning of insurance business as a business of an insurer in effecting, issuing and carrying out insurance. This meaning is provided by S.3 of the Act.

Categories of insurance business

In general  usage insurance business can be categorized in several groups including Auto Insurance; Home Insurance; Health Insurance; Accident, Sickness, and Un-employment Insurance; Property insurance; Liability Insurance; Credit Insurance; and several others. But the ITA gives us only two categories of insurance businesses and these are life insurance business and general insurance business.

Life Insurance Business (S. 59 & S. 3)

Life insurance means insurance to be paid to the beneficiary when the insured dies. Life insurance provides a monetary benefit to a descendant’s family or other designated beneficiary, and may specifically provide for income to an insured person’s family, burial, funeral and other expenses. Life Insurance policies often allow the option of leaving the proceeds paid to the beneficiary either in a lump-sum cash payment or an annuity. Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires.

But the ITA refers to life insurance as insurance of any of the following classes:
Insurance where the specified event is the insured or an associate of the insured;
Insurance where:-
the specified event is an individual who is the insured or an associate of the insured sustaining personal injury or becoming incapacitated; and the insurance agreement is expressed to be in effect for at least five years or without limit of time and is not terminable by the insurer before the expiry of five years except in circumstances prescribed by the regulations;
Insurance under which an amount or series of amounts is to become payable to the insured in the future; and
Re-insurance of insurance referred to under paragraphs (a) to (c).
Life insurance business means a business of an insurer in effecting, issuing and carrying out life insurance.

Taxation Principles [S. 59(1)]

All activities of a person that are carried in conducting life insurance business are required to be treated as a business separate from any other activity of the person and the person’s income or loss for any year of income shall be calculated separately. That is to say, if you conduct general insurance business, life insurance business or any other type of business, you must calculate your income for the general insurance business, the life insurance business and the other business separately.

Computation of Income from Life Insurance Business

You should not include in your income any premiums you receive as insurer or re-insurer or any proceeds from reinsurance where you had to pay out and make a claim of the re-insurance.
You may deduct ordinary business expenses and commissions. However, you should not deduct expenditure on proceeds you pay out as insurer or re-insurer, or premiums paid to re-insurers where you take out re-insurance.
Proceeds of an insured person from life insurance issued by a resident insurer are exempt in the hands of the insured. Proceeds from life insurance from a non-resident insurer are not exempt and are included in the investment income of the insured.

General Insurance Business (S. 58 & S. 3)

General insurance business is not defined in the Income Tax Act, however the Act refers to general insurance business as any insurance business that is not life insurance business.

Taxation Principles [S. 58(1)]
All activities of a person that are carried in conducting a general insurance business are required to be treated as a business separate from any other activity of the person and the person’s income or loss for any year of income shall be calculated separately. That is to say, if you conduct general insurance business, life insurance business or any other type of business, you must calculate your income for the general insurance business, the life insurance business and the other business separately.

Computation of Income from a General Insurance Business
You include in your income:
  • Premiums received as an insurer or re-insurer
  • Any proceeds from re-insurance where you had to pay out and make a claim of the re-insurance
You deduct from your income
  • Expenditure on proceeds you pay out as insurer or re-insurer
  • Any premiums paid to re-insurers where you take out re-insurance
Otherwise you should calculate your general insurance business income as any other business.

Principles guiding determination of proceeds from insurance (S. 60)

Proceeds derived from insurance are normally derived in the form of compensation/indemnification. Taxation principles related to compensation are provided by S. 31. According to this section, where a person or an associate of the person derives compensation amounts, the compensation amount shall be included in calculating income of the person and takes its character from the amount compensated for.
For instance, XYZ Company insured its stock in warehouse against theft. On occurrence of the event of theft, XYZ Company will write off stock by that amount. This will reduce the profit stated by the company. But if the insurer is satisfied and compensates for the loss, then XYZ Company has to disclose the amount compensated as part of the realized stock.
But sometimes the insured can obtain a gain from insurance. The gain is the extent to which proceeds from life insurance paid by an insurer exceed premiums paid to the insurer with respect to the insurance.
Whenever such a gain happen:-
  • In the case where the proceeds are paid by a resident insurer, they are exempt in the hands of the insured; and
  • In the case where the proceeds are paid by a non-resident insurer, included in calculating the income of the insured.
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