SD DOMBO UNIVERSITY OF BUSINESS AND INTEGRATED DEVELOPMENT STUDIES

 EBS 508: ADVANCE TAXATION

 TAXATION OF INSURANCE BUSINESS
TAXATION OF INSURANCE
BUSINESS
 Insurance is a business of transferring financial risks from one
entity(insured) to another entity(insurer)
 In Ghana, the business of insurance is regulated by the Insurance
Law Act, 2006(Act 724).
 Classes of insurance business include the following:
1. Life Business
2. Non-Life Business( fire, marine, transport, motor
vehicle, workmen’s compensation)
3. Reinsurance business covering any or all of the
foregoing business
4. Income of general business insurance is taxed at 25%
 Insurance Terms
Premium(Gross premium Income)
Reserve for unexpired risk or provision for unearned
premium. It is allowable item on negotiated percentage
Reserve for unexpired risk:
40% for non-life business
75% for marine business
Claims. Amount payable under a contract of insurance arising
from the occurrence of an insured event. Claims incurred but
not reported(IBRN)
Reserve for unexpired risk format

Gross premium income xxx

Less Returns and cancellations xxx
Reinsurance xxx
Premium received in advance XXX XXX
Net premium income xxxx
Add reserve for unexpired risk at start xxx
Less reserve for unexpired risk at end xxx xxx
Premium earned xxxx
 Claims
Claims means the amount payable under a contract of insurance
arising from the occurrence of an insured event. Included in claims
are expenses incurred by an insurance company, which are
incidental to the handling of claims.
Claims paid xxx
Add: outstanding claim at the end of year xxx
Claims incurred but not reported xxx
Less: outstanding claim at the start of the year xxx
re-insurances recovered xxx
Claims incurred xxxx
 Claims
 Claims incurred: aggregate of all claims handling expenses paid,
actual claim paid

 Treatment of Dividend
A resident company that receives dividend from another company
following part ownership of 25% or more, the paying company will
not withhold tax. However, the receiving company will have to add
the dividend as other income and should be taxed at the corporate
tax rate or the rate of tax applicable to the entity concerned.
 Treatment of interest on investment
The interest from investment would have to be grossed up and
added as other income where such interest on investment has
suffered a withholding tax. When the tax is determined the taxes
withheld should be deducted before arriving at the net tax payable.
Format for Taxation of General Insurance Business
GHS GHS
Gross premium income xxx
Less: returns and cancellation xxx
reinsurance xxx
xxx
Net premium income xxxx
Reserve for unexpired risk at start of year xxx
Less reserve for unexpired risk at the end of year (xxx) xxx
Less : claims incurred xxx
Re-insurance recoveries xxx (xxx)
xxxx
Deduct Management Expenses:
General administrative expenses XXX
Commission paid to agents XXX XXX
XXXX
Less capital allowance XXXX
Assessable Income XXXX
Format of Life Insurance Business
Gross Investment Income: GHS GHS
Dividends received XXX
Interest on Treasury bills XXX
Interest on loans XXX
Interest on unit trust XXX
XXX
Deduct Management Expenses:
Staff salaries XXX
General administrative expenses XXX
Maintenance and repairs XXX
Commission to agents XXX
Adverts and promotion XXX XXX
XXX
Less Capital allowance XXX
Chargeable Inc ome XXXX
Computation on taxation of General Insurance
Business
Enterprise Life Insurance limited submitted the following returns to the Suame tax office for
2016 year of assessment
GHS
Gross premium 897,000,000
Amount of premium return 16,000,000
Claims received 48,000,000
Claims paid during the year 275,500,000
Premiums paid to other firms 22,500,000
General and admin expense 98,750,000
Interest on T-bills 18,500,000
Commission to agents 12,000,000
Reserve for unexpired risk(2015) 285,000,000
Reserve for unexpired risk 2016 358,800,000
Depreciation 40,000,000
Capital allowance claimed 25,500,000
Computation on taxation of General Insurance
Business
As a tax office in charge of insurance companies, you are required to
determine the assessable income of Enterprise Life for the relevant
year.
Enterprise Life Insurance Limited
Computation of assessable income

GHS000 GHS000
Gross premium
897,000
Less: return inwards 16,000
reinsurance 22,500 38,500
Net premium income
858,500
Add: other income 18,500
 GHS,000
GHS,000
Add: reserve for unexpired risk 285,000
1,162,000
Less reserve for unexpired risk 358,800
803,200
Less claims paid 275,500
Reinsurance claims recovered 48,000
227,500
General and admin 98,750
Commission to agents 12,000 338,250
Assessable income 464,950
Capital allowance 25,500
Chargeable Income 439,450
 Question on Life Insurance Business

Below is the extracts of the accounts of Priority Life Insurance Co. Ltd
for the year ended 31st December 2017

GHS
Interest on treasury bills
61,000
Interest on investment 75,000
Dividend income
10,200
Gross premium received
820,000
Claims paid during the year 420,000
Salaries and wages
20,000
Income tax paid
70,000
Commission to agent
24,000
Administrative expenses
35,000
Capital allowance
15,000

You are required to determine the chargeable income of the company

Solution :Priority Life Insurance Company

GHS
GHS
Investment income:
Interest on T-bills
61,000
Income on investments 75,000
Dividend income
10,200

146,200
Admin expenses 35,000
Commission 24,000
Salaries and wages 20,000 79,000
Assessable income
67,200
Less capital allowance 15,000
Chargeable income
 Tutorial Question 1

1. Below is the extracts of the accounts of Glico Insurance Co. Ltd for the
year ended 31st December 2017
Short term business
Life business

GHS GHS
Gross premium received 485,000
Claims settled during the year 45,350
Re-insurance premium paid 13,000
Salaries and wages 42,000
29,300
General admin expenses 12,500
45,800
Commission to agents 8,000
Recoveries under reinsurance 15,000
Premium returned to clients 7,250
Interest earned on loans/T-bills 20,000
57,500
Capital allowance claimable 62,000 43,500
Reserve at close of previous year 105,000
Interest from investments
15,750
Payment in respect of matured policies 52,850
Note that reserve is calculated at 40% of net premium income
Required: Find the tax payable by the Insurance Company. Use Tax rate of 25%
Tutorial Question 2
Below are extracts of the accounts of Enterprise Life Insurance Co.
Ltd. The year ended at 31/12/2018
Short term
GHS
Gross premium received 2,500,000,000
Claims settled during the year 300,000,000
Re-insurance premium paid 200,000,000
Salaries and wages 600,000,000
General admin expenses 100,000,000
Commission to agents 500,000
Recoveries under reinsurance 150,000,000
Premium returned to clients 1,250,000
Interest earned on loans 1,005,000,000
Capital allowance claimable 70,000,000
Reserve at close of previous year 1,200,000,000
Note that reserve is calculated at 40% of net premium income
Life
Interest on treasury bill 475,000,000
Interest from H.F.C unit trust 250,000,000
General admin expense 310,000,000
Salaries and wages 450,000,000
Capital allowance claimable 15,000,000
Redemption of policies matures 500,000,000
Required: Find the tax payable by the Insurance Company. Use Tax rate of
25%