Contingency funds kept by insurance companies are subject to tax, the High Court has ruled.
All insurance companies are required to have such funds as stipulated by section 47 of the Insurance (Amendment) Act, 2011. The monies are meant to “cover fluctuations in securities and variations in statistical estimates.”
Justice David Wangutusi of the Commercial Division of the High Court concurred with Uganda Revenue Authority (URA) that these reserves, which are portions of profit, are earned through a company’s normal operation and then set aside for any particular purpose or strengthening of the company.
“I want to conclude that what is deducted must be sums of money that were used in the production of income. In this case, contingency reserves were not used in the production of income, but were the income themselves,” the judge ruled.
Justice Wangutusi ruled that contingency reserves are not allowable deductions for tax purposes.
“For those reasons, the (Tax Appeals) tribunal was correct when it held that monies that are put aside for a contingency reserve fund are done after profits have been taxed,” held Justice Wangutusi while dismissing an appeal by Goldstar Insurance Company.
The insurance firm had petitioned the High Court challenging the decision of URA to tax its Contingency funds.
Four-year Corporation Tax audit
Justice Wangutusi’s decision was linked to a four-year Corporation Tax audit (2008-2012) by URA. The audit unearthed an anomaly communicated in an October 2013 court document.
“Contingency reserves amounting to Shs 1, 815, 897, 000 for the period 2008 to 2012 were claimed as deductions for corporation tax, which resulted in the understatement of taxable profits or chargeable income,” Court heard.
Responding in an October 2013 letter to URA, Goldstar, through an agent, protested the subsequent Shs699,319,467 tax liability based on the contingency funds.
“The contributions, which are a statutory requirement, are made in accordance with section 47 (2) of the Insurance Act and have previously been claimed as a deduction for corporation tax purposes,” the agent argued.
Following a string of letters including one written by the regulator-Insurance Regulatory Authority, unconvinced, Goldstar petitioned the Tax Appeal Tribunal (TAT).
The reserves, Goldstar argued, were allowable deductions under the income tax and thus not subject to tax. An allowable deduction is a deduction on any item or expenditure to reduce the income subject to tax.
However, URA argued that the Fourth schedule of the Income Tax Act does not provide for contingency reserves.
Convinced, the TAT dismissed the company’s appeal, a decision that culminated in the High Court civil.
Among others, Goldstar had argued that TAT erred in law by saying that contingency reserves were not tax exempt (allowable deduction).
Citing Section 22 of the Income Tax Act, Justice Wangutusi said contingency funds were not provided for under allowable deductions.
“…..it is clear that setting aside contingency reserves was not diversion of income before it reached the appellant, but rather a case of setting aside a portion of the appellant’s income under force of law for the use of and benefit of the appellant….,” the court ruled.
He additionally dismissed the Goldstar’s claim that the TAT “erred in law and fact” in its earlier decision.
Wangutusi’s judgment, according to URA Assistant Commissioner Litigation, George Okello, vindicated the institution.
“It means that going forward; contingency funds are deductible for tax purposes. The tax assessment on Goldstar was raised in accordance with the law. Therefore, all such monies held by insurance companies, are subject to tax,” Okello stated.
Uganda has a vibrant insurance sector comprising several players. IRA regulates the sector. Commercial banks recently started offering “covers” similar to that provided by insurance companies.
By David Sseguya