Taxation of transport, telecommunication, banking and insurance businesses

A foreign airline flies passengers out of Lagos and the revenue authority must decide how much of its worldwide profit to tax. A bank lends to a farmer at a low rate, and a life insurer takes premiums that are not income. These businesses do not fit the ordinary company computation, so the Companies Income Tax Act gives each its own rules in sections 14 to 17.

The exam asks for the computations, and each has a set format.

This topic covers foreign air and sea transport companies, foreign cable and telecommunication undertakings, banks, and insurance businesses (life, non-life and reinsurance, Nigerian and foreign). The previous topic covered real estate and agriculture. The next covers non-interest finance.

Key terms in plain English

Syllabus check

This topic is in syllabus area D, company taxation. It covers:

• foreign air and sea transport and cable companies
• banks and exempt interest
• insurance businesses and minimum tax

CAMA 2020 and specialised businesses

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Foreign air and sea transport (section 14)

A foreign company in air or sea transport is taxed on income from loading passengers, mails, livestock or goods into an aircraft or ship in Nigeria. Income from leasing, containers, non-freight operations and other incidental income is taxed under section 9. Exempt: passengers, mails, livestock or goods loaded outside Nigeria on routes ending in Nigeria, and goods in transit (brought to Nigeria for trans-shipment or a connecting flight).

Method 1: the ratio basis. It is used where the Service is satisfied that the carrier’s home tax authority computes and assesses tax on a basis not materially different from Nigeria’s and certifies the ratios:

• adjusted profit ratio = adjusted profit ÷ worldwide income × 100;
• depreciation ratio = depreciation allowance ÷ worldwide income × 100.

Assessable profit = income receivable in Nigeria × profit ratio; capital allowance = income receivable in Nigeria × depreciation ratio; the difference is the total profit. Where the authority agrees that depreciation charged in the accounts is given in place of capital allowances, the depreciation itself is the capital allowance.

Method 2: a fair percentage. Where the Service is not satisfied, it applies a fair percentage to the full sum receivable for carrying passengers, mails, livestock and goods loaded in Nigeria. The company may require that the assessment be revised on method 1, but only within six years after the assessment year and with a certificate from its home authority.

Minimum tax: not less than 2% of the full sum receivable for carriage loaded in Nigeria, excluding VAT and levies that the carrier collects for others, such as airport or passenger charges.

Foreign cable undertakings (section 15)

A foreign company that sends messages by cable or wireless apparatus is taxed in the same way as a foreign air or sea carrier. Messages sent from Nigeria through its network to places outside Nigeria are treated as the equivalent of loading passengers or goods in Nigeria. Messages that end in Nigeria or pass through it are not taxed on this basis.

All the other rules on air and sea carriers apply, including the two methods and the 2% minimum.

Banks

Banks are not exempt from the Companies Income Tax Act. They pay company income tax and VAT like other companies, and file monthly and annual returns, with penalties for default. The peculiar points are these.

Exempt interest in the bank’s hands:

• interest on a loan for manufacturing goods for export, within Table 2 of the Third Schedule (70%, 40%, 10% or nil by repayment and grace periods), if the borrower exports at least 50% of its goods, not re-exported to Nigeria, and holds a NEPC certificate;
• interest on a loan for primary agricultural production, for local fabrication of plant, machinery and tools, or for a cottage industry under FEAP, if the moratorium is at least 12 months and the rate is not above the bank’s base lending rate;
• interest on federal and state government development loan stocks or bonds;
• interest on foreign placements, and dividend, rent and royalty from abroad brought in through a domiciliary account;
• dividends treated as franked investment income.

Not allowed: increases in provisions on performing loans, on other assets and receivables, on advances under finance leases, for diminution in the value of investments, for off balance sheet engagements and for gratuity, and unrealised exchange loss.

Insurance businesses (section 16)

An insurer is taxed as a general insurance company or a life insurance company. The rules cover Nigerian and foreign insurers. If a company does both classes (a composite insurer), the funds, books, returns and assessments of life and non-life are kept separate, and a loss in one class cannot be set against the other.

Within a class, losses of one type of insurance may be set against another type, and unrelieved loss is carried forward against the same class without limit (from 1 February 2020).

Life insurance. The premium received from the assured is not income, because the assured will certainly be paid at death or on maturity, so claims paid are not deducted either. The taxable profit is investment income less management expenses, including commission. Investment income means income from investing shareholders’ funds.

Amounts distributed from an actuarial revaluation are part of the total profits, and particulars and the actuary’s certificate must reach the Service within three months of a revaluation.

Deductions: an amount to make the general reserve and fund equal to the net liabilities on policies at the time of revaluation; a special reserve of the greater of 1% of gross premium or 10% of profits until it equals the statutory minimum capital; and all normal allowable outgoings.

Non-life insurance. The profit is gross premium and other income less reinsurance, less a reserve for unexpired risks computed on a time apportionment basis of the risks accepted in the year, and less an amount equal to outstanding claims and outgoings estimated. Any part of the estimate not used for claims is added to the profit of the next year.

Reinsurance. The same format as non-life, with an allowed transfer to a general reserve: up to 50% of the gross profit while the general reserve is less than the initial statutory minimum authorised capital, and up to 25% once it equals or exceeds it.

Foreign insurers. A foreign insurer is taxed only if it has a permanent establishment in Nigeria: a branch, management or fixed place of business, but not an agency unless the agent habitually has and uses general authority to negotiate and conclude contracts. Only premium received in Nigeria and expenses incurred in Nigeria (with a fair share of head office expenses) are taken into account.

A foreign life insurer’s investment income is global investment income × premium receivable in Nigeria ÷ global premium.

Minimum tax (section 16(14)). Not less than 0.5% of gross turnover (gross income and other income) for non-life business, and 0.5% of gross income for life business. The rate is 0.25% for two accounting periods between 1 January 2019 and 31 December 2021 chosen by the taxpayer. Gross premium means total premiums written, received and receivable, excluding unearned premium and premiums returned to the insured.

Returns. The annual return must list agents, loss adjusters and brokers engaged, with dates and payments. The insurer must keep schedules of policies and unexpired risks and of estimated claims and outgoings. The Finance Act 2021 replaced the words “paid-up share capital” with “capital requirement” in the Insurance Act.

Life and non-life insurance compared

Why the reserves are there

A non-life insurer is paid the premium for a year of cover when the policy starts, but part of the cover is still to run at the year end.

That part of the premium has not been earned, so the law lets the insurer deduct a reserve for unexpired risk, worked out by time apportionment of the risks accepted in the year: if a policy runs for twelve months from 1 October, three-twelfths of the cover has been used by 31 December and nine-twelfths is still to run.

The reserve brought forward from the last year is, in effect, brought back into profit, so only the movement is taxed. In the same way, claims that have been reported but not paid at the year end are estimated and deducted, and any part of the estimate not used is added to the profit of the next year, so the deduction is only a timing difference.

1. Net premium.
   300 − 20 = 280.
   Gross income = 280 + 30 + 10 + 5 + 15 = 340.
2. Deductions = 90 + 40 + 25 + 50 + (60 + 30) = 295.
3. Assessable profit.
   340 − 295 = 45
   less capital allowances 5 = total profit ₦40m.
4. Tax at 30% = ₦12m. Minimum tax at 0.5% of gross premium of ₦280m = ₦1.4m. The higher, ₦12m, is payable.

1. Gross income.
   30 + 4 + 6 = 40.
2. Special reserve.
   the higher of 1% × 500 = 5 or 0.8, so 5.
3. Assessable profit.
   40 − 5 − 5 − 12 = 18
   less capital allowances 2 = total profit ₦16m.
4. Tax at 30% = ₦4.8m
   minimum tax 0.5% × 40 = ₦0.2m.
   Payable: ₦4.8m.

1. If the general reserve is below the initial statutory minimum capital, it may deduct up to 50% × 100 = ₦50m.
2. If the fund equals or exceeds the minimum, it may deduct up to 25% × 100 = ₦25m.
3. A transfer of ₦40m would be allowed in full in the first case and limited to ₦25m in the second.

1. Nigerian investment income.
   ₦5bn × 2 ÷ 20 = ₦500m.
2. Less agency commission in Nigeria, allowable expenses in Nigeria and a fair share of head office expenses gives the assessable profit.

1. Assessable profit.
   10% × ₦500m = ₦50m.
2. Minimum tax.
   2% × ₦500m = ₦10m; so the tax at 30% of ₦50m, which is ₦15m, is higher and is payable.
3. If the line later produces a certificate from its home authority within six years, it can ask for the assessment to be revised on the ratio basis.

Banks: how the exempt interest and the disallowed provisions work

A bank’s profit and loss account includes interest on many kinds of loan. For the tax computation, interest on a loan that meets the conditions for agriculture, local fabrication of plant, machinery and tools, a cottage industry under FEAP, or an export manufacturer is taken out as exempt, and interest on government development stocks and bonds is also taken out.

Each loan is tested on two points, the moratorium and the rate against the base lending rate at the time of the loan. A loan that fails either test is taxable. For export loans the Third Schedule table sets the percentage that is exempt by repayment and grace period, and the borrower must hold a NEPC certificate.

On the other side, a bank charges large provisions in its accounts under the accounting standards for expected credit losses and similar items.

For tax, an increase in those provisions on performing loans, on other assets and receivables, on finance lease advances, for diminution in the value of investments, for off balance sheet engagements and for gratuity is added back, because the law allows only specific provisions for bad debts that are proved bad. Unrealised exchange losses are also added back, since the loss has not yet happened in cash.

A bank that writes off a specific bad loan can deduct it, and recoveries are income when received.

1. Deduct exempt income.
   ₦8,000m + ₦3,000m = ₦11,000m.
2. Add back.
   ₦6,000m + ₦1,500m + ₦900m + ₦4,000m = ₦12,400m.
3. Adjusted profit.
   ₦50,000m − ₦11,000m + ₦12,400m = ₦51,400m.

A short guide to choosing the right format

• Income from carrying people or goods from Nigeria by a foreign line: sections 14 and the ratios or fair percentage.
• Income from messages sent from Nigeria by a foreign company: section 15, the same format.
• A bank or other financial institution: the ordinary computation with the special exempt income and disallowed provisions.
• An insurer: section 16, by class: life, non-life or reinsurance, Nigerian or foreign.

Where a question gives the business type in the opening line, the format is fixed, and the marks go for the headings of the computation as well as for the numbers. A candidate who recognises the business and sets out the headings correctly gains most of the marks even if one figure is wrong.

Foreign carriers: the full reasoning

A foreign airline or shipping line earns income all over the world, and only a small part of it comes from Nigeria. The law does not try to trace its profit by route. It takes the carrier’s own worldwide results and asks what share of them comes from carrying passengers and goods that board in Nigeria.

Three types of income are left out: goods and passengers that board abroad and end their journey in Nigeria, goods that are simply in transit, and income that is not from loading. Incidental income, such as leasing and container income, is taxed separately as ordinary profit.

The ratio basis works because it uses the carrier’s true profit margin. If the carrier earns 40% of its worldwide income as adjusted profit, the Nigerian income is taken to earn 40% as well. The depreciation ratio does the same for capital allowances.

The home authority must certify the ratios. The Service must be satisfied that the home country taxes shipping and air profit on a similar basis, otherwise the Service has a free hand to choose a fair percentage. The carrier can later ask for the better treatment if it brings the certificate in time, and the six-year limit is counted from the end of the relevant assessment year.

The minimum tax protects the revenue where the ratio gives a low profit. It is 2% of the full sum receivable for carriage loaded in Nigeria, and the sum receivable excludes VAT and levies that the carrier collects for others, such as airport and passenger charges.

Cable and wireless undertakings

The same logic is applied to a foreign company that transmits messages by cable or wireless systems. A message that starts in Nigeria is taken to be like a passenger loaded in Nigeria, because the company earns the fee from a Nigerian customer for sending it out. A message that ends in Nigeria, or one that is routed through its network in Nigeria, is not taxed under this section.

The Finance Act 2021 also extended the charge to digital and electronic services to the extent of a significant economic presence, which is covered in the topic on e-commerce.

Returns and administration for banks and insurers

Banks must file monthly and annual returns and pay the penalties in the Act when they default; for example, the administrative penalty on a bank for failing to file its quarterly return on new customers and large deposits is ₦1,000,000 for each quarter.

An insurer must file its annual return with the schedules on agents, loss adjusters and brokers, the schedule of policies and unexpired risks, and the schedule of estimated claims and outgoings that make up the amounts deducted. It must give the Service the actuary’s revaluation certificate within three months of a revaluation. Life and non-life classes file separate returns with separate books.

Exam outlines

1. Foreign carrier computation. Compute adjusted profit from the net profit by adding back depreciation, disallowed items and capital deposits; find the ratios on worldwide income; apply them to the Nigerian income only; give the tax at 30%; compare with 2% minimum tax.
2. Cable company. Identify which of the three income streams is taxable (the one originating in Nigeria); then follow the same steps.
3. Insurance. State the class first. For non-life, show the unexpired risk working for each year, then the assessable profit with the estimates brought back, then the minimum tax on gross premium. For life, show investment income less management expenses and the reserves.
4. Banks. Start from net profit, deduct exempt interest after testing each loan on the moratorium and rate, and add back the disallowed provisions and unrealised exchange loss.

Points to remember

• The 2% minimum tax belongs to foreign carriers and cable companies, and the 0.5% minimum tax belongs to insurers.
• A foreign carrier’s tax is on loading in Nigeria; a cable company’s tax is on messages sent from Nigeria.
• The reserve for unexpired risks is on time apportionment, not a fixed percentage; the old 25% basis for outstanding claims has been replaced by the estimate.
• A composite insurer files two returns.
• An agency is not a permanent establishment of a foreign insurer unless the agent has and habitually uses a general authority to conclude contracts.

The position from 2026

The Nigeria Tax Act 2025 re-enacts special rules for these sectors with changes. Use the rules above for years to 2025. From 2026 four points matter. First, section 18 of the Nigeria Tax Act 2025 deals specially with a non-resident engaged in shipping or air transport, and section 21 of the Nigeria Tax Administration Act 2025 adds stricter compliance, with remittances for these carriers due by the 21st of the following month.

Second, section 17(3)(c) requires a Nigerian resident to deduct withholding tax on insurance premiums paid to a non-resident. Third, a non-resident with a taxable presence is taxed on a profit margin not below that of its group, and the deemed profit floor is 4% of turnover. Fourth, for the minimum tax of a life insurance company, net income excludes the gross and investment income that belongs to policyholders.

Banks and telecommunications companies are taxed like other companies, with the 30% company rate, the 4% development levy and, for large groups, the 15% minimum effective tax rate.

Worked examples

1. Adjusted profit.
   240 + 120 + 40 + 80 = 480
   ratio = 480 ÷ 1,200 = 40%.
2. Income loaded in Nigeria.
   220 + 180 = 400 (the ₦300m terminating in Nigeria is exempt).
3. Assessable profit.
   40% × 400 = 160
   capital allowance = 120
   total profit = ₦40m.
4. Tax at 30% = ₦12m.
   Minimum tax = 2% × 400 = ₦8m, which is lower, so ₦12m is payable.

1. Adjusted profit.
   56 + 90 + 39 + 23 = 208
   worldwide income = 450
   profit ratio = 46.22%
   depreciation ratio = 90 ÷ 450 = 20%.
2. Only the ₦100m originating in Nigeria is taxed: assessable profit = 46.22% × 100 = 46.22
   capital allowance = 20
   total profit = ₦26.22m.
3. Tax at 30% = ₦7.866m. The printed solution shows ₦7.886m, which is an arithmetic slip.

1. Unexpired risk attributable to the year.
   2022 = 65,000 − 50,000 = 15,000
   2021 = 50,000 − 43,000 = 7,000.
2. 2021 assessable profit = 11,000 − (2,800 + 3,000) = 5,200.
3. 2022 assessable profit = 12,000 + 3,000 (estimate of 2021 added back) − (2,500 + 4,200) = 8,300.
4. Gross premium 2022 = 125,150 − 8,200 = 116,950
   2021 = 122,000 − 7,100 = 114,900.
5. Minimum tax at 0.25%: 2022 = ₦292,375; 2021 = ₦287,250. The printed answer shows these ten times too large.

1. ₦3,200,000 is exempt; the remaining ₦1,800,000 is taxable.

How to score full marks

• Name the business and the section, then pick the right format.
• Separate Nigerian income from exempt income by route or origin.
• Compute ratios on worldwide figures and apply them to the Nigerian income.
• Compare the minimum tax with the normal tax.

Common mistakes in the exam

• Taxing income from cargo that only ends or passes through Nigeria.
• Treating life premium as income.
• Mixing life and non-life losses.
• Allowing increases in loan provisions for a bank.
• Applying 2% minimum tax to an insurer, or 0.5% to a carrier.

Quick revision

• Air and sea: loading in Nigeria; ratios; 2% minimum.
• Life: investment income less expenses; non-life: premium less reserves and claims.
• Banks: exempt farm, export and government stock interest; no loan provision increases.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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