Question: In Tanzania, are proceeds from life insurance taxable? How are life insurance proceeds taxed?
Answer: The twin benefits of savings and security are offered by life insurance, whose contribution to the economy of Tanzania is very important. Far from giving security to the insured against potential risk exposure, life insurance, from an economics standpoint, mobilizes funds through attractive savings products that boost economic growth. The life insurance industry in Tanzania is regulated by the Tanzania Insurance Regulatory Authority (TIRA).
This is a statutory government agency established under the Insurance Act, 2009 to regulate, supervise and develop the insurance industry. According to industry pundits, the uptake of insurance in Tanzania and the contribution of the insurance sector is anticipated to improve after the approval of the country’s National Insurance Policy.
The tax law on life insurance
The Income Tax Act, 2004 governs the taxation of life insurance in Tanzania and the legislation is broken down into eleven parts and further into divisions and subdivisions. Part V is the part that covers special industries, which include insurance business covered under division I (sections 58, 59 and 68) of that part. Section 59 provides the legislative footing on the tax treatment of life insurance business. In essence, the conduct of a person’s life insurance business is treated as a business separate from any other activity of the person. In addition, the income or loss from such business for any year of income is required to be calculated separately.
This provision, together with the provisions on general insurance business (section 58) and on proceeds from insurance (section 60), were introduced for the first time in Tanzanian income tax history in 1994 vide section 8 of the Finance Act, 1994.
The strong policy thrust behind the taxonomic characterisation of insurance business as ‘special industry’ within the Income Tax Act, 2004 is the need to encourage the insurance industry to be more productive and competitive by improving the uptake of insurance.
Tax treatment of life insurance proceeds
First, in relation to life insurance, it is important to not confuse the terms ‘proceeds’ and ‘premiums’. Proceeds are benefit proceeds paid out by a life insurance policy as a result of a verified claim against the loss that has been insured.
Premiums, on the other hand, simply means the an agreed amount that an insured pays to a life insurance company for life insurance, either as one payment or as a series of monthly or annual payments. The tax treatment of premiums are outside the scope of this comment. Section 60(1) of the Income Tax Act provides that the tax treatment of proceeds from insurance is to be determined in conformity with section 31 of the Act, which provides that a compensation amount which a person expects or expected to derive shall be included in calculating the person’s income.
However, section 60(1) declares that it is to be construed subject to section 60(2) on gains of an insured from life insurance. The phrase “gains of an insured from life insurance” is interpreted in section 60(3) of the Act to mean “the extent to which proceeds from life insurance paid by an insurer exceed premiums paid to the insurer with respect to the insurance.”
Thus, in line with section 60(2)(a) of the Act, when an insured receives proceeds from a resident insurer, the gains of the insured respecting those proceeds are not taxed as they are exempt.
However, when an insured receives proceeds from a non-resident insurer, the gains of the insured respecting those proceeds are to be included in calculating the income of the insured as required by section 31 highlighted above (section 60(2)(b)).
This is in accordance with section 4 of the Income Tax Act, read together with paragraph 1 of the First Schedule to the Act.
Curiously, though, paragraph 2 and paragraph 3 of the First Schedule provides for a different tax rate where “gains” (note that, in terms of section 3 and section 36, gains are expressed to be in respect of realisation of an asset and asset is interpreted to include a right to income future income) are included in calculating the income of a resident individual whose total income for a year of income exceeds Sh2,040,000. In this case, the rate is 10 per cent of the amount exceeding Sh2,040,000.
This is reinforced by section 9 (income from an investment) which provides that in calculating a person’s gains from conducting an investment, any gains of an insured from life insurance shall be included.
Paul Kibuuka (email@example.com) is a tax and corporate lawyer, tax policy analyst and chief executive of Isidora & Company.