Nigeria: Taxation Of Commissions Payable To Insurance Brokers/Agents – An Obligation Or A Nightmare?

Last Updated: 1 March 2018
Article by Deloitte Nigeria

The insurance industry is one of the specialised businesses having a peculiar business model and corresponding distinct tax considerations in Nigeria. The core business of insurers/insurance companies, simply put, is to provide cover to another party (insured), against possible financial loss within a specified period. In return, the insured pays an insurance premium at the inception of the cover period, which forms part of the income reported in the books of the insurer.

A critical aspect of the business expansion mechanism in the insurance industry revolves round brokers and agents. Insurance brokers/agents act as middle men; bridging the gap and linking insurers with potential insured parties seeking to hedge against risks. Insurance companies incur costs in sourcing the services of brokers/agents (commissions). Commissions are often calculated as a percentage of the insurance premium, depending on a number of factors such as coverage, the insurer and marketing methods, etc.

Although the commission is "paid" to the broker/agent, in practice, the cash does not usually flow from the insurance companies; brokers/agents collect the full premium and deduct appropriate commission upfront. The peculiarity of this deduction mechanism has far-reaching implications on the tax compliance obligations and exposure of insurance companies as described below:

Withholding Tax (WHT)

As a general rule in Nigeria, companies are required to withhold as tax, a percentage (5 or 10) of payments to service providers, vendors and suppliers in respect of qualifying transactions and remit same to relevant tax authorities.

One of the "qualifying transactions" include commissions, thus implying that the insurer (payer) is obliged to act as a collecting agent for government. However, in view of the peculiarities of the manner of making "payment" to broker/agents, deduction of WHT due on the relevant commission in the insurance sector becomes impracticable.

In practice, insurance companies often argue impracticability of deduction during tax reviews/audits. Conversely, the tax authorities invoke the provisions of Section 16(11) of the Companies Income Tax Act, which states "an insurance company that engages the services of an insurance agent, ... and an insurance broker shall include in its annual tax returns, a schedule showing the name and address of that agent, and insurance broker, the date their services were employed and terminated, as applicable, and payments made to each such agent, ...and insurance broker for the period covered by the tax returns".

This information would enable tax authorities deal with the agent/broker directly without insisting on the WHT requirement from the insurer. While this ordinarily appears to be a welcome solution, insurance companies are faced with a dilemma, based on their reliance on brokers/agents for business development.

Insurers in Nigeria are practically at the mercy of brokers/agents, since brokers originate a large portion of insurance business. The brokers/agents are not exclusive to any insurance company and typically decide the insurance company to transact with. A typical and often subtle negotiating strategy used by brokers/agents is urging insurers to mimimise information shared with government agencies. Where an insurer is perceived to divulge "too much" information about a broker, there is a high likelihood of the broker taking his business to another insurance company. This commercial consideration weighs a lot on insurance companies' decision to file the returns prescribed above.

Value Added Tax (VAT)

While insurers seek solutions to manage the above imposed WHT obligation, they also carry an additional burden to account for VAT, a consumption tax paid on the supply of goods and services (including insurance brokerage/agency). Based on the VAT Act, insurance companies are meant to pay VAT over and above the commissions "paid" to brokers/agents who remits to tax authorities.

Similar to the WHT requirement, the VAT treatment does not follow the normal cycle. Insurance companies are not expected to pay VAT to the brokers/ agents; rather, they are obliged to apply the reverse charge mechanism and remit the VAT directly to tax authorities, in line with FIRS Information Circular No. 2006/02 and 9503.

As noted above, this is based on Circular as the law on deduction of VAT at source or reverse charge mechanism is inapplicable to insurance companies. Thus this treatment may be different for established brokers/agents who may demand payment of VAT to them for onward remittance to tax authorities (to avoid penalties).

Other VAT intricacies on payment to broker/agent include issuance of VAT invoice. A supplier is obliged to issue an invoice with specific information for VAT purposes. Considering that commission is usually deducted upfront, the broker/agent may consider it superfluous to issue any invoice with the relevant details. This exposes such insurance companies to penalties for non-issuance of a valid invoice, on the strict interpretation of the law.


Despite these challenges, capturing brokers/agents in the tax net is essential to ensure they pay their fair share of taxes. In the same vein, it is important that government assists this industry in every possible way to deal with its operational nightmares.

Therefore, rather than seeking to impose WHT on insurance companies that incur these commissions, Tax Authorities could explore other means of ensuring compliance such as collaborating with other regulators within the insurance industry to ensure tax compliance by brokers.

On 7 December 2017, the National Insurance Commission (NAICOM) released a circular mandating all insurance companies to confirm the status of the operational license of brokers / loss adjusters prior to engaging the services of brokers. This could be a stepping stone for Tax Authorities to leverage in order to obtain relevant information about brokers / loss adjusters for ease of tracking. In this regard, Tax Authorities' collaboration with NAICOM could include making tax clearance a condition precedent to obtaining relevant operational licences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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