Overseas tax applicable on reinsurance premium
This writeup is really for those who are engaged in reinsurance functions; treaty and facultative alike.
It is normal for us to charge a 1.25% (back in 2007 and before we charged 1.40%) on the amount of premium reinsured to foreign insurers. We were so used to imposing this tax levy whenever we have dealings with foreign reinsurers, unless they have a branch licensed to operate within Malaysia – like Munich Re and Swiss Re, with the transactions booked at the said branch….
Conveniently we understand this as tax matter and therefore a domain of our Finance department…. we gave no thoughts to it until we received a request from a fresh-faced foreign reinsurer to enlighten them as to such an application. You see… this reinsurer has a domestic branch but the treaty was contracted with their Head Office domiciled in Europe with their Singapore branch mentioned as the managing office. Their Malaysian office played no part in the operations of the contract, save for those prescribed downstream activities…. which also have nothing to do with the reinsurance contract.
Upon checking with the finance department we then realised they too did not quite remember which part and section of the Income Tax Act that are relevant to derive this 1.25% rate.
After numerous rounds of serching and researching with them, we gathered the following must be true….
Corporate tax is 25% since assessment year 2009
1. Corporate Tax applicable for company with capital more than RM2.5 million is 25% as adopted from year of assessment 2009. If there is change in tax rate this is usually made know during the annual budget announcement.
“All insurance and reinsurance companies must necessarily fall within this bracket, thus corporate tax is 25%″
Section 60 (7) Income Tax Act
2. Section 60 (7) of the Income Tax Act 1967 – spelt out that such reinsurance premium ceded to foreign reinsurer (or no local branch involvement) cannot be allowed a 100% deduction for the purpose of tax application – however, a 95% deduction of the amount of cede premium is allowed. You can read the details below:
INCOME TAX ACT 1967 (ACT 53) PART III – ASCERTAINMENT OF CHARGEABLE INCOME
Chapter 8 – Special cases
(7) “(7) Where an insurer carrying on general business has re-insured the risk or part of the risk with a re-insurer who either does not carry on the business of insuring risks of that kind in Malaysia or does not re-insure the risk through a branch in Malaysia, there may be deducted under subsection (5)(b)(ii) or (6)(b)(ii) in respect of such risks which are re-insured only ninety-five percent of the amount which would otherwise be deductible:
Provided that in a case to which subsection (6), (6A) or (6B) applies-
(a) the insurer may elect that no deductions shall be made under subparagraph (6)(b)(ii); and
(b) where he does so-
(i) the election shall be irrevocable and shall apply in relation to the basis period for the year of assessment for which it is made and for the basis periods for all subsequent years of assessment; and
(ii) amounts recoverable under re-insurance contracts shall be disregarded for the purposes of subparagraph (6)(a)(iv).
[Subs. Act 544:s.10]
You can get the full wordings here: http://bit.ly/section60-Insurance-Business-Income-Tax-Act
Summing these two parts of the tax prescription, we should arrive at the following….
“Corporate tax rate (25%) x taxable portion of the reinsurance premium (5%) = 1.25%″
Thus whenever there is any overseas cession, be it facultative or treaty transactions, this 1.25% should be applied on the total premium ceded out. Of course if this foreign reinsurer has a branch licensed under Malaysian laws and the reinsurance business is transacted through it then this may be waived, since the local branch is already equally subjected to the same tax law.