Aligning Tax Laws with IFRS 17: Implications for Insurance Sector

IFRS 17, issued in May 2017, replaces IFRS 4, governing accounting for insurance contracts from 1 January 2023. It shifts from a premium-centric to a service delivery and risk release model, aiming for a more accurate reflection of insurer performance and revenue recognition timing. It further standardizes reporting with expected value and current value measurement principles, enhancing transparency, comparability, and consistency. IFRS 17 introduces significant changes, including the Premium Allocation Approach (PAA) and the Contractual Service Margin (CSM). The PAA simplifies accounting for contracts that meet specific criteria by spreading the expected premium revenue over the coverage period. Meanwhile, the CSM represents unearned profit in an insurance contract and is recognized in the income statement as obligations are fulfilled, aligning profit recognition with insurance coverage.

This transition represents a significant overhaul of accounting practices for insurance contracts, with substantial implications for tax reporting. Without adjustments to tax laws, insurers will need to align accounts prepared using IFRS 17 with current tax reporting, potentially involving complex reconciliations and adjustments to tax liabilities. Continuing under IFRS 4 may avoid these complexities but would require maintaining dual reporting systems. For example, under current tax laws, short-term insurance is taxed on an adjusted cash basis, where premiums and incomes such as reinsurance commissions and investment returns are recorded when received. Reinsurance premiums are deducted when paid, and claims when incurred, while technical reserves, except for unexpired risk reserves, are not allowed as income tax deductions. These elements are typically accessible from the accounting records, except for technical reserves, which are actuarially determined. However, using IFRS 17, which relies heavily on actuarial calculations and shifts focus from premium receipt to service delivery, may challenge this approach and potentially erode trust from tax authorities in the short to medium term. This standard method of tax computation might be difficult to maintain with accounts prepared under IFRS 17, possibly leading to distrust from tax authorities in the short to medium term.

Many key elements in the financial statements under IFRS 17, such as insurance services revenue, reinsurance services revenue, and insurance contract liabilities and receivables, are largely calculated by actuaries. The shift in source and terminology under IFRS 17 complicates tax assessments and assimilation, as it focuses on delivering insurance services rather than just receiving premiums. This change could shift the timing of revenue recognition, significantly diverging from current tax treatments under the ITA, which align more closely with cash flows and premium receipts. Further, IFRS 17’s immediate recognition of losses could potentially reduce taxable income, presenting further challenges for tax authorities. It is vital to amend the ITA to align tax deductions with the financial recognition of these losses, to prevent mismatches in tax reporting and financial accounting.

As the insurance industry prepares for the implementation of IFRS 17, it is imperative to consider specific amendments to the Income Tax Act (ITA) to ensure that tax legislation keeps pace with these significant changes in accounting standards. This alignment will ensure that Zimbabwe’s tax laws meet global financial reporting and taxation standards, enhancing the country’s appeal to international investors and ensuring consistent financial reporting for insurance companies. These amendments will eliminate ambiguity, minimize potential tax disputes, and lead to more predictable and equitable tax outcomes. Clarifying the law will help stakeholders understand their tax duties and the basis for their calculations, simplifying compliance and minimizing conflicts. More importantly, adjustments to the ITA should allow for the deferral of taxation on the Contractual Service Margin (CSM) until profits are actually realized, aligning tax obligations with actual earnings rather than anticipated profits. This ensures taxation reflects the actual economic activities rather than expected future profits. A further suggestion is that, losses should be immediately deductible for tax purposes. This would reflect their true economic impact and aid insurers in effective risk management.

In conclusion, the introduction of IFRS 17 represents a watershed moment for the insurance industry, necessitating significant adjustments in both accounting and taxation practices. Aligning the Income Tax Act with these new standards, ensures competitiveness, transparency, and financial stability within the Zimbabwe insurance sector. It is essential for policymakers and industry stakeholders to engage collaboratively to enact these changes, ensuring that the transition not only meets international standards but also supports the local market’s unique needs and conditions.

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