MBABANE – The Revenue Appeals Tribunal Eswatini (RATE) has delivered yet another landmark judgment that will shape the tax administration for insurance companies.
The Tribunal’s latest ruling clarifies how unrealised investment gains and losses should be treated for income tax purposes.
The Tribunal considered that this appeal brought before it to have served an important public function. “Revenue statutes affect not only the parties before the Tribunal but the wider body of taxpayers and the administration of the tax system itself,” said the Tribunal.
“The proceedings afforded the Tribunal the opportunity to pronounce upon an important issue concerning the interpretation of the Fifth Schedule, thereby providing certainty and guidance for future tax administration.”
The ruling, arising from a tax dispute between the State-owned insurance company and the Eswatini Revenue Service (ERS), establishes an important legal precedent on the interpretation of the Fifth Schedule to the Income Tax Order, 1975, providing long-awaited certainty for both taxpayers and tax administrators.
In dismissing the insurer’s appeal, the Tribunal ruled that unrealised fair value gains and losses on investment assets cannot be included when calculating taxable income because they have neither been received nor accrued to the taxpayer.
The Tribunal said unrealised investment losses are equally not deductible because they have not been ‘actually incurred’ as required by the Income Tax Order.
Importantly, the Tribunal noted that the case presented an opportunity to settle an important legal question that had never before been determined in Eswatini.
“The present proceedings have afforded this Tribunal the opportunity to pronounce upon an important issue concerning the interpretation of the Fifth Schedule, thereby providing certainty and guidance for future tax administration,” the judgment states.
The decision effectively establishes how ERS should assess similar tax matters involving insurers in future unless Parliament amends the legislation or a superior court reaches a different interpretation.
The dispute originated from a comprehensive ERS tax audit covering the insurer’s 2014 to 2018 years of assessment.
ERS issued a revised assessment on January 22, 2026, disallowing deductions for unrealised fair value losses on financial assets amounting to E208 439 541.80.
The appellant insurance firm holds financial assets back to its policyholder liabilities and these assets are measured at fair value through profit and loss. The appellant treated these unrealised gains and losses as part of its taxable income.
ERS in response stated that, in terms of the Order, amounts are only included in gross income when they are ‘received by or accrued to’ a taxpayer during the year of assessment.
The tax collector maintained that they should be excluded until the assets are actually sold or disposed. The ERS submitted that because these are merely ‘paper gains’ (gains on paper and not actual) or losses, they do not have an impact on the computation of taxable income.
The adjustment exposed the insurer to an additional income tax liability exceeding E57.3 million.
Like many insurers worldwide, the company measures investment assets at fair value under International Financial Reporting Standards (IFRS), meaning changes in market values are reflected in its financial statements even when the assets have not been sold.
The insurer argued these unrealised gains and losses formed part of its taxable income because they reflected the actual financial performance of its insurance operations.
ERS disagreed, maintaining that tax law recognises only amounts that have been received or have accrued, not paper gains or losses resulting from market fluctuations.
After considering detailed legal arguments from both parties, the Tribunal sided with ERS.
It found that although accounting standards require insurers to record changes in market values, accounting treatment does not automatically determine tax treatment.
Instead, taxable income remains governed by the Income Tax Order.
The Tribunal held that the decisive word in the legislation is ‘derived’.
According to the ruling, income or gains are only regarded as derived when they have either been received or when the taxpayer has obtained an unconditional legal right to them.
Because unrealised fair value movements remain subject to future market changes and may reverse before assets are sold, they cannot be regarded as having been derived.
Similarly, unrealised losses cannot be considered losses actually incurred for tax purposes. The Tribunal, therefore, concluded that neither unrealised gains nor unrealised losses should enter the tax computation.
Protecting revenue stability
MBABANE – Beyond the legal interpretation, the Revenue Appeals Tribunal highlighted wider fiscal implications.
It warned that taxing unrealised gains and allowing deductions for unrealised losses would expose government revenue to fluctuations in international financial markets.
Duo to insurers investing substantial portions of their portfolios on the Johannesburg Stock Exchange, tax collections could fluctuate significantly depending on market performance rather than actual realised income.
The Tribunal said such an outcome would undermine revenue certainty and fiscal stability.
It described the realisation principle as an important safeguard that ensures tax is based on genuine economic events rather than temporary market movements.
The judgment stated that the kingdom’s tax base should not become dependent on changing valuations of investments traded on foreign stock exchanges.
Although the Tribunal ruled in favour of ERS, it also criticised inconsistencies identified during the audit.
Evidence before the Tribunal suggested ERS had treated short-term and long-term insurance businesses differently regarding unrealised fair value movements.
The Tribunal said similar transactions should receive consistent treatment.
However, rather than accepting the insurer’s interpretation, it directed ERS to ensure consistency by excluding unrealised gains and losses across both insurance businesses unless legislation provides otherwise.
Accordingly, the Tribunal ordered ERS to recompute the assessment in line with the realisation principle while reconsidering whether any distinction between short-term and long-term insurance businesses remains justified.
Despite dismissing the appeal, the Tribunal declined to award costs against the insurer.
It found the case raised genuine and complex questions of statutory interpretation affecting the wider insurance industry and tax administration.
The Tribunal said taxpayers should not be discouraged from bringing legitimate legal disputes before specialist tribunals where important questions of law require clarification.
Each party was, therefore, ordered to bear its own legal costs.
The Tribunal ultimately dismissed the appeal against Finding 3 of the revised assessment covering the 2014 to 2018 tax years. It declared that unrealised fair value movements on financial assets that have not been disposed of during a year of assessment are not regarded as income derived by a taxpayer and, therefore, do not form part of taxable income.
It further held that unrealised fair value losses are not losses actually incurred and are consequently not deductible under the Income Tax Order.
While confirming the revised assessment disallowing the E208.4 million unrealised fair value losses, the Tribunal directed ERS to recompute the assessment in accordance with the realisation principle and to determine, consistently with its ruling, whether any distinction should be made between short-term and long-term insurance business.
The Tribunal also ordered each party to bear its own legal costs.
… accounting rules vs tax law
MBABANE – One of the insurer’s principal arguments was that insurance companies are legally required to prepare financial statements under IFRS 9 and IFRS 17 while operating under the supervision of the Financial Services Regulatory Authority.
These standards require investment assets supporting insurance liabilities to be measured at fair value.
The insurer argued that because these accounting standards accurately reflected its financial performance, the same treatment should apply for tax purposes.
However, the Tribunal rejected that argument.
It held that financial reporting and taxation serve different purposes.
According to the judgment, accounting standards are designed to ensure transparency, protect policyholders and monitor solvency, whereas tax liability is determined strictly according to legislation.
The Tribunal reaffirmed the long-established legal principle that accounting treatment cannot override statutory tax provisions.
The judgment also rejected the insurer’s argument that the Fifth Schedule establishes a special tax regime allowing insurers to recognise unrealised market movements.
Instead, the Tribunal found that although the Fifth Schedule creates specialised rules for insurers, it does not abandon the traditional realisation principle.
It said Parliament would have needed to include clear wording had it intended insurers to be taxed on a mark-to-market basis.
Without such explicit language, the Tribunal held, the courts cannot create an entirely new taxation system through interpretation.
The judgment further observed that many countries that tax financial institutions on a mark-to-market basis have enacted detailed legislation dealing with valuation, reversals and timing adjustments.
Eswatini’s legislation contains no comparable provisions.
