THE NIGERIAN 2024 WHT REGULATIONS AND THEIR EFFECT ON TAX GROSS-UP PROVISIONS IN CONTRACTS

Introduction

The Nigerian Government through the Ministry of Finance and the Coordinating Minister of the Economy issued the Deduction of Tax at Source (Withholding) Regulation 2024 (“Regulation 2024”) which took effect on the 1^st of July 2024 and supersedes any other regulation governing deductions at source of Withholding Tax (WHT). The Regulation 2024 maintains the interpretation of the previous provisions of the Companies Income Tax (Rate, etc., of Tax Deducted at Source) Withholding Tax Regulation of 1997 (“Regulation 1997”) on with respect to WHT not being an additional cost to contracts.

This article examines the nature of gross-up clauses and their interplay with the WHT regime in Nigeria, legality and implications.

Nature of Gross-Up Clauses

The gross-up provision ensures that the recipient of a payment receives the full amount owed, regardless of the taxes the payer must withhold. This typically leads to the payer bearing the tax burden thus, increasing the overall cost of the transaction. A typical gross-up provision usually read thus:

“In the event that Party A is required by law to make a payment subject to withholding of Tax, Party A shall ensure that Party B receives the fees it would have received had no such withholding been made or required to be made.”

Principle of Withholding Tax

The WHT regime is an advance payment of income tax which can be used to offset the income tax liability of a taxpayer. While it is not a separate form of tax, it is a collection mechanism adopted by the Tax Authorities to reduce the incidence of tax evasion/fraud by a taxable person, and it helps to bring obscure transactions to the notice of tax authorities. It enhances voluntary compliance, and it is a compulsory payment on any relevant income in which WHT is applicable and must be paid by the person making a payment to a third person as such person becomes an unpaid agent of the Relevant Tax Authority. Such payments are evinced on the Taxpromax portal of the relevant tax payer.

Implications of the “Deduction not a Separate Tax or an Extra Cost” Provision as stated in Regulation 2024 on Contracts

Under Nigerian law, a provision in a contract will be deemed valid where there is no express provision in a statute prohibiting that contractual provision. Therefore, in the absence of specific provisions prohibiting gross-up provisions for WHT, gross-up provisions for WHT in contracts cannot be considered illegal[1].

The shifting of tax obligations in contracts depends primarily on the bargaining positions of the parties. Hence, gross-up provision in contract cannot be regarded as illegal but will be unfair to the payer as it would be an extra cost on the payer as a portion of the payee’s tax burden has been shifted.

Conclusion

It is our considered view that Withholding Tax Regimes should tackle the issue on tax burden shifting. In our view, gross-up provisions in contracts do not aid or promote equity as a party would have to pay the WHT and the grossed-up monies. We believe that the tax regimes should also be concerned about who bears the burden of tax paid, that way, WHT will not be an additional cost to the payer. For businesses and individuals engaged in commercial contracts, understanding and adapting to this change will be crucial in optimizing their tax planning and maintaining the integrity of their financial dealings in Nigeria’s evolving tax environment.