RE-VISITING TOTAL (NIG) PLC V.

AKINPELU:
FILLING THE GAPS TO BUILD THE TAXPAYERS HAVEN
By Bidemi Olumide Olowosile

BACKGROUND

Recently, I had instructions to represent a major Nigerian company (my Client) in a dispute with
one of its foreign investors. The dispute had centered on the legality of my Client’s decision to
deduct the statutory 10% Withholding Tax on Dividends from the Dividends accruable to the foreign
investor under a Preference Shares Subscription Agreement (PSSA). It had been the contention of the
foreign investor that in the light of the ‘Withholding and Gross-Up’ Clause which formed part of the
PSSA, my Client was obligated to them the full sum due as Dividend. The Clause which the made
reference to provides thus:

“If, at any time, any applicable law, regulation or regulatory requirement requires the
Company to make any deduction or withholding from any sums payable under this
Agreement, the amount so due shall be increased to the extent necessary to ensure that, after
the making of such deduction or withholding, the recipient of that payment receives, on the
due date for such payment, a net sum equal to the sum which it would have received had no
such deduction or withholding been required to be made.”

It was the argument of the Attorneys to the foreign investor that the above clause effectively prevents
my Client from paying their Client any sum less than their Client would have been entitled to had
no withholding tax been deducted. They submitted that by the tenor of the Clause, my Client was to
bear the burden of their Client’s Withholding Tax burden.

Quite swiftly my team had attacked the premise of the other side’s arguments that the Clause in
question has made no reference to ‘Withholding Tax’; indeed we had faulted the conclusion of the
other side by certain principles of law and commercial sense, to wit:
1. A Withholding Tax is not a “withholding or deduction” but an income tax that is
withheld or deducted at source from any sum payable by a Nigerian company.
2. Where the parties had intended that the Clause be applied to Withholding Tax, such
would have been clearly stated as there is no euphemism for Tax.
3. Provisions that are claimed to relate to tax are strictly interpreted as the Courts would
only give effect to the clear wordings of the provision
4. In the absence of a definition to the contrary in the contract, “Sums payable” could
mean ‘on after-tax basis.’
5. Where in a contract such as these, where there is doubt as to the import of the words
used, the Court would adopt the construction least favourable to the person putting
forward the instrument or document (fortissime contra Proferentes)

Interestingly the parties had reached an accord without visiting the court-room; and interestingly my
Client had gotten away with the legal naivety of allowing such a clause in the Contract.
It was whilst I was getting set for the second round of the Private Dispute Resolution Session that I
came across the Court of Appeal’s decision in Total (Nig) Plc v. Moshood Adeleye Akinpelu (2004)
17 NWLR (pt. 903) 509, which I decision I found an interesting reading; most especially because of
the criticism I naturally attach to its basis.

TOTAL (NIG) PLC V. MOSHOOD ADELEYE AKINPELU (2004) 17 NWLR (PT. 903) 509

Total v. Akinpelu (the Total case) is a 7 pages lead judgment delivered by HIS LORDSHIP V.O.A
OMAGE JCA of the Court of Appeal, Ibadan Divison on Thursday, June 26, 2003. The case which
was an appeal from the decision of the Oyo State Court witnessed the Court of Appeal making
pronouncement on such areas of law as, Contract, Taxation and Principles of Interpretation.

THE FACTS: By the terms of a Sub-Lease Agreement between Total (Nig) Plc (Total) and another,
Total became the Lessee of Akinpelu’s land. The term s of the Head Lease which was incorporated
into the Sub-Lease Agreement provided that the Lessee covenants “to pay all existing and future taxes,
rates, assessments and outgoings of every description to which the premises, or the lessor or lessee in respect of
the premises are or is or shall hereafter be liable.”

When in line with a rent revision clause contained in the Lease Agreement (upon which the parties
agreed on the sum of N135,000.00 per annum as consideration for the 10 year period 1996 to 2006)
Total sought to pay the total sum of N1,350,000.00 less the 10% Withholding Tax stipulated by
Section 68 of the Personal Income Tax Act (PITA), No. 104 of 1993, Akinpelu rejected the net
amount sought to be paid and demanded for the total amount of N1,350,000.00. Whilst Akinpelu
directed Total’s attention to the above stated clause wherein Total had covenanted to pay all existing
and future taxes, Total referred Akinpelu to Sections 68 & 70 of PITA whose combined effect makes
it a criminal offence for Total not to deduct a Withholding Tax of 10% of any sum paid as rent.

It became obvious that neither party was set to shift ground, hence Akinpelu proceeded to Court
seeking for a determination of the Lease Agreement and inter alia prayed for “a declaration that the
refusal of the defendant to pay the withholding tax amounts to a breach of the defendants’ covenant to pay
taxes which entitles the plaintiff to exercise a right of re-entry conferred on the lessor by the deeds of lease.”
After consideration and evaluation of evidence tendered by both parties, the Oyo State High Court
ruled thus:

“Declaration that under the Deed of Lease…the defendant is liable to pay the withholding
tax chargeable on the rent payable for the premises covered by the deeds.”

The Court further ordered Total to pay Akinpelu damages for the use and occupation of the
premises. The Court however refused Akinpelu’s prayer that Total should deliver vacant possession
of the premises.

THE ISSUES: At the Court of Appeal Total raised six grounds of appeal and formulated two issues
for determination, to wit:
 1. Whether in view of the available materials and the state of the law, the learned trial
Judge was right in directing the defendants to pay the withhold (sic) tax on rental
income
2. Whether having regard to the circumstances of this case and the observation of the
learned trial Judge, damages and interest was rightly ordered to be paid by the
defendant.

THE JUDGMENT: Whilst the Court of Appeal reversed the part judgment of the High Court
awarding damages to Akinpelu, the Court upheld the decision of the High Court on Total’s liability
to pay the Withholding Tax due on Akinpelu’s rental income. In particular the Court made the
following decisive dictum:

1. “It is sufficient to say the statute (Section 68 of PITA) did not compel the source of the
money paid as tax.” – @ page 522 para.G
2. “In resolving the issue whether the clause in the covenant in the Deed previously referred to
has been frustrated by the provisions of Decree No. 104section 68(1), or put in another way,
does Decree No.104, which imposes a criminal sanction on the appellant, if he did not pay;
direct the appellant not to make payment of the 10% withholding tax on behalf of the
respondent; the receiver of the rent; in accordance with his obligation under the covenant?
The sure and reasonable response is that the Decree made no such provision. It really would
not matter who made the payment, penalty attaches to the Appellant if it is not paid.” – @
page 523 paras.F-H
3. “Secondly; is there a provision in Decree No. 104 Section 68(1) or Section 70 which prohibits
the provisions in the Deed that the appellant should pay the 10% withholding tax on behalf
of the respondent? There is no such provision in Decree No. 104.” – @ pages 523-524
paras.H-A
4. “In my view an agreement in a deed creates a binding obligation between the parties; in the
absence of specific provisions affecting the obligation the provisions at the (sic) statute should
not be used as an excuse to breach the obligation.” – @ page 524 paras.B-C
5. “…it appears to me that rather than the provisions of Decree No. 104, Section 68(1)
operating to frustrate the obligations of the appellant in the deeds of lease, the statutory
provisions actually invests the appellant with the duty to ensure that the payment of the
withholding tax is made to the Inland Revenue. Since the appellant had in the covenant in
the deed undertaken to make the payment on behalf of the respondent, it requires only a
turn of the mind and a determination of the appellant, to actually take the money from his
purse and pay it in the name of the respondent; knowing that the alternative to payment of
the rent due on the premises is a determination of the lease it should not be difficult to allow
the mind to turn in order to make the payment of the withholding tax, to regard it as an
extension of the agreed rent payable on the premises which he holds of the respondent.” – @
page 524 paras.D-G
6. “A supplemental issue to be considered is this, when the 10% withholding tax is deducted in
compliance with the provisions of Decree No. 104, section 68(1) would the full rent agreed
 upon have been paid by the appellant on the premises? It is in my view and I so direct that
though the law prescribed it, the deduction of 10% withholding tax on the rent paid, reduces
the rent in the hands of the lessors – the respondent, the value of the rent agreed.” – @ page
524 paras.G-H
7. “As Decree No. 104 does not contain a provision restricting or forbidding the payment of
the withholding tax payable by the respondent by another, and the appellant has covenanted
on the pain of forfeiting the lease, discretion should dictate that the appellant should agree to
pay as covenanted with the respondent from his pocket, the 10% withholding tax. – @ pages
524-525 paras.H-A

Quite naturally, Total was to appeal the judgment of the Court of Appeal; unfortunately however it
withdrew its Appeal at the Supreme Court and the Appeal was subsequently dismissed by the lead
Judgment of Onu JSC on July 12, 2006. Hence, as it stands the above judgment of the Court of
Appeal remains the law in Nigeria until there is a contrary decision by either the same Court of
Appeal or the Supreme Court.

THE IMPORT OF TOTAL (NIG) PLC V. AKINPELU

It should be agreed without contention that the judgment of the Court of Appeal in Total v.
Akinpelu has the following effects on the Nigerian Tax Law jurisprudence:
1. A party can by means of a contract by Deed effectively shift his tax obligation arising
out of the contract to the other party; and
2. The Taxman is least concerned who bears the burden of tax as much as the tax due on
the transaction forming the Deed is paid.

As opposed to the decisions above, it should also be agreed that the Court of Appeal did not decide
on the following nor where they contemplated by the Court in arriving at its decision: it should be
agreed that Total v. Akinpelu did not decide on the following:
1. On how Total was to report and remit the Withholding Tax to the Taxman in the light
of the PITA deduction and remittance requirement
2. On the import of Regulation 2 of the Personal Income Tax (Rates e.t.c of Tax
Deducted at Source (Withholding Tax)) Regulations

With respect to how Total was to report and remit the Withholding Tax to the Taxman, the
provisions of Section 69(3) of the Personal Income Tax Act and Regulation 3 of the Personal Income
Tax (Rates e.t.c of Tax Deducted at Source (Withholding Tax)) Regulations must be taken to
account.

Section 69(3) of the Personal Income Tax Act stipulates that:

“In accounting for the tax so deducted to the relevant tax authority, the payer shall state in
writing the following particulars which shall accompany the remittance, that is-
a. The gross amount of the rent;
 b. The amount of tax being accounted for
c. The name and address of the recipient and the period for which the rent
has been paid or credited; and
d. The address or accurate description of the location of the property
concerned.”

Regulation 3 of the Personal Income Tax (Rates e.t.c of Tax Deducted at Source
(Withholding Tax)) Regulations stipulates that:
“A person who deducts tax from a payment shall issue a receipt for the tax so deducted and a
statement containing the following information, that is-
a. The name and address of the person from whom the tax was deducted;
b. The nature of activity or service in respect of which the payment was
made;
c. The gross amount paid or payable;
d. The amount of tax deducted;
e. The period to which the payment relates”

A question that necessarily arises from the foregoing is that: If the gross amount of rent payable is
N1,350,000 and Total report’s that it duly made the deduction of N135,000 (as 10% Withholding
Tax) from the said amount, the transaction having been duly receipted, how will Total now treat the
Court of Appeal-imposed cost of N135,000 in its books of account? Indeed, under what head of
expenses is it going to record that it paid the Withholding Tax liability of Akinpelu, taking into
consideration the relevant requirements of either the Statement of Accounting Standards (SAS) or
International Accounting Standards (IAS)? In truth what the judgment of the Court of Appeal would
amount to is that whilst Total reports to the Taxman that the gross amount paid was N1,350,000 and
a tax of N135,000 was deducted as Withholding Tax, it would have to record the full amount
N1,485,000 actually incurred on the premises in the equation:

Sum paid to Landlord: 1,350,000

Withholding Tax paid on behalf of Landlord: 135,000
Total Cost of Premises: 1,485,000

The above practically demands that different costs would be stated in the books of the Taxman and
Total’s Account books; and where the difference represents a colossal sum that could otherwise have
been made available to Shareholders as distributable profits of Total, Total might be calling for
negative shareholder reactions. Further, should the Taxman undertake a contemplative consideration
of the transaction, I wonder if he would not be right to come to the conclusion that Akinpelu had
actually received an income of N1,485,000 from the transaction and hence liable to an actual tax of
N148,500 as opposed to the N135,000 paid by Total. Of course, if the Taxman comes to such
conclusion, then Total might be liable under Section 74 of the Personal Income Tax Act for failure to
deduct tax, while Akinpelu might be liable under Section 76 of the same Act for non-payment of tax.
To save itself from the embarrassment of having to explain to both the Shareholders and Taxman
that it undertook to suffer the Withholding liability of Akinpelu, a Clause in the Lease Agreement
stating that the Contract Value should be grossed-up to an amount such that when Withholding Tax
of 10% is deducted, Akinpelu would be left with the agreed rental sum of N1,350,000.00, would have
proven most useful.

Secondly and quite curiously, the Court of Appeal made no reference to the provisions of Regulation
2 of the Personal Income Tax (Rates e.t.c of Tax Deducted at Source (Withholding Tax))
Regulations which provide that:

“A deduction made from a payment shall not be regarded as an additional cost of the
contract to be included in the contract price but as a tax due on the payment.”

On a careful reading of the words of the Regulation, one is inclined to reason that if by the use of the
word ‘deduction’ is meant Withholding Tax (which I hope not), then clearly, the Regulation
prohibits all agreements that tend to gross-up payments due under a contract as to include the sum
due as tax; hence effectively declaring gross-up clauses illegal. Unfortunately for the Taxman
however, the draughtsman of the law chose to be so vague in the drafting of the Regulation; for
nowhere in both the substantive Act and the Regulation is Withholding Tax referred to as
‘deduction’. With all due respect an ambiguous provision such as this must be resolved in favour of
the Taxpayer (or is it the Tax Avoider!). Semantics notwithstanding, the decision of the Court of
Appeal in the Total case when it said that “…Decree No. 104 does not contain a provision restricting or
forbidding the payment of the withholding tax payable by the respondent by another,…”, has effectively
rendered Regulation 2 as inapplicable to agreements where one party undertakes to bear the burden
of another’s tax obligation, how ever such undertaking is to be discharged.

In summation, it is only to be stated that the Court of Appeal in Total v. Akinpelu has simply
decided that it will not interfere with the decision of parties to a Contract to pass on the buck of tax
that the particular transaction may attract. Within the context of commercial practice and reality
however, the Court had not pronounced on how this is to be done. As we have seen above, simply
directing one party to withdraw the amount due as tax from its pocket and pay to the Taxman would
pose the challenge of inconsistent accounting reporting for the payer. It is with respect to these gaps
in the decision of the Court of Appeal in the Total case that we shall now attempt to fill them and
thus allow the taxpayer an effective and efficient tax solution to tax obligations that may arise in
commercial transactions.

ON THE OPERATION OF GROSS-UP CLAUSES

Gross-up Clauses have become a predominant feature of tax planning globally. Indeed it is not
unknown to see these clauses in most contracts where one party has a greater bargaining power. Put
simply, the tenor of these clauses are to the effect that in the event that any law, regulation or any
other obligation would demand that the sum payable under the contract is to be subject to any
deduction, withholding or tax on the transaction, the sum payable or the recipient of the sum
(payee), the sum payable shall be increased to a sum that would ensure that, after the making of such
deduction, withholding or tax, the payee shall receive, on the due date for such payment, a sum equal
to the sum which it would have received had no such deduction, withholding or tax had been so
deducted or paid. It is no gain saying that the effect of a Gross-up Clause is to effectively shift the
burden of tax to the paying party under a contract. It is indisputably a tax avoidance scheme.

Quite logically, the formula for arriving at the amount the sum payable would be grossed-up to (for
example where the amount of deduction, withholding or tax is put at 10% of the sum payable) would
be:

Y= X - 0.1X or X= Y + 0.1X

Where: X = the Grossed-up sum

Y = the sum payable under the Contract

Globally, Gross-up Clauses have found their way into almost all types of contracts, ranging from
employment contracts, private equity investment contracts to contracts for services. Whilst the
Taxman readily construes the presence of the clause as a granting the payee party a tax advantage, he
might not be inclined to interfere with the parties’ freedom to contract as they wish. Thus, according
to RICHARD BRANWELL in his ‘Taxation of Companies and Company Reconstructions’ (4th Ed. @
page 47), in the UK, where a person is guaranteed a stipulated amount as expected income, free of
tax, provided that the net income is reported as after-tax income and the tax duly remitted, the
arrangement is legal. It is the responsibility of the paying party to arrange its accounts books in such
a way that the correct reports are given to the Taxman whilst ensuring that the correct percentage of
tax is deducted and the payee is eventually paid the agreed sum under the contract.

Although Gross-up Clauses have raised jurisprudential questions of the citizen’s civil obligation to
pay for, in the form of tax, the benefits he derives from using tax-funded social amenities; such
questions however cannot circumvent the right of parties to freely contract as they will, subject to
the qualification of the legality of the contract. Clearly, the Total case has pronounced that a contract
shifting the burden of tax from the statutorily chargeable party to another is legal. According to
LORD SIMON OF GLAISADALE in Ransom v. Higg (1974) 50 TC 1@94:

“It may seem hard that a cunningly advised taxpayer should be able to avoid what appears to
be his equitable share of the general fiscal burden and cast it on the shoulders of his fellow
citizens. But for the Courts to try to stretch the law to meet hard cases (whether the hardship
appears to bear on the individual taxpayer or on the general body of taxpayers as represented
by the inlandrevenue) is not merely to make bad law but to run the risk of subverting the
rule of law itself. Disagreeable as it may seem that some taxpayers should escape what might
appear to be their fair share of the general burden of national expenditure, it should be far
more disagreeable to substitute the rule of caprice for that of law.”

It only need be added that the Clause that purports to be a Gross-up Clause must be carefully drafted
as to admit of all the possibilities of its application. Indeed the Attorneys to the my Client’s foreign
investors, as stated in the introduction to this piece, had intended the Clause in dispute to apply to
Withholding Tax but the Clause had not been so expressed. Indeed the moral of the experience might
simply be on the need to be as verbose as necessary in legal drafting! An example of an absolute
Gross-up Clause would be thus:

“a. All payments to be made under this Agreement shall be made in cleared funds,
without any deduction, withholding or set-off whatsoever, except as may be required
by law.
b. Where at any time, any law, regulation, trade practice or other requirement
requires the (Payer) to make any deduction, withholding or set-off on account of any
taxes, levies, imports, duties, charges, fees and withholdings of any nature from any
sums payable under this Agreement, the amount so due shall be increased to the
extent necessary to ensure that, after the making of such deduction, withholding or
set-off on account of any taxes, levies, imports, duties, charges, fees and withholdings
of any nature, the (Payee) shall receive, on the due date for such payment, a sum
equal to the sum which it would have received had no such deduction or
withholding been required to be made.
c. Provided that in computing the amount to which the amount due under this
contract shall be increased, parties shall apply the equation Y= X - 0.1X or X= Y +
0.1X; where, Y is the sum payable under this Contract and X is the grossed-up sum”

CONCLUSION

Commercial agreements by their very nature are products of negotiations; negotiations that might
demand conventional notions being tweaked to accommodate the choices of parties. Whilst the
outcome of some negotiations might see one party gaining clear financial advantages, it may not be
the burden of the law, more so when there are none, to inquire on the moral acceptability of such
advantages. Indeed it is for the law to either declare a particular transaction lawful or not; and in the
absence of a definite provision or pronouncement on the illegality of a transaction, it remains legal as
it is only that which is prohibited that is illegal and not vice versa.

However, whilst it might seem quite convenient to uphold a Gross-up Clause in the event one
represents the Payee, one would have to creatively negotiate the way out of such should one
represent the Payer, who without counsel, executed such Agreement. Whichever way the pendulum
of representation tilts, it is the lot of the legal practitioner to maximize the opportunities available to
the Client; after all it is the call of professionalism.

Total v. Akinpelu presently remains the Nigerian authority on the legality of transferability of tax
burden; even though one is inclined to question the practicability of the substance of the judgment in
the light of the particular facts of the case. Whichever the pendulum of representation tilts, it is
either for the legal practitioner to fill the gaps in the decision and build the much needed haven for
the Payee Client or expand the gaps and pronounce the errors of the judgment, in a bid for possible
reversal. I only put myself in the shoes of the Attorneys to my Client’s foreign investor.