Understanding Net of Tax and Gross-Up Provisions in Contracts

By P.L. Osakwe

■ INTRODUCTION
Every contract has two visible parties. Yet, lurking in the background is a third guest who never signs but always demands his share: the Taxman.
When a company promises to pay a consultant ₦10 million for a job well done, both sides may think the matter is settled. But at the moment of payment, the Taxman extends his hand, withholding tax rules, value-added tax, company income tax, and suddenly the question arises: who should bear this extra burden?

For the consultant, receiving ₦9 million instead of the promised ₦10 million feels like betrayal. For the company, paying extra to satisfy both the consultant and the Taxman feels like punishment. Contracts are caught in this tug of war.
It is here that the doctrines of net of tax and gross-up provisions enter the stage. They are the contract’s way of saying: “A promise is a promise, even when the Taxman intervenes.”
This article is my attempt to unpack these concepts, not in sterile legal jargon, but in human terms. I will explore how they work, why they matter, how Nigerian law sees them, and what lessons we might draw about fairness, trust, and responsibility in business.

■ The Net of Tax Promise: Protecting the Agreed Amount.
To declare that a payment shall be “net of tax” is to make a bold promise: “No matter what deductions the law demands, you will receive the full amount we agreed.”
Picture a Nigerian consultant who signs a contract to earn ₦10 million from an international oil company. Unknown to her, withholding tax of 10% applies. Without a net of tax clause, she may only walk away with ₦9 million. But with the clause, she is guaranteed ₦10 million in her account, and the company must shoulder the tax separately.

This is not just about money. It is about trust. The consultant may have budgeted for school fees, salaries of her team, or office rent based on ₦10 million. A shortfall feels like a broken covenant. Net of tax provisions protect the dignity of that agreement.
In the world of expatriates, the principle is even more striking. Many foreign employees posted to Nigeria negotiate “net of tax” salaries. This shields them from Nigeria’s unpredictable tax landscape. The employer becomes the one who wrestles with the Taxman, leaving the expatriate’s paycheck untouched.
Net of tax, therefore, is less about taxation and more about certainty. It reassures the recipient that what was promised is what will be delivered.

■ Gross-Up: The Muscle Behind the Promise.
But promises need power. That is where gross-up provisions come in.
To gross up means to increase the amount paid so that, after taxes are deducted, the net equals the agreed figure.
Imagine you owe your friend ₦10,000, but the bank always charges 10% per transfer. If you only transfer ₦10,000, your friend receives ₦9,000. To keep your promise, you must send ₦11,111, so that after the 10% charge, your friend pockets ₦10,000.

That extra ₦1,111 is the gross-up.
Now picture a Nigerian borrower paying interest to a foreign lender. The contract requires $100,000 “net of tax.” Nigerian law demands 10% withholding tax on interest. Without a gross-up, the lender would only receive $90,000. With gross-up, the borrower pays $111,111, $100,000 for the lender, $11,111 for the government.
Gross-up is not charity. It is the machinery that makes the net of tax promise possible. It transfers the tax burden from the recipient to the payer.
In practice, this can be very expensive. In high-value projects, oil and gas, telecoms, infrastructure, gross-up clauses can add millions of dollars or billions of naira to the cost. That is why these clauses are heavily negotiated. The payer will resist; the recipient will insist. Between them, the Taxman smiles.

■ Why Net of Tax and Gross-Up Exist: The Legal and Commercial Rationale.
Why do parties insert these clauses in the first place? The answers are both commercial and moral.
1. Certainty for the recipient. No one wants to discover at payday that the actual amount is less than agreed. Net of tax provides predictability.
2. Protection of weaker parties. Consultants, employees, or lenders in weaker bargaining positions use these clauses to shield themselves from surprise tax deductions.
3. Cross-border fairness. In international transactions, the foreign party often has no control over Nigeria’s tax rules. Gross-up ensures that Nigerian tax laws do not reduce their expected return.
4. Preservation of trust. Contracts are more than documents, they are promises. Net of tax and gross-up clauses preserve the spirit of those promises against external interference.

■ Nigerian Law and the Taxman’s Perspective
Now we arrive at the thorny question: Can a private contract override Nigeria’s tax laws?
The short answer: No.
The Companies Income Tax Act (CITA), the Value Added Tax Act, and related legislation empower the Federal Inland Revenue Service (FIRS) to collect taxes directly from payments. A clause in a contract cannot stop FIRS from deducting withholding tax.
So what happens when a contract says “net of tax”?
FIRS will still demand its share.
The payer must then gross up the payment to fulfil its contractual promise.
In effect, the government always gets paid, and the recipient still receives the full net amount.
Nigerian tax law does not forbid gross-up clauses. What it forbids is any attempt to evade taxes. As long as the payer pays both the tax and the recipient’s net amount, the law is satisfied.
This creates an interesting dynamic. The government does not care who ultimately bears the burden, payer or recipient. What matters is that the tax is collected. The contract only decides who cries while paying.

■ International Practice and Comparisons

In cross-border finance, gross-up clauses are standard. The Loan Market Association (LMA) templates used globally include tax gross-up provisions as a default.
In the UK and EU, courts uphold gross-up clauses, provided they do not attempt to nullify statutory taxes.
In the United States, tax gross-up provisions are common in employment contracts for executives relocated abroad. Companies agree to cover the extra taxes so that the executive is not worse off.
In developing economies, foreign investors often insist on net of tax payments to avoid uncertainty. Local companies, desperate for foreign capital, often accept.
Nigeria is not unique in this. But Nigeria’s heavy reliance on withholding taxes makes gross-up especially burdensome for local businesses.

■ Challenges and Controversies
These provisions are not without criticism.
1. Tax avoidance concerns: Critics argue that shifting the burden to the payer encourages recipients to ignore local tax responsibilities.
2. Unfair cost burdens: Small Nigerian companies may find themselves paying far more than expected when forced to gross up payments to foreign partners.
3. Negotiation imbalance: Stronger foreign parties can demand net of tax clauses, leaving Nigerian entities to carry double costs.
4. Double taxation risk: In cross-border deals, if gross-up is not carefully structured, both Nigeria and the recipient’s home country may tax the same income.
Yet despite these challenges, the practice survives because it preserves commercial trust.

● Everyday Scenarios in Nigeria
1. Employment Contracts:
Expatriates working in Nigeria often insist on net of tax salaries. The Nigerian company bears the PAYE tax separately, ensuring the expatriate receives their full agreed salary.
2. Consultancy Agreements:
A consultant promised ₦5 million net of tax will actually cost the company about ₦5.56 million once withholding tax is grossed up.
3. Loan Agreements:
Foreign lenders demand interest net of tax. Nigerian borrowers end up paying both the interest and the withholding tax.
4. Infrastructure Projects:
In public-private partnerships, foreign contractors often negotiate net of tax fees. This increases the project cost borne by government or Nigerian sponsors.

■ Policy and Ethical Reflections.
Here lies the heart of the matter. Should private contracts shift the tax burden away from those who earn income?
On one hand, net of tax provisions protect trust. They ensure that promises are kept. On the other hand, they risk creating inequality. Nigerian companies bleed while foreign contractors smile.
There is also a philosophical question: is it just for the law to allow one party to walk away untouched by taxation, while another carries the double load?

My view is this: taxation is the price we all pay for civilisation. No contract should entirely remove that responsibility. Yet, the realities of commerce demand flexibility. For Nigeria to attract foreign capital, some concessions must be made. The key is balance, contracts should protect recipients without crushing payers.

■ Conclusion: Between Promise and the Taxman.
At the end of every deal lies a triangle: the payer, the recipient, and the Taxman. "Net of tax" and "Gross-up" provisions are the tools by which we navigate this triangle. They are not loopholes but lifelines, ensuring that promises survive the intrusion of law.
In Nigeria, as elsewhere, the government will always take its due. Contracts cannot change that. What contracts can do is decide who bears the pain.
And perhaps that is the enduring lesson: in law and in life, when promises meet taxes, someone must gross up. The only question is who?