Tax Event - 1992 ISDA Provision

1992 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →’87 equivalent →’92 equivalent →’02 equivalent Combined Tax Event in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. Original text 5(b)(ii) Tax Event. Due to: (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); “Change in Tax Law” means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into. “Indemnifiable Tax” means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document). See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA. The Varieties of ISDA Experience Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext) Preamble Pre Pre Pre Interpretation 1 1 1 Obligns/Payment 2 2 2 Representations 3 3 3 Agreements 4 4 4 EODs & Term Events 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • FM • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUSS • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM Early Termination 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations; Payment Date • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET Transfer 7 7 7 Contractual Currency 8 8 8 Miscellaneous 9 9 9 Offices; Multibranch Parties 10 10 10 Expenses 11 11 11 Notices 12 12 12 Governing Law 13 13 13 Definitions 14 14 14 Schedule Schedule Schedule Schedule Termination Provisions Part 1 Part 1 Part 1 Tax Representations Part 2 Part 2 Part 2 Documents for Delivery Part 3 Part 3 Part 3 Miscellaneous Part 4 Part 4 Part 4 Other Provisions Part 5 Part 5 Part 5 Resources and Navigation Index: Click ᐅ to expand: ISDA

Comparisons

This is a composite page covering Tax Event, Change in Tax Law and the hilarious concept of Indemnifiable Taxes.

Redlines

• 1987 ⇒ 1992: Redline of the ’92 vs. the ’87: comparison (and in reverse)
• 1992 ⇒ 2002: Redline of the ’02 vs. the ’92: comparison (and in reverse)
• 1987 ⇒ 2002: Redline of the ’92 vs. the ’87: comparison (and in reverse)

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Discussion

Tax Event

The 1992 ISDA represented a significant change from the 1987 ISDA which was a bit half-hearted about gross-ups.

Other than the renumbering, no real changes in the definition of Tax Event from the 1992 ISDA to the 2002 ISDA though, unhelpfully, the sub-paragraph references in the 1992 ISDA are (1) and (2) and in the 2002 ISDA are (A) and (B). Otherwise, pretty much the same.

Change in Tax Law

The 1987 ISDA and the 1992 ISDA were the same, and the best ISDA’s crack drafting squad™ could do to upgrade the 2002 ISDA was the rather fussy “on or after” tweak.

“Indemnifiable Tax”

The joyous expression first found voice in the 1987 ISDA and somewhat undercuts JC’spet theory that the absurd prolixity of modern commercial drafting is the fault of word processing. There wasn’t any word processing in 1986. It was all typewriters, carbon paper and Tipp-Ex.

Anyhow, you would like to think as the generations rolled on ISDA’s crack drafting squad™ could do something to improve a passage with a quintuple negative, wouldn’t you? Even, if, bloody-mindedly, to add a sixth negative, just to underline how scanty is the damn they give about the neurotic whinings of those, like JC, who are always simpering on about more economical expressions. In your face, prose stylists, such a stance might say. Actually, since I’m here, have a fricking seventh negative, punk, and brand it on your forehead so all who look upon you will know who it was who schooled you.

We can but dream, possums. We can only imagine what might have been. but no; they left the ghastly tract inviolate. In this place, at least the innocent spirit of 1987’s Children of the Forest — for this is their text.

Basics

Tax Event

Basically, the gist is this: if the rules change after the Trade Date such that you have to gross up an Indemnifiable Tax would weren’t expecting to when you priced the trade, you have a right to get out of the trade, rather than having to ship the gross up for the remainder of the Transaction.

That said, this paragraph is a bastard to understand. Have a gander at the JC’s nutshell version (premium only, sorry) and you’ll see it is not such a bastard after all, then.

In the context of cleared swaps, you typically add a third limb, which is along the lines of:

(3) required to make a deduction from a payment under an Associated LCH Transaction where no corresponding gross up amount is required under the corresponding Transaction Payment under this Agreement.

Change in Tax Law

So one mild observation here is that this definition of a “Change in Tax Law” does not specifically mention, you know, tax per se. Which at first glance is odd.

This transpires not to matter, though, seeing as Change in Tax Law appears only twice in the 2002 ISDA, and in each case the context in which it appears is very specific to tax. They are:

• Section 2(d)(4)(B) (which deals with exclusions to the general requirement to gross up for Indemnifiable Taxes; and
• Section 5(b)(iii) (Tax Events), defining things that count as Tax Events by making an Affected Party more likely to suffer an Indemnifiable Tax.

The provisions surrounding gross up and termination and Indemnifiable Taxes are some of the most (linguistically) complicated in the ISDA Master Agreement, by the way.

Indemnifiable Tax

Negatives, negatives, everywhere

Without wishing to be overly negative, this one truly comes from the "wow" file in indefensible drafting:

... other than a tax which would not be imposed but for...

Not only a triple negative, but since the squad’s definition of Tax already contains a negative (being any tax that isn’t a Stamp Tax) and “Indemnifiable Tax” is itself often used in the negative (e.g. “a tax which is not an Indemnifiable Tax”) — or even double negative (e.g. “other than a tax which is not an Indemnifiable Tax”) in the body of the ISDA Master Agreement. That makes it a sextuple negative. Beat that ISLA.

Now: as we know, HAL 9000 is coming to a legal workspace near you and will soon deliver us from these noisome legal curlicues. The JC fed this language into the “OpenAI” text generator, and asked for a summary that a second grader (in old money, an eight-year-old) could understand and, well, the outcome is impressive:

Indemnifiable Tax is a kind of tax that is different from other taxes. It is a tax that is only imposed when someone is connected to the country or state that imposes the tax. This connection could be because the person is from the country, does business there, or has gotten money from there.

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See also

• Deduction or Withholding for Tax
• On or after
• From but excluding