Liability (for withholding) - ISDA Provision: Difference between revisions

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The best guess we’ve seen comes from our old friend, the tiresome [[FT book about derivatives]], whose learned author contends that it addresses the time where a {{isdaprov|Payer}} makes a payment gross, relying in [[good faith]] on a {{isdaprov|Payee Tax Representation}} that the {{isdaprov|Payee}} is entitled to receive gross, only to then find that the {{isdaprov|Tax}}ing authority in question requires the {{isdaprov|Payer}} to make that payment net, and account to it for the {{isdaprov|Tax}}, after all.  In this case the {{isdaprov|Payer}} can require the {{isdaprov|Payee}} to [[indemnify]] it for the payment, interest and penalties.
The best guess we’ve seen comes from our old friend, the tiresome [[FT book about derivatives]], whose learned author contends that it addresses the time where a {{isdaprov|Payer}} makes a payment gross, relying in [[good faith]] on a {{isdaprov|Payee Tax Representation}} that the {{isdaprov|Payee}} is entitled to receive gross, only to then find that the {{isdaprov|Tax}}ing authority in question requires the {{isdaprov|Payer}} to make that payment net, and account to it for the {{isdaprov|Tax}}, after all.  In this case the {{isdaprov|Payer}} can require the {{isdaprov|Payee}} to [[indemnify]] it for the payment, interest and penalties.


This seems a stretch (though probably one cribbed from the 2002 User’s Guide<ref>It says “... no [[gross-up]] is required if the payee has made a {{isdaprov|Payee Tax Representation}} that was false when made or later becomes false (unless it becomes false as a result of a {{isdaprov|Change in Tax Law}} or similar legal development”</ref>) — the usually fulsome<ref>Did I say fulsome? Tiresome.</ref> prose of the {{isdama}} neglects in this case to say anything about {{isdaprov|Payee Tax Representations}}, right or wrong, much less the {{isdaprov|Payer}}’s legitimate reliance on them. It seems to say if the [[Payer]], whether through blameless inadvertence or stupidity, neglects to account for a tax it was obliged to account for, the poor old Payee has to cover.  
This seems a stretch (though probably one they cribbed from [[2002 ISDA User Guide]]<ref>the [[2002 ISDA User Guide]] says “... no [[gross-up]] is required if the payee has made a {{isdaprov|Payee Tax Representation}} that was false when made or later becomes false (unless it becomes false as a result of a {{isdaprov|Change in Tax Law}} or similar legal development”</ref>) — the usually fulsome<ref>Did I say fulsome? Tiresome.</ref> prose of the {{isdama}} neglects in this case to say anything about {{isdaprov|Payee Tax Representations}}, right or wrong, much less the {{isdaprov|Payer}}’s legitimate reliance on them. It seems to say if the [[Payer]], whether through blameless inadvertence or stupidity, neglects to account for a tax it was obliged to account for, the poor old Payee has to cover.  


But on the other hand, it is hard to think of a better explanation. So, go [[FT book about derivatives|Paul C. Harding]]!!!
But on the other hand, it is hard to think of a better explanation. So, go [[FT book about derivatives|Paul C. Harding]]!!!

Revision as of 15:17, 19 September 2019

ISDA Anatomy™


In a Nutshell™ Section 2(d)(ii):

2(d)(ii) Liability. If the payer :—
(1) is required by law to withhold a non-Indemnifiable Tax;
(2) nonetheless does not do so; and
(3) suffers by direct assessment a liability for that Tax,
then, unless the recipient has satisfied the Tax liability directly, it must reimburse the payer for that liability (plus interest, but not penalties unless it failed to provide tax information required under Section 4(a), or breached any Payee Tax Representations.

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2002 ISDA full text of Section 2(d)(ii):

2(d)(ii) Liability. If:―
(1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4);
(2) X does not so deduct or withhold; and
(3) a liability resulting from such Tax is assessed directly against X,
then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)).

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Click here for the text of Section 2(d)(ii) in the 1992 ISDA

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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
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It is hard to peer into the fevered mind of an ISDA ninja who came up with this provision to work out just what it is meant to do, and why.

The best guess we’ve seen comes from our old friend, the tiresome FT book about derivatives, whose learned author contends that it addresses the time where a Payer makes a payment gross, relying in good faith on a Payee Tax Representation that the Payee is entitled to receive gross, only to then find that the Taxing authority in question requires the Payer to make that payment net, and account to it for the Tax, after all. In this case the Payer can require the Payee to indemnify it for the payment, interest and penalties.

This seems a stretch (though probably one they cribbed from 2002 ISDA User Guide[1]) — the usually fulsome[2] prose of the ISDA Master Agreement neglects in this case to say anything about Payee Tax Representations, right or wrong, much less the Payer’s legitimate reliance on them. It seems to say if the Payer, whether through blameless inadvertence or stupidity, neglects to account for a tax it was obliged to account for, the poor old Payee has to cover.

But on the other hand, it is hard to think of a better explanation. So, go Paul C. Harding!!!

See also

References

  1. ↑ the 2002 ISDA User Guide says “... no gross-up is required if the payee has made a Payee Tax Representation that was false when made or later becomes false (unless it becomes false as a result of a Change in Tax Law or similar legal development”
  2. ↑ Did I say fulsome? Tiresome.
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