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

From The Jolly Contrarian
Jump to navigation Jump to search
← Older editNewer edit →
VisualWikitext
No edit summary
No edit summary
Line 2: Line 2:
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.  
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 {{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 that turned out to be false, 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 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.  
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 or {{isdaprov|Change in Tax Law}}.  
 
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 than the one nicked from the [[2002 ISDA User Guide]]. So, go [[FT book about derivatives|Paul C. Harding]]!!!
But on the other hand, it is hard to think of a better explanation than the one nicked from the [[2002 ISDA User Guide]]. So, go [[FT book about derivatives|Paul C. Harding]]!!!

Revision as of 15:21, 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.

view template

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)).

view template

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

Index: Click ᐅ to expand:
ISDA
Navigation
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
Tell me more
Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.


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 that turned out to be false, 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 or Change in Tax Law.

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 than the one nicked from the 2002 ISDA User Guide. 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.
Retrieved from "https://jollycontrarian.com/index.php?title=Liability_(for_withholding)_-_ISDA_Provision&oldid=33156"