Indemnifiable Tax - ISDA Provision: Difference between revisions
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From the "wow" file in truly indefensible derivatives drafting: | From the "wow" file in truly indefensible derivatives drafting: | ||
{{box|... ''other than'' a tax which '' | {{box|... ''other than'' a tax which would ''not'' be imposed ''but for''... }} | ||
Not only a triple negative, but since the expression {{isdaprov|Indemnifiable Tax}} is itself often used in the negative (ie ''a tax which is not an {{isdaprov|Indemnifiable Tax}}'') - and even ''double'' negative (ie ''{{isdaprov|other than}} a tax which is not an {{isdaprov|Indemnifiable Tax}}'') in the body of the {{isdama}}. That makes it a '''''quintuple negative'''''. Quite a literary feat. | Not only a triple negative, but since the expression {{isdaprov|Indemnifiable Tax}} is itself often used in the negative (ie ''a tax which is not an {{isdaprov|Indemnifiable Tax}}'') - and even ''double'' negative (ie ''{{isdaprov|other than}} a tax which is not an {{isdaprov|Indemnifiable Tax}}'') in the body of the {{isdama}}. That makes it a '''''quintuple negative'''''. Quite a literary feat. |
Revision as of 12:54, 12 April 2016
In gory detail
1992 ISDA |
2002 ISDA |
Commentary
From the "wow" file in truly indefensible derivatives drafting:
- ... other than a tax which would not be imposed but for...
Not only a triple negative, but since the expression Indemnifiable Tax is itself often used in the negative (ie a tax which is not an Indemnifiable Tax) - and even double negative (ie other than a tax which is not an Indemnifiable Tax) in the body of the ISDA Master Agreement. That makes it a quintuple negative. Quite a literary feat.
A need to know version is this:
Indemnifiable Tax in a Nutshell™ (ISDA edition)
An Indemnifiable Tax is any Tax that is not[1] a Stamp Tax that is not[2] a tax that would not[3] be imposed if there were not[4] a connection between the taxing authority’s jurisdiction and the recipient that did not[5] arise solely from the recipient having performed any part of this Agreement in that jurisdiction.
Withholding under the ISDA
TL;DR: The basic rationale is this:
- if the tax relates to the underlying instrument, rather than the {{{{{1}}}|Payer}}’s residence or tax status, the {{{{{1}}}|Payer}} does not have to gross up.
- if the tax relates to the {{{{{1}}}|Payer}}’s residence or tax status, then the Payer does have to gross up unless the {{{{{1}}}|Payee}} should have provided information to the {{{{{1}}}|Payer}} which would have entitled the {{{{{1}}}|Payer}} to avoid the tax.
- if you’ve agreed the {{{{{1}}}|FATCA Amendment}}, the {{{{{1}}}|Payer}} doesn’t have to gross up any {{{{{1}}}|FATCA Withholding Tax}}es.
The combination of the {{{{{1}}}|Payer Tax Representations}} and the {{{{{1}}}|Gross-Up}} clause of the ISDA Master Agreement has the following effect:
- Section {{{{{1}}}|3(e)}}: I promise you that I do not have to withhold on my payments to you (as long as all your {{{{{1}}}|Payee Tax Representations}} are correct and you have, under Section {{{{{1}}}|4(a)}}, given me everything I need to pay free of withholding);
- Section {{{{{1}}}|2(d)}}: I will not withhold on any payments to you. Unless I am required to by law. Which I kind of told you I wasn’t... If I have to withhold, I'll pay the tax the authorities and give you the receipt. If I only had to withhold because of my connection to the taxing jurisdiction (that is, if the withholding is an {{{{{1}}}|Indemnifiable Tax}}), I’ll gross you up. (You should look at the drafting of {{{{{1}}}|Indemnifiable Tax}}, by the way. It's quite a marvel). ...
- {{{{{1}}}|Gross-Up}}: Unless the tax could have been avoided if the {{{{{1}}}|Payee}} had taken made all its {{{{{1}}}|3(f)}} representations, delivered all its {{{{{1}}}|4(a)}} material, or had its {{{{{1}}}|3(f)}} representations been, like, true).
- {{{{{1}}}|Stamp Tax}} is a whole other thing.
- As is FATCA, which (as long as you’ve made your {{{{{1}}}|FATCA Amendment}} or signed up to a {{{{{1}}}|FATCA Protocol}}, provides that {{{{{1}}}|FATCA Withholding Tax}}es are excluded from the Section {{{{{1}}}|3(e)}} {{{{{1}}}|Payer Tax Representations}}, and also from the definition of {{{{{1}}}|Indemnifiable Tax}}. Meaning one doesn't have to rep, or gross up, FATCA payments.
Withholding under the ISDA
TL;DR: The basic rationale is this:
- if the tax relates to the underlying instrument, rather than the {{{{{1}}}|Payer}}’s residence or tax status, the {{{{{1}}}|Payer}} does not have to gross up.
- if the tax relates to the {{{{{1}}}|Payer}}’s residence or tax status, then the Payer does have to gross up unless the {{{{{1}}}|Payee}} should have provided information to the {{{{{1}}}|Payer}} which would have entitled the {{{{{1}}}|Payer}} to avoid the tax.
- if you’ve agreed the {{{{{1}}}|FATCA Amendment}}, the {{{{{1}}}|Payer}} doesn’t have to gross up any {{{{{1}}}|FATCA Withholding Tax}}es.
The combination of the {{{{{1}}}|Payer Tax Representations}} and the {{{{{1}}}|Gross-Up}} clause of the ISDA Master Agreement has the following effect:
- Section {{{{{1}}}|3(e)}}: I promise you that I do not have to withhold on my payments to you (as long as all your {{{{{1}}}|Payee Tax Representations}} are correct and you have, under Section {{{{{1}}}|4(a)}}, given me everything I need to pay free of withholding);
- Section {{{{{1}}}|2(d)}}: I will not withhold on any payments to you. Unless I am required to by law. Which I kind of told you I wasn’t... If I have to withhold, I'll pay the tax the authorities and give you the receipt. If I only had to withhold because of my connection to the taxing jurisdiction (that is, if the withholding is an {{{{{1}}}|Indemnifiable Tax}}), I’ll gross you up. (You should look at the drafting of {{{{{1}}}|Indemnifiable Tax}}, by the way. It's quite a marvel). ...
- {{{{{1}}}|Gross-Up}}: Unless the tax could have been avoided if the {{{{{1}}}|Payee}} had taken made all its {{{{{1}}}|3(f)}} representations, delivered all its {{{{{1}}}|4(a)}} material, or had its {{{{{1}}}|3(f)}} representations been, like, true).
- {{{{{1}}}|Stamp Tax}} is a whole other thing.
- As is FATCA, which (as long as you’ve made your {{{{{1}}}|FATCA Amendment}} or signed up to a {{{{{1}}}|FATCA Protocol}}, provides that {{{{{1}}}|FATCA Withholding Tax}}es are excluded from the Section {{{{{1}}}|3(e)}} {{{{{1}}}|Payer Tax Representations}}, and also from the definition of {{{{{1}}}|Indemnifiable Tax}}. Meaning one doesn't have to rep, or gross up, FATCA payments.
See Also
See in particular Section 2(d) (Deduction or Withholding for Tax).