Combined Tax Event - 1987 ISDA Provision
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1987 ISDA Interest Rate and Currency Exchange Agreement
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Crosscheck: Combined Tax Event in a Nutshell™
Original text
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
Resources and Navigation
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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)
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[1], 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.[2] 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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