Indemnifiable Tax - ISDA Provision
2002 ISDA Master Agreement
From our machine overlords
Full text of Section Indemnifiable Tax
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Now you would like to think 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 the JC who hanker for more economical expression. 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.
But HAL 9000 is coming. 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: see panel to right.
Withholding under the ISDA
TL;DR: The basic rationale is this:
- if the tax relates to the underlying instrument, rather than the Payer’s residence or tax status, the Payer does not have to gross up.
- if the tax relates to the Payer’s residence or tax status, then the Payer does have to gross up unless the Payee should have provided information to the Payer which would have entitled the Payer to avoid the tax.
- if you’ve agreed the FATCA Amendment, the Payer doesn’t have to gross up any FATCA Withholding Taxes.
The combination of the Payer Tax Representations and the Gross-Up clause of the ISDA Master Agreement has the following effect:
- Section 3(e): I promise you that I do not have to withhold on my payments to you (as long as all your Payee Tax Representations are correct and you have, under Section 4(a), given me everything I need to pay free of withholding);
- Section 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 Indemnifiable Tax), I’ll gross you up. (You should look at the drafting of Indemnifiable Tax, by the way. It's quite a marvel). ...
- Gross-Up: Unless the tax could have been avoided if the Payee had taken made all its 3(f) representations, delivered all its 4(a) material, or had its 3(f) representations been, like, true).
- Stamp Tax is a whole other thing.
- As is FATCA, which (as long as you’ve made your FATCA Amendment or signed up to a FATCA Protocol, provides that FATCA Withholding Taxes are excluded from the Section 3(e) Payer Tax Representations, and also from the definition of Indemnifiable Tax. Meaning one doesn't have to rep, or gross up, FATCA payments.
Stamp Taxes are not Indemnifiable Taxes
Stamp Taxes are not Indemnifiable Taxes. They are covered by Section 4(e) and not the general gross-up in Section 2(d). They are not covered by Payee Tax Representations.
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 ISDA’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.
- Section 2(d) (Deduction or Withholding for Tax).