Liability (for withholding) - ISDA Provision
2002 ISDA Master Agreement
Section 2(d)(ii) in a Nutshell™
Use at your own risk, campers!
Full text of Section 2(d)(ii)
Related agreements and comparisons
Content and comparisons
Template:M comp disc 2002 ISDA 2(d)(ii)
Template:M summ 2002 ISDA 2(d)(ii)
Template:M gen 2002 ISDA 2(d)(ii)
Template:M sa 2002 ISDA 2(d)(ii)
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) — the usually fulsome 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 — all of that is in the previous section (2(d)(i)) about the liability to withhold and gross-up in the first place.
It seems to say if the Payer, whether through blameless inadvertence, stupidity or the falsity of a Payee Tax Representation, 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!!!
Importing into other master agreements
You may well be asked to wire this concept into other master agreements, like the 2010 GMSLA. Good luck explaining that!
- ↑ 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”
- ↑ Did I say fulsome? Tiresome.