Liability (for withholding) - ISDA Provision

2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Resources and navigation [[{{{1}}} - 1992 ISDA Provision|This provision in the 1992]] Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project Navigation Preamble | 1 • (a) (b) (c) | 2 • (a) (b) (c) (d) | 3 • (a) (b) (c) (d) (e) (f) (g) | 4 • (a) (b) (c) (d) (e) | 5 • 5(a) Events of Default: 5(a)(i) Failure to Pay or Deliver 5(a)(ii) Breach of Agreement 5(a)(iii) Credit Support Default 5(a)(iv) Misrepresentation 5(a)(v) Default Under Specified Transaction 5(a)(vi) Cross Default 5(a)(vii) Bankruptcy 5(a)(viii) Merger Without Assumption 5(b) Termination Events: 5(b)(i) Illegality 5(b)(ii) Force Majeure Event 5(b)(iii) Tax Event 5(b)(iv) Tax Event Upon Merger 5(b)(v) Credit Event Upon Merger 5(b)(vi) Additional Termination Event (c) (d) (e) | 6 • (a) (b) (c) (d) (e) (f) | 7 | 8 • (a) (b) (c) (d) | 9 • (a) (b) (c) (d) (e) (f) (g) (h) | 10 | 11 | 12 • (a) (b) | 13 • (a) (b) (c) (d) | 14 | Index: Click ᐅ to expand: 2002 ISDA 1992 ISDA Section 2(d)(ii) in a Nutshell™ Use at your own risk, campers! 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 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 Related agreements and comparisons Click here for the text of Section 2(d)(ii) in the 1992 ISDA Template:Isdadiff 2(d)(ii) Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

Content and comparisons

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Summary

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General discussion

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References

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!

See also

• Withholding tax
• Indemnifiable Tax
• That awful FT book about derivatives