Tax Event - ISDA Provision

Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).

In gory detail

1992 ISDA 5(b)(ii) Tax Event. Due to: (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); (view template)

2002 ISDA 5(b)(iii) Tax Event. Due to (1) any action taken by a taxing authority, or brought in a court of competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (2) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Settlement Date (A) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (B) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 9(h)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); The line breaks are for comprehension and do not appear in the original (view template)

Template:Isdasnap2

Commentary

Note, unhelpfully, the subpara reference in the 1992 ISDA is (1) and (2) and in the 2002 ISDA is (A) and (B). Note, also unhelpfully, that this paragraph is a bastard to understand. Let's have a look then:

A "Tax Event" is a Termination Event whereby, following a change in tax law or practice after any trade date, an "Affected Party" is likely to have to either

(1) Gross Up an Indemnifiable Tax deduction or

(2) receive a payment net of Tax which the Non-Affected Party is not required to Gross Up.

Not such a bastard after all, then. In the context of CCP, you typically add a third limb, which is along the lines of

(3) required to make a deduction from a payment under an Template:Swapclearprov where no corresponding Gross Up amount is required under the corresponding Transaction Payment under this Agreement.