2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
Tax Event and Change in Tax Law in a Nutshell™
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Tax Event and Change in Tax Law in all its glory
- 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
“Change in Tax Law” means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs after the parties enter into the relevant Transaction.
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No real change from the 1992 ISDA. Note, unhelpfully, the sub-paragraph reference in the 1992 ISDA is (1) and (2) and in the 2002 ISDA is (A) and (B). Otherwise, pretty much the same.
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:
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.
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