Tax Provisions in the Multicurrency–Cross Border
ISDA Master Agreement and Schedule
Ruth Ainslie
Senior Policy Director
ISDA
Fundamentals of ISDA Documentation
Sao Paulo, Brazil
August 6, 2002
ISDA Master Agreement and Schedule
Tax provisions: what are they for?
• Establish basis for concluding that no withholding is required
—Representations
—Tax forms
•
Allocate risk of withholding tax
•
Allow innocent burdened party to terminate
ISDA Master Agreement and Schedule
Tax provisions: how do they work? (1)
• Payer makes Payer Tax Representation that it is
not required to withhold - Section 3(e) and Schedule
Part 2(a)
— In making Payer Tax Representation, Payer may
rely on Payee Tax Representations, Payee’s
compliance with Tax Agreement and provision of tax
forms
ISDA Master Agreement and Schedule Tax
provisions: how do they work? (1) (contd.)
• Payee obligations and representations are designed to
ensure conditions are met so that no withholding is required
—Payee makes Payee Tax Representations - Section
3(f) and Schedule Part 2(b)
—Tax Agreement: Payee agrees to notify Payer if Payee
Tax Representations cease to be true - Section 4(d)
—Payee agrees to provide tax forms - Section
4(a)(i)&(iii) and Schedule Part 3(a)
ISDA Master Agreement and Schedule
Tax provisions: how do they work? (2)
•Payer takes risk of withholding under Indemnifiable Tax ...
—Payer is required to gross up for any withholding arising
under an Indemnifiable Tax - Section 2(d)(i)(4)
•Section 14 "Indemnifiable Tax" = any tax other than
—Stamp Tax
—Tax imposed due to a connection between Payee
and taxing authority’s jurisdiction
ISDA Master Agreement and Schedule
Tax provisions: how do they work? (2) (contd.)
•
…unless Payee is at fault…
—Payer is not required to gross up if Payee breaches Tax
Agreement or does not provide tax forms Section 2(d)(i)(4)(A)
—Payer is not required to gross up if Payee Tax
Representations cease to be true - Section 2(d)(i)(4)(B)
•
… but Change of Tax Law risk remains with Payer
—Payer must gross up even if Change of Tax Law causes
Payee Tax Representations to be false –
Section 2(d)(i)(4)(B)
ISDA Master Agreement and Schedule
Tax provisions: how do they work? (3)
• Tax Termination Events allow the burdened party to
terminate the transaction
—Tax Event: if the obligation to withhold is caused by a
Change in Tax Law or similar legal development Section 5(b)(ii)
—Tax Event Upon Merger: if the obligation to withhold
is caused by a party merging with another entity Section 5(b)(iii)
•
BUT Payee may not terminate if it is at fault
Allocation of risk under ISDA Master
Agreement and Schedule
START
Does obligation
to withhold arise
under an
Indemnifiable
Tax?
PAYEE RECEIVES NET
Payee may terminate transaction if,
for example, obligation to withhold
is caused by a
Change in Tax Law
NO
YE
S
PAYEE RECEIVES NET
Has Payee
provided tax forms
and complied
with Tax
Agreement?
Payee may not
terminate transaction
NO
NO
YE
S
PAYER GROSSES UP
Are
Payee Tax
Representations
true?
NO
Is this failure due
only to a Change
in Tax Law or
similar legal
development?
YE
S
YE
S
Payer may terminate transaction if
obligation to withhold is caused by
EITHER a Change in Tax
Law or similar legal development
OR the merger of a party
ISDA Master Agreement and Schedule
Tax-related provisions
•
Master Agreement
—Section 2(d) - Withholding tax gross-up
—Section 3(e) - Payer Tax Representation
—Section 3(f) - Payee Tax Representations
—Section 4(a)(i) and (iii) - Tax forms
—Section 4(d) - Tax Agreement
ISDA Master Agreement and Schedule
Tax-related provisions (contd.)
—Section 4(e) - Payment of Stamp Tax
—Section 5(b)(ii) - Tax Event
—Section 5(b)(iii) - Tax Event Upon Merger
—Section 14 - Definitions of “Indemnifiable Tax” and "Tax"
•Schedule
—Part 2 - Tax Representations
—Part 3 - Tax Forms
New US Regulations (Effective 2001)
•No withholding on swaps (provided no embedded loan)
•No US tax form required to avoid withholding
•But representations may be needed to avoid information
reporting
Information reporting on payments to
foreign parties
Form 1042S reporting for swap payments to US branch of
foreign counterparty
•
• Foreign counterparty establishes that it is not acting out of
US branch by:
— Representing in a swap schedule or confirmation that
it is a US person or non-US branch of a foreign person;
— Providing Form W-8BEN to certify that it is a foreign
person
Domestic information reporting on Form
1099
•Does not apply if payee
—represents in swap schedule or confirmation that it is
a foreign person or provides Form W-8BEN
—is an exempt recipient (such as a corporation)
Standard representations for US information
reporting
•In October, 2001, ISDA issued standard representations for
purposes of the US information reporting requirements just
described
•Available on ISDA website (www.isda.org)
New ISDA Master Agreement
•Tax provisions currently under review by ISDA's Tax
Committee
•Change to 5(b)(iv)(2)
•Some further changes under discussion
•Incorporates October, 2001 US withholding representations
—See October explanation (and get tax advice) for help
selecting appropriate representation