Tax Provisions in the MulticurrencyCross Border

1
Tax Provisions in the MulticurrencyCross Border
ISDA Master Agreement and Schedule
Ruth Ainslie Senior Policy Director ISDA
Fundamentals of ISDA Documentation
Sao Paulo, Brazil
August 6, 2002
2
ISDA Master Agreement and ScheduleTax
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

3
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, Payees
  compliance with Tax Agreement and provision of
  tax forms

4
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)

5
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 authoritys jurisdiction

6
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)

7
ISDA Master Agreement and ScheduleTax
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

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Allocation of risk under ISDA Master
Agreement and Schedule
Does obligation to withhold arise under an
Indemnifiable Tax?
PAYEE RECEIVES NET Payee may terminate
transaction if, for example, obligation to withh
old
is caused by a Change in Tax Law
NO
START
YES
Has Payee provided tax forms and complied with
TaxAgreement?
PAYEE RECEIVES NET Payee may not terminate trans
action
NO
NO
YES
PAYER GROSSES UP 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
ArePayee Tax Representations true?
Is this failure due only to a Change in Tax La
w or
similar legal development?
NO
YES
YES
9
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

10
ISDA Master Agreement and ScheduleTax-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

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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

12
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

13
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)

14
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)

15
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