1. 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

2. 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

3. ISDA Master Agreement and Schedule Tax provisions: how do they work
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

4. ISDA Master Agreement and Schedule Tax provisions: how do they work
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
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

6. ISDA Master Agreement and Schedule Tax provisions: how do they work
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 Schedule Tax provisions: how do they work
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

8. 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 withhold
is caused by a
Change in Tax Law NO
START
YES
Has Payee provided tax forms and complied with Tax Agreement?
PAYEE RECEIVES NET
Payee may not terminate transaction 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
Are Payee Tax Representations true?
Is this failure due
only to a Change
in Tax Law or
similar legal
development? NO
YES
YES

9. ISDA Master Agreement and Schedule Tax-related provisions
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 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

11. 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 (

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