FATCA protocol on derivatives can yield streamlined modifications

August 2012
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FATCA protocol on derivatives can yield streamlined modifications

At a glance

International Swaps and Derivatives Association, Inc. (ISDA) releases FATCA protocol on derivatives, which may provide payors with an opportunity to allocate the cost of FATCA Withholding to their counterparties, rather than treat FATCA Withholding as an 'Indemnifiable Tax' for which a payor has responsibility.

Beginning on January 1, 2014, provisions of the Foreign Account Tax Compliance Act (FATCA) could subject derivatives transactions to a 30% withholding tax on certain U.S. source payments (FATCA Withholding). For a contract trading under an International Swaps and Derivatives Association, Inc. (ISDA) Master Agreement, a payor could be required to gross-up a recipient for FATCA Withholding due to the recipient's non-compliance with FATCA. ISDA released a new protocol which may provide payors with an opportunity to allocate the cost of FATCA Withholding to their counterparties, rather than treat FATCA Withholding as an 'Indemnifiable Tax' for which a payor has responsibility.

This new protocol allows for an automatic modification of master agreements if both parties to the agreement act, potentially avoiding the need for negotiating individual amendments to address FATCA Withholding. This modification clarifies which party bears the cost for any FATCA Withholding that may otherwise be required.