The International Swaps and Derivatives Association (ISDA) has launched a protocol that allows market participants to efficiently amend the ISDA Master Agreement tax provisions to address the effects of the Foreign Account Tax Compliance Act (FATCA), which may impose a withholding tax on payments under derivatives transactions.
FATCA was enacted to help the US Inland Revenue Service to prevent US residents who hold investments in offshore account from committing tax evasion. FATCA imposes a 30 percent withholding tax on a list of payments to non-participating foreign financial institutions and others that are not compliant with the act.
The ISDA 2012 FATCA Protocol puts the FATCA withholding tax burden on the recipient of the payment. It eliminates the tax from the definition of “Indemnifiable Tax” in the ISDA Master Agreement.
ISDA said: “The rationale is that the recipient is the sole party that has the ability to avoid the withholding tax by complying with the FATCA rules; therefore, the recipient should be the party burdened with the FATCA withholding tax if it chooses to not comply.”
The protocol became active on 15 August and it is open to ISDA members and non-members.
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