Relates to the provision of certain financial services to debt evading foreign states

Summary of provisions

Section 1 - The New York Tax Law is amended to add a new Article 15 containing sections numbered 330 to 332. It defines the terms "agency or instrumentality of a foreign state", "final judgment", "financial insti- tution", "paying agent and fiscal agent services", "foreign state", "debt evading foreign state", "state-owned corporation of a debt evading foreign state" and "state". It defines debt-evading foreign states ("DEFS") as foreign sovereigns that have had judgments rendered against them in New York, if the judgments in the aggregate total $100 million and any of the judgments have been outstanding for at least two years. The poorest developing countries are excluded from this definition and would not be affected by this tax. Foreign sovereigns that qualify as DEFS, and their agencies and instrumentalities, would be subject to a tax on certain types of paying agent and fiscal agent services provided in New York by financial institutions. The rate of tax would be four percent of the gross amount disbursed in New York by a financial insti- tution or institutions in relation to and at the time of each initial provision of such service. Each financial institution which provides the initial paying agent or fiscal agent services in New York with respect to all or any portion of an interest or principal payment on behalf of a DEFS is responsible for collecting the tax from the DEFS allocable to the gross amount of funds it disburses and remitting the tax to the tax commission. Any financial institution that fails to collect and remit the tax to the tax commission shall be liable for the full amount of the

tax. The Department of Taxation would determine and publish a list of DEFS, and the Attorney General would be empowered to investigate and take any appropriate enforcement action.

Section 2 - The New York Tax Law is amended by adding a new Section 1816 to Part III of Article 37. Any financial institution that willfully attempts to evade or defeat the tax shall, in addition to other penal- ties provided by law, be guilty of a misdemeanor punishable by a fine of not more than $10,000 per occurrence.

Section 3 - Provides that the act will take effect thirty days after enactment and shall apply to any disbursement of funds in connection with the provision of a paying agent service or fiscal agent service occurring on or after the effective date.

Justification

New York taxpayers have invested billions of dollars in debt issued by foreign sovereigns. To facilitate the issuance of their debt to New York citizens and other individuals through New York's capi- tal markets, many foreign sovereigns designate New York as the place of payment and the venue where the foreign sovereign waives sovereign immu- nity and consents to jurisdiction to be sued in the case of a default. As a result, actions to enforce defaulted debt are frequently brought in state and federal courts located in New York. Although many foreign sovereigns pay their debts responsibly, some foreign sovereigns that are capable of making payments to their creditors instead choose to repudi- ate their debts and to refuse to pay judgments rendered against them. Because of the difficulties associated with enforcing judgments against foreign sovereigns, New York taxpayers suffer significant losses, and have little legal recourse, when foreign sovereigns choose not to pay their debts. The losses incurred by taxpayers significantly affect New York tax revenue, not only because New York cannot tax interest and other gains that are not paid, but also because investors' losses can be offset against other taxable gains.

The most egregious example of a foreign sovereign that is capable of paying its debt, but that chooses not to, is the Republic of Argentina. In 2001, Argentina defaulted on $81.2 billion of debt, which is the largest sovereign debt default in history. Argentina refused to negoti- ate with its bondholders until 2005, and then offered the bondholders an exchange worth about 25-cents on the dollar on a take-it-or-leave-it basis. Approximately 76 percent of bondholders accepted the exchange offer, and Argentina repudiated the remaining portion of its debt. In 2010 Argentina made a follow on exchange offer on worse financial terms than its 2005 offer, and renewed its repudiation of any remaining defaulted debt not tendered in such exchange offer. Argentina has repu- diated these debts while claiming, in a recent filing with the Securi- ties and Exchange Commission, to have a debt-to-gross domestic product ratio of 49.1% - less than the ratios of Canada, the United Kingdom, France, Germany, and a variety of other European countries - and a budg- et surplus in each year from 2004 to 2008.

Dozens of lawsuits have been filed in the United States District Court for the Southern District of New York as a result of the Argentine debt default. The two largest creditors alone have claims and judgments of over $3 billion. Judge Thomas P. Griesa, the most senior judge in the Southern District, has repeatedly observed that Argentina has never offered to pay the judgments rendered against it and instead focused all of its efforts on protecting its assets from creditors. In May 2009, Judge Griesa held that Argentina was in civil contempt of court for failing to comply with court orders and drew an adverse inference that Argentina had removed assets from New York in violation of court orders.

The economic impact of this debt repudiation has been substantial. The direct net costs to New York holders of defaulted Argentine debt currently total $902 million, including $452 million in capital losses, $382 million in foregone interest payments, and $180 million in foregone investment returns, less nearly $112 million in tax benefits created by the losses or foregone income. From December 2001 to December 2008, the indirect costs of the Argentine debt default, through lost tax revenue, total approximately $329 million.

This bill creates a tax to offset a portion of the adverse effect that DEFS have on New York tax revenue. It does so by imposing an excise tax on the initial provision in New York of paying agent services, fiscal agent services or other similar services by one or more financial insti- tutions to a debt evading foreign state. The financial institution providing the service must collect the amount of the tax from the debt evading foreign state allocable to the gross amount of principal or interest on a bond, note and other obligation issued by a DEFS that it disburses and remit the funds to New York. This bill ensures that the tax does not adversely affect the payees of the funds since the tax is collected from the DEFS, and is structured to avoid double taxation on follow on distributions of the same funds. The bill prevents the DEFS from avoiding the tax by not depositing the funds to be disbursed directly with the paying agent in New York designated for such purpose with respect to the DEFS debt obligations. It does so by imposing the tax on the initial distribution in New York of such funds by any finan- cial institution, including the Depository Trust Company.

Legislative history

S.8463 (2010) Referred to Rules

Fiscal implications

At present, at least one debt evading foreign state, the Republic of Argentina, is using the Bank of New York as its paying agent. Argentina deposits funds with the Bank of New York to service currently outstanding debt of Argentina and the Bank of New York disburses those funds to the appropriate payees. This bill seeks to impose a tax on Argentina equal to 4% of the gross amount of such funds deposited with and disbursed by the Bank of New York or any other finan- cial institution providing such paying agent or any other similar service, including the Depository Trust Company. This bill would raise revenue of at least $61 million per year.

Effective date

This act shall take effect thirty days after enactment and shall apply to any disbursement of funds in connection with the provision of a paying agent service or fiscal agent service occurring on or after the effective date.