BILL NUMBER:S3491

TITLE OF BILL:
An act
to amend the tax law, in relation to the provision of certain financial
services to debt evading foreign states

PURPOSE OF BILL:
This bill will amend the New York
Tax Law to impose
an excise tax on the provision in New York of paying agent services
or fiscal agent services by a financial institution to (1) a foreign
state that (i) has had one or more final judgments in an aggregate
amount exceeding $100,000,000 entered against it by any state or
federal court located in New York, including any final judgment
originally issued in a foreign court that is filed or registered in
New York; (ii) fails to satisfy any such judgment for a period of
more than 2 years after it becomes effective; and (iii) is not a
foreign state eligible for (a) financing through the International
Development Association (unless such state is eligible for financing
from the International Bank for Reconstruction and Development), (b)
debt relief under the Enhanced HIPC Initiative (as defined in section
1625(e)(3) of the United States International Financial Institutions
Act), or (c) debt relief under the Multilateral Debt Relief
Initiative of the International Monetary Fund, or (2) a political
subdivision of such a foreign state (any such foreign state or
              

political subdivision, a "debt evading foreign state"). This tax will
recover a portion of the costs, in the form of
capital losses, lost interest, lost investment returns, and
accompanying losses of tax revenue, imposed on New York taxpayers by
foreign states through their evasion of valid judgments rendered
against them.

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 institution", "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
institution 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 penalties 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 capital markets, many foreign sovereigns designate New York as
the place of payment and the venue where the foreign sovereign waives
sovereign immunity 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 repudiate 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 negotiate 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 repudiated these debts while
claiming, in a recent filing with the Securities 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 budget
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 institutions 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 effect 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 financial institution,
including the Depository Trust Company.

LEGISLATIVE HISTORY:
S.8463 - 2010 - Referred to Rules

FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
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 financial 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.