This amendment was made in order to resolve a discrepancy between market practice in Japan and the ISDA documentation. Each of the English Law (Transfer) ISDA CSA and New York Law ISDA CSA was amended to have Gross-Up clause not applicable as it allowed the Obligor to argue that the payment should be a gross-up based on Section 2(d) of the ISDA Master Agreement, and resulted in the Obligee being asked not to deduct the withholding tax.

In the Japanese tax system, interest income from cash deposits placed with an account opened with a bank located in Japan, which is paid to a foreign corporation (i.e. a foreign bank) is taxed by withholding at the source by the Japanese payer (Income Tax Law, Article 212, clause 1) unless such interest income is attributable to a branch or other permanent establishment in Japan.

When a Japanese resident bank receives cash collateral from a nonresident bank, it is the market practice that a Japanese resident bank (the Obligee) shall pay the Interest Amount less withholding tax to a nonresident bank (the Obligor). This allowed the Obligor to argue that the payment should be a gross-up based on Section 2(d), and ask the Obligee not to deduct the withholding tax.