Senate Bill S7767

                                 BILL NUMBER:  S7767

 TITLE OF BILL :
An act to amend the tax law, in relation to debt evading foreign
states


 PURPOSE OF BILL :
This bill will amend the New York Tax Law in order to impose a tax:
upon financial transactions conducted in New York by foreign states
that have failed to pay judgments rendered by, or filed or registered
with, courts located in New York. 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 12-B
containing sections numbered 289-g to 289-i.  It defines debt-evading
foreign states ("DEFS") as foreign sovereigns that have had judgments
rendered against them in New York, if the judgments in 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
financial transactions that are commonly conducted in New York's
capital markets: foreign exchange transactions and overnight
repurchase agreements. The rate of tax would be fifty percent of any
interest or other gain from an overnight repurchase agreement, and one
percent of the entire amount of a foreign exchange transaction.  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. Any financial institution that
willfully fails to comply with the tax would be subject to a $10,000
fine per occurrence.

Section 2 - 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.  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 Argentina
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 Argentina 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 Argentina 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 a tax on two
types of transactions that foreign sovereigns commonly engage in when
they utilize New York's capital markets: foreign exchange transactions
and overnight repurchase agreements. The rate of tax would be fifty
percent of any interest or other gain from an overnight repurchase
agreement, and one percent of the entire amount of a foreign exchange
transaction. Foreign exchange transactions are simply transactions in
which one currency is exchanged for another at the prevailing market
exchange rate. Foreign exchange traders earn profits through shifts in
exchange rates. Overnight repurchase agreements are essentially
collateralized overnight loans: a lender buys securities from a
borrower, and the borrower agrees to repurchase the securities for a
higher price the next day. The price difference serves as interest,
and the securities serve as collateral.

The volume of these transactions in New York is considerable. For
example, Banco Central de la Republica Argentina ("BCRA"), which is
the central bank of Argentina and would be subject to this tax,
reports that, globally, it engages in average daily net purchases of
foreign currency worth tens of millions of dollars. A substantial
portion of these transactions occur in New York, which is known
because Argentina's creditors have frozen a portion of BCRA's assets
in New York. Judge Griesa limited the freeze to $100 million found in
one account on one particular day so that BCRA could continue to
engage in transactions in New York. At a hearing before Judge Griesa
on January 13, 2010, BCRA's counsel confirmed, among other things,
that BCRA consistently uses New York's capital markets for foreign
exchange transactions, especially after European markets close for the
day. BCRA reports on its website that the net daily value of its
foreign exchange transactions ranges from tens of millions of dollars
to hundreds of millions of dollars. At the applicable rates, this tax
would raise approximately $75 million per year. If Argentina pays the
judgments rendered against it in order to avoid the tax, the tax would

still indirectly raise revenue through interest and capital gains
taxes on Argentina's belated payments to investors.

The bill also ensures that the tax does not adversely affect
developing countries. It expressly excludes heavily indebted poor
countries ("HIPC") that are eligible for relief from the International
Monetary Fund and World Bank under the Enhanced HIPC Initiative. It
also excludes countries that are eligible for financing from the World
Bank's International Development Association, which aids the world's
poorest countries (unless such the country is eligible for financing
from the International Bank for Reconstruction and Development, which
serves middle-income countries), or for debt relief under the
Multilateral Debt Relief Initiative of the International Monetary Fund

 LEGISLATIVE HISTORY :
New bill.

 FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS :
Raises additional revenue of at least $75 million per year.

 EFFECTIVE DATE :
Immediately on the date on which it shall have become a law.