Syllabus :GS 2/IR
In News
Switzerland will suspend the Most Favoured Nation (MFN) clause in its double taxation avoidance agreement (DTAA) with India starting January 1, 2025.
- This will double the withholding tax rate on dividends paid to Indian tax residents from 5% to 10%.
| Do you know ? – A Double Taxation Avoidance Agreement (DTAA) is a treaty signed between two or more countries to prevent income earned in one country from being taxed twice. – It aims to provide relief to taxpayers, ensure tax fairness, and foster international trade and investment. |
What is the MFN Clause?:
- The MFN clause ensures equal treatment in international treaties, requiring countries to extend favorable tax rates or conditions to all other parties under the treaty.
- It guarantees that no country is treated less favorably than any other in trade or taxation matters.
The 2023 Nestlé Case:
- Swiss company Nestlé sought a refund on withholding tax, claiming the benefit of the MFN clause under the India-Switzerland tax treaty.
- The Supreme Court ruled in 2023 that the MFN clause does not automatically apply without formal notification, which led to Switzerland re-evaluating its tax treaty with India.
Why Switzerland Suspended the MFN Clause:
- The Supreme Court ruling clarified that automatic adjustments in tax rates under the MFN clause require formal notification under Section 90 of the Indian Income Tax Act.
- Switzerland suspended the MFN clause after this clarification, impacting the withholding tax rate.
Impact of the Suspension:
- Higher Tax Liabilities for Indian Companies: Indian companies receiving dividends from Switzerland will face a higher withholding tax of 10% instead of 5%.
- Swiss Investments in India: Swiss companies will continue to face the 10% withholding tax on dividends received from Indian subsidiaries.
- EFTA Investments Unaffected: Investments from the European Free Trade Association (EFTA) will not be impacted, as they are already subject to the 10% tax rate.
- No Change for Other DTAA Benefits: Indian companies operating in Switzerland can still benefit from other provisions in the DTAA, such as tax relief on royalties and technical service fees.
Reevaluation of MFN Clauses by Other Countries:
- Switzerland’s decision may prompt other countries to reconsider how the MFN clause is applied in their tax treaties with India, especially after similar legal rulings.
Conclusion and Way Forward
- The decision highlights the need for clear mutual agreement in interpreting international tax agreements.
- The suspension reflects a shift towards careful and clearly defined interpretations of tax treaty provisions.
- India’s double taxation treaty with Switzerland may need renegotiation due to its trade pact with the European Free Trade Association (EFTA) member states.
Source: BS