Context
Recently, Switzerland revoked the Most Favoured Nation (MFN) status under the Double Taxation Avoidance Agreement (DTAA), granted to India.
India-Switzerland Double Taxation Avoidance Agreement (DTAA)
- It was signed on November 2, 1994, and was later revised in 2000 and 2010.
- The agreement sought to reduce the dangers of double taxation to promote easier cross-border investment and trade.
- One of the treaty’s most important provisions, the MFN clause, guarantees that nations treat investors from partner nations equally to those from any other third country.
- Under the MFN provision, it was anticipated that Indian companies would receive additional benefits or lower tax rates if Switzerland provided them to another nation.
What is the MFN clause?
- The MFN clause is a rule in international agreements, like tax treaties, that ensures equal treatment for all countries involved.
- If one country gives special tax benefits to another, it must offer the same benefits to all other countries in the agreement.
- This clause makes sure that no country gets worse treatment than any other in trade or tax matters.
Impacts of Suspension of MFN clause
- The suspension of the MFN clause will have several key consequences for businesses and investors:
- Higher tax liabilities for Indian companies: Indian companies receiving dividends from Switzerland will face a higher tax, with the withholding tax increasing from 5% to 10%.
- Effects on Swiss Investments in India: Swiss companies receiving dividends from Indian subsidiaries will continue to face a 10% withholding tax, as this has always been the rate under the India-Switzerland DTAA.
- EFTA investments unaffected: Switzerland’s decision is unlikely to affect investments into India from the European Free Trade Association (EFTA), as these investments already face a 10% withholding tax.
- No change for other DTAA benefits: Indian companies in Switzerland can still benefit from tax relief on royalties and technical services under the India-Switzerland DTAA.
- Reevaluation of MFN clauses by other countries: This move may lead other countries to reconsider the MFN clause in their tax treaties with India, especially if similar rulings occur elsewhere.
Importance of mutual agreement
- The decision emphasizes the need for mutual agreement and clarity in interpreting international tax agreements.
- The MFN clause aims for fairness and equal treatment but requires both parties to understand its terms.
- The suspension shows a shift toward cautious, clear interpretations of tax treaty provisions.
- Changes to tax rates or conditions should be based on mutual consent, not automatic application.