New Delhi:
Switzerland has taken a unilateral position following the Supreme Court of India's ruling in the Nestlé case. It has revoked the 'Most Friendly Nation' or MFN status granted to India under the Double Taxation Prevention Agreement or DTAA Treaty.
Switzerland's move marks a significant shift in the bilateral treaty dynamics and will result in a major impact on Indian companies operating in Switzerland as well as Swiss investments in India.
In its official statement on December 11, the Swiss Finance Department cited the Supreme Court of India and cited the 2023 ruling as the reason for its decision to revoke India's MFN status. In its ruling, the Supreme Court had said that the MFN clause between two countries does not automatically apply when a country becomes a member of the OECD, especially if the Indian government previously had a tax treaty with that country before joining the group.
The OECD or Organization for Economic Co-operation and Development was founded in 1961 and is headquartered in Paris. It calls itself a forum and knowledge center for data, analysis and best practices in public policy to build stronger, fairer and cleaner societies, shaping better policies for better lives. It works closely with policymakers, stakeholders and citizens to set evidence-based international standards and find solutions to social, economic and environmental challenges.
A HISTORY OF THE CASE
India had signed tax agreements with Lithuania and Colombia under which tax rates on certain types of income were lower than the rates it provided to OECD countries. Both countries later joined the OECD.
According to the OECD, the effect of an MFN clause is that a country obliges itself to its treaty partner to provide the country with 'more favorable' tax treatment.
Switzerland assumed that the accession of Colombia and Lithuania to the OECD meant that a 5 percent dividend rate would apply to the India-Switzerland tax treaty under the MFN clause, instead of the 10 percent mentioned therein .
But the Supreme Court ruling meant something different: that the MFN clause does not automatically apply between two countries when a country becomes a member of the OECD, and that the previous tax treaty takes precedence unless the MFN clause is specifically mentioned in a 'notice' in accordance with section 90 of the Income Tax Act.
WHAT THIS MEANT FOR THE NESTLE CASE
According to the statement of the Swiss Finance Department, in 2021, while hearing the case against Nestle, the Delhi High Court confirmed the applicability of the residual tax rates after taking into account the MFN clause under the Double Taxation Avoidance Agreement. This was consistent with how Switzerland had interpreted it.
However, in a ruling dated October 19, 2023, the Supreme Court overturned the Supreme Court's judgment and stated that the applicability of the MFN clause did not come into effect automatically. The top court ruled that the MFN clause was “not directly applicable in the absence of 'notice' in accordance with section 90 of the Income Tax Act” – a ruling that affected Nestlé and which in turn went against where Switzerland had hoped for.
REPLY FROM SWITZERLAND
Switzerland has now responded by unilaterally revoking India's MFN status and outright citing the “Indian Supreme Court” as the reason for its decision.
This means that from January 1, 2025, Switzerland will impose a 10 percent tax (instead of the current 5 percent) on dividends payable to Indian tax residents and entities claiming reimbursement of Swiss withholding tax, and to Swiss tax residents filing foreign tax returns. tax credits.
The Swiss Ministry of Finance released a statement announcing: “Suspension of the application of the MFN clause of the Protocol to the Agreement between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on income.”
The statement cited the “2023 judgment of the Supreme Court of India” in a case involving Nestle for its decision to revoke MFN status.
WHAT EXPERTS SAY
Some see Switzerland's measure as a retaliation against the Supreme Court's ruling, while others see it as a measure of reciprocity.
Terming Switzerland's move as unilateral, Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala said, “This suspension could lead to higher tax liabilities for Indian entities operating in Switzerland, highlighting the complexity of navigating international tax treaties in an evolving global landscape.”
“It also underlines the need to align treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, equality and stability in the international tax framework,” Mr Jhunjhunwala told news agency Press Trust of India.
AKM Global Tax Partner, Amit Maheshwari, said: “The main reason behind the decision to withdraw MFN is reciprocity, which ensures that taxpayers in both countries are treated equally and fairly.”
“The Swiss authorities announced in August 2021 that based on the MFN clause between Switzerland and India, the tax rate on dividends from eligible shares would be reduced from 10 percent to 5 percent, retroactively from July 5, 2018. The subsequent The 2023 Supreme Court judgment contradicted the same,” Mr Maheshwari told PTI.
He added: “This could impact Swiss investments in India as dividends would now be subject to higher withholding tax and income accrued on or after January 1, 2025 could be taxed at the rates provided for in the original double tax treaty between Switzerland and India. regardless of the MFN clause.”
JSA Advocates & Solicitors Partner Kumarmanglam Vijay said: “This would mainly impact Indian companies that have ODI (overseas direct investment) structures with subsidiaries in Switzerland and will increase Swiss withholding tax on dividends from 5 percent to 10 percent from January 1, 2025 . “
(Input from PTI)
