New Delhi:
Switzerland has taken a unilateral stand after the Supreme Court docket of India’s ruling within the Nestle case. It has revoked the ‘Most Favoured Nation’ or MFN standing accorded to India beneath the Double Taxation Avoidance Settlement or DTAA treaty.
Switzerland’s transfer marks a big shift in bilateral treaty dynamics and can lead to a huge impact on Indian firms working in Switzerland in addition to on Swiss investments in India.
In its official assertion on December 11, the Swiss finance division named the Supreme Court docket of India and cited its 2023 ruling as the rationale for its choice to take away India’s MFN standing. In its order, the Supreme Court docket had stated that the MFN clause between two nations doesn’t apply mechanically when a rustic joins the OECD, particularly if the Indian authorities already had a previous tax treaty with that nation earlier than becoming a member of the grouping.
The OECD or Organisation for Financial Co-operation and Improvement was established in 1961 and is headquartered in Paris. It calls itself a discussion board and information hub for knowledge, evaluation, and finest practices in public coverage to construct stronger, fairer, and cleaner societies – serving to to form higher insurance policies for higher lives. It really works carefully with coverage makers, stakeholders and residents to determine evidence-based worldwide requirements and to seek out options to social, financial and environmental challenges.
A HISTORY TO THE CASE
India had signed tax agreements with Lithuania and Colombia beneath which the tax charges on sure kinds of revenue had been decrease than the charges it supplied to OECD international locations. Each international locations later joined the OECD.
Underneath the OECD, the impact of an MFN clause is that one nation obligates itself to its treaty companion with respect to providing it a ‘extra beneficial’ tax remedy.
Switzerland assumed that Colombia and Lithuania becoming a member of the OECD meant a 5 per cent fee for dividends would apply to the India-Switzerland tax treaty beneath the MFN clause, as a substitute of the ten per cent which was talked about in it.
However the Supreme Court docket ruling meant in any other case — that the MFN clause between two nations doesn’t apply mechanically when a rustic joins the OECD, and that the prior tax treaty takes priority, until the MFN clause is particularly talked about in a ‘notification’ in accordance with Part 90 of the Earnings Tax Act.
WHAT THIS MEANT FOR THE NESTLE CASE
In line with the assertion by Switzerland’s finance division, in 2021, the Delhi Excessive Court docket whereas listening to the case towards Nestle, upheld the applicability of the residual tax charges after making an allowance for the MFN clause beneath the Double Taxation Avoidance Settlement. This was according to how Switzerland had interpreted it.
Nevertheless, in a ruling dated October 19, 2023, the Supreme Court docket reversed the excessive courtroom’s judgement and acknowledged that, the applicability of the MFN clause was not triggered mechanically. The highest courtroom dominated that the MFN clause “was indirectly relevant within the absence of ‘notification’ in accordance with Part 90 of the Earnings Tax Act” – a ruling that impacted Nestle and in-turn went towards what Switzerland had hoped for.
SWITZERLAND’S RESPONSE
Switzerland has now responded by unilaterally revoking India’s MFN standing and squarely named the “Indian Supreme Court docket” as the rationale for its choice.
Because of this from January 1, 2025, Switzerland will levy a ten per cent tax (as a substitute of the present 5 per cent) on dividends payable to Indian tax residents and entities who declare refunds for Swiss withholding tax and for Swiss tax residents who declare international tax credit.
The Swiss Finance Division launched a press release wherein it introduced “Suspension of the appliance of the MFN clause of the protocol to the settlement between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on revenue.”
The assertion cited the “2023 ruling by Indian Supreme Court docket” in a case referring to Nestle for its choice to withdraw the MFN standing.
WHAT EXPERTS SAY
Some see Switzerland’s transfer as a retaliatory measure to the Supreme Court docket ruling, whereas others see this as a measure of reciprocity.
Nangia Andersen M&A Tax Accomplice Sandeep Jhunjhunwala known as Switzerland’s transfer unilateral and stated “This suspension might result in elevated tax liabilities for Indian entities working in Switzerland, highlighting the complexities of navigating worldwide tax treaties in an evolving international panorama.”
“It additionally underscores the need of aligning treaty companions on the interpretation and software of tax treaty clauses to make sure predictability, fairness, and stability in worldwide tax framework,” Mr Jhunjhunwala instructed information company Press Belief of India.
AKM International Tax Accomplice, Amit Maheshwari, stated that “The primary cause behind the choice to withdraw MFN is of reciprocity, which ensures that taxpayers in each international locations are handled equally and pretty.”
“Swiss authorities introduced in August 2021 that primarily based on the MFN clause between Switzerland and India, the tax fee on dividends from qualifying shareholdings can be lowered from 10 per cent to five per cent, efficient retroactively from July 5, 2018. Nevertheless, the next Supreme Court docket ruling in 2023 contradicted the identical,” Mr Maheshwari instructed PTI.
He added that “This might influence Swiss investments in India as dividends can be topic to increased withholding now and revenue accruing on or after January 1, 2025, could also be taxed on the charges supplied for within the authentic double taxation treaty between Switzerland and India, whatever the MFN clause.”
JSA Advocates & Solicitors Accomplice Kumarmanglam Vijay stated “This is able to particularly influence Indian firms having ODI (abroad direct funding) constructions with subsidiaries in Switzerland and can increase the Swiss withholding tax on dividends from 5 per cent to 10 per cent from January 1, 2025.”
(Inputs from PTI)
