New Delhi:
Switzerland has taken a unilateral stand after the Supreme Court of India’s ruling within the Nestle case. It has revoked the ‘Most Favoured Nation’ or MFN standing accorded to India underneath the Double Taxation Avoidance Agreement or DTAA treaty.
Switzerland’s transfer marks a major shift in bilateral treaty dynamics and can end in a huge impact on Indian corporations 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 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 had stated that the MFN clause between two nations doesn’t apply robotically 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 Economic Co-operation and Development was established in 1961 and is headquartered in Paris. It calls itself a discussion board and information hub for knowledge, evaluation, and greatest practices in public coverage to construct stronger, fairer, and cleaner societies – serving to to form higher insurance policies for higher lives. It works intently with coverage makers, stakeholders and residents to determine evidence-based worldwide requirements and to search out options to social, financial and environmental challenges.
A HISTORY TO THE CASE
India had signed tax agreements with Lithuania and Colombia underneath which the tax charges on sure forms of revenue had been decrease than the charges it offered to OECD international locations. Both international locations later joined the OECD.
Under the OECD, the impact of an MFN clause is that one nation obligates itself to its treaty associate with respect to providing it a ‘extra beneficial’ tax therapy.
Switzerland assumed that Colombia and Lithuania becoming a member of the OECD meant a 5 per cent charge for dividends would apply to the India-Switzerland tax treaty underneath the MFN clause, as a substitute of the ten per cent which was talked about in it.
But the Supreme Court ruling meant in any other case — that the MFN clause between two nations doesn’t apply robotically when a rustic joins the OECD, and that the prior tax treaty takes priority, except the MFN clause is particularly talked about in a ‘notification’ in accordance with Section 90 of the Income Tax Act.
WHAT THIS MEANT FOR THE NESTLE CASE
According to the assertion by Switzerland’s finance division, in 2021, the Delhi High Court whereas listening to the case towards Nestle, upheld the applicability of the residual tax charges after bearing in mind the MFN clause underneath the Double Taxation Avoidance Agreement. This was in keeping with how Switzerland had interpreted it.
However, in a ruling dated October 19, 2023, the Supreme Court reversed the excessive courtroom’s judgement and acknowledged that, the applicability of the MFN clause was not triggered robotically. The high courtroom dominated that the MFN clause “was indirectly relevant within the absence of ‘notification’ in accordance with Section 90 of the Income 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” as the rationale for its choice.
This signifies that 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 overseas tax credit.
The Swiss Finance Department launched a press release during which 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” 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 ruling, whereas others see this as a measure of reciprocity.
Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala referred to as Switzerland’s transfer unilateral and stated “This suspension could result in elevated tax liabilities for Indian entities working in Switzerland, highlighting the complexities of navigating worldwide tax treaties in an evolving world 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 advised information company Press Trust of India.
AKM Global Tax Partner, Amit Maheshwari, stated that “The essential motive 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 based mostly on the MFN clause between Switzerland and India, the tax charge on dividends from qualifying shareholdings could be lowered from 10 per cent to five per cent, efficient retroactively from July 5, 2018. However, the next Supreme Court ruling in 2023 contradicted the identical,” Mr Maheshwari advised PTI.
He added that “This may influence Swiss investments in India as dividends could be topic to greater withholding now and revenue accruing on or after January 1, 2025, could also be taxed on the charges offered for within the authentic double taxation treaty between Switzerland and India, whatever the MFN clause.”
JSA Advocates & Solicitors Partner Kumarmanglam Vijay stated “This would particularly influence Indian corporations having ODI (abroad direct funding) constructions with subsidiaries in Switzerland and can elevate the Swiss withholding tax on dividends from 5 per cent to 10 per cent from January 1, 2025.”
(Inputs from PTI)