Switzerland Suspends MFN Clause for India under DTAA from January 1, 2025
Switzerland has suspended the Most Favored Nation (MFN) clause under the Double Taxation Avoidance Agreement (DTAA) with India, effective from January 1, 2025. This means that the lower tax rate of 5% on dividend payments from Swiss entities to Indian investors will no longer apply. Instead, a higher rate of 10% will be applicable. This decision by Switzerland is a response to a recent Indian Supreme Court ruling regarding the interpretation of the MFN clause.This decision follows a 2023 Indian Supreme Court ruling on the Nestle case, which stated that the MFN clause in such agreements does not apply automatically and requires explicit notification under Indian tax law. The suspension will impact the tax rates on dividends, potentially increasing the tax burden for Indian entities in Switzerland, raising it from 5% to 10%. This change could affect Swiss investments in India as well, as dividends would now be subject to higher withholding taxes. Swiss authorities have cited a lack of reciprocity in interpretation as the basis for this decision. The move has led to discussions about the possible renegotiation of the DTAA to address these changes in the bilateral tax framework.
What is Most Favored Nation (MFN)?
The Most Favored Nation (MFN) clause is a principle in international trade that requires a country to provide the same trade advantages to all its trading partners. Essentially, it prohibits discrimination between countries in terms of trade benefits. 1 2
Here's a breakdown of the MFN clause:
- Equal Treatment: If a country grants a special trade advantage (like a lower tariff) to one trading partner, it must extend the same advantage to all other countries with MFN status.
- Non-Discrimination: The MFN clause aims to promote non-discriminatory trade relations among countries.
- Core Principle of WTO: The MFN principle is a cornerstone of the World Trade Organization (WTO), ensuring fair and equitable trade practices among member countries.
Benefits of MFN:
- Promotes free trade: By reducing trade barriers and encouraging equal treatment, the MFN clause fosters a more open and competitive global market.
- Reduces trade disputes: The MFN principle helps to minimize trade disputes by ensuring that all countries are treated equally.
- Encourages economic growth: By facilitating trade and investment, the MFN clause can contribute to economic growth and development for all participating countries.
Limitations of MFN:
- Potential for abuse: In some cases, the MFN clause can be used to prevent countries from entering into preferential trade agreements with certain partners, such as regional trade blocs.
- May not always be beneficial: In some situations, granting MFN status to all countries may not be in the best interests of a particular nation, especially if it involves trade with countries with significantly different economic structures or development levels.
India's View on MFN Clause in Tax Treaties:
The Indian government's view on the Most Favored Nation (MFN) clause in tax treaties has undergone some evolution.
- Historically: India generally adhered to the MFN principle in its tax treaties.
- Recent Developments:
- Supreme Court Ruling: The Indian Supreme Court ruled that a notification under Section 90 of the Income Tax Act, 1961, is mandatory to invoke the MFN clause in tax treaties. This ruling emphasized the need for explicit action by the Indian government to extend benefits under the MFN clause.
- Switzerland's Suspension: The recent suspension of the MFN clause by Switzerland in its DTAA with India, effective from January 1, 2025, highlights the potential implications of this ruling.
- Implications:
- Increased Scrutiny of Tax Treaties: The Supreme Court ruling and Switzerland's action may lead to increased scrutiny of the MFN clause in India's tax treaties.
- Potential for Renegotiation: The Indian government may consider renegotiating existing tax treaties to address the implications of the Supreme Court ruling and ensure that India's tax policies align with its economic and development objectives.
- Impact on Foreign Investment: The suspension of the MFN clause by Switzerland could potentially impact foreign investment flows into India, particularly from Swiss entities.
Disclaimer: This information is for general knowledge and informational purposes only
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