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The Swiss government's recent suspension of the Most Favoured Nation (MFN) clause within its Double Taxation Avoidance Agreement (DTAA) with India has sent ripples through the international business community. This decision, stemming from a 2023 Indian Supreme Court ruling concerning a case involving Nestle, effectively alters the tax landscape for Swiss and Indian entities operating across borders. The crux of the issue lies in the interpretation of the MFN clause, which aims to ensure equal treatment among treaty partners. Switzerland previously argued that this clause mandated a reduction in dividend tax rates based on similar agreements India held with other OECD nations. The Indian Supreme Court, however, overturned this interpretation, ruling that the MFN clause does not automatically apply upon a country’s OECD membership without specific notification under Section 90 of the Income Tax Act. This legal discrepancy lies at the heart of the Swiss decision to suspend the MFN clause, impacting the tax obligations of numerous Indian businesses operating in Switzerland.
The practical consequences of this suspension are significant. From January 1, 2025, Indian tax residents seeking Swiss withholding tax refunds and Swiss tax residents claiming foreign tax credits will face a 10% tax on dividends. This represents a return to the original treaty rates, negating the previously lowered rates resulting from Switzerland's interpretation of the MFN clause. The impact will be keenly felt by Indian companies with Overseas Direct Investment (ODI) structures that utilize Swiss subsidiaries. These companies will see a marked increase in Swiss dividend withholding tax, jumping from 5% to 10%, adding substantial costs to their operations. The increased tax burden, according to experts like Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala, underscores the challenges of navigating international tax treaties in an increasingly complex global environment. The uncertainty surrounding interpretations and the unilateral nature of Switzerland's move highlight the need for greater clarity and collaboration between treaty partners to ensure predictability and stability.
The implications extend beyond immediate tax liabilities. The suspension of the MFN clause carries the potential to chill Swiss investments in India. The higher withholding tax on dividends could dissuade Swiss companies from investing in or expanding their operations within India, leading to slower economic growth in both countries. The lack of reciprocity in tax treatment, which was cited by AKM Global Tax Partner Amit Maheshwari as a key driver of Switzerland's decision, further underscores the importance of harmonized tax policies and interpretations. The situation highlights the crucial need for greater dialogue and collaboration between India and Switzerland to resolve the underlying legal discrepancies and establish a more predictable and equitable tax framework. The absence of a mutually agreed upon interpretation of the MFN clause highlights the inherent complexities of international tax law and the potential for unilateral actions to have significant and far-reaching consequences on cross-border business activities.
This case serves as a cautionary tale for nations entering into international tax agreements. The importance of clear, unambiguous language and mechanisms for dispute resolution within these agreements cannot be overstated. The lack of clarity regarding the MFN clause in this instance has led to significant economic consequences for both India and Switzerland. Moving forward, both countries need to actively engage in diplomatic discussions and renegotiate aspects of the DTAA to ensure that it reflects the realities of the current legal interpretations and promotes a more stable and predictable investment climate. The unilateral suspension of the MFN clause, while a response to a specific legal ruling, underscores the necessity for ongoing dialogue and improved understanding between countries to avoid similar situations in the future. International tax law remains a complex and evolving field, requiring consistent efforts to ensure clarity, fairness, and reciprocal treatment between treaty partners.
The Nestle case and the resulting Swiss action also emphasize the need for a proactive approach to managing international tax risks. Multinational corporations, particularly those with operations in India and Switzerland, must adapt their tax planning strategies to account for the changes stemming from the suspension of the MFN clause. This may necessitate restructuring of existing investment structures or reassessing their dividend distribution policies. The complexity of navigating these changes underlines the growing importance of seeking expert advice to ensure compliance and minimize potential tax liabilities. Legal experts and tax advisors will play a vital role in guiding businesses through this transition, assisting them in understanding the new tax implications and devising strategies to mitigate their potential impact.
Source: Switzerland suspends most favoured nation status to India, cites Nestle verdict