Switzerland has revoked the ‘Most Favoured Nation’ or MFN status accorded to India under the Double Taxation Avoidance Agreement or DTAA treaty after the Indian Supreme Court ruling in the Nestle case, according to a report published in NDTV wensite.
Switzerland’s move marks a significant shift in bilateral treaty dynamics and will result in a big impact on Indian companies operating in Switzerland as well as on Swiss investments in India.
In its official statement on December 11, the Swiss finance department named the Supreme Court of India and cited its 2023 ruling as the reason for its decision to remove India’s MFN status. In its order, the Supreme Court had said that the MFN clause between two nations does not apply automatically when a country joins the OECD, especially if the Indian government already had a prior tax treaty with that country before joining 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 forum and knowledge hub for data, analysis, and best practices in public policy to build stronger, fairer, and cleaner societies – helping to shape better policies for better lives. It works closely with policy makers, stakeholders and citizens to establish evidence-based international standards and to find solutions to social, economic and environmental challenges.
India had signed tax agreements with Lithuania and Colombia under which the tax rates on certain types of income were lower than the rates it provided to OECD countries. Both countries later joined the OECD.
Under the OECD, the effect of an MFN clause is that one country obligates itself to its treaty partner with respect to offering it a ‘more favourable’ tax treatment.
Switzerland assumed that Colombia and Lithuania joining the OECD meant a 5 per cent rate for dividends would apply to the India-Switzerland tax treaty under the MFN clause, instead of the 10 per cent which was mentioned in it.
But the Supreme Court ruling meant otherwise — that the MFN clause between two nations does not apply automatically when a country joins the OECD, and that the prior tax treaty takes precedence, unless the MFN clause is specifically mentioned in a ‘notification’ in accordance with Section 90 of the Income Tax Act.
According to the statement by Switzerland’s finance department, in 2021, the Delhi High Court while hearing the case against Nestle, upheld the applicability of the residual tax rates after taking into account the MFN clause under the Double Taxation Avoidance Agreement. This was in line with how Switzerland had interpreted it.
