Switzerland suspends MFN status; impacts India.
Switzerland Suspends MFN Clause in DTAA with India: Implications for Tax Liabilities
Switzerland recently announced the suspension of the Most Favoured Nation (MFN) clause in its Double Tax Avoidance Agreement (DTAA) with India, effective January 1, 2025. This decision, while technically grounded in procedural nuances, could have far-reaching consequences for Indian entities with cross-border investments in Switzerland and the broader European Free Trade Association (EFTA) region. The MFN clause has been pivotal in reducing tax liabilities and fostering bilateral trade and investments.
The MFN Clause and Its Suspension
The MFN clause under the DTAA between India and Switzerland enables taxpayers to avail more favorable tax rates or treatment provided in agreements with other nations. However, Switzerland’s Federal Supreme Court recently ruled that the MFN clause would not apply automatically unless expressly incorporated into India’s Income Tax Act, 1961, through official notification.
This ruling aligns with India’s Supreme Court’s decision in the Nestle case, which emphasized the need for clear procedural adherence and mutual agreement for MFN clause applicability. Consequently, Switzerland has decided to suspend the clause, citing the absence of reciprocity and a uniform interpretation of treaty provisions.
Impact on Investments and Trade
Tax experts and industry analysts believe that this development could impact investment commitments exceeding $100 billion under the EFTA framework, of which Switzerland is a key member. Indian companies and Swiss entities have benefited from reduced tax rates on dividends, royalties, and interest under the DTAA. The suspension could increase withholding taxes and compliance burdens, potentially discouraging investments in both directions.
For example, without the MFN clause, Indian companies receiving dividend income from Swiss entities may face higher withholding taxes than currently applicable. Similarly, Swiss investors in India may lose access to lower rates negotiated in India’s treaties with other nations. The change will require businesses to reassess their financial strategies, possibly leading to increased tax liabilities.
Expert Commentary
Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen, remarked that the suspension reflects a global trend towards stricter adherence to reciprocity and mutual consent in tax treaty interpretations. He explained that the Nestle ruling by India’s apex court has established a legal precedent for treaty enforcement, where automatic applicability of MFN clauses is no longer assumed. Jhunjhunwala emphasized the need for businesses to align with this shift by revisiting their tax structures and understanding jurisdictional nuances.
Policy Implications
The suspension underscores the importance of clear communication and collaboration between treaty partners. While it represents Switzerland’s effort to align treaty interpretations with legal precedents, it also serves as a wake-up call for India to address ambiguities in its tax laws and treaty notifications. This development may pave the way for renegotiations between India and Switzerland, potentially incorporating more explicit MFN provisions in future agreements.
Conclusion
The suspension of the MFN clause in the India-Switzerland DTAA introduces uncertainty into the tax landscape, potentially altering investment flows between the two nations. As businesses grapple with the implications, this development serves as a reminder of the need for transparency and mutual understanding in international tax treaties. Both nations will need to navigate this complex issue carefully to maintain robust economic ties.