Switzerland Withdraws MFN Status To India Over Supreme Court’s Ruling On Nestle
Switzerland withdraws MFN status to India over Supreme Court’s ruling on Nestle
Switzerland has retaliated against India’s 2023 Supreme Court ruling on Nestle, by withdrawing the most-favored-nation (MFN) clause under the Double Tax Avoidance Agreement (DTAA).
The Swiss Federal Department of Finance stated, "For dividends due from and including 01 January 2025, the residual tax rate in the source State is limited to 10 percent.” Earlier, the tax was five percent.
In 1994, India and Switzerland signed an agreement. The protocols were amended in 2000 and 2010.|
Subsequently, India signed tax treaties with Colombia and Lithuania that provided tax rates on certain incomes that were lower than the rates it provided to the Organisation for Economic Co-operation and Development (OECD) member nations.
Meanwhile, in 2021, Switzerland interpreted the joining of Colombia and Lithuania as the OECD meant that a 5 percent dividends rate would also apply to India under the DTAA and the MFN clause. Last year, the apex court ruled that the MFN clause was not automatically applicable when a country joined the OECD if the Indian government had signed a tax treaty with that country before joining the organization.
However, the Swiss government stated, "Based on the Indian Supreme Court’s ruling, the Swiss competent authority acknowledges that its interpretation of para 5 of the protocol to the IN-CH (India-Switzerland) DTA is not shared by the Indian side. In the absence of reciprocity, it therefore, waives its unilateral application with effect from 01 January 2025.”
Experts have claimed that Indian companies would face a higher liability due to the decision. Ajay Srivastava of the Global Trade Research Initiative (GTRI) remarked, "With the reversion to a 10 percent residual rate, these firms face higher tax liabilities, reducing their competitiveness compared to businesses from countries still benefiting from MFN provisions.”
Analysts stated that more countries could follow suit. Amit Maheshwari, tax partner, AKM Global stated, “Switzerland views that it is not receiving the same treatment that India grants to other countries with more favorable tax treaties. The main reason behind this is reciprocity, which ensures that taxpayers in both countries are treated equally and fairly.”
He added, This seems to have been disregarded after the ruling since Swiss authorities announced in August 2021 that based on the MFN clause between Switzerland and India, the tax rate on dividends from qualifying shareholdings would be reduced from 10 percent to 5 percent, effective retroactively from 05 July 2018. However, the subsequent 2023 ruling contradicted it.”
