MFN clause not sufficient for corporations from OECD international locations to avail decrease withholding tax: SC

A bench led by Justice Ravindra Bhatt held that worldwide treaty practices are usually not enforceable in India until the federal government notifies them, a ruling that specialists stated could have large ramifications for the business.

“The choice of the apex court docket could have large repercussions for the business and will lead to thousands and thousands of {dollars} of further tax income for the federal government,” stated Amit Maheshwari, tax accomplice, AKM World, including that it may additionally entail reopening of previous instances in type of contemporary motion by tax authorities.

The highest court docket put aside a 2021 Delhi Excessive Court docket ruling that allowed Nestle SA, Concentrix Providers, Steria and others a concessional withholding tax charge of 5% on dividend earnings from their Indian arms, extending the MFN clause within the OECD. The court docket additionally made it clear that preferential therapy given to a rustic beneath a double taxation avoidance settlement didn’t mechanically get prolonged to different member international locations until the sooner treaty with them was amended.

Specialists stated different international locations may additionally revisit the place on advantages beneath these treaties. “Consequently, the opposite nation may additionally revisit its place earlier than granting Indian corporations such advantages beneath the treaty. This is able to additionally impression previous investments, whereby tax prices (e.g. dividend payouts) would have already been factored in by companies,” stated Prashant Bhojwani, accomplice, Tax & Regulatory Providers, BDO India.

India signed a tax treaty with the Netherlands in 1998 the place a withholding tax of 10% was allowed. Subsequently, it additionally entered into treaties with Slovenia, Lithuania, and Colombia the place it agreed to the same helpful charge of 5% on dividend earnings if the recipient firm held 10% or extra of the share capital within the Indian firm.

Slovenia, Lithuania, and Colombia later grew to become members of the OECD.

Tax authorities sought to use a ten% charge on the dividend earnings of corporations from the Netherlands, Switzerland, and France. These corporations argued that the decrease charge of 5% accessible to corporations beneath the tax treaties with the international locations of Slovenia, Lithuania and Colombia should even be relevant to them as all had been members of the OECD. They stated OECD gives for MFN therapy, making it crucial that if India has signed a treaty with an OECD member that has a decrease tax charge, the identical may also apply to different members of the grouping.