In News:

Switzerland scraps MFN status to India, dividend income to face higher tax

Key Highlights:

• Reason for Suspension:
  • The suspension follows a 2023 Supreme Court ruling in India, which clarified that the MFN clause in tax treaties is not automatically triggered when a country joins the OECD if the tax treaty with that country was signed before its OECD membership.
  • The Court ruled that the Double Taxation Avoidance Agreement (DTAA) cannot be enforced unless it is notified under the Income-Tax Act, 1961.
• Details of the Suspension:
  • Starting January 1, 2025, Switzerland will suspend the Most Favoured Nation (MFN) clause in its DTAA with India.
  • The MFN clause was part of the India-Switzerland DTAA signed in 1994.

Impact of the Suspension:

• Higher Tax Liabilities for Indian Companies: Withholding tax on dividends from Switzerland will increase from 5% to 10% for Indian companies.
• Effects on Swiss Investments in India: Swiss companies will continue to face a 10% withholding tax on dividends from India, as per the India-Switzerland DTAA.
• Potential Re-evaluation of MFN Clauses by Other Countries: Other countries may reconsider how the MFN clause is applied in their tax treaties with India, following this development.
• No Change for Other Benefits: Other DTAA benefits and investments related to the European Free Trade Association (EFTA) will remain unaffected.

Most Favoured Nation (MFN) Clause Overview:

• Definition: The MFN principle ensures that favorable trading terms given by one WTO member country to another are extended to all other WTO members, promoting non-discrimination.
• Purpose: To ensure equal treatment among trading nations by preventing discrimination, and to promote fair trade and equitable market access.
• Key Features:
  • Equal treatment in tariffs, quotas, and trade barriers.
  • Members must extend the best terms to all other WTO members.
• Origin: The MFN principle was established after World War II as a cornerstone of the multilateral trading system under the WTO.
• Exceptions:
  • Bilateral or regional trade agreements.
  • Special access granted to developing countries.
  • Non-WTO members (e.g., Iran, North Korea) are not bound by MFN rules.
• Removal of MFN:
  • There is no formal procedure under the WTO to suspend MFN status.
  • Countries are not obligated to notify the WTO when suspending or removing MFN treatment.

Recent Development:

• From January 1, 2025, Indian companies will face higher withholding tax (10%) on income sourced from Switzerland, as a result of the MFN clause suspension.