In a move that could have significant implications for Indo-Swiss economic relations, the Swiss government has suspended the "most favoured nation" (MFN) clause in its tax treaty with India. This decision, stemming from a disagreement over the interpretation of the MFN clause and a related Supreme Court ruling, could lead to higher taxes for Indian companies operating in Switzerland and potentially impact Swiss investments in India. This development highlights the complexities of international tax treaties and the importance of clear and consistent interpretations to maintain a stable and predictable investment environment.
Understanding the MFN clause and the dispute:
The MFN clause in tax treaties ensures that each country provides the other with the same favourable tax treatment it offers to any other country. The dispute arose from India's tax treaties with Colombia and Lithuania, which offered lower tax rates on certain incomes compared to those offered to OECD countries. When these two countries later joined the OECD, Switzerland argued that the lower tax rates should also apply to its treaty with India under the MFN clause.
However, the Indian Supreme Court, in a 2023 ruling related to Nestle, clarified that the MFN clause does not automatically apply when a country joins the OECD if the tax treaty was signed before that country became an OECD member. This ruling contradicted Switzerland's interpretation and led to the suspension of the MFN clause.
Impact of the suspension:
- Higher Taxes for Indian Companies: Starting January 1, 2025, Switzerland will levy a 10% tax on dividends earned by Indian entities, instead of the 5% rate that was applicable under the MFN clause. This could increase the tax burden for Indian companies operating in Switzerland.
- Potential Impact on Swiss Investments: The suspension could also discourage Swiss investments in India, as dividends would now be subject to higher withholding tax rates.
- Increased Complexity and Uncertainty: This development highlights the complexities of navigating international tax treaties and the potential for differing interpretations between countries. It underscores the need for clear and consistent guidelines to ensure predictability and stability in the international tax framework.
The suspension of the MFN clause in the Indo-Swiss tax treaty marks a significant development with potential implications for both Indian and Swiss businesses. It highlights the importance of clear communication and mutual understanding between treaty partners to avoid disputes and ensure a stable investment environment. While the immediate impact may be limited to specific tax provisions, the broader implications could affect investment flows and economic cooperation between the two countries. It is crucial for both India and Switzerland to engage in constructive dialogue to resolve this dispute and ensure that their tax treaty continues to promote mutually beneficial economic relations.
