New Delhi: Switzerland’s federal finance department said on Wednesday (December 11) that it was suspending India’s ‘most favoured nation’ (MFN) status under a treaty between the two countries on avoiding double-taxation.
It made this decision as it had determined India did not reciprocate Switzerland’s understanding of the MFN clause in the treaty.
Asked about the Swiss government’s suspension of India’s MFN status, the external affairs ministry said it did not have further details on the subject.
According to the MFN clause, which was added to the 1994 treaty by an amendment in 2010, rates of taxation at source agreed to between India and a third OECD country on dividends, interest, royalties or fees for technical services that were lower than that mentioned in the 1994 treaty would apply between Switzerland and India as well.
But a September 2023 ruling by the Indian Supreme Court in which the Switzerland-based Nestle was a respondent said that a notification under Section 90(1) of the Income Tax Act would be necessary for such ‘double taxation avoidance agreements’ to be given effect.
The Swiss finance department said on Wednesday that according the apex court’s ruling, India’s MFN status would not be directly applicable without such a notification.
The court also decided, Bern noted, that the third countries with whom tax rates were agreed to would have to have been OECD countries at the time of the agreement in order for the MFN clause to apply.
“On the basis of the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation of para. 5 of the Protocol [containing a mention of the third country being an OECD member] to the IN-CH DTA [the treaty] is not shared by the Indian side,” Bern said.
It added: “In the absence of reciprocity, it therefore waives its unilateral application with effect from January 1, 2025.”
Bern’s decision will raise taxation at source rates for Indian entities in Switzerland to 10%.
They had been lowered from 10% to 5% in 2021 on account of the Swiss government noting that India had inked agreements with Lithuania and Colombia of a 5% tax rate in 2011 and that the latter two countries joined the OECD in 2018 and 2020 respectively.
However, the Supreme Court ruling meant that as Lithuania and Colombia were not OECD countries when their agreements with India were made, the subsequent adjustment of tax in the Indo-Swiss agreement would not apply, the Swiss finance ministry said on Wednesday.
External affairs ministry spokesperson Randhir Jaiswal during the weekly press briefing on Friday was asked for comment on the Swiss government’s decision.
“My understanding is that with Switzerland, because of EFTA [the European Free Trade Association], the double taxation treaty that we have, it’s going to be renegotiated. So that is one aspect of it,” he said.
Jaiswal continued: “The other one is this ‘most favoured nation’. I don’t have an update on it as to the details, etc. We’ll come back to you more on that account.”