Context

• Switzerland has announced to suspend the most favoured nation (MFN) clause in its double taxation avoidance agreement (DTAA) with India, starting from January 1, 2025, after Nestle's 2023 Supreme Court ruling.
• This move will double the withholding tax rate on dividends paid to Indian tax residents to 10% from 5%.

What is MFN Clause?

• It is a principle found in international treaties, including tax agreements, that ensures equal treatment for all parties involved. If one country offers favourable tax rates or conditions to another, it must extend those same benefits to all other countries covered by the treaty.

What is the Nestle Case?

• Swiss company Nestle had sought a refund of withholding tax paid on dividends, claiming the benefit of the MFN clause under the India-Switzerland tax treaty.

Supreme Court ruling on Nestle in 2023

• Indian Supreme Court, in a decision dated October 19, 2023, had said that the MFN clause between two nations does not apply automatically when a country joins the Organisation for Economic Co-operation and Development (OECD), especially if the Indian government already had a prior tax treaty with that country before joining the grouping.
• Applicability of MFN clause provided "was not directly applicable in the absence of 'notification' in accordance with Section 90 of the Income Tax Act".

What is DTAA?

• Double Tax Avoidance Agreements (DTAA) is a bilateral or multilateral agreement between two or more countries which ensures that the same income is not taxed in both countries.
• India has signed comprehensive DTAAs with more than 90* countries.

DTAA in 2024

• India & Mauritius signed a protocol in March 2024, amending the Double Taxation Avoidance Agreement (DTAA), which introduced Principal Purpose Test (PPT) to avail tax benefits.

About OECD

• Founded: 30 September 1961
• HQ: Paris, France
• Secretary-General: Mathias Cormann