Following the suspension, Switzerland will impose a 10% tax on dividends paid to Indian tax residents and entities, replacing the current lower rate. The decision comes in the wake of the Indian Supreme Court’s recent ruling against Nestlé, where the company sought a reduced 5% withholding tax under the DTAA.
In its statement, the Swiss government explained that its interpretation of the MFN clause diverges from that of the Indian government, particularly due to the absence of reciprocity in the arrangement.
Nestlé, a Swiss FMCG giant, had earlier claimed a reduced 5% rate on dividends and royalties paid by its Indian subsidiary to its Swiss parent company.
To explore the implications of this move, CNBC-TV18 spoke with industry experts including Jayant Dasgupta, Former Ambassador to the WTO; Mukesh Butani, Managing Partner at BMR Legal Advocates; and Prabhash Ranjan, Vice-Dean of Jindal Global Law School.
Below are the excerpts of the discussion.
Q: What kind of impact is this going to have on Indian entities working in Switzerland, those who have bank accounts there, companies that have business in Switzerland, and also, what about those hundreds of Swiss companies that are working in India? How does this immediately impact their functioning and tax liabilities?
Butani: The genesis of this development has got to do with India’s Supreme Court ruling, which, for right or wrong reasons, took a view that the MFN treatment, which is the dividend withholding tax of 5%, is not applicable to Swiss multinationals working in India.
What was happening was that when this was going into the dispute, the Swiss authorities issued what they call it as a unilateral direction as to what is their interpretation of the treaty. This was in 2021, and they took a view that the 5% withholding tax was available because the Swiss government was granting the concessional rate of tax to Indian companies, repatriating dividends from Switzerland to India. Now that interpretation has been reversed in a way. Now what the Swiss government is saying is that whereas we continue to hold that position, which is the unilateral interpretation, but because India’s Supreme Court has gone ahead and interpreted the law in this manner, from January 1, 2025 we are going to revert back to India’s position, which is levy tax of 10% on withholding tax declared by Indian multinationals operating in Switzerland. That’s the issue over here.
Now none of the people who have bank accounts in Switzerland are really getting impacted. This concerns only those Indian companies who are operating from Switzerland and they are repatriating their profits into India.
While the Swiss have taken this view, the Swiss still hold on to their view that their unilateral interpretation of the availability of the MFN treatment to Swiss multinationals in India is indeed the correct view. They are saying that India is entitled to this view, but this is our view. And hence, that’s the reason they are saying that between 2008 and 2024 we will continue to maintain that Swiss multinationals should be held for withholding tax only at 5%. In a way, you can say that there is an impasse for those years, and the only way for it to be resolved is the government intervention. And the government will have to be very careful because it cannot go against the law laid down by the Supreme Court. But nothing stops them from getting into a diplomatic agreement on how they should be looking at interpreting this clause.
Q: The MEA was asked this question, and the spokesperson said that because of the EFTA agreement, the double tax avoidance (DTA) treaty with Switzerland will now have to be renegotiated. Is there a way out? One of the points that the Supreme Court had made that DTA cannot be enforced until notified under the IT Act. Can the government make certain amendments to the IT Act now to make sure that we are not hit by an increased tax liability? Is there any way out of the Supreme Court judgement and to resolve this matter with Switzerland?
Ranjan: Yes, there is a way out. As you rightly said, the reason why the Supreme Court interpreted the law the way it did is because India has not made a notification under Section 90 of the Income Tax Act. Basically, the Supreme Court took a dualist position, which is that international law is not binding or applicable within India unless or until it is transformed into domestic legislation.
I disagree with this opinion because there are several other Supreme Court cases where the Supreme Court has said that even if an international treaty has not been transformed into domestic law, it can still be read as part of the Indian legal system. Following that logic, the Supreme Court, in my opinion, should have upheld the Delhi High Court decision.
But be that, as it may, a remedy is still possible if India decides to issue a notification—I mean, the government decides to issue a notification under Section 91 and implement the MFN provision that we have in the double taxation avoidance agreement—but that would also mean lowering down the tax rates, not just for Swiss companies but also for other countries who are not OECD members. Whether India is willing to do that, we’ll have to wait and see.
Q: Do you also worry that the Supreme Court’s judgment in the Nestle case and Switzerland’s action revoking the MFN status for India and saying that the concessional 5% tax rate won’t be applicable? You will be facing the 10% tax rate. Now, other countries with whom India has a similar agreement could follow Switzerland example.
Dasgupta: I would just like to say a few words about how this came about. In the 2000 protocol following the 1994 DTAA with Switzerland. There is Article 11, which is the MFN clause, now that says that any agreement signed after February 2000 with any other country that is already a member of the OECD, if that rate for withholding tax, that is the implication, is lower, then, it will automatically be available to the India-Switzerland DTAA.
And in terms of the India-Lithuania agreement and the India-Colombia DTAA, which were signed respectively in 2011 and also, you know, the Lithuanian one came into force in 2013 and the other one came into force in 2014. These two agreements offer the withholding tax at 5% and Lithuania acceded to the OECD only in 2018 and Colombia in 2020 so in a way, I don’t blame the Supreme Court for having said what it said, because I think the interpretation of the protocol can also lead to this conclusion, which the Supreme Court has arrived at.
The other point is it is not insurmountable. Section 90 notification can be made, but Section 90 only gives effect to the terms of an agreement. So the terms of the agreement can be negotiated again, and clarification or a proviso can be put in. So that is not the problem. I think the major problem is that if we reduce the withholding tax for Switzerland to 5%, what implications will it have in respect of the DTAAs with other countries where maybe there is an MFN clause, maybe there isn’t an MFN clause, because everybody would then like to renegotiate and bring it down to 5%.
Watch the video for more