Taxpayers from France, Swiss companies cannot claim low tax benefit by citing tax treaties with other OECD members

Indian arms of companies from France, Netherlands would now not be eligible for low tax rate of 5% while remitting dividends to their overseas parents. India’s apex direct taxes body Thursday said taxpayers from these countries cannot apply the benefits available under tax treaties with entered into by India with Columbia, Slovenia making use of the most favoured nation clause.

Countries including France, Switzerland, Netherlands, recently, affirmed that withholding tax in India should not exceed the rate prescribed under the treaties with Columbia, Slovenia etc, which is at lower rate of 5%, against the regular tax rate of 15%.

The Central Board of Direct Taxes, in a circular, said that Lituania and Columbia became members of OECD after signing the tax treaty with India and therefore these treaties could not be applied to all countries.

It said unilateral decrees, issued by these countries (France, Switzerland and Netherlands), stating that they could avail low tax applicable due to MFN was a merely a reflection of the understanding of the respective countries and did not affirm India’s position in this matter.

The CBDT said that India reserves its right to apply withholding tax at the rates prescribed under the respective tax treaties and treaties with Columbia, Slovenia and could be subject to common interpretation.

It added that import of concessional rates by invoking MFN clause cannot be done selectively and the benefit of lower rate or restricted scope of source taxation will be available only when the conditions specified in the Circular are met.

Experts claim that this will have a bearing on Indian arms of companies based in these countries and were engaged in litgation with Indian tax authorities.

“This assumes significance as there were recent High Court rulings in favor of the taxpayers on this issue which upheld the applicability of lower withholding tax rates using the MFN clause based on the principle of common interpretation. Though the Circular clarifies that existing rulings already rendered in favor of the taxpayer would not be affected, taxpayers staking refund claims or seeking to obtain lower withholding tax certificates would stand impacted by this Circular,” Sudin Sabnis, Partner, Nangia Anderson LLP said.

He added that many high court rulings had also being appealed by the Revenue in the Apex Court and this Circular could give a new dimension on whether the interpretation in unilateral decrees of Netherlands, France really reflected a common interpretation.

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