Tax Treaties: What Will Become Of French, Swiss, And Dutch Dividends?
India vs France, Switzerland, Netherlands...with corporates caught in the middle of a dividend divide.
Indian subsidiaries of companies located in the Netherlands, France, and Switzerland cannot claim the benefit of lower rate on dividends under respective tax treaties, the Indian revenue department has clarified.
The Central Board of Direct Taxes has said that Indian branches of French, Swiss and Dutch companies will have to withhold 10-15% on dividends remitted to their parents. And that they won't be eligible for low tax rate of 5%.
CBDT's clarification is a result of two developments.
First, unilateral directives from the Netherlands, France, and Switzerland asserting the ‘Most Favoured Nation’ clause under their respective tax treaties with India. The three countries have stated that because of the MFN clause, tax rate on dividends gets modified since India has agreed to a 5% rate with Columbia, Lithuania and Slovenia.
MFN clause in a treaty ensures that if there’s a beneficial tax rate in any other treaty that India has signed, that rate can be imported.
CBDT's clarification is nothing but the government laying out its own stand, Parul Jain, direct tax leader at Nishith Desai Associates, told BloombergQuint.
But, circulars are not binding on taxpayers. Only on tax authorities — that said, companies still need to be cautious as to how they go about asserting their view, Jain pointed out.
Even if dividends have been paid to the parent company and tax has not been withheld, the pragmatic approach for the company would be to pay the tax at 10-15% (as per the respective treaty) and claim a refund (in excess of 5%, which is the lower tax rate). Otherwise, penalties and interest may be attracted.Parul Jain, Direct Tax Leader, Nishith Desai Associates
The second reason is a 2021 Delhi High Court ruling that went in favour of companies.
In the case of Concentrix Services Netherlands BV and Optum Global Solutions International BV, the high court directed that their dividend income be taxed at a lower rate of 5% even though the country’s double tax avoidance treaty with India prescribes a 10% rate. The court had applied the MFN clause in the treaty protocol, while arriving at this conclusion.
In saying so, the high court quashed the withholding tax certificates issued by the revenue department prescribing a rate of 10% on dividends from Indian subsidiaries.
The All-Important 'Is'
As with most legal standoffs, this too finds its roots in the language used in the tax treaties. The wording of the MFN clause, in particular.
For instance, the MFN clause in the Netherlands treaty reads:
If after the signature of this convention [Netherlands], under any convention or agreement between India and a third state which is a member of the OECD, India should limit its taxation at source on dividends, interests, royalties…the same rate shall also apply under this convention [Netherlands].
India's argument hinges on the "is" — that for the beneficial rate to be applicable, the three countries should’ve been OECD members when the Netherlands, French and Swiss treaties were signed. Since Slovenia, Lithuania and Columbia became OECD members much later, the benefit of the lower rate cannot be imported, CBDT has maintained.
For the MFN clause to be applicable, the third State i.e., the country not party to the treaty, has to be an OECD Member State on the date of the conclusion of DTAA with India. If a country wants to apply a lower rate of tax, then India must issue a separate notification saying that the benefits of the first treaty have been imported to the second treaty.CBDT Circular
The CBDT circular has imported a very restrictive meaning with regard to the applicability of MFN clause in the tax treaties, SR Patnaik, tax partner at Cyril Amarchand Mangaldas, told BloombergQuint. Legally, the circular won't be applicable to taxpayers. But, on a practical level, it would be cumbersome to navigate, he added.
Taxpayers, who are not satisfied with the CBDT's directive, have two remedies. Either, challenge the constitutionality of the circular before the court. Or, take a conscious call and ignore the circular issued by the CBDT and file the income tax return by offering the subject income to a lower rate of tax, Patnaik opined.
If the tax department doesn't agree with the company, it will raise a demand notice and the company, in turn, can contest it by filing an appeal. And, appeal has its own process. You are looking at 10-15 years. So, the ability to fight the department is also crucial.SR Patnaik, Tax Partner, Cyril Amarchand Mangaldas
Either way, if a company wants to contradict the view taken by the CBDT, it will be advisable to do a detailed cost-benefit analysis, he added.