Switzerland suspends MFN Clause in Tax Avoidance Pact with India

Switzerland has suspended the Most-Favoured-Nation (MFN) clause under the Double Taxation Avoidance Agreement (DTAA) with India, effective from January 1, 2025.

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About Most-Favoured-Nation (MFN)

MFN is a principle of trade that requires countries to treat all other World Trade Organization (WTO) members equally.
Countries cannot discriminate between their trading partners, and must extend any favorable treatment given to one country to all other WTO members.

Exemptions

The WTO provides the following exemptions from MFN provisions –

Trade blocs: Trade blocs like the European Union and the USMCA can discriminate against imports from outside the bloc.
Trade barriers: Countries can raise barriers against products from specific countries that are considered to be traded unfairly.
Trade preferences: Countries can extend trade preferences to developing countries.
Free trade agreements: Countries can set up free trade agreements that only apply to goods traded within the group.

Removal of MFN status

There is no formal procedure for suspending MFN treatment and it is not clear whether members are obliged to inform the WTO if they do so.
Eg. India revoked Pakistan’s MFN status following the Pulwama attack in 2019. Pakistan has never granted India MFN status.

India-Switzerland Tax Treaty

The Double Taxation Avoidance Agreement (DTAA) between India and Switzerland was signed in 1994 and amended in 2010 to prevent double taxation of income.

Double Taxation Avoidance Agreement (DTAA)

DTAA is an international treaty between two or more countries designed to prevent the same Income from being taxed twice. India has signed such agreements with around 90 countries, benefiting individuals who reside in one country but earn Income in another.

Supreme Court Ruling

In 2023, SC ruled that the DTAA’s provisions require explicit notification under the Income-Tax Act to be enforceable.
This overturned a Delhi High Court decision that protected entities from double taxation.

Implications of the Suspension of the MFN Clause

Higher tax rates:
- Dividends paid after January 1, 2025, will be taxed at a higher rate of 10% in the source state.
- This will affect Swiss companies like Nestlé and challenge India’s attractiveness as an investment destination.
Investment Risks:
- Swiss investment in India could decline due to the increased tax burden.
- EFTA’s $100 billion investment commitment over a 15-year period may be at risk.

European Free Trade Association (EFTA)

It is a group of 4 countries – Iceland, Liechtenstein, Norway and Switzerland.
Establishment: In 1960 through the Stockholm Convention.
Aim: To promote free trade and economic integration among its members.
Relationship with EU: EFTA operates alongside the European Union (EU), with all members participating in the European Single Market and the Schengen Area but not in the EU Customs Union.