NEW DELHI: Several multinational companies headquartered in the Netherlands, Switzerland and France could be staring at retrospective tax demands for close to ₹11,000 crore on dividend income repatriated from India, following a Supreme Court ruling last week.
The Supreme Court said on Thursday that the lower 5% withholding tax on dividend income of companies was not available to all Organisation for Economic Co-operation and Development (OECD) countries merely on the most favoured nation (MFN) basis. The apex court held that the 5% rate would be available only to companies based in countries with which India had notified a double taxation avoidance agreement (DTAA) allowing it. In the absence of this, companies have to pay 10% tax on dividend income.
“A large number of companies were misusing the OECD Most Favoured Nation (MFN) clause,” a senior official told ET, indicating tax notices for lower tax payments in previous years. “We were awaiting the Supreme Court order so there will be a review of tax positions in many cases.” Even by conservative estimates, India was losing about ₹3,000 crore in taxes annually, according to him.
Tax experts said the verdict may also have implications for withholding tax on royalties and fees for technical services.
“The SC ruling would have a retrospective application and would impact all existing and past transactions where treaty benefits claimed under the MFN clause are not in accordance with the above principles decided by SC,” said Riaz Thingna, partner, Grant Thornton Bharat.
The apex court had set aside a 2021 Delhi High Court ruling that allowed Nestle SA, Concentrix Services, Steria and others a 5% withholding tax rate on dividend income from their Indian subsidiaries.
India signed a tax treaty with the Netherlands in 1998, allowing a withholding tax of 10%. Subsequently, it entered into treaties with Slovenia, Lithuania and Colombia with which it agreed to a lower 5% rate if the recipient held 10% or more of the share capital in the Indian company. Slovenia, Lithuania, and Colombia later became members of the OECD.
These companies argued that under the OECD’s MFN clause if a tax benefit was available to one of the 38-member countries then it would be available to others as well.
The Supreme Court said preferential treatment given to a country under a double taxation avoidance agreement (DTAA) was not automatically extended to other member countries unless the earlier treaty with them was amended.
Divakar Vijayasarathy, founder and CEO, DVS Advisors, said the ruling may cover other areas.
“The MFN clause is not restricted only to the extent of favourable rates but also extends to the scope of the income such as dividends, royalty, fees for technical services (FTS) and income from asset leasing,” he said.
Induslaw partner Shruti KP said the ramifications of the ruling could extend beyond that.
“There may be scenarios where, as of today, there may be no ongoing tax proceedings on this specific issue, but post this ruling the tax authorities may scrutinise further and even initiate new tax proceedings,” she said.
Source: The Economic Times