February 2020

MFN CLAUSE: RELEVANCE OF INTERPRETATION BY FOREIGN COURTS

Shreyas Shah
Chartered Accountant

BACKGROUND

A tax treaty is usually bilateral in nature and is limited to two countries: Resident country and Source country. When two bilateral treaties are compared, there ought to be substantial or minor differences on account of the different strategies and the negotiation power of the competent authorities of the respective countries. The question is whether the taxpayer can rely on another bilateral tax treaty, one that is not applicable to him. The answer is clearly ‘No’.

 

The taxpayer relies on the tax treaty entered into by his resident country for the income that has arisen in the source country. For his taxability, the taxpayer is restricted to the applicable tax treaty only. However, the tax treaty mechanism is such that, if expressly provided for in his treaty, the taxpayer is permitted to enforce the beneficial provisions of another bilateral tax treaty, though subject to conditions. This is widely termed as the Most Favoured Nation clause (MFN clause). It prevents discrimination amongst the OECD member states. Its application cannot be implicit but has to be expressly provided for. If not expressed, a tax treaty cannot oblige another tax treaty to apply its beneficial provisions (whether in terms of scope or tax rate).

 

In the Indian context, the MFN clause is usually found in the Protocol to its tax treaties, for example, the Protocol to the India-Netherlands TT, the India-France TT, the India-Sweden TT, etc. For instance, article  12(3)(b) of the India-Sweden Tax Treaty defines the Fees for Technical Services (FTS) as ‘(b) The term “fees for technical services” means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services, including the provision of services by technical or other personnel but does not include payment for services mentioned in articles 14 and 15 of this Convention’.

 

If the Indian taxpayer is making payment for commercial service, the payment would primarily be covered under this FTS article. It would be interesting to then look into the Protocol to the India-Sweden DTA that reads as under:

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