International TaxationMFN Clause Most Favoured Nation ClauseIndia Wresting its Right to Taxation

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The Tax Publishers International Taxation--MFN Clause Most Favoured Nation Clause--India Wresting its Right to Taxation Srivatsan Ranganathan The learned author, in this brief Article, highlights the fact that based on Double Taxation Avoidance Treaties entered into by one state with another, the OCED countries carved out in the MFN (Most favoured nation) clause for their own benefits, comfort and convenience. As MFN clause/provision existing in DTAA alone confers the benefits of lower tax rates/exemption thereto he concludes that India has been trying hard to protect its share of Taxes i.e. protection of tax base in matter of tax treaties but has not been successful in deriving the benefit of trade beneficiary clause i.e. the MFN clause. He also criticises the recent Circular issued by CBDT in this regard. 1. Convenience in taxation amongst a bloc The predecessor to OECD was an economic bloc of European countries, then called as OEEC. To facilitate/retain economic benefits symbiotically within the EU block competitively, while drafting Double taxation avoidance Treaties (DTAA) OCED countries carved out in the MFN clause for their own comfort/convenience. The MFN clause is a beneficial clause to tax or exempt a subject at a lower/zero rate than what is envisaged under a DTAA, especially if another country of the OCED (EU bloc) comes out with a clause which has a lower or exemption clause of the said topic of taxation. The topic of taxation could range from interest, dividends, royalties, fee for technical services, et al. Subsequently US, UK, Canada also became part of the OCED. India also joined as a signatory to the OCED development centre, however, is not a member country. MFN clause did not work that well with stronger bargaining States like Us. Of late, countries across the world have been trying hard to protect their share of taxes and the BEPS Project I and II also enshrine various measures enlisted to ensure protection of tax base across countries. 2. Pacta Sunt Servanda The Vienna Convention of 1969 (called treaty of treaties) elaborates rights, duties and responsibilities of sovereigns, in matters of treaties entered into by one State with another. The golden rule here is 'Pacta sunt servanda' which means 'Agreements must be honoured/kept with utmost good faith'. A closely held group like the OCED countries in their days of bloom had made clauses like the MFN provision. Seen from another angle, the MFN clause is also a sort of a tax/treaty lobbying if one were to say but by a particular economic bloc, though it does not point out to this. 3. Treaty shopping using MFN/Make-available clauses Consequentially when India got pinched legally and on tax side due to such clauses as the MFN and the 'makes-available clause' under Fees for technical services, India chose to amend its domestic laws to widen the meaning of royalties, Fee for technical services (FTS), etc. by making clarifcatory amendments. Generally clarificatory amendments are read retrospectively. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

International Taxation--MFN Clause

Most Favoured Nation Clause--India Wresting its Right to Taxation

Srivatsan Ranganathan

The learned author, in this brief Article, highlights the fact that based on Double Taxation Avoidance Treaties entered into by one state with another, the OCED countries carved out in the MFN (Most favoured nation) clause for their own benefits, comfort and convenience. As MFN clause/provision existing in DTAA alone confers the benefits of lower tax rates/exemption thereto he concludes that India has been trying hard to protect its share of Taxes i.e. protection of tax base in matter of tax treaties but has not been successful in deriving the benefit of trade beneficiary clause i.e. the MFN clause. He also criticises the recent Circular issued by CBDT in this regard.

1. Convenience in taxation amongst a bloc

The predecessor to OECD was an economic bloc of European countries, then called as OEEC. To facilitate/retain economic benefits symbiotically within the EU block competitively, while drafting Double taxation avoidance Treaties (DTAA) OCED countries carved out in the MFN clause for their own comfort/convenience.

The MFN clause is a beneficial clause to tax or exempt a subject at a lower/zero rate than what is envisaged under a DTAA, especially if another country of the OCED (EU bloc) comes out with a clause which has a lower or exemption clause of the said topic of taxation. The topic of taxation could range from interest, dividends, royalties, fee for technical services, et al.

Subsequently US, UK, Canada also became part of the OCED. India also joined as a signatory to the OCED development centre, however, is not a member country. MFN clause did not work that well with stronger bargaining States like Us. Of late, countries across the world have been trying hard to protect their share of taxes and the BEPS Project I and II also enshrine various measures enlisted to ensure protection of tax base across countries.

2. Pacta Sunt Servanda

The Vienna Convention of 1969 (called treaty of treaties) elaborates rights, duties and responsibilities of sovereigns, in matters of treaties entered into by one State with another. The golden rule here is 'Pacta sunt servanda' which means 'Agreements must be honoured/kept with utmost good faith'. A closely held group like the OCED countries in their days of bloom had made clauses like the MFN provision. Seen from another angle, the MFN clause is also a sort of a tax/treaty lobbying if one were to say but by a particular economic bloc, though it does not point out to this.

3. Treaty shopping using MFN/Make-available clauses

Consequentially when India got pinched legally and on tax side due to such clauses as the MFN and the 'makes-available clause' under Fees for technical services, India chose to amend its domestic laws to widen the meaning of royalties, Fee for technical services (FTS), etc. by making clarifcatory amendments. Generally clarificatory amendments are read retrospectively.