As published on economictimes.indiatimes.com, Tuesday 22 February, 2022.
Several multinationals and foreign investors that have invested in India through entities in France, the Netherlands, and Switzerland have reached out to their tax advisors and lawyers for clarity on India’s stand to disallow lower tax on dividends, a step that may result in increased tax liability retrospectively for them.
Many companies are exploring legal options available to them as the debate around the validity of unilateral measures versus the applicability of tax treaties again comes to the fore, say people involved in the discussions.
"The question is whether the sovereign right of a country supersedes the bilateral tax treaty and this is what many companies want clarity on. Many multinationals coming from the Netherlands, Switzerland, and France will also see their tax liability jump for earlier years and may have to pay even additional interest," said Girish Vanvari, founder of tax advisory firm Transaction Square.
Multinationals are looking to challenge India’s decision to introduce unilateral measures that override bilateral tax treaties.
The recent clarification by India would mean that investors from these countries will not be able to avail of the 5% tax on dividends and will have to cough up higher taxes, penalties, and interest retrospectively.
According to the people aware of the development, many investors are looking to file writ petitions in the courts in the coming weeks. Others are looking to take on the taxman in other forums if their tax computations are challenged or rejected.
"Many of these multinationals may take action at some stage, and with judicial precedents in their favour, they are likely to succeed. To attract foreign investments, the principle of consistency has to be kept in mind rather than knee jerk reactions," said Tejveer Singh, partner, DMD Advocates, a law firm.
As per the clause in the bilateral tax treaties signed by these three countries, they could opt for lower taxes if India were to offer that to any other country that is part of OECD.
The tax on dividends under the treaties with these most favoured countries—the Netherlands, Switzerland and France—was fixed between 10% and 15% depending on the investment and facts.
India, however, entered into tax treaties with Colombia, Slovenia, and Lithuania and offered a lower tax on dividends at 5%.
The entities from the countries that have signed the MFN treaty say this automatically triggers the clause, which means they should also pay less tax.
After the Indian tax department rejected the claims for lower taxation, many companies and investors approached the courts. Some of the companies have gotten favourable decisions too.
A CBDT circular in February said that the lower tax benefit would be denied to MFN countries and that they should continue paying higher tax on dividends.
Tax experts say this could result in additional taxes for the investors.
"There are basically two types of companies coming from these MFN countries—first those who have managed to get clarity from the high courts, and second, those who haven’t. Many companies that have been withholding 5% tax, but have no clarity, will be looking to approach the courts going ahead, "said Vanvari.
Tax experts say India’s stand and the litigation at a time when the world is already moving towards a common tax treaty or multilateral instruments (MLI) could create confusion.
MLI is part of the global anti-tax avoidance framework, Base Erosion and Profit Shifting.
"For investors, including multinationals or FPIs, coming from European countries, the recent government circular leads to uncertainty. Considering that the international tax is making a serious attempt to move towards certainty and clarity in many forms, including MLI, what is needed is certainty," said Singh.