Background –
- Most Favoured Nation (‘MFN’) clause has a long history. World Trade Organisation (‘WTO’) generally requires its members to grant one another MFN status It exists in wide range of trade agreements. Further, unlike international tax laws which are only bilateral in nature, trade agreements has wide variants.
- Different tax treaties are negotiated under different political/ social/ economic factors hence the benefits accorded by different tax treaties varies. OECD model convention doesnot have MFN clause. Since, many tax treaties are modelled on OECD model convention, the absence of such a clause in the OECD model convention is a clear indication that MFN treatment is not general rule of international tax law.
- These are provisions in tax treaties under which one of the contracting state to the tax treaty agree to accord to the other contracting state, treatment that is no less favourable than which it accords to other or third states. The MFN treatment prevents discrimination among foreign investors of different nationalities and allows the creation of a level playing field. Also, MFN clause has reciprocal application, India entities may claim benefit in respect of income received by them from abroad from their dealings with foreign entities.
- Usually found in Protocols and Exchange of Notes to tax treaties, it tries to avoid discrimination between residents of different countries. The object of the MFN clause are – To guarantee that no discriminatory treatment when compared with a third Country and to offer a better treatment because of a favorable change in policy
- MFN clause in tax treaties are not general but are restricted to certain aspects. MFN clause in India context relates it –
- Rates of withholding
- Scope of applicability of tax treaty clauses
- Allowability of deduction/ expenses
- Working of the MFN clause is illustrated in the below diagram –
- Points that needs consideration while applying MFN clause :
- Date of applicability of MFN clause : It can be either the date of signing of the tax treaty or date of entry into force or the effective date
- Reference should be placed on treaties of which country (OECD countries or Non-OECD countries)
- Scope of MFN clause
- In the past CBDT has issued notifications in relation to India-Netherlands, India-Belgium and India-France tax treaties, explaining the changes in the respective tax treaties due to the MFN clause. It is yet to be seen if CBDT comes out with a detailed clarification on various aspects of the applicability and effective utilization of MFN clause to give effect to the intention behind the introduction of MFN clause under the tax treaties.
- Snapshot of the some of the Indian tax treaties which has MFN clause
| OECD member countries | Belgium, France, Hungary, Netherlands, Norway, Spain, Sweden, Finland, Swiss Confederation, United Kingdom and Israel |
| Non-OECD member countries | Kazakhstan, Philippines, Saudi Arabia and Sri-Lanka |
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