India: Guidance regarding invocation of “most favoured nation” treaty clause

The “most favoured nation” (MFN) clause in India’s tax treaties can be invoked only when certain conditions are met.

The clause in India’s tax treaties can be invoked only when certain conditions are met.

The Central Board of Direct Taxes (CBDT) issued guidance (Circular No. 3/2022, 3 February 2022) providing that the “most favoured nation” (MFN) clause in India’s tax treaties can be invoked only when certain conditions are met:

  • India subsequently enters into a treaty with a third state
  • The subsequent treaty is entered into between India and a state that is a member of the OECD at the time of signing the treaty
  • The subsequent treaty provided for a lower rate or restricted scope of taxation
  • India has issued a notification permitting invocation of MFN clause on account of beneficial treatment accorded in the subsequent treaty

KPMG observation

The circular was issued in response to positions taken by the Netherlands, France, and Switzerland on invocation of the MFN clause based on tax treaties where the country has become an OECD member after entering the treaty with India.

The Delhi High Court has taken a position contrary to that in the CBDT guidance, so taxpayers will have to wait for the Apex Court to settle the dispute. In the meantime, it is incumbent on the CBDT to proactively notify the availability of the MFN clause across its treaty network.

Read a February 2022 report [PDF 330 KB] prepared by the KPMG member firm in India

 

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