Last updated: November 30th, 2022 12:47 PM

CBIC Clarification on Applicability of Most Favoured Nation (MFN)

The Central Board of Direct Taxes (CBDT) has received representations seeking clarity on the applicability of the Most Favoured Nation (MFN) clause available in the Protocol to some of the Double Taxation Avoidance Agreements with OECD member states. Given the various decrees/bulletin/publication on the interpretation of the MFN clauses, the CBDT issued certain clarifications on the applicability of the M FN clause vide Circular No. 3/2022 dated 03.02.2022. The present article briefs the CBIC Clarification on Applicability of Most Favoured Nation (MFN). For more details on India USA DTAA – Double Tax Avoidance Agreement, click here.

Synopsis of CBIC Clarification on Applicability of MFN

CBIC issues Clarification regarding the Most-Favored-Nation (MFN) clause in the Protocol to India's DTAAs with certain countries.

• CBIC has clarified that the third State has to be an OECD Member State on the date of the conclusion of DTAA with India to apply the MFN clause.
• Central Board of Direct Taxes (CBDT) has also announced that India has not issued any notification importing the benefit of treaties with Slovenia, Lithuania, and Colombia to treaties with the Netherlands, France, or the Swiss Confederation.
• The CBDT also clarified that where any decision by any court on the issue is favorable to the taxpayer, this Circular will not affect the implementation of the court order in such case.

Click here to know more about How to Claim Double Taxation Relief in the absence of DTAA?

Most-Favored-Nation Clause

To start with, let us overview the Most-Favored-Nation Clause: As per the standard trade arrangement, the World Trade Organization (WTO) members must give equal preferences to trade partners. There should not be any discrimination between the countries. This trade arrangement under the WTO is known as the Most Favored Nation (MFN) clause.

• The World Trade Organization allows members to give unique and differential treatment to developing countries like zero-tariff imports. This is an exemption for Most Favored Nation.
• A most-favored-nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries.
• In international trade, MFN treatment is synonymous with non-discriminatory trade policy because it ensures equal trading among all WTO member nations rather than exclusive trading privileges.

For example, if a nation reduces tariffs by 5% for one country, the MFN clause states that all WTO members will have their taxes cut by 5%.

Most-Favoured-Nation (MFN) clause in the Protocol to India's DTAAs with certain countries

The Protocol to India's Double Taxation Avoidance Agreements (DTAAs) with some of the countries, especially the European States and OECD members (The Netherlands, France, the Swiss Confederation, Sweden, Spain, and Hungary), contains the Most-Favoured-Nation (MFN) clause. CBIC states that "Though each MFN clause in these DTAAs has a different formulation, the general underlying provision is that if after the signature/ entry into force (depending upon the language of the MFN clause) of the DTAA with the first State, India enters into a DTAA with another OECD Member State, wherein India limits its source taxation rights about certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) to a rate lower or a scope more restricted than the scope provided for those items of income in the DTAA with the first State, such beneficial treatment should also be extended to the first State." India's DTAAs with countries, namely Slovenia, Colombia, and Lithuania, provides for a lower rate of source taxation concerning certain items of income. However, these States were not members of the OECD at the time of the conclusion of their DTAAs with India and have become members of the OECD thereafter. Note: The Organization for Economic Co-operation and Development  (OECD ) aims to foster international cooperation in issues concerned with tax and address harmful practices.

CBIC Clarification on Relevance of unilateral decree issued by the other jurisdictions

The decree/bulletin/publication issued by other jurisdictions does not represent any mutual understanding between India and the respective jurisdiction. The same has been issued without any bilateral consultation with India.

• The interpretation laid down under the respective decree/bulletin/publication at best represents views of the respective jurisdictions and does not have any impact under the Indian tax law.
• CBIC also stated that India has reached out to the relevant jurisdictions to convey those above and is awaiting a response.

CBIC Clarification on Relevant date for testing OECD membership status

In the above illustration, the Third State (i.e., Slovenia, Lithuania, and Columbia) should be an OECD member at the time of the conclusion of India's tax treaty with the Third State.

CBIC Clarification on Relevant date from which the benefit from the other treaty can be borrowed

CBIC Clarified that the benefit would be available from the date of entry into force of the tax treaty with the Third State and not when it becomes an OECD member

CBIC Other Clarification on Applicability of MNF

A tax treaty or any amendment to a tax treaty is effective only upon its notification in the Official Gazette as required under Section 90 of the Income-tax Act, 1961. Then a beneficial provision under a Third State is borrowed by invoking the MFN clause; the taxpayer must import such helpful requirements along with the associated conditions. Thus, selective import of a provision is not permissible.

Conditions to Apply for MNF

The Circular concludes that a taxpayer is entitled to apply the MFN clause under a tax treaty (Relevant Tax Treaty) about any beneficial provision under a tax treaty with the Third State only if the following conditions are cumulatively satisfied:

• The treaty with the Third State was entered into after the signing/entry into force (depending on the language in the respective tax treaty) of the Relevant Tax treaty;
• The Third State was an OECD member at the time of signing of its tax treaty with India;
• The provision in the tax treaty with the Third State is more beneficial vis-à-vis the Relevant Tax Treaty
• A separate notification has been issued by the Indian Government importing such benefits into the Relevant Tax Treaty.

The official Notification of CBIC about the Clarification regarding the Most-Favored-Nation (MFN) clause in the Protocol to India's DTAAs with certain countries is attached here for reference: