Context:
Switzerland has decided to suspend the Most Favoured Nation (MFN) treatment for India under the two countries’ 30-years old double-taxation avoidance agreement (DTAA).
Most Favoured Nation (MFN) status:
- A level of treatment accorded by one country to another in international trade.
- It ensures that the country granting the status must provide equal trade advantages to the recipient country as it does to its most-favoured trading partner.
- Purpose – To promote non-discriminatory trade practices and ensure equal treatment among trading partners.
- Key Features –
- Non-Discrimination: Countries with MFN status must treat each other equally in terms of trade tariffs, import quotas, and other trade barriers.
- WTO Rules: Under the World Trade Organization (WTO) rules, member countries must extend MFN status to all other WTO members.
- Exceptions: Regional trade agreements and preferential treatment for developing countries are exceptions to the MFN principle.
- Benefits
- Market Access: Countries with MFN status gain access to a wider market with reduced trade barriers.
- Economic Growth: Promotes economic growth by encouraging fair competition and trade.
- Stability: Provides a stable and predictable trading environment.
- Challenges
- Unilateral Interpretations: Countries may interpret MFN provisions differently, leading to disputes.
- Impact on Investors: Changes in MFN status can affect investors’ tax liabilities and investment decisions.
- Tax Treaty Shopping: Investors may exploit MFN provisions for favourable tax treatment, leading to unequal treatment and revenue distortions.
Double Taxation Avoidance Agreement (DTAA):
- A treaty signed between two or more countries to prevent individuals and businesses from being taxed twice on the same income.
- Key Features
- Tax Relief: Provides relief from double taxation by exempting income earned abroad from tax in the resident country or by providing tax credits.
- Coverage: DTAAs can cover all types of income or target specific types of income, such as salaries, property, capital gains, and savings.
- Sections 90 and 91: Under the Income Tax Act 1961, Section 90 deals with provisions involving countries with which India has a DTAA, while Section 91 deals with countries without a DTAA.
- Challenges
- Complexity: DTAAs can be complex and require careful interpretation to avoid disputes.
- Tax Evasion: Some investors may use DTAAs to evade taxes by routing investments through low-tax jurisdictions.
- Regular Updates: DTAAs need to be regularly updated to reflect changes in tax laws and economic conditions
Source: The Hindu
Previous Year Question
With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2018 Prelims]
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (d)