India invokes MFN clause, lowers royalty, FTS tax rates in India-Spain treaty
March 20, 2024
The tax charged will not exceed 10 per cent of the gross amount of royalties or fees for technical services instead of the existing treaty rates which can be as high as 20 per cent
India has announced lower tax rates on royalties and fees for technical services (FTS) in its double taxation avoidance agreement (DTAA) with Spain. The tax charged will not exceed 10 per cent of the gross amount of royalties or fees for technical services instead of the existing treaty rates which can be as high as 20 per cent.
CBDT has notified the amendment in the light of the India-Germany DTAA read with paragraph 7 of the protocol to the India-Spain DTAA. This deals with the most favoured nation (MFN) clause concerning an OECD member entering into a treaty with India and limits the source-based taxation of royalty or FTS to a lower rate or scope than that provided in the India- Spain DTAA.
“The CBDT’s notification is in line with its 2022 circular and the SC decision in the Nestle SA matter last year that the (MFN) benefit is not automatic and requires legislative action in the form of a notification,” said Ashish Karundia, Founder, Ashish Karundia & Co.
Tax Treaty Update
“The notification for extending 10 per cent rate for royalties (other than royalties paid for right to use industrial, commercial or scientific equipment) and FTS streamlines the India-Spain tax treaty pursuant to the MFN clause,” added Yashesh Ashar, Partner, Illume Advisory.
The MFN clause generally provides for a lower rate of taxation at source on dividends, interest, royalties, or FTS as the case may be, or restriction of the scope of royalty/FTS in the tax treaty, similar to concession given to another OECD country.
According to Ashish Sodhani, Co-founder and Partner at Parakram Legal, only the rate of tax for royalty and FTS has been lowered by importing the rate of tax (at 10 per cent) from Germany. While this will result in lowering the tax rate from what has been provided under the Income Tax Act 1961, the scope of FTS remains unchanged, he said.
Additionally, while the notification tries to summarise what has been written in para 7 of the Protocol to the India-Spain tax treaty it does not mention the date from which the changes should come into force, said Sodhani. The 2022 CBDT circular provides that the amendment should come into effect as per what has been written in the treaty but has been made applicable prospectively from AY24-25.
Karundia added that taxpayers for whom tax deducted at source in 2023-24 is over 10 per cent can claim a refund of such excess TDS by filing an income tax return.
MFN clause
The Nestle SA matter in the SC last year discussed the right to invoke the MFN clause when the third country with which India entered into a tax treaty was not an OECD member at the time of entering into such a tax treaty. And whether the MFN clause is to be given effect, automatically, or if it is to only come into effect after a notification is issued.
[The Hindu Busienss Line]
