Several multinationals doing business in India are on the hook for significant back taxes, interest, and potential penalty payments after the Supreme Court overturned a lower court’s interpretation of tax treaty implementation.
(Bloomberg Law) — Several multinationals doing business in India are on the hook for significant back taxes, interest, and potential penalty payments after the Supreme Court overturned a lower court’s interpretation of tax treaty implementation.
The decade-old case impacts taxation at source of dividends, fees for technical services and the like, remitted by Indian subsidiaries of multinationals. Four companies—Nestle SA, Steria (India) Ltd., Concentrix Services Netherlands B.V. and Optum Global Solutions International BV—won favorable rulings on the issue in the Delhi High Court, which were challenged by the tax department, and now overturned by the Supreme Court.
The apex court order issued Thursday said lower tax rates in new treaties don’t “automatically” apply to treaties with these countries that contain clauses on parity—also known as the “most favored nation” clause—unless separately notified by the Indian government.
The companies were covered by tax treaties between India and Netherlands, France, and Switzerland—all three OECD members with a similar most favored nation clause in the treaties.
The judgment will directly impact the companies involved and cast a shadow on arrangements involving other companies and other treaties. Lower taxes paid or withheld based on the earlier interpretations may now need to be topped up. There will also be an impact on the viability of certain existing business arrangements.
Multinational companies will face practical issues in recovering tax amounts from recipients, said Dinesh Kanabar, chief executive of Dhruva Advisors LLP, a Mumbai-based tax and regulatory consultancy.
The resulting tax demands will revive concerns about ease of doing business in India at a time when the South Asian country is seeking to lure investments away from China.
“This will raise once again the issue of the lack of certainty for MNCs operating in India,” said Rohan Shah, tax advocate.
Foreign companies followed the law as declared by high courts. As a final decision has taken several years in litigation, the government should offer a “standstill” on taxes for past periods and implement the Supreme Court order prospectively, Shah said. “Absent this, the situation will be chaotic.”
There’s a bigger concern. The judgment indicates the government has the power to notify only some aspects of a treaty.
“Not notifying beneficial clauses or partly notifying or notifying after a length of time effectively amounts to a unilateral treaty override,” Kanabar said.
Nestle, Steria, Concentrix and Optum weren’t immediately available to respond to a Bloomberg email seeking comment on the impact of the judgment after working hours.
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