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A Tax Treaty Problem
Context:
The evolving landscape of tax treaties in India, emphasise on the need for careful interpretation and review. It highlights recent challenges arising from changing economic circumstances and legislative shifts.
Shifting Grounds of Tax Treaties
- Dynamic Nature of Tax Treaties: Tax treaties subject to interpretation due to evolving legislation and economic circumstances, as recently witnessed in India.
- Changing Dynamics: Pre-1995 treaties with France, the Netherlands, and Switzerland, tied benefits to OECD membership, but dynamics changed post-1995.
- Reevaluating Tax Benefits: Accession of countries to OECD prompted reevaluation of tax benefits, leading to legal and interpretative challenges.
Interpreting Treaty Terms and Investor Response
- Unilateral Tax Rates: France, the Netherlands, and Switzerland unilaterally extended lower tax rates retrospectively, based on OECD accession dates.
- Taxpayer Response: Delhi High Court's Concentrix case ruled in favor of treaty extension without notification, leading to taxpayer applications for low tax deductions.
- Supreme Court's Clarification: CBDT's 2022 circular provided some clarity, but Supreme Court's ruling emphasized mandatory notification for Most Favored Nation (MFN) invocation.
Necessity for Treaty Reviews
- Balancing Fairness: MFN provision meant to prevent preferential treatment, but using it without notification undermines legislative process.
- Ensuring Consistency: Varying dividend treatment across treaties necessitates clarity from tax department before application.
- Importance of Regular Treaty Reviews: Need for periodic review of tax treaties to align with economic benefits and enforce anti-abuse measures in changing global circumstances.
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