Under the context of tax treaties, an MFN clause is incorporated where one of the contracting countries decide to grant MFN status to the other contracting country in relation to specified income streams. The residents of the MFN country are given the same beneficial treatment that India has extended to a resident of a third country (OECD countries). The beneficial treatment is accorded in form of lower rate of tax or restricted scope. The MFN clause is intended to provide a level playing field to all the OECD members.
The MFN clause in a tax treaty entitles the eligible tax residents to adopt the beneficial treatment (by way of lower rate or restricted scope) accorded to a third country (OECD members).
Generally such MFN clause are provided as a protocol in the negotiated tax treaties. As per MFN clause in India-Netherlands tax treaty, if India enters into a tax treaty or Protocol with any other OECD member country after the date India-Netherlands signed the tax treaty, which restricts scope or provides for lesser rate of tax inter alia in relation to FTS, such restricted scope or lesser rate of tax would also apply to the India-Netherlands tax treaty.
As far as India is concern, surrounding the application of MFN there have been a few issues which requires/required certain jurisdictional interpretation/clarification. Some of them are:
1. Whether a specific notification would be required to give effect to a protocol containing MFN clause or being a protocol it is an integral part of the tax treaty and no separate notification is required?
2. When the third country (with which India has signed a favorable agreement) should be a member of OECD-
on the date of their signing of tax agreement with India? Any time before applying MFN clause?
click Update on MFN Application to read the observations of Delhi Court and our comments on the same