Most Favoured Nation Has The Favour Gone?

Tax treaties have aided in the flow of capital across jurisdictions. Hence, the natural question – What is a treaty? A treaty represents an agreement between two independent countries.

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Whilst finalizing a tax treaty, the countries evaluate the benefits that a treaty would proffer in comparison with the tax foregone.

Moving on, the clause governing Most Favoured Nation (“MFN”) is unique in various ways in the context of interpretation of tax treaties. The said clause ensures that a resident of the contracting state receives the same treatment that the other contracting state grants to a resident of the third state. Consequently, if a contracting state provides certain benefits to a resident of a third state, the other contracting state must receive the same treatment subject to the satisfaction of extant conditions. As a fortiori, the MFN Clause

would essentially provide that if after the signature of a tax treaty/ Double Tax Avoidance Agreement (“DTAA”) with a particular state (say, India signs a treaty with Country A), the said state (ie, India) enters into a tax treaty with another contracting state (say, Country B) which is a member of the Organization for Economic and Development (“OECD”) which provides a beneficial treatment to the said third state (ie, Country B), the beneficial treatment accorded by India to the third state (ie, Country B) could be availed by a resident of Country A.

This clause thereby ensures that tax payers are not disadvantaged owing to their residential status in a particular state.

1 What’s the controversy about? 

The key dispute that has culminated in the landmark decision in the case of Assessing Officer (In