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MNCs scrutinising tax treaties to gauge DDT outgo

Many are trying to find out if the status of most favoured nation would lead to additional benefits.

, ET Bureau|
Last Updated: Feb 18, 2020, 03.51 PM IST
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MUMBAI: Multinational companies in India have reached out to their tax advisers seeking to know the exact tax payable on dividends under existing tax treaties and if the status of most favoured nation would lead to additional benefits.

Several persons in the know said multinationals are analysing the total tax on the dividends with respect to the tax treaties and the most favoured nation status of the source country. Many would now fall back on the tax treaties and could be looking to postpone their dividend payouts till April this year.

Under most tax treaties India has with other countries, multinationals will be liable to pay 5% to 15% tax on dividends against 20% earlier. However, multinationals from countries such as Switzerland and France will even get to set off additional 5% tax against liabilities in their home country.

“Following the recent changes in the budget around dividends, most multinationals would look to give dividends after March end as that would mean tax of anywhere between 5-15% depending on the tax treaty. For countries like France and Switzerland that have MFN status, the rate would be 5% tax. Further, in either case set-off would be available, said Girish Vanvari, founder of tax advisory firm, Transaction Square.

The government in the recent budget removed the dividend distribution tax (DDT) and made it taxable in the hands of the investors. Earlier DDT was around 20% in the hands of the company, which meant that this was a pure cost. Any investor or the holding company that gets dividend would not have been able to set it off against liability in their home country.

After the change in the budget, any investor who gets dividend can set off the tax paid on that either in India or in the home country. For the multinationals that tend to give dividends to their parent, it makes sense to wait till April, when the new tax rate kicks in and they would be able to partially set it off against tax liabilities in their country.

Under tax treaties with countries like Mauritius and Singapore, the tax rate would be 15%, while for the US and Canada the tax rate applicable on dividends would be 25%. For other countries including France, Switzerland, Sweden and Hungary, while the tax would be at 10%, due to MFN status these countries could set off additional 5%.

Many Indian companies may be looking to take exactly the opposite position on giving dividends due to the change in DDT, say tax experts.

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