Multinationals Seek Review Using Vienna Convention

GS Paper II International Relations

Context: European multinational companies facing substantial tax demands in India are urging the Supreme Court to reconsider a landmark verdict.

The ruling, based on the Vienna Convention, interprets the Most-Favoured Nation (MFN) clause in tax treaties.

Background:

The October Supreme Court decision favored the tax department, doubling withholding tax for companies.

LAW OF TREATIES

Introduction: Importance of the law of treaties

All kinds of inter-state transactions are conducted through treaties.
Various international organizations are established by means of treaties.
Disputes between States are brought before international courts by means of treaties.
The treaty is the most important source of international law.
Therefore, the special importance of treaties in international law does not need emphasis.

The Vienna Convention on the Law of Treaties, 1969

Adopted on 23 May 1969 and entered into force on 27 January 1980.
It is a combination of codification and progressive development of international law.

For Example:
- Dividends earned by Dutch companies in India face a 10% withholding tax under the Double Tax Avoidance Agreement (DTAA).
- The MFN clause allows a lower tax rate if India has a better deal with another country.
- Dutch companies calculated tax at India’s lower rate of 5% with certain countries.
- The tax department rejected this calculation, citing a lack of government notification.
- The Supreme Court held that MFN tax provisions don’t automatically apply and that the Indian government must notify the lower tax rate.

The review petitions call for adherence to the Vienna Convention on the Law of Treaties.
This framework obligates parties to comply in good faith. The argument hinges on whether notification is necessary for the MFN clause to be operational.

The 164 members of the World Trade Organization commit to treating each other equally to benefit from the lowest tariffs, highest import quotas, and minimal trade barriers for goods and services.
This commitment to non-discrimination is termed Most Favoured Nation (MFN) treatment.
Exceptions:
- When members strike bilateral trade agreements or when members offer developing countries special access to their markets.
Non-WTO Countries:
- WTO members can impose whatever trade measures they wish without flouting global trading rules. Ex, Iran, North Korea, Syria, or Russian
Removal of MFN status:
- There is no formal procedure for suspending MFN treatment.
- India suspended Pakistan’s MFN status in 2019. Pakistan never applied MFN status to India.