Dutch FPIs face tax concerns following apex court ruling

livemint.com:

NEW DELHI : Foreign portfolio investors (FPIs) based in the Netherlands face tax concerns following a Supreme Court verdict last week pertaining to the interpretation of Double Taxation Avoidance Agreements (DTAAs). In its verdict, the Supreme Court clarified that the most favoured nation (MFN) clause in a tax treaty is not automatically triggered and has to be notified separately by the central government. It is common for FPIs based in the Netherlands to believe that their dividends will be subject to a 5% withholding tax in India.

However, the recent ruling by the apex court has clarified that they will be subject to a 10% withholding tax instead. This means that all Netherlands-based entities receiving dividends must pay an additional withholding tax. The verdict on the issue of withholding tax has put FPIs in a quandary, as they have in the past taken advantage of the 5% withholding tax rate, according to tax experts.

This decision has become more significant now, as many FPIs are currently undergoing an audit by the tax department for their 2021-22 filings. Every year, the revenue department selects a sample of FPIs for auditing purposes. Also, the verdict has exposed FPIs to potential reassessment by the tax department.

Reassessment is an exercise where the tax department can re-examine the tax filings of an entity from the past if they believe some income has not been properly assessed. “FPIs who had previously asserted their entitlement to the 5% rate on dividends should closely re-evaluate their position considering this Supreme Court ruling. It’s conceivable that these cases may now be subject to reopening, resulting in the collection of tax differentials, along with interest and penalties," said Suresh Swamy,