Royalty arrangements: ABC asks govt to revisit disallowance decision

ISLAMABAD: The American Business Council of Pakistan (ABC) has strongly recommended to the government to reconsider and remove proposed 25 percent disallowance on sales promotion and advertising expenses related to royalty arrangements from the budget.

In a communication to the Pakistan Broadcasters Association, Karachi, the ABC expressed concerns regarding the recent budget proposals submitted to the Parliament on June 12, 2024.

Specifically, the ABC is concerned about the 25 per cent disallowance of sales promotion and advertisement expenses where the taxpayer has claimed royalty expenses under arrangements with associated concerns on certain intangibles.

“As representatives of multinational corporations operating in Pakistan, we appreciate the government’s efforts to enhance fiscal responsibility and tax compliances. However, the proposed disallowance presents significant challenges and would negatively impact both multinational corporations and the broader economic environment”, the ABC maintained.

Multinational corporations like the other local corporations, rely heavily on advertising and sales promotions to establish and maintain their market presence. These activities are crucial for brand recognition and competitiveness, especially in a diverse and dynamic market like Pakistan.

This measure would reduce the competitiveness of MNC’s in the market and will also result in diminishing returns, which are already affected by the currency devaluation. Such a scenario will further weaken investor interest in the country, undermining efforts to attract foreign direct investments.

The ABC understands that the rationale behind this measure is to increase much needed revenues. While this is a valid concern, it is important to recognise that legitimate advertising and promotional expenses are fundamental to business operations and should not be subject to disallowance.

This measure could inadvertently penalise compliant MNC businesses that are already significantly contributing to the national economy. This would also lead to reduced investment in marketing activities, stifling business growth and innovation. If MNCs start rationalising or reducing their media spends due to this proposal, it would have serious consequences on the media and advertising industry’s health, the ABC added.

Copyright Business Recorder, 2024