The American Business Council (ABC) has expressed concerns over the proposal in Budget 2024-25 to disallow sales promotion and advertisement expenses under the royalty arrangement.

The proposal under the Finance Bill 2024, presented by Finance Minister Muhammad Aurangzeb on June 12 2024, is to disallow 25 percent of sales promotion, advertisement and publicity expenses if a deduction has been claimed on account of royalty paid or payable to an associate.

According to tax experts, under the existing provisions, the royalty payable to an associate is allowed as a deduction as long as the same is in accordance with the arm’s length principles.

In its letter to Pakistan Broadcasters Association (PBA), a copy of which is available with Business Recorder, the ABC appreciated the government’s efforts to enhance fiscal responsibility and tax compliances but urged it to revisit the decision to disallow 25 percent of sales promotion, saying it would “present significant challenges and would negatively impact both multinational corporations and broader economic environment.”

The letter explained that multinationals are heavily dependent on advertising and sales promotion to establish and maintain a market presence.

However, it said, the government’s decision would reduce the competitiveness of MNCs in the market, besides resulting in diminishing returns, which are already affected by currency devaluation.

“Such scenarios will further weaken investors’ interest in the country, undermining efforts to attract foreign direct investments.”

The American Business Council requested the PBA to remove the proposed 25 % disallowance on sales promotion and advertising expenses related to royalty arrangements from the budget, highlighting that failing to do so could inadvertently penalize compliant MNC businesses and reduce investment in marketing activities.