Pakistan Consumer Goods Tax Changes
On June 30, 2024, the Government of Pakistan passed the Finance Act effective July 1, 2024 for fiscal year 2024–25 that includes a new tax provision disallowing the deduction of 25% of royalty, sales promotion, advertising, and publicity expenses from companies’ tax base. This provision specifically impacts multinational companies (MNCs) operating in Pakistan, including U.S. companies, because of the use of their marketing, branding and other intellectual property by their local subsidiary or associated company based in Pakistan.
The relevant provision from Section 108, Subsection 6 of The Income Tax Ordinance of 2001 states that: “Notwithstanding the provisions of sub-section (1), for the tax year 2024 and onwards, where any amount is claimed as deduction for the tax year or for any of the two preceding tax years on account of royalty paid or payable to an associate directly or indirectly in respect of use of any brand name, logo, patent, invention, design or model, secret formula or process, copyright, trademark, scientific or technical knowledge, franchise, license, intellectual property or other like property or right or contractual right and on a notice issued by the Commissioner, the taxpayer fails to furnish any explanation or evidence that no benefit has been conferred on the associate, twenty five percent of the total expenditure for the tax year in respect of sales promotion, advertisement and publicity shall be disallowed and allocated to the said associate.”
U.S. industry operating in Pakistan has raised concerns about this recent amendment to tax law. Specifically, the provision retroactively imposes the tax deduction disallowance back two years and grants discretionary powers to the tax authorities of Pakistan’s Federal Board of Revenue. The subsidiaries and associated companies of MNCs rely significantly on advertising and sales promotions as key strategies to establish and uphold their visibility and influence within the Pakistani market, as well as the branding, copyrights and intellectual property of the parent company. U.S. companies argue that the new tax provision would place them at a significant cost disadvantage compared to domestic competitors. As a result, trade associations representing U.S. industry operating in Pakistan such as the American Business Council, Pakistan Business Council, and Overseas Investors Chamber of Commerce and Industry, have raised concerns against the implementation of this discretionary tax regime with the highest levels of the Federal Government of Pakistan. In addition, the U.S. International Trade Administration has communicated their similar concerns with the new tax provision in bilateral meetings with officials of the Government of Pakistan.
Contact the Commercial Service in Pakistan for help in navigating this or similar challenges in Pakistan to take advantage of the business and trade opportunities the country has to offer at AyanAli.Khan@trade.gov.