Karachi, July 15, 2024 – In a significant move, the Federal Board of Revenue (FBR) has rolled out new tax changes affecting royalty payments, as introduced through the Finance Act, 2024.
The implementation of these changes commenced on July 1, 2024, marking a new phase in the tax treatment of royalties.
According to official sources at the FBR, the Finance Act, 2024, has introduced a new sub-section (6) in Section 108 of the Income Tax Ordinance, 2001. This provision stipulates that for the tax year 2024 and onwards, any amount claimed as a 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, will face a disallowance. Specifically, 25% of the total expenditure for the tax year related to sales promotion, advertisement, and publicity will be disallowed and allocated to the said associate.
FBR officials elaborated that this section would apply in cases where a taxpayer, upon receiving a notice issued by the Commissioner Inland Revenue, fails to provide an adequate explanation or evidence demonstrating that no benefit has been conferred on the associate by virtue of the expenditure in question.
According to the FBR officials, royalty, as defined in the Income Tax Ordinance, 2001, encompasses a wide range of intellectual property uses. It includes the use of or right to use 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 similar property or right, or contractual right.
This change is poised to impact a variety of sectors where royalties are a common transaction. Businesses will need to carefully review their financial strategies and ensure compliance with the new rules to avoid potential disallowances. The FBR’s emphasis on transparency and proper documentation underscores the government’s commitment to curbing tax evasion and ensuring that the tax system is fair and effective.
In light of these new regulations, companies engaged in transactions involving royalties with associates must be vigilant. Proper documentation and clear justifications for expenses related to sales promotion, advertisement, and publicity will be critical to avoid penalties and disallowances.
The FBR’s implementation of these changes reflects a broader strategy to enhance tax compliance and revenue collection. As businesses adapt to these new rules, the onus will be on them to maintain meticulous records and be prepared for increased scrutiny from tax authorities.
The new tax changes to royalty payments are a part of the government’s ongoing efforts to streamline tax laws and close loopholes. Companies are advised to consult with tax professionals to navigate these changes effectively and ensure full compliance with the updated regulations.