Karachi, December 2, 2023 – The Federal Board of Revenue (FBR) has explained tax treatment of foreign-source income of residents during tax year 2024.
The FBR has updated the Income Tax Rules, 2002, for the tax year 2024, providing clarity on the procedures and conditions surrounding the taxation of income earned abroad by residents.
Foreign Income Tax Rules:
The newly introduced rules are designed to complement Sections 102 and 103 of the Income Tax Ordinance, 2001, which aim to provide relief from international double taxation for resident individuals.
1. Definition of Foreign Income Tax:
• A foreign levy is considered a foreign income tax if it meets certain criteria.
• The levy must be a tax, substantially equivalent to the income tax imposed by the Ordinance.
• It should require a compulsory payment under the authority of the foreign country to levy taxes.
2. Exclusions from Tax Definition:
• Penalties, fines, interest, or similar obligations are explicitly excluded from the definition of tax for the purpose of these rules.
• A foreign levy is not considered a tax if the person subject to the levy receives a specific economic benefit from the foreign country in exchange for the payment.
3. Equivalence to Pakistan’s Income Tax:
• A foreign tax is considered substantially equivalent to the income tax imposed under the Ordinance if certain conditions are met.
• It must be imposed in respect of events resulting in the derivation of income, gains, or profits under the Ordinance.
• The taxable amount should be computed, considering significant expenses and the depreciation or amortization of capital costs.
• Dividend or interest income from foreign sources may be treated similarly to the Ordinance.
4. Specific Foreign Taxes Deemed Equivalent:
• Withholding tax on dividends and gross receipts payable to non-resident persons.
• Tax on wages by withholding imposed as a final tax on salary.
5. Definition of Economic Benefit:
• Economic benefit includes property, services, fees, payments, rights to use natural resources, patents, or other foreign-controlled properties.
• Specific economic benefit refers to an economic benefit not available on substantially the same terms to all persons subject to the income tax or the general population of the foreign country.
Foreign Tax Credit Rules:
1. Application Process:
• The rules specify the procedure for claiming a foreign tax credit.
• A resident taxpayer must submit an application for the credit with their annual return of income.
2. Required Documentation:
• Depending on whether tax has been deducted at the source or not, the application must be accompanied by relevant documents.
• This includes a declaration by the payer if tax has been deducted at source and a certified copy of the receipt from the foreign tax authority.
3. Alternative Evidence Acceptance:
• In cases where obtaining evidence of tax deduction is challenging, the Commissioner may accept secondary evidence determined by him.
The introduction of these comprehensive rules marks a significant step forward in aligning Pakistan’s taxation framework with global standards, providing a transparent and structured approach to taxing foreign-source income of residents. The move is expected to enhance compliance, reduce ambiguity, and contribute to the overall effectiveness of Pakistan’s taxation system.