FBR outlines how foreign-source losses are calculated, carried forward and adjusted against income under Section 104 of the Income Tax Ordinance.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the treatment and adjustment of foreign losses for Tax Year 2027 under Section 104 of the Income Tax Ordinance, 2001.
The FBR has issued the Income Tax Ordinance, 2001, updated up to June 30, 2026, applicable to Tax Year 2027, covering the period from July 1, 2026 to June 30, 2027.
Foreign losses under Section 104
Under Section 104, deductible expenditure incurred by a person in deriving foreign-source income chargeable to tax under a particular head of income can only be deducted against income from that foreign source.
Where the total deductible expenditure exceeds the total foreign-source income chargeable to tax under a particular head of income during a tax year, the resulting amount is treated as a foreign loss.
The provision therefore restricts the adjustment of expenses to the relevant foreign-source income and does not allow a foreign loss to be freely adjusted against income from other sources or heads of income.
Foreign losses can be carried forward
A foreign loss may be carried forward to the following tax year and set off against foreign-source income chargeable to tax under the same head of income.
The adjustment can continue in subsequent tax years, subject to the time limit prescribed under Section 104.
A foreign loss cannot be carried forward for more than six tax years immediately following the tax year in which the loss was incurred.
This means that taxpayers must utilise an eligible foreign loss within the prescribed six-year period or lose the ability to carry it forward beyond that period.
Earlier losses adjusted first
Where a taxpayer has foreign losses carried forward from more than one tax year, the loss relating to the earliest tax year must be set off first.
The provision therefore establishes a first-in, first-out approach for the utilisation of foreign losses.
For example, where losses from two or more tax years are available for adjustment, the loss that arose first must be utilised before a loss from a later tax year.
Separate treatment of foreign-source income
Section 104 further provides that Section 67 applies for determining foreign losses, subject to the conditions specified in the law.
Section 67 deals with the apportionment of deductions where expenditure relates to different heads of income.
For purposes of Section 104, income from carrying on a speculation business is treated as a separate head of income.
Similarly, foreign-source income chargeable to tax under a particular head of income, including income from a speculation business, is treated as a separate head of income.
Foreign losses restricted to corresponding income
The provisions effectively restrict the adjustment of foreign losses to the corresponding foreign-source income and head of income.
A loss arising from one foreign-source head of income cannot simply be adjusted against income falling under another head.
At the same time, qualifying foreign losses can be carried forward and set off against the relevant foreign-source income for up to six succeeding tax years, subject to the conditions of Section 104.
The rules form part of the FBR’s tax framework applicable to Tax Year 2027, covering income earned from July 1, 2026 to June 30, 2027.