FBR says foreign-source salary received by a resident individual is exempt from tax if foreign income tax has been paid on the salary.
ISLAMABAD: The Federal Board of Revenue (FBR) has said that foreign-source salary is tax exempted during Tax Year 2027, subject to the conditions prescribed under the Income Tax Ordinance, 2001.
The FBR has issued the Income Tax Ordinance, 2001, updated up to June 30, 2026, for Tax Year 2027, covering the period from July 1, 2026 to June 30, 2027.
Under Section 102, foreign-source salary received by a resident individual is exempt from tax if the individual has paid foreign income tax in respect of that salary.
Foreign tax must be paid
Section 102 of the Income Tax Ordinance provides that any foreign-source salary received by a resident individual shall be exempt from tax where the individual has paid foreign income tax on the salary.
The law also specifies when a resident individual will be considered to have paid foreign income tax in respect of foreign-source salary.
A resident individual will be treated as having paid the foreign tax where the tax has been withheld from the salary by the employer and paid to the revenue authority of the foreign country in which the employment was exercised.
This provision covers foreign-source employment income where tax has already been collected by the relevant foreign tax authority.
Foreign tax credit available under Section 103
The FBR has also explained the rules governing foreign tax credit under Section 103.
Where a resident taxpayer derives foreign-source income that is chargeable to tax under the Income Tax Ordinance and has paid foreign income tax on that income, the taxpayer shall be allowed a tax credit.
The amount of the tax credit is limited to the lesser of:
• the foreign income tax paid; or
• the Pakistan tax payable in respect of the income.
The provision therefore limits the credit to the amount of foreign tax actually paid or the corresponding Pakistani tax liability, whichever is lower.
Pakistan tax payable on foreign-source income
For calculating the Pakistan tax payable on foreign-source income, Section 103 provides that the amount is determined by applying the average rate of Pakistan income tax applicable to the taxpayer for the relevant year to the taxpayer’s net foreign-source income.
This mechanism determines the maximum amount of Pakistani tax against which the foreign tax credit can be applied.
Separate calculation for different heads of income
Where a taxpayer has foreign income under more than one head of income during a tax year, the foreign tax credit provisions apply separately to each head of income.
For this purpose, income derived from carrying on a speculation business is treated as a separate head of income.
The tax credit allowed under Section 103 is then applied in accordance with the relevant provisions of Section 4(3) of the Income Tax Ordinance.
Unused tax credit cannot be refunded or carried forward
Section 103 also sets out restrictions on unused foreign tax credits.
Any tax credit, or part of a tax credit, allowed for a tax year that is not credited under Section 4(3) cannot be refunded, carried back to the preceding tax year or carried forward to the following tax year.
This means an unused portion of the foreign tax credit cannot be converted into a refund or transferred to another tax year.
Two-year deadline for foreign tax payment
The law also sets a time limit for claiming a foreign tax credit.
Under Section 103(7), a credit is allowed only if the foreign income tax is paid within two years after the end of the tax year in which the relevant foreign income was derived by the resident taxpayer.
The provision therefore links eligibility for the foreign tax credit to payment of the foreign tax within the prescribed two-year period.
Tax treatment for Tax Year 2027
The FBR’s updated Income Tax Ordinance provides separate rules for foreign-source salary and other foreign-source income.
For foreign-source salary, Section 102 provides an exemption for resident individuals where foreign income tax has been paid on the salary. For other foreign-source income that remains chargeable to tax in Pakistan, Section 103 provides a mechanism for claiming a foreign tax credit, subject to the conditions and limits specified in the law.
The provisions apply for Tax Year 2027, which commenced on July 1, 2026 and will end on June 30, 2027.