The Income Tax Rules, 2002, through Rule 15, provide relief to resident taxpayers from the burden of double taxation on foreign-sourced income. This rule supports Sections 102 and 103 of the Income Tax Ordinance, 2001, which address international double taxation relief for resident individuals.
Definition of Foreign Income Tax
Under Rule 15, a foreign levy qualifies as a foreign income tax if:
1. Nature of Levy:
o The levy is recognized as a tax.
o It is substantially equivalent to the income tax imposed under the Income Tax Ordinance, 2001.
2. Compulsory Payment:
o The levy must involve a mandatory payment under the taxing authority of the foreign country.
o Penalties, fines, interest, or similar obligations are not considered taxes for these purposes.
3. Exclusions:
o A levy does not qualify as a tax if it offers the payer a direct or indirect economic benefit in exchange for payment.
Substantial Equivalence to Local Tax
A foreign tax is deemed substantially equivalent to Pakistan’s income tax if it meets the following conditions:
1. Tax on Income-Generating Events:
o The foreign tax applies to events that result in income, gains, or profits.
2. Computation Method:
o The taxable amount under the foreign tax law is calculated by deducting significant expenses or depreciation from gross receipts.
3. Characterization of Income:
o Dividend or interest income earned from foreign sources, when taxed by the Federal Board of Revenue (FBR), retains the same character as defined under the Ordinance.
Specific examples of equivalent foreign taxes include withholding taxes on dividends or gross receipts for non-residents and final tax on wages deducted via withholding.
Economic Benefits and Specific Provisions
The rule also outlines “economic benefits” and their exclusions:
• Economic Benefit: This includes property, services, payments, rights to resources or patents, or the discharge of obligations provided by the foreign country.
• Specific Economic Benefit: It excludes benefits that are not equally available to all individuals subject to the foreign country’s income tax or the general population in cases where no broad income tax exists.
This comprehensive framework ensures that resident taxpayers can avoid paying tax twice on the same income, promoting compliance and fairness in cross-border taxation.