Section 102, outlines the tax exemption on foreign-source income for resident individuals, underlining the importance of foreign income tax payments in the exemption process.
In a move aimed at providing clarity and relief to resident individuals, the Federal Board of Revenue (FBR) has incorporated amendments to the Income Tax Ordinance, 2001 through the Finance Act, 2021.
The text of Section 102 of the Income Tax Ordinance, 2001 reads as follows:
“102. Foreign source salary of resident individuals.— (1) Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary.
(2) A resident individual shall be treated as having paid foreign income tax in respect of foreign-source salary if tax has been withheld from the salary by the individual’s employer and paid to the revenue authority of the foreign country in which the employment was exercised.”
This section introduces a significant provision by granting tax exemption to resident individuals on foreign-source income, specifically salaries. The exemption is contingent upon the condition that the individual has paid foreign income tax concerning the salary received from a foreign source.
Under subsection (1) of Section 102, any foreign-source salary received by a resident individual becomes exempt from tax if the individual can demonstrate that they have fulfilled their foreign income tax obligations related to that specific salary. This provision acknowledges the global nature of employment and seeks to avoid double taxation on the same income.
Subsection (2) provides further clarity on how a resident individual is considered to have fulfilled their foreign income tax obligations. If the tax has been withheld from the salary by the individual’s employer and subsequently paid to the revenue authority of the foreign country in which the employment was exercised, the resident individual is treated as having fulfilled the foreign income tax payment requirement.
This provision aims to streamline the taxation process for individuals engaged in foreign employment, eliminating the need for them to bear the burden of tax on the same income in both their home country and the foreign country where they are employed. The mechanism of recognizing tax withholding by the employer and its payment to the foreign revenue authority ensures that the foreign income tax is accounted for and contributes to the tax relief granted under Section 102.
Tax experts suggest that such provisions are essential in promoting fairness and avoiding double taxation conflicts. They not only provide relief to individuals earning foreign-source income but also encourage participation in the global workforce.
As the global economy continues to evolve, and cross-border employment becomes more prevalent, tax regulations that consider the complexities of international income are crucial. Section 102 of the Income Tax Ordinance, 2001 represents a step towards aligning tax laws with the modern realities of a globalized workforce, ultimately contributing to a more equitable and efficient taxation system in Pakistan.
Section 102’s provisions on the tax exemption for foreign-source income demonstrate the FBR’s commitment to adapting tax regulations to the changing dynamics of the global economy. By acknowledging the challenges faced by resident individuals earning foreign salaries and providing a clear framework for exemption, this section contributes to a more nuanced and globally responsive tax regime.
