Taxability of Foreign Remittances under the Income Tax Ordinance, 2001

DISCLAIMER - The following discussion is subject to changes due to volatilty of the Tax statutes over the period of time.

Recently, we witnessed certain high profile probes initiated against money laundering including the references filed as a result of Panama leaks. All these sudden developments have increased the risks involved in foreign remittances and therefore proper understanding of the prevailing laws is a must nowadays especially for genuine cases such as individuals remitting money from abroad which includes their life time savings.

Foreign remittances are perhaps one of the major contributors in the growth of the economy made by residents, non residents, expatriates e.t.c.

Besides Anti Money Laundering Act, 2010 certain technicalities regarding the taxability are raised once the remittance is made, and if, remained unexplained and not followed by the proper procedures laid down in the Income Tax Ordinance, 2001 the same might become subject to heavy taxes.

In this blog we will go through certain guidelines in order to understand various treatments of foreign remittances under the light of the Income Tax Ordinance, 2001 in order to minimize the impact of taxability on the same.

FOREIGN INCOME VS FOREIGN RECIEPT 

It should be noted that there is a difference between foreign source income and foreign receipt.

The foreign source income becomes part of return of income, where as the foreign receipts is reflected in the reconciliation of wealth statement.

RESIDENTS VS NON RESIDENTS

Before we proceed any further it is very important to understand the concept of resident and nonresident individuals as per the definitions provided under the Income Tax Ordinance, 2001.

A resident individual is one who stays in Pakistan for 183 days or more or is an employee of Federal government or Provincial government.

Whereas, a non resident individual is one who stayed in Pakistan for less than 183 days.


REMITTANCES BY RESIDENTS

1) Foreign source salary income of a resident individual is exempt from tax if the applicable tax has been deducted at source on such foreign income under section 102 of the Income Tax Ordinance 2001.

2) Foreign source income of a resident other than salary is liable to Tax (Except for those covered under double tax treaties specified in section 107 of the Income Tax Ordinance, 2001).

However, In such case a tax credit of such foriegn tax deducted at source shall be given to the resident individual as explained under section 103 of the Income Tax Ordinance 2001.

REMITTANCES BY NON-RESIDENTS

Only Pakistan source income of non resident is taxable. The foriegn source income of non resident is not taxable and he is not required to submit wealth statement under section 116 of the Income Tax Ordinance, 2001. 

However, the remittance should be made through banking channel as discussed below in detail.

It is recommended to maintain a proper foreign currency account rather than remitting foreign currency in local currency.

SHORT TERM RESIDENTS (SECTION 50)

The foreign-source income of an individual —

(a) who is a resident individual solely by reason of the individual‘s employment; and

(b) who is present in Pakistan for a period or periods not exceeding three years,shall be exempt from tax under this Ordinance.

Exceptions —

(a) any income derived from a business of the person established in Pakistan; or

(b) any foreign-source income brought into or received in Pakistan by the person.

RETURNING EXPATRIATES (SECTION 51)

Any foreign-source income derived by a citizen of Pakistan in a tax year who was not a resident individual in any of the four tax years preceding the tax year in which the individual became a resident shall be exempt from tax under this Ordinance in the tax year in which the individual became a resident individual and in the following tax year.

Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year, any income chargeable under the head ―Salary earned by him outside Pakistan during that year shall be exempt from tax under this Ordinance.

INMMUNITY UNDER SECTION 111 OF THE INCOME TAX ORDINANCE, 2001

If the remittances are through unexplained sources that is are either not supported with proper evidence or the evidence provided does not recnocile the amount remitted it falls under the category of unexplained income and concealment of assets under section 111 of the Income Tax Ordinance, 2001.

In order to avail the immunity or exemption from tax on such unexplained remittances all the foreign source remittances (Not exceeding Rs. 10 Million Sec 111(4)(a)) shall be made through banking channel at inter-banking conversion rates or in foreign currency and the Encashment Certificates thereon shall be provided as the proof of the transaction in order to show that the benefit of conversion of foreign exchange has been transferred to the government.

In case of foreign remittances is made through other than a banking channel the same becomes taxable under the Income Tax Ordinance, 2001 and the immunity provided under section 111 of the Income Tax Ordinance 2001 cannot be availed.

There are following ways to transfer foreign remittances through banking channel:

- in first case the individual maintains a foreign currency account and all the remittances are transferred in US dollar or some other currency; and

- the second way to transfer the same through a banking channel is that the foreign remittance is transferred in local currency and is converted by the local bank according to the inter bank conversion rate,

- Another treatment these days we often come to see is that the foreign currency is remitted through ATM which is converted to local currency in exact amount as required that is to say that the foreign currency is converted into local currency by the foreign bank and the advantage of the exchange is not transferred to the government. In such case the remittance will remain outside the ambit of the immunity provided under section 111 of the Income Tax Ordinance, 2001 and will be subject to probe under the law.

UPDATE: Bank accounts with Rs10mln monthly deposit on FBR radar

UPDATE SBP turns down FBR request for data of account-holders

Amount should be below Rs. 10 million

Note: resident or a non resident individual having business of shipping and air transport the income of such businesses including foreign source income are subject to taxation under section 7 of the Income Tax Ordinance 2001 and are not exempted. 

Also, Taxes on Non Residents Income from "Royalty" or "Fees for Technical Services" under section 6 of the Income Tax Ordinance, 2001

Hopefully, the above article will be helpful for the readers and enable them to properly avail the benefits regarding the remittances as explained above.

Misc. References for remittances

1) Gain on disposal of assets outside Pakistan (Sec 101A)

2) Profit on Debt by Non Resident (Sec 46)

3) Pakistan Sourcec (POD) C7, Chapter VII, Part I

4) Pakistan Source (Royalty) C8, Chapter VII, Part I

5) Pakistan Source (Fee for Technical Services) C12, Chapter VII, Part I

6) Fee for offshore Digital Services (C12A, Chapter VII, Part I)

7) Advance Tax on purchase of Immoveable Property by non residents (236K)

8) Taxation of Non Residents (Chapter VII Part III)

9) Agreements of Avoidance of Double Taxation (Chapter VII Part IV)

10) C-5, Part I, II Schedule (Allowance to citizen by government)

11) C-90(ii), Part I, II Schedule (Profit on Debt of Industrial Undertaking)

12) C-131, Part I, II Schedule (Double Treaty Summary)

13) C-133,Part I, II Schedule (IT Services)

14) C-3, Part II, 2nd Schedule (Services, Contracts)
15)Automatic Exchange of Information (AEOI)

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Author:

Zeeshan Qureshi
Income Tax Practitioner
Specialist in Tax Returns for Pakistani individuals living abroad.

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