Foreign Tax credit (Section 103)

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This blog is in continuation to the series "Curtailing the Tax Liability (Part II) - Tax Credits".


Disclaimer: This blog will be updated over the period of time with practical examples, sample letters and relevant case laws and due to the volatility of tax statutes it is subject to unprecedented changes as and when required.


Foreign Tax Credit (Section 103)


A resident taxpayer deriving foreign source taxable income shall be eligible for tax credit provided foreign tax in respect of such income has already been paid. 



The tax credit shall be lesser of the following: 

(a) the foreign income tax paid; or 

(b) the Pakistan tax payable in respect of the income. 


Mechanism 


The Pakistan tax payable in respect of foreign source income derived by a taxpayer in a tax year shall be computed by applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the taxpayer’s net foreign-source income for the year. 


Where, in a tax year, a taxpayer has foreign income under more than one head of income [including speculation business], this section shall apply separately to each head of income. 


Foreign tax credit cannot be carried back, carried forwarded or refunded incase unclaimed; 


Foreign tax credit shall only be eligible if foreign tax has been paid within 2 years after the end of the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer. 



Definitions


“average rate of Pakistan income tax” in relation to a taxpayer for a tax year, means the percentage that the Pakistani income tax (before allowance of the tax credit under this section) is of the taxable income of the taxpayer for the year; 

“foreign income tax” includes a foreign withholding tax; and 

“net foreign-source income” in relation to a taxpayer for a tax year, means the total foreign-source income of the taxpayer charged to tax in the year, as reduced by any deductions allowed to the taxpayer under this Ordinance for the year that – 

(a) relate exclusively to the derivation of the foreign-source income; and 

(b) are reasonably related to the derivation of foreign-source income in accordance with sub-section (1) of section 67 and any rules made for the purposes of that section.


Comments

  1. Faraz Ahmed Qureshi12 October 2018 at 11:57

    Wow!
    "Cannot be carried back, carried forwarded or refunded incase unclaimed".
    Everyone needs to declare it today!

    ReplyDelete
  2. Anonymous26 January 2019 at 03:52

    How much ratio of tax applicable on foreign income remittance? received under exports.

    ReplyDelete

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