The Federal Board of Revenue (FBR) has outlined the treatment of foreign-source losses for Tax Year 2027 under Section 104 of the Income Tax Ordinance, 2001. The rules determine how foreign losses are calculated, carried forward, and adjusted against future foreign-source income.
What Is a Foreign Loss?
Under Section 104, deductible expenses incurred in earning taxable foreign-source income can only be deducted against income from the corresponding foreign source and head of income.
When eligible deductible expenses exceed the related foreign-source income, the difference is treated as a foreign loss. Such losses cannot generally be adjusted against unrelated income or another head of income.
Foreign Loss Carry Forward
A qualifying foreign loss can be carried forward to subsequent tax years and adjusted against foreign-source income under the same head of income.
However, a foreign loss cannot be carried forward for more than six tax years immediately following the year in which the loss was incurred.
Earlier Losses Are Adjusted First
If foreign losses are carried forward from multiple tax years, the loss from the earliest year must be set off first.
This helps determine the order in which accumulated foreign losses should be utilised within the permitted period.
Separate Treatment of Foreign Income
Section 104 also provides separate treatment for foreign-source income under different heads of income. Income from a speculation business is treated as a separate head for these purposes.
Therefore, taxpayers should maintain proper records of foreign income, related expenses, and accumulated losses separately by applicable income head.
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Foreign income and losses can involve complex tax calculations and documentation requirements. Xact Legal provides professional tax advisory and compliance support to help businesses and individuals properly manage foreign-source income, deductions, losses, and tax reporting in Pakistan.