The Federal Board of Revenue (FBR) has clarified the tax treatment of foreign-source salary for Tax Year 2027 under Pakistan’s Income Tax Ordinance, 2001.
Under Section 102, foreign-source salary received by a resident individual is exempt from Pakistani income tax if foreign income tax has been paid on that salary. Tax Year 2027 runs from July 1, 2026 to June 30, 2027.
Foreign-Source Salary Exemption
Section 102 provides that foreign-source salary received by a resident individual is exempt from tax where the individual has paid foreign income tax on that salary.
Foreign tax is considered to have been paid where the employer has withheld the tax from the salary and paid it to the tax authority of the foreign country where the employment was exercised.
This provision is particularly relevant for Pakistani residents working for overseas employers or earning employment income from services performed outside Pakistan.
Foreign Tax Credit for Other Income
The exemption under Section 102 specifically concerns foreign-source salary. Other foreign-source income that remains taxable in Pakistan may qualify for a foreign tax credit under Section 103.
The credit is generally limited to the lower of:
- Foreign income tax actually paid; or
- Pakistan tax payable on the relevant foreign-source income.
This mechanism helps address potential double taxation where the same foreign-source income is subject to tax in another country and Pakistan.
Important Two-Year Requirement
Section 103 also provides a specific time limit for foreign tax credits.
Foreign income tax must be paid within two years after the end of the tax year in which the relevant foreign income was derived for the credit to be available.
Taxpayers should therefore maintain proper evidence of foreign tax payments and ensure that supporting documentation is available when preparing their Pakistani tax returns.
What Taxpayers Should Keep in Mind
Pakistani residents receiving income from overseas should carefully distinguish between foreign-source salary and other forms of foreign-source income.
Important records may include:
- Employment contracts
- Foreign salary statements
- Foreign tax withholding certificates
- Proof of foreign tax payment
- Bank statements
- Foreign income documentation
- Relevant tax returns and supporting records
Proper documentation can help establish the source of income and support the applicable tax treatment.
Xact Legal – Tax Compliance Support
Cross-border income can involve complex questions relating to tax residency, foreign-source income, foreign tax credits and reporting requirements.
Xact Legal provides professional tax and legal services in Pakistan, helping individuals and businesses understand their tax obligations and maintain compliance with applicable tax laws.
Need assistance with foreign income or Tax Year 2027 tax compliance? Contact Xact Legal for professional guidance.