Taxation of Foreign-Source Income of Residents

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Taxation Management FIN 623

MODULE 5

LESSON 5.18

RESIDENTIAL STATUS & TAXATION

Taxation of Foreign-Source Income of Residents:

Foreign Source Salary of Resident Individuals Sec. 102

(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.

Foreign losses Sec.104: Deductible expenditures incurred by a person in deriving foreign-

source income chargeable to tax under a head of income shall be deductible only against that

income.

Taxation of Non-Residents

Taxation of a permanent establishment in Pakistan of a non-resident person Sec. 105:

(1) The following principles shall apply in determining the income of a permanent establishment in

Pakistan of a non-resident person chargeable to tax under the head "Income from Business",

namely:

· The profit of the permanent establishment shall be computed on the basis that it is a distinct and

separate person engaged in the same or similar activities under the same or similar conditions and

dealing wholly independently with the non-resident person of which it is a permanent

establishment;

Taxation of Non-Residents-Deductions

Subject to this Ordinance, there shall be allowed as deductions any expenses incurred for the

purposes of the business activities of the permanent establishment including executive and

administrative expenses so incurred, whether in Pakistan or elsewhere;

No deduction shall be allowed for amounts paid or payable by the permanent establishment to

its head office or to another permanent establishment of the non-resident person (other than

towards reimbursement of actual expenses incurred by the

non-resident person to third

parties) by way of:

Royalties, fees or other similar payments for the use of any tangible or intangible asset by the

permanent establishment

· Compensation for any services including management services performed for the

permanent establishment; or

· Profit on debt on moneys lent to the permanent establishment, except in connection

with a banking business; and

Taxation of Non-Residents Deductions

· Compensation for any services including management services performed by the permanent

establishment; or

· Profit on debt on moneys lent by the permanent establishment, except in connection with a

banking business.

No account shall be taken in the determination of the income of a permanent establishment of

amounts charged by the permanent establishment to the head office or to another permanent

establishment of the non-resident person (other than towards reimbursement of actual expenses

incurred by the permanent establishment to third parties) by way of:

Royalties, fee or other similar payments for the use of any tangible or intangible asset;

(2) No deduction shall be allowed in computing the income of a permanent establishment in Pakistan

of a non-resident person chargeable to tax under the head "income from Business" for a tax year

for head office expenditure in excess of the amount as bears to the turnover of the permanent

establishment in Pakistan the same proportion as the non-resident's total head office expenditure

bears to its worldwide turnover.

Taxation Management FIN 623

(3) In this section: head office expenditure: means any executive or general administration expenditure

incurred by the non-resident person outside Pakistan for the purposes of the business of the

Pakistan permanent establishment of the person, including

(4) No deduction shall be allowed in computing the income of a permanent establishment in Pakistan

of a non-resident person chargeable under the head "Income from Business" for-

· Any profit paid or payable by the non-resident person on debt to finance the operations of the

permanent establishment; or

· Any insurance premium paid or payable by the non-resident person in respect of such debt.

· Any rent, local rates and taxes excluding any foreign income tax, current repairs, or insurance

against risks of damage or destruction outside Pakistan;

· Any salary paid to an employee employed by the head office outside Pakistan;

· Any traveling expenditures of such employee; and

· Any other expenditure which may be prescribed.

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