Tax on Foreign Income in Pakistan: A Legal Guide

Taxing foreign income in Pakistan is an important topic for residents and non-residents.

With the growing number of Pakistanis working abroad or receiving remittances from foreign sources, it is crucial to understand how foreign income is taxed in Pakistan.

This guide explains everything you need to know about tax rates, exemptions, calculation methods, and the filing process.

1. Introduction to Taxation of Foreign Income in Pakistan

Foreign income refers to income earned outside Pakistan, which can include salaries, business profits, rents, and remittances.

Pakistan’s tax laws require that residents pay taxes on their worldwide income, including foreign earnings.

The government has set clear guidelines to ensure that foreign income is taxed correctly, while also offering certain exemptions and reliefs to reduce the financial burden on taxpayers.

Understanding the tax implications of foreign income is essential, especially for those who earn from overseas sources, whether they are expatriates or individuals receiving foreign remittances.

2. Understanding Foreign Income for Pakistani Tax Residents

To determine how foreign income is taxed, it is essential to understand what qualifies as “foreign income.” This can include various types of income earned outside Pakistan, such as:

• Salaries: Income from employment abroad.
• Business Profits: Earnings from a business operating in foreign countries.
• Rental Income: Income generated from property located outside Pakistan.
• Investments and Dividends: Profits or dividends from overseas investments.

Pakistani residents are obligated to declare foreign income when filing their taxes, regardless of where the income is earned.

3. Tax Residency Status in Pakistan

In Pakistan, the taxation of foreign income depends heavily on your tax residency status.

A Pakistan resident must pay tax on all income, whether earned within or outside the country. Non-residents, on the other hand, are only required to pay tax on income sourced from Pakistan.

How to determine if you are a tax resident:

• Stayed in Pakistan for 183 days or more during the tax year.
• A permanent home in Pakistan.
• Center of vital interests (e.g., family, business) in Pakistan.

If you meet any of the above criteria, you are considered a tax resident, and your foreign income will be subject to taxation in Pakistan.

4. Tax Rates on Foreign Income in Pakistan

The tax rates on foreign income in Pakistan are progressive, which means the rate increases as your income rises. The tax authorities impose specific tax slabs depending on the income range.

For example, for salaried individuals, the tax rate may range from 2.5% to 35%, depending on the annual income. However, foreign income is subject to taxation at the same rates as local income.

5. Exemptions and Reliefs on Foreign Income

While foreign income is generally taxable, there are several exemptions and reliefs available to reduce the burden:

• Foreign Tax Credit: If you pay tax on foreign income in another country, you may be eligible for a foreign tax credit to avoid double taxation.
• Exempted Income: Certain types of foreign income may be exempt from tax, such as pensions from foreign governments and income from foreign trusts.
• Remittances: Foreign remittances received by Pakistani citizens are generally not taxed if they are sent by family members.

It is important to understand the specific exemptions that apply to your situation to ensure proper tax filing.

6. How to Calculate Tax on Foreign Income

Calculating tax on foreign income involves a straightforward process.

First, you need to determine your total foreign income by adding up all earnings received from various sources, such as salary, business, or investments.

Once you have the total amount, convert it into Pakistani Rupees (PKR) using the exchange rate applicable on the date the income was earned, ensuring accurate taxation.

Finally, apply the progressive tax rates relevant to your income bracket to calculate the tax liability on your foreign income.

Example:

If you earn USD 10,000 from foreign employment and the exchange rate is 1 USD = 300 PKR, your foreign income in PKR would be 3,000,000 PKR. Based on your total income, the applicable tax rate will be determined.

7. Procedure to Pay Tax on Foreign Income in Pakistan

Paying taxes on foreign income in Pakistan involves the following steps:

• File your income tax return: All taxpayers must file their annual income tax return with the Federal Board of Revenue (FBR). You can file your return online using the FBR’s e-filing system.
• Submit supporting documents: You need to provide proof of your foreign income, such as foreign bank statements, contracts, or pay slips.
• Pay the tax: After filing your return, you must pay the tax due through the FBR’s online payment portal or at designated banks.

Make sure to meet the filing deadlines to avoid penalties.

If you need any expert help regarding the tax filing call us at 03337703712 or contact us today for stress-free taxation.

8. Implications for Overseas Pakistanis

Many overseas Pakistanis may wonder whether they are subject to income tax in Pakistan on their foreign earnings. The answer depends on whether they are considered tax residents of Pakistan.

Overseas Pakistanis who are tax residents: If they satisfy the residency criteria, they will be liable to pay taxes on foreign income.

Overseas Pakistanis who are non-residents: Non-residents only pay tax on income sourced from Pakistan, such as property income or business earnings within Pakistan.

Additionally, certain tax exemptions are available for foreign income received by overseas Pakistanis, making it easier for them to manage their tax obligations.

Here read a detailed guide on taxation for overseas pakistanis.

9. Frequently Asked Questions (FAQs)

Do I have to pay tax on foreign income in Pakistan?
Yes, if you are a tax resident of Pakistan, you are required to pay tax on your worldwide income, including foreign income.

Which income is exempted from tax in Pakistan?
Certain types of foreign income, such as pensions from foreign governments or income from foreign trusts, may be exempt. Additionally, foreign remittances from family members are typically not taxed.

How much tax on foreign remittance in Pakistan?
Foreign remittances sent by family members are generally not subject to tax in Pakistan. However, it’s essential to keep proof of the source and purpose of the remittance.

Are overseas Pakistanis exempt from income tax?
Overseas Pakistanis are not automatically exempt from income tax. If they are tax residents of Pakistan, they will be required to pay tax on foreign income.

How much foreign income is tax-free in Pakistan?
There is no specific threshold for foreign income to be tax-free, but certain exemptions and credits may reduce your taxable amount, such as the foreign tax credit.

10. Conclusion

Understanding the tax obligations on foreign income is essential for residents and non-residents alike.

By staying informed about the latest tax rates, exemptions, and calculation methods, you can ensure compliance with Pakistan’s tax laws.

If you are an overseas Pakistani, it is equally important to understand your tax residency status and how it affects your foreign income taxation. Be sure to file your returns on time and consult a tax professional if needed to avoid any complications.

Staying up to date on tax policies will not only keep you compliant but also help you manage your foreign income more effectively, saving you time and money in the long run.

If you need any expert help regarding the tax filing call us at 03337703712 or contact us today for stress-free taxation.