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CHAPTER – IV
TAXATION OF FOREIGN-SOURCE INCOME OF RESIDENTS
15. Foreign income tax.- (1) This rule applies for the purposes of sections 102 and 103, which provide resident persons with relief from international double taxation.
(2) A foreign levy is a foreign income tax if the following conditions are satisfied, namely:-
(a) the levy is a tax; and
(b) the tax is substantially equivalent to the income tax imposed by the Ordinance.
(3) Subject to sub-rules (4) and (5), a foreign levy is a tax if it requires a compulsory payment pursuant to the authority of the foreign country to levy taxes.
(4) A penalty, fine, interest or similar obligation is not a tax for the purposes of this Chapter.
(5) A foreign levy is not a tax to the extent that a person subject to the levy receives or is entitled to receive, directly or indirectly, a specific economic benefit from the foreign country in exchange for the payment pursuant to the levy.
(6) Subject to sub-rule (7), a foreign tax is substantially equivalent to the income tax imposed under the Ordinance if the following conditions are satisfied, namely:-
(a) the tax is imposed in respect of events that would result in the derivation of income, gains or profits under the Ordinance; and
(b) the taxable amount is computed under the foreign tax by subtracting from gross receipts any significant expenses and the depreciation or amortization of capital costs attributable to such receipts, or, where the tax is imposed under the foreign law or any other basis;
(c) Dividend or interest income earned from foreign source, on being so taken by the CBR, may be treated to have same character for the resident person, as it has under the Ordinance.
(7) The following foreign taxes are substantially equivalent to the income tax
imposed under the Ordinance, namely:-
(a) a withholding tax imposed on dividends, gross receipts payable to non-resident persons as final tax; or
(b) tax on wages by withholding imposed as a final tax on salary.
(8) In this rule,
(a) “economic benefit” includes –
(i) any property;
(ii) any service;
(iii) any fee or other payment;
(iv) any right to use, acquire or extract natural resources, patents, or other property owned or controlled by the foreign country; or
(i) any reduction or discharge or a contractual obligation; and
(b) “specific economic benefit” means an economic benefit that is not available on substantially the same terms –
(i) all persons subject to the income tax generally imposed by the foreign country; or
(ii) if there is no generally imposed income tax, the population of the country in general.
16. Foreign tax credit.- (1) This rule applies for the purposes of section 103, which provides for the foreign tax credit.
(2) A resident taxpayer claiming a foreign tax credit for a tax year shall submit an application for the credit with the taxpayer ‘s return of income for that year.
(3) an application for a foreign tax credit shall be in the form as specified in Part I of the First Schedule to these rules.
(4) Subject to sub-rule (5), an application for a foreign tax credit shall be accompanied by the following documentation, namely:-
(a) where the tax has been deducted at source, a declaration by the payer of the income that tax has been deducted and a certified copy of the receipt that the payer has received from the foreign tax authority for the deducted tax; or
(b) in any other case, the original or a certified copy of the receipt that the taxpayer has received from the foreign tax authority for the tax paid.
(5) Where a resident taxpayer cannot obtain evidence of the deduction of tax from the payer of income as required under clause (a) of sub-rule (4), the Commissioner may accept such secondary evidence of the deduction as is determined by him.
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