How does the foreign tax credit work in Pakistan?

Section 103 of the Income Tax Ordinance 2001 allows a resident filer to claim a credit for income tax paid abroad on foreign-source income, capped at the Pakistani tax attributable to that same foreign income. Pakistan tax × (foreign income / total taxable income) sets the ceiling. Anything above is permanently lost - no refund and no carry-forward.

What documents do I need to claim a foreign tax credit?

A Proceeds Realisation Certificate (PRC) from your Pakistani bank showing the foreign remittance and the rate, plus the foreign tax authority's documentation (W-2, foreign tax return, withholding certificate, employer letter) proving the income tax paid. Both are required - PRC alone doesn't establish foreign tax, foreign documents alone don't establish remittance to Pakistan.

Foreign Tax Credit Calculator Pakistan (Section 103, 2025-26)

The principle - no double taxation, but no double benefit either

Pakistan taxes its residents on their worldwide income. A resident IT consultant who freelanced for a US client, a salaried engineer seconded to Dubai for six months, or an investor with Indian dividend income - all must include the foreign earnings in their Pakistani taxable income. Without a credit mechanism, that same income would be taxed twice: once by the source country and again by Pakistan. Section 103 of the Income Tax Ordinance 2001 prevents that, but only up to a cap.

The cap is the amount of Pakistan tax attributable to the foreign income, computed pro rata. If your foreign income is 20% of your taxable income, the FTC ceiling is 20% of your Pakistani slab tax. If the foreign country charged you more than that, the excess is permanently lost. Pakistan does not refund the difference and does not allow you to carry it forward to future years. This is the hard rule that catches filers from high-tax jurisdictions like Norway, Germany, or California.

The formula, in plain English

The Section 103 cap is computed as:

Formula

FTC cap = Pakistan slab tax × (foreign income ÷ total taxable income)

FTC allowed = min(foreign tax paid, FTC cap)

Net Pakistan tax = Pakistan slab tax − FTC allowed

The cap binds when the foreign country's effective rate exceeds Pakistan's effective rate on that income. For example, if your overall Pakistani effective rate is 22% but you paid 30% income tax in California, the 8% spread on your California-source income is lost. The cap doesn't bind in the opposite direction - if you paid 15% in Saudi Arabia (or anywhere lower), the full Saudi tax is creditable and you'll still owe Pakistan the residual 22% − 15% = 7% to top up.

Worked example - salaried engineer on a six-month UK secondment

Annual Pakistani taxable income (worldwide): PKR 8,000,000, of which PKR 3,000,000 was UK salary during the secondment. Pakistan salaried slab tax (TY 2025-26): approximately PKR 1,330,000. UK PAYE deducted on the UK salary, converted to PKR equivalent: PKR 750,000.

FTC cap = 1,330,000 × (3,000,000 ÷ 8,000,000) = PKR 498,750. UK tax paid PKR 750,000 exceeds the cap. FTC allowed = PKR 498,750 (the cap). Excess UK tax lost = 750,000 − 498,750 = PKR 251,250. Net Pakistan tax after credit = 1,330,000 − 498,750 = PKR 831,250.

The PKR 251,250 lost is the cost of being a Pakistani resident earning in a higher-tax jurisdiction. There is no mechanism to recover it.

Documents you absolutely need

FBR audits foreign tax credits closely because they're easy to inflate. You need two sets of documents, not just one:

Proceeds Realisation Certificate (PRC) from your Pakistani bank showing the foreign remittance landed in your account, the date, and the SBP rate used to convert to PKR. This establishes that the foreign income did come into Pakistan and what the PKR equivalent is.
Foreign tax documentation - your foreign payslip showing PAYE / income tax deducted, a foreign employer's tax certificate (e.g., US W-2, UK P60), a foreign tax return acknowledgement, or a foreign withholding tax certificate from the payer. This establishes that income tax (not VAT, sales tax, or social security) was charged abroad on this specific income.

Sales tax, VAT, social security contributions, and tax-like levies that are not income tax do not qualify under Section 103. Only foreign income tax does.

PSEB freelancers - read carefully

If you're a PSEB-registered freelancer and your foreign client paid you through a Pakistani bank, your receipts are taxed under Section 154A as a flat 0.25% final tax. They are excluded from the slab base entirely. Because they don't suffer Pakistani slab tax, there's no Pakistan tax to credit against, and the FTC mechanism doesn't apply.

This sounds bad but isn't. The 0.25% rate is so much lower than any plausible Pakistani slab rate that even allowing for the foreign tax already deducted by the platform (e.g., Upwork withholds 5% from US clients in some cases), PSEB filers are still better off than non-PSEB filers going through the slab + FTC route. Just don't try to double-dip by claiming both regimes on the same receipts.

Frequently asked questions

Who can claim a foreign tax credit in Pakistan?: Any resident filer of Pakistan who paid income tax abroad on income that is also being declared in their Pakistani return. Residence is determined by the 183-day rule under Section 82. Non-residents don't owe Pakistani tax on foreign-source income at all, so they don't need an FTC.
Can I carry forward unused foreign tax?: No. Pakistan's Section 103 does not allow carry-forward or carry-back of excess foreign tax. Any foreign tax above the cap is permanently lost. This is harsher than many comparable jurisdictions (US, UK, India all allow some form of carry-forward).
What documents do I need?: Two documents are mandatory: a Proceeds Realisation Certificate (PRC) from your Pakistani bank proving the foreign remittance, and a foreign tax document (W-2, P60, foreign return acknowledgement, foreign withholding certificate) proving the foreign income tax paid. Without both, FBR will disallow the credit on audit.
What exchange rate do I use?: Use the bank's PRC rate on each remittance for the income, and the SBP year-end rate (or the actual remittance rate) for the foreign tax converted to PKR. Be consistent within a return - don't shop rates to maximise the credit. FBR's audit guidance accepts both the SBP daily rate and the State Bank's averaged annual rate, but you must use one method throughout.
Do treaty benefits change anything?: Pakistan has Double Taxation Avoidance Agreements (DTAAs) with 60+ countries. A DTAA may give you a reduced foreign withholding rate (lower than the statutory rate) or, in some cases, exclusive taxing rights to one side. If a DTAA reduces the foreign tax you paid, you can only claim the actually-reduced amount as FTC - not the original statutory rate.