CAF-2 · Chapter 13

Foreign Source Income of a Resident Person MCQs with Answers

15 multiple-choice questions on Foreign Source Income of a Resident Person for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.

1. Question 1

   Under the Income Tax Ordinance, 2001, how are the deductible expenditures relating to foreign-source income treated for a resident person?

   • A) A) They can be deducted proportionally against both Pakistan-source and foreign-source income.
   • B) B) They are deductible only against the specific foreign-source income to which they relate and cannot be deducted against Pakistan-source income.
   • C) C) They are allowed as a general deductible allowance against the total worldwide income.
   • D) D) They are completely ignored for tax purposes.
   Show answer & explanation

   Answer: B) B) They are deductible only against the specific foreign-source income to which they relate and cannot be deducted against Pakistan-source income.

   Foreign-source income is computed separately from Pakistan-source income, meaning expenditure incurred in deriving foreign-source income is deductible only from foreign-source income and cannot be deducted against Pakistan-source income.

2. Question 2

   If a resident taxpayer derives foreign-source income from multiple heads (e.g., Business and Property), how must this income be computed?

   • A) A) All foreign-source income is clubbed together under 'Income from Other Sources'.
   • B) B) All foreign-source income is aggregated into a single 'Foreign Income' pool.
   • C) C) Foreign-source income is computed separately for each head of income.
   • D) D) It is taxed at a flat rate of 15% regardless of the head of income.
   Show answer & explanation

   Answer: C) C) Foreign-source income is computed separately for each head of income.

   Foreign-source income is computed separately for each head of income. Accordingly, foreign-source income under one head will be computed separately from foreign-source income chargeable under any other head.

3. Question 3

   What is the maximum amount of Foreign Tax Credit (FTC) a resident taxpayer can claim under Section 103?

   • A) A) The exact amount of foreign income tax paid, with no upper limit.
   • B) B) The amount of Pakistan tax payable in respect of that income, minus a 10% penalty.
   • C) C) The lesser of the foreign income tax paid or the Pakistan tax payable in respect of the net foreign-source income.
   • D) D) 50% of the foreign income tax paid.
   Show answer & explanation

   Answer: C) C) The lesser of the foreign income tax paid or the Pakistan tax payable in respect of the net foreign-source income.

   A taxpayer shall be allowed a tax credit of an amount equal to the lesser of the foreign income tax paid, or the Pakistan tax payable in respect of the income.

4. Question 4

   For the purpose of calculating the Foreign Tax Credit, how is the "Pakistan tax payable" in respect of foreign-source income determined?

   • A) A) By applying the highest marginal tax slab rate to the foreign income.
   • B) B) By applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the net foreign-source income.
   • C) C) By applying a flat 20% corporate rate to the foreign income.
   • D) D) By computing the tax on foreign income as a separate block.
   Show answer & explanation

   Answer: B) B) By applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the net foreign-source income.

   The Pakistan tax payable in respect of foreign-source income shall be computed by applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the taxpayer’s net foreign-source income for the year.

5. Question 5

   If a taxpayer’s available Foreign Tax Credit exceeds their Pakistan tax payable on that foreign income for the year, what is the treatment of the unadjusted excess credit?

   • A) A) It can be carried forward for up to 3 immediately succeeding tax years.
   • B) B) It can be carried back to the preceding tax year.
   • C) C) It can be refunded in cash by the FBR.
   • D) D) It cannot be refunded, carried back, or carried forward.
   Show answer & explanation

   Answer: D) D) It cannot be refunded, carried back, or carried forward.

   Any tax credit or part of a tax credit allowed for a tax year which is not credited shall not be refunded, carried back to the preceding tax year, or carried forward to the following tax year.

6. Question 6

   To successfully claim a Foreign Tax Credit for a specific tax year, what is the maximum time limit within which the foreign income tax must actually be paid?

   • A) A) Before the due date of filing the return in Pakistan.
   • B) B) Within one year from the end of the tax year.
   • C) C) Within two years after the end of the tax year in which the foreign income was derived.
   • D) D) The tax must be paid in advance during the tax year.
   Show answer & explanation

   Answer: C) C) Within two years after the end of the tax year in which the foreign income was derived.

   A foreign tax credit shall be allowed only if the foreign income tax is paid within two years after the end of the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer.

7. Question 7

   Mr. Junaid has a foreign-source business loss of Rs. 800,000 and a foreign-source property income of Rs. 1,000,000 during the same tax year. How will this loss be treated?

   • A) A) The business loss will be set off against the property income, leaving a net foreign-source income of Rs. 200,000.
   • B) B) The business loss cannot be set off against the property income and must be carried forward to be set off against future foreign-source business income.
   • C) C) The business loss will be set off against his Pakistan-source business income.
   • D) D) The business loss will lapse immediately.
   Show answer & explanation

   Answer: B) B) The business loss cannot be set off against the property income and must be carried forward to be set off against future foreign-source business income.

   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 specific income. Therefore, a foreign business loss cannot be adjusted against foreign property income.

8. Question 8

   If a foreign loss sustained under a specific head of income cannot be wholly set off in the current tax year, for how many years can it be carried forward?

   • A) A) It cannot be carried forward.
   • B) B) Up to 3 immediately succeeding tax years.
   • C) C) Up to 6 immediately succeeding tax years.
   • D) D) Indefinitely.
   Show answer & explanation

   Answer: C) C) Up to 6 immediately succeeding tax years.

   The foreign loss shall be carried forward to the following tax year and set off against the foreign-source income chargeable to tax under that head, but no foreign loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was computed.

9. Question 9

   Mr. Smith, a UK national, comes to Pakistan solely for employment purposes and stays for two years, making him a resident individual. He earns rental income from a property in London, which is deposited into his UK bank account. Is this rental income taxable in Pakistan?

   • A) A) Yes, because he is a resident individual in Pakistan.
   • B) B) No, it is exempt because he is a short-term resident and the income is not brought into or received in Pakistan.
   • C) C) Yes, but it will be taxed at a special reduced rate of 15%.
   • D) D) No, because property income is always exempt for foreigners.
   Show answer & explanation

   Answer: B) B) No, it is exempt because he is a short-term resident and the income is not brought into or received in Pakistan.

   The foreign-source income of a short-term resident individual (present for not exceeding three years and resident solely for employment) is exempt, provided the income is not derived from a business established in Pakistan or brought into/received in Pakistan.

10. Question 10

    Mr. Tariq, a citizen of Pakistan, returns to Pakistan in Tax Year 2026 to permanently settle after living in the UAE for 6 years. He was a non-resident in Pakistan for all 6 preceding years. He sets up a business in Dubai that generates foreign-source income. For which tax years will this foreign-source income be exempt in Pakistan?

    • A) A) Only for Tax Year 2026.
    • B) B) Tax Year 2026 and Tax Year 2027.
    • C) C) It will never be exempt; it is taxable immediately.
    • D) D) For the first 4 tax years after his return.
    Show answer & explanation

    Answer: B) B) Tax Year 2026 and Tax Year 2027.

    Any foreign-source income derived by a citizen of Pakistan who was not a resident individual in any of the four preceding tax years shall be exempt from tax in the tax year in which the individual became a resident and in the following one tax year.

11. Question 11

    Under Section 102, a resident individual’s foreign-source salary is completely exempt from tax in Pakistan under which of the following conditions?

    • A) A) If the salary is remitted to Pakistan through normal banking channels.
    • B) B) If the individual stays outside Pakistan for at least 100 days.
    • C) C) If the individual has paid foreign income tax in respect of that salary.
    • D) D) Foreign-source salary is never exempt for a resident.
    Show answer & explanation

    Answer: C) C) If the individual has paid foreign income tax in respect of that salary.

    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 (or if the employer has withheld it and paid it to the foreign revenue authority).

12. Question 12

    If an individual has multiple tax credits available to apply against their gross tax liability in a tax year, which credit must legally be applied FIRST?

    • A) A) Tax credit for charitable donations (Sec 61).
    • B) B) Foreign tax credit (Sec 103).
    • C) C) Tax credit for investment in an approved pension fund (Sec 63).
    • D) D) Advance tax deducted at source.
    Show answer & explanation

    Answer: B) B) Foreign tax credit (Sec 103).

    If a person has more than one type of tax credits available, they shall be applied in the specific order: (a) Foreign tax credit, (b) Tax credit/rebate on donations, investment, etc., and (c) Advance tax and tax deducted/collected at source.

13. Question 13

    Mr. A, a citizen of Pakistan, left the country on 15 August 2025 (Tax Year 2026) to take up a job in Saudi Arabia and remained abroad for the rest of the tax year. He earned a salary of Rs. 3,000,000 in Saudi Arabia during Tax Year 2026. There is no income tax in Saudi Arabia. What is the tax treatment of this salary in Pakistan?

    • A) A) It is fully taxable because he did not pay any foreign income tax.
    • B) B) It is exempt from tax because he left Pakistan during the tax year and remained abroad for the remainder of that year.
    • C) C) It is added to his Pakistan-source income for rate purposes only.
    • D) D) It is taxable as 'Income from Other Sources'.
    Show answer & explanation

    Answer: B) B) It is exempt from tax because he left Pakistan during the tax year and remained abroad for the remainder of that year.

    Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year, any foreign-source salary earned by him outside Pakistan (only during that tax year) shall be exempt from tax, completely regardless of whether foreign tax was paid or not.

14. Question 14

    Mr. Zaid has a total taxable income of Rs. 4,000,000, which includes Rs. 3,000,000 as Pakistan-source income and Rs. 1,000,000 as foreign-source 'Income from Other Sources'. His gross Pakistan tax liability on the Rs. 4,000,000 is Rs. 800,000. He paid Rs. 150,000 as foreign income tax on his foreign income. What is his net tax payable in Pakistan? (Assume the Rs. 800,000 is his exact tax).

    • A) A) Rs. 800,000
    • B) B) Rs. 650,000
    • C) C) Rs. 600,000
    • D) D) Rs. 450,000
    Show answer & explanation

    Answer: B) B) Rs. 650,000

    Average rate of Pak tax = (800,000 / 4,000,000) = 20%. Proportionate Pak tax on foreign income = 20% of 1,000,000 = Rs. 200,000. Foreign Tax Credit is the lesser of the foreign tax paid (Rs. 150,000) or Pak tax payable (Rs. 200,000). Net tax payable = Gross Tax (800,000) - FTC (150,000) = Rs. 650,000.

15. Question 15

    When calculating foreign-source income and adjusting losses, how is a foreign-source speculation business treated?

    • A) A) It is merged with normal foreign-source business income.
    • B) B) It is merged with Pakistan-source speculation business income.
    • C) C) It is treated as a separate head of income distinct from normal business income.
    • D) D) Speculation losses are simply ignored for foreign income.
    Show answer & explanation

    Answer: C) C) It is treated as a separate head of income distinct from normal business income.

    Income derived by a taxpayer from carrying on a speculation business shall be treated as a separate head of income. Section 67 (apportionment of deductions) applies on the basis that foreign-source income chargeable under a head of income, including a speculation business, is a separate head of income.