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The taxability of an income of a person in Nepal is based on two broad principles. In case of non-resident person generating income or receiving any payment from various income categories viz. employment, business, investment or win fall gain, it is taxed in Nepal on the basis of ‘Source Principle’. Similarly, any resident person generating income or receiving any payment from outside Nepal is taxed on the basis of ‘Residence Principle’. If any resident person pays income tax from income generated outside Nepal, he can claim the amount of tax paid in the foreign country while assessing his income tax in Nepal.
Section 71(1) of Nepalese Income Tax Act, 2002 provides the following provision.
A resident person may claim a foreign tax credit for an Income Year for any foreign income tax paid by the person to the extent to which it is paid with respect to the person’s assessable foreign income for the year.
Process of Claiming Foreign Tax Credit
There are two methods of claiming Foreign Tax Credit.
(1) Credit Method
(2) Expense Method
Under Credit Method, Foreign Tax Credits (FTC) claimed shall be calculated as follows
• FTC calculated separately for assessable foreign income sourced in each country; and
• With respect to each calculation, FTC shall not exceed the average rate of Nepal Income Tax of the person for the year applied for the person’s assessable foreign income.
This can be clarified with following example.
Mr. Handsome has a source of income in Nepal and also in more than one foreign country. During the Fiscal Year 2016/17, income and tax paid in each foreign country is given below;
Let us assume that he is a resident natural person and selected for the couple as tax payer during the year. His tax liability shall be as follows
Expense Method:
Notwithstanding anything contained in credit method, with respect to any Income Year, a person may elect to relinquish a FTC for the year and claim a deduction for foreign income tax for which the credit is available.
It is beneficial to take credit method as tax payable is lesser.
