Territorial Tax System

Territorial Tax System

A territorial tax system is a method of taxation where a country taxes only the income earned within its borders and does not tax foreign income earned by its residents or corporations.

Under this system, businesses and individuals are not subject to tax on earnings generated outside the country’s jurisdiction, which can incentivize international trade and investment. For example, if a U.S. company operates in Canada and earns profits there, those profits would generally not be subject to U.S. income tax under a territorial system. This contrasts with a worldwide tax system, where residents are taxed on their global income, regardless of where it is earned.