Terrtoriality principle

Tax Glossary Definition

Terrtoriality principle

The territoriality principle in taxation holds that a country has the right to tax only income, transactions, or activities that occur within its own borders. Under this system, residents are typically not taxed on income earned outside the country. This principle contrasts with the worldwide taxation system, where residents may be taxed on global income regardless of where it is earned.

Example: A resident of Singapore earns $10,000 from freelance work for a company in the USA. Since Singapore follows the territoriality principle, this foreign-source income is not subject to Singaporean income tax, though it may be taxed in the USA.

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