Tax Debt Solutions Blog

Understanding Territorial Taxation

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Territorial taxation is an interesting topic that most people don't even consider as it does not directly affect their day-to-day finances. This is a shame considering that the topic has huge implications and is responsible for indirectly affecting almost every aspect of our lives when it comes to available government money for public services.

Essentially there are two different tax strategies employed worldwide; territorial taxation and worldwide taxation. With territorial taxation companies are only responsible for paying taxes on business they do within their home country or state. That is to say a multinational corporation only has to pay taxes to their home countries government for the parts of business that are done within that country. As you can imagine this can lead to a great deal of overseas operations in order to save money on taxes. Worldwide taxation on the other hand is where a company is taxed on all the business that they do worldwide by their home government.

Emotions run high on both sides of this debate so it is no surprise that there are strong arguments for both tax systems. Some believe that territorial taxation encourages businesses to outsource as much as possible in order to save money; while others believe that worldwide taxation creates a hostile environment for businesses within the countries that employ this method. The reality of the situation is that the facts lies somewhere in the middle.

It is, however, interesting to note that the majority of countries employ a worldwide taxation policy; with the United States, North Korea and Vietnam being the largest three countries that do not. The problem with this of course is that because the world is divided into territorial tax countries and worldwide tax countries there will always be an incentive for businesses to save money by operating in low tax countries if they happen to reside within a country that institutes a territorial tax. No matter where you fall in the debate, it's difficult to ignore the benefit of a single policy utilized by the majority of countries. Whether it's a territorial tax policy or a worldwide tax policy; things would even out in the wash so long as everyone played by the same rules.