I have seen a few threads surrounding this topic, but none that give a clear explanation. I will below give my understanding of these two tax systems (which are clearly wrong, as they do not align with answers given to practice questions):
Source tax system: The country taxes all revenue generated within its borders, regardless of the residency of whoever generates the revenue. It DOES NOT tax its residents or anyone else on any revenue generated outside its borders.
Resident tax system: The country taxes all its residents on all revenue they generate, regardless of where the revenue is generated. It DOES NOT tax foreigners on any revenue they generate inside the country´s borders or anywhere else.
By using the definition above, anyone who is a resident of country A, which uses a source tax system, and has revenue from within country B, which uses a resident tax system, would not pay any tax on that revenue, as country B would ignore it as it is not generated by a resident of country B, and country A would ignore it as it is not generated within its borders.
Who is resident of country A, this is his resident country so residence tax system applies on all individual’s worldwide income. This is presumption of so called worldwide income, doesn’t matter in which country this income was realized.
If individual generated income in country B, this can be only source country, so income realized within border of country B will be taxed as source income.
In the absence of tax treaties, income earned in country B would be once again fully taxed in country A. If there is a Tax treaty between A and B, one of the 3 methods applies.
I am having a difficult time understanding this explanation.
You are saying that if someone is a resident of country A, that country will tax all his worldwide income, even though country A uses a source tax system, and NOT resident tax system?
If that is the case, why are we even classifying countries on whether they use a resident or source tax system, if in the end everyone just taxes everything?
I think you have difficult time to distinguish between source and residence tax system.
If someone is resident of country A then residence tax system applies to his income doesn’t matter in which country the income was realized. If income is realized in country B, then country B will apply source jurisdiction for income earned within its borders. This income cannot be under residence tax jurisdiction of country B.
The fact that almost each country seeks to tax as much as it can is just the prove of this query.
PS
This income cannot be under residence tax jurisdiction of country B.
Correction. It can under some circumstances. And this is a residence-residence conflict.