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Glossary of Tax Terms
 
Disclaimer: Explanations on the terms are very condensed and may not be complete.  They are not considered to necessarily reflect official position of the OECD in interpreting international tax terms, for example, in the tax treaty context.

 
 
 
 
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ABATEMENT -- A reduction in the assessment of tax, penalty or interest when it is determined the assessment is incorrect
ABUSE OF LAW -- The doctrine which allows the tax authorities to disregard a civil law form used by the taxpayer which has no commercial basis
ACCELERATED DEPRECIATION -- Method of depreciation under which taxpayers may allocate larger depreciation deductions to the first year or first few years of useful business assets, such as plant and machinery
ACCOUNTING BASIS  -- Method of calculating amounts subject to income tax and VAT. In respect of VAT, tax would be computed as a percentage levy on the excess of sales over purchases. This is a theoretical concept and no country uses it.
ACCOUNTING PERIOD  -- A period of time used by taxpayer for the determination of tax liability
ACCOUNTS PAYABLE  -- A list of the debts currently owed by a person or business, mainly for the purchase of services, inventory, and supplies
ACCOUNTS RECEIVABLE  -- A list of the money owed on current account to a creditor, which is kept in the normal course of the creditor's business and represents unsettled claims and transactions
ACCOUNTING RECORDS -- All documents and books used in the preparation of the tax return and all financial statements, including general ledger, subsidiary ledgers, sales slips, and invoices.
ACCRUAL BASIS (ACCRUAL METHOD)  -- An accounting method whereby income and expense items are included in taxable income or expense as they are earned or incurred, rather than when they are received or paid
AD VALOREM TAX -- A tax on goods or property expressed as a percentage of the sales price or assessed value
ADMINISTRATIVE COMPANY  -- See: Service company
ADMINISTRATIVE EXPENSES  -- Expenses that are not as easily associated with a specific function as are the direct costs of manufacturing and selling. It typically includes expenses of the headquarters office and accounting expenses.
ADMINISTRATIVE OFFICE  -- Office frequently located in a country other than that of the headquarters office, the parent company or country of operation.
ADVANCE PRICING ARRANGEMENT (APA)  -- An arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time.  An advance pricing arrangement may be unilateral involving one tax administration and a taxpayer or multilateral involving the agreement of two or more tax administrations.
ADVANCE RULING  -- A letter ruling, which is a written statement, issued to a taxpayer by tax authorities, that interprets and applies the tax law to a specific set of facts
AFFILIATED COMPANIES  -- General term used to describe the relationship between two or more companies linked by a common interest
AFFILIATION PRIVILEGE  -- Tax relief or exemption accorded to dividend distributions made by a resident subsidiary company to its parent company which owns a certain minimum percentage of shares, in order to mitigate double taxation of such dividends.
AGENCY  -- A business that provides a particular service to a company (that are outside of the country where the agency is located). Dependent agency constitutes a permanent establishment for the other company and the income achieved through the agency is taxed on the income earned from the country where the agency is located whereas independent agency does not.
AGGREGATION  -- Term used to denote the adding together of the taxpayer's income from all sources in order to determine the applicable tax rate for income tax purposes.
ALIEN, TAX TREATMENT OF  -- A person who is not a citizen of the country in which he or she lives. In general, most countries do not distinguish between nationals and aliens for tax purposes; rather tax liability is based on residence and/or domicile.
ALIENATION OF INCOME  -- Term generally used to describe the transfer of the right to receive income from a source while not necessarily transferring the ownership of that source to the same person.
ALLOCATION  -- The apportionment or assignment of income or expense for various tax purpose, e.g., between permanent establishments in various jurisdictions
ALLOWANCE  -- Deduction or exemptions generally made in computing income taxes, inheritance and gift taxes and some forms of sales taxes.
AMORTIZATION  -- Process of writing off the cost of an intangible asset over its useful life.
AMORTIZATION METHOD  -- Method of computing a credit under a VAT regime where investment goods are purchased which have a useful life in the business for a period exceeding one year. The tax embodied in the price paid for the assets may be credited to the trader over a period of years corresponding to the life of the assets.
APA  -- See: Advance Pricing Arrangement
APPORTIONMENT METHOD  -- One of the methods used to allocate income and expenses between related enterprises using a formula consisted of some factors such as sales, property, or payroll.
ARBITRAGE  -- Process of buying a commodity (which may include currency or securities) and simultaneously selling it in another market in order to profit from price differentials.
ARBITRAGE, TAX  -- Process of entering into a tax motivated transaction (i.e. to obtain profit from the application of tax rules).
ARBITRATION  -- Term used for the determination of a dispute by the judgment of one or more persons, called arbitrators, who are chosen by the parties and who normally do not belong to a normal court of competent jurisdiction
ARM'S LENGTH PRINCIPLE   -- The international standard which states that, where conditions between related enterprises are different from those between independent enterprises, profits which have accrued by reason of those conditions may be included in the profits of that enterprise and taxed accordingly
ARM'S LENGTH RANGE  -- A term used in transfer pricing to describe a range of values that can be defined for purpose of selecting an appropriate arm's length price from comparable transactions.
ARM'S LENGTH TRANSACTION -- A transaction among parties, each of whom acts in his or her own best interest.
ASSESSMENT  -- Act of computing the tax due
ASSOCIATED ENTERPRISES  -- Generally speaking, enterprises are associated where the same persons participate directly or independently in the management, control or capital of both enterprises, i.e. both enterprises are under common control.
ATTRIBUTION RULES  -- Rules that create ownership by attributing stock to one party even though the shares are legally owned by another party; often called constructive ownership of stock.
AUDIT  -- Examination and verification carried out by an outside agency (such as an accountancy firm or the tax authorities) of a taxpayer¡¯s books and accountants and/or the general accuracy of returns and declarations, either as a routine operation, or where evasion is suspected.
AUXILIARY ACTIVITIES  -- A fixed place of business through which an enterprise exercises solely an activity which has, for the enterprise, a preparatory or auxiliary character, is, under tax treaties generally, deemed not to be a permanent establishment. The decisive criterion is whether the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.
AUXILIARY COMPANY  -- Company which is part of a group of companies and which supplies auxiliary services to group companies.
AVOIDANCE  -- A term that is difficult to define but which is generally used to describe the arrangement of a taxpayer's affairs that is intended to reduce his tax liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow. Cf. evasion
 
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BACK-TO-BACK LOAN  -- Method of borrowing between related parties where a loan is channeled through an independent third-party intermediary.
BAD DEBT  -- Debt which is unlikely to be paid. Bad debts may usually be treated as losses and written off against a reserve for such debts.
BALANCE SHEET  -- Statement of the financial position of a business as of a particular date. The statement will show the business's assets in one column and its liabilities and owner's equity in another column.
BALANCING PAYMENT  -- A payment, normally from one or more participants to another, to adjust participants¡¯ proportionate shares of contributions, that increases the value of the contributions of the payer and decreases the value of the contributions of the payee by the amount of the payment, in the context of CCA (Cost Contribution Arrangements).
BANK SECRECY PROVISIONS  -- Provisions which require that a bank refuse to disclose information about its customers to third parties, including the tax authorities.
BAPA  -- Bilateral advance pricing arrangement. Also called MAP APA.
BASE COMPANY  -- Company situated in a low-tax or non-tax country (i.e. tax haven), which is used to shelter income and reduce taxes in the taxpayer's home country. Base companies carry on certain activities on behalf of related companies in high-tax countries (e.g. management services) or are used to channel certain income, such as dividends, interest, royalties and fees.
BASE COST  -- Term used in capital gains tax legislation to denote the cost of an asset to an owner.
BEARER SECURITIES  -- Stocks, bonds, etc. in which ownership can be transferred from one holder to another without registration of the transaction by the issuing company, that is, title passes with delivery.
BENEFICIAL OWNER  -- A person who enjoys the real benefits of ownership, even though the title to the property is in another name. Often important in tax treaties, as a resident of a tax treaty partner may be denied the benefits of certain reduced withholding tax rates if the beneficial owner of the dividends etc is resident of a third country.
BENEFICIARY  -- The person who receives or is to receive the benefits resulting from certain acts. In a tax context, the beneficiary is the person entitled to the benefits from trust property or from an insurance policy.
BENEFITS IN KIND  -- Term which refers to earnings, usually from employment, other than in cash, as part of compensation for services rendered.
BENEFIT TEST  -- In considering whether a company may be allowed to deduct, as an expense, payments made to a related company in a multinational group on account of expenses incurred by that related company in providing intra-group services, tax authorities would refuse a deduction unless a real benefit had been conferred on the company claiming the deduction.
BERRY RATIO  -- Ratio used to establish an arm's length profit. The Berry ratio is the ratio of a business' gross income to operating costs.
BEST METHOD RULE  -- Transfer pricing rule requiring that a taxpayer use the transfer pricing method that results in the most reliable measure of an arm's length price. This rule doesn't prescribe priorities between various methods.
BILATERAL ADVANCE PRICING ARRANGEMENT  (BAPA) APA -- involving two or more tax authorities
BOND  -- Interest-bearing debt obligation to a government or entrepreneur. The rate of interest is usually fixed.
BOOK VALUE  -- The value of individual asset as recorded in the accounting records of a taxpayer, calculated as actual cost less allowances for any depreciation
BRACKETS  -- Term used in connection with graduated system of taxation to refer, for example, to the slabs or slices of taxable income subject to particular rates of income tax.
BRANCH  -- Division, office or other unit of business located at a different location from the main office or headquarters. It is not a separate legal entity.
BRANCH PROFITS TAX (BPT)  -- See: Branch tax
BRANCH TAX  -- Tax imposed on branches of foreign companies in addition to the normal corporate income tax on the branch's income. This is equivalent to the tax on dividends which would be due if the branch had been a subsidiary (see: subsidiary company) of the foreign company and had distributed its profit as dividends.
BROTHER-SISTER CORPORATIONS  -- Two or more companies which are owned and controlled by the same shareholders.
BURDEN OF PROOF  -- Obligation to persuade a court or other entity of the validity of a factual assertion.
BUSINESS ASSETS  -- Assets used for purposes of carrying on a business
"BUSINESS PURPOSE" TEST -- Test used as a weapon against tax avoidance schemes. Artificial schemes which create circumstances under which no tax or minimal tax is levied may be disregarded if they do not serve a "business purpose".
BUY-IN PAYMENT -- A payment made by a new entrant to an already active CCA (Cost Contribution Arrangements) for obtaining an interest in any results of prior CCA activity.
BUY-OUT PAYMENT  -- Compensation that a participant who withdraws from an already active CCA may receive from the remaining participants for an effective transfer of its interests in the results of past CCA activities.
 
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CAPITAL ASSETS  -- All property held for investment by a taxpayer.
CALL OPTION -- Contract under which the holder of the option has the right but not the obligation to purchase securities or commodities on or before a specified date for a specified exercise price.
CAPITAL EXPENDITURE -- Expenditure on improvement rather than repair. Where expenditure is more closely connected with the business income-earning structure than its income earning capacity, it is capital expenditure. 
CAPITAL GAIN  -- A gain on the sale of capital asset.
CAPITAL TAX -- A tax based on capital holdings, as opposed to a capital gains tax.
CAPITALIZE  -- To record capital outlays as additions to asset accounts, not as expenses.
CAPITAL LOSS -- The loss from the sale of a capital asset.
CAPTIVE BANK  -- Wholly owned subsidiary of a multinational group of companies whose purpose is to provide banking service to the group and those with whom the group deals. A captive bank is generally located in a tax haven in order to avail itself of the low capital requirements and freedom from exchange control.
CAPTIVE INSURANCE COMPANY -- Wholly owned subsidiary of a multinational group of companies which exclusively insures or reinsures the risks of companies that belong to the group. A captive insurance company is usually established in a low-tax country. Whether premiums paid to captive insurance companies are recognized as business expenses depends on the country in question.
CARRYBACK -- See: Carryover
CARRYFORWARD -- See: Carryover
CARRYOVER  -- A process by which the deductions or credits of one taxable year that cannot be used to reduce tax liability in that year are applied against a tax liability in subsequent years (carryforward) or previous years (carryback).
CASH BASIS (CASH METHOD) -- The accounting method which recognizes income and deductions when money is received or paid.
CCA -- See: Cost Contribution Arrangements
CENTRAL MANAGEMENT AND CONTROL -- Where the central management and control is located is a test for establishing the place of residence of a company. Broadly speaking, it refers to the highest level of control of the business of a company.
CENTRE OF VITAL INTEREST -- This is one of the criteria used to resolve the problem of dual residence of individuals. It refers to the place where the taxpayer's personal and economic relationships are closer.
CFC -- See Controlled foreign company
CHERRY PICKING  -- Term used in the USA in R&D arrangements to prevent a contracting party from selecting or funding only the technologies that are successfully developed, i.e. "cherry picking". In transfer pricing context, it often describes a situation where a tax authority tries to impose a TP adjustment on a taxpayer based on a few of ¡°cherry picked¡± related party transactions of other comparable companies with an intention to maximize its adjustment.
CIF VALUE -- The value of imported goods which includes cost, insurance and freight.
CIVIL LAW -- Systems of law based primarily on statutes or codes rather than judicial decisions. Examples are the French and German systems.
CLOSE (CLOSELY HELD) COMPANY -- Company which is owned or controlled by a single shareholder or closely knit group of shareholders.
COMMENSURATE WITH INCOME STANDARD -- See: Super royalty provision
COMMERCIAL INTANGIBLE -- An intangible that is used in commercial activities such as the production of a good or the provision of a service, as well as an intangible right that is itself a business asset transferred to customers or used in the operation of business.
COMMODITIES FUTURES -- Contracts, traded on recognized futures markets, in which sellers promise to deliver a given commodity by a certain date at a predetermined price.
COMMODITY TAX -- Tax based on a selective number of commodities.
COMMON LAW -- The body of law developed by the judiciary in systems based on English law and which is followed under the doctrine of precedent, i.e. past judicial decisions on similar cases. Much of it is now incorporated in statute.  Also this term is used to describe a system ultimately based on English legal systems, as opposed to civil law systems.
COMMON STOCK -- The ordinary stock of a corporation. An equity or ownership interest in a corporation. The holder of common stock usually has a vote in deciding company affairs. Common stock is usually last in priority when profits or assets are distributed.
COMPANY -- Often used to mean a separate legal entity (a corporation) organized to perform an activity, business or industrial enterprise.  Sometimes it has a broader meaning to mean individual or collective enterprises seeking profit.
COMPARABILITY ANALYSIS -- Comparison of controlled transaction conditions with conditions prevailing in transactions between independent enterprises (uncontrolled transactions). Controlled and uncontrolled transactions are comparable if none of the differences between the transactions could materially affect the factor being examined in the methodology (e.g. price or margin), or if reasonably accurate adjustments can be made to eliminate the material effects of any such differences.
COMPARABLE PROFIT METHOD (CPM) -- Under US regulations CPM is a method to determine an arm's length consideration for transfers of intangible property. If the reported operating income of the tested party is not within a certain range, an adjustment will be made. In effect this method requires a comparison of the operating income that results from the consideration actually charged in a controlled transfer with the operating income of similar taxpayers that are uncontrolled.
COMPARABLE UNCONTROLLED PRICE (CUP) METHOD  -- A transfer pricing method that compares the price for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.
COMPARABLE UNCONTROLLED TRANSACTION (CUT) METHOD -- A transfer pricing methodology used in the US, which determines an arm's length royalty rate for an intangible by reference to uncontrolled transfers of comparable intangible property under comparable circumstances.
COMPENSATING ADJUSTMENT -- An adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer's opinion, an arm's length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises. This adjustment would be made before the tax return is filed.
COMPENSATION -- Direct and indirect monetary and non-monetary rewards to employees.
COMPENSATORY STOCK OPTIONS -- Options offered to employees as partial compensation for their services.
COMPETENT AUTHORITY (CA) -- Forum to resolve disputes arising from the application and/or interpretation of a double tax treaty. Both treaty countries appoint a representative (frequently the Ministry of Finance or its authorized representative) as the CA to assist aggrieved taxpayers by acting as the official liaison with the foreign CA. The CA is generally indicated in the definitions sections of tax treaties.
COMPLIANCE -- See: Tax compliance
CONDUIT APPROACH -- A method whereby income or deductions flow through to another party
CONDUIT COMPANY -- Company set up in connection with a tax avoidance scheme, whereby income is paid by a company to the conduit and then redistributed by that company to its shareholders as dividends, interest, royalties, etc.
CONSIDERATION -- Anything of value, including property, given in return for a promise or performance by another party to form a contract
CONSOLIDATED TAX RETURN -- A combined tax return in the name of the parent company filed by companies organized as a group.
CONSORTIUM -- Association of business enterprises, whether individuals, partnerships or companies, operating together on a temporary basis for some specific venture.
CONSTRUCTIVE DIVIDEND -- A variety of payments whether in cash or in kind made by companies to shareholders or associated persons, which are not expressed as dividends, may nevertheless be regarded by the tax law as distributions of profits and treated for tax purposes as if they were dividends.
CONSTRUCTIVE OWNERSHIP -- A taxpayer may be considered to own property or stock which he only indirectly owns.
CONSUMPTION TAX -- Tax generally intended to fall on the ultimate consumption of goods and services.
CONTRACT MANUFACTURER -- A manufacturer, in most cases, located in a low-cost jurisdiction, which has a license to use an intangible property developed by its parent company. The manufacturer uses the intangible property to produce tangible property which is then resold to the parent for distribution to ultimate customers.
CONTRIBUTION ANALYSIS -- Where the profit-split method is applied in transfer pricing cases, a contribution analysis requires that the combined profit be divided between associated enterprises based upon the relative value of the functions performed by each of the associated enterprises participating in the controlled transaction.
CONTROL  -- The capacity of one person to ensure that another person acts in accordance with the first person's wishes, or the exercise of that capacity. The exercise of control by one person over another could enable individuals and corporations to avoid or reduce their tax liability. A company is usually regarded as controlling another company if it holds more than 50% of the latter company's voting shares. However, the definitions vary according to country and situation.
CONTROLLLED FOREIGN COMPANIES (CFC)  -- Companies, usually located in low tax jurisdictions, that are controlled by a resident shareholder.  CFC legislation is usually designed to combat the sheltering of profits in companies resident in low- or no-tax jurisdictions. An essential feature of such regimes is that they attribute a proportion of the income sheltered in such companies to the shareholder resident in the country concerned. Generally, only certain types of income fall within the scope of CFC legislation, i.e. passive income such as dividends, interest and royalties.
CONTROLLED TRANSACTION  -- Transactions between two enterprises that are associated enterprises with respect to each other.
CONTROLLING INTEREST  -- Ownership of more than 50% of a corporation's voting shares.
COOPERATIVE SOCIETY  -- In general, cooperative societies are founded to reduce the purchase price or increase the sales price of certain products for the benefit of their members or to serve the interest of their members in some other way, among small traders, farmers, consumers, etc.
COORDINATION CENTRE  -- Enterprise whose only purpose is to coordinate the activities of affiliated companies, to do research or to carry out support activities for the benefit of such corporations.
COPYRIGHT  -- Exclusive right granted to authors and artists to publish, use and exploit their literary or artistic works.
CORPORATE INCOME TAX  -- Income tax on the income of companies
CORPORATE VEIL  -- As a corporation is a separate legal entity, and shareholders have an interest in the company rather than in its assets, the corporate veil is used to describe the inability to look behind the legal entity and attribute the actions assets, debts and liabilities of a company to those standing behind it, notably the shareholders. Courts may sometimes be able to ¡°pierce¡± (look through) the corporate veil to make an attribution to the underlying person or persons.
CORPORATION  -- In technical terms, it means a legal entity generally chartered by a relevant government and separate and distinct from the persons who own it. However it is now commonly used as another way of referring to a company. (See: Company)
CORPORATION SHOPP ING  -- Term sometimes used in addition to treaty shopping to denote the use of tax treaty provisions by interposing a company instead of a different form of association for which tax relief would not been available.
CORRESPONDING ADJUSTMENT  -- An adjustment to the tax liability of the associated enterprise in a second jurisdiction made by the tax administration of that jurisdiction, corresponding to a primary adjustment made by the tax administration in a first tax jurisdiction, so that the allocation of profits by the two jurisdictions is consistent.
COST  -- Purchase price paid for property or the value of the exchange for which property is given.
COST CONTRIBUTION ARRANGEMENT (CCA)  -- A CCA is a framework agreed among enterprises to share the costs and risks of developing, producing, or obtaining assets, services, or rights, and to determine the nature and extent of the interests of each participant in the result of the activity of developing, producing, or obtaining those assets, services, or rights.
COST FUNDING  -- Contribution of an affiliate company to the general research and development (R&D) costs of another affiliate or group member, in proportion to its turnover or some other criterion
COST OF GOODS SOLD (COGS) -- A figure representing the cost of buying raw materials and producing finished goods. Included are clear-cut factors, such as direct factory labor, as well as others that are less clear-cut, such as overhead
COST-PLUS MARK-UP -- A mark up that is measured by reference to margins computed after the direct and indirect costs incurred by a supplier of property or services in a transaction
COST-PLUS METHOD -- A transfer pricing method using the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus mark up is added to this cost, to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions.  What is arrived at after adding the cost plus mark up to the above costs may be regarded as an arm's length price of the original controlled transaction.
COST-SHARING AGREEMENT -- See: Cost-contribution agreement
CPM -- See: Comparable profit method
CREDIT, FOREIGN TAX -- A method of relieving international double taxation. If income received from abroad is subject to tax in the recipient's country, any foreign tax on that income may be credited against the domestic tax on that income.  The theory is that this means foreign and domestic earnings of an entity will as far as possible be similarly taxed, although usually the credit allowed is limited to the amount of domestic tax, with no carry over if tax is higher abroad.
CREDIT, TAX -- Allowance of deduction from or a direct offset against the amount of tax due as opposed to an offset against income.
CREDIT, UNDERLYING (INDIRECT) TAX -- In relation to a dividend, credit for underlying tax is credit for the tax levied on the profits of the company out of which the dividends have been paid. Such relief may be given either under a tax treaty or in accordance with unilateral provisions.
CREDIT, WITHHOLDING TAX -- Various kinds of income (such as dividends, interest, royalties) are taxed at source by requiring the payer to deduct tax and account for it to the tax authorities (abroad). The taxpayer recipient is entitled to credit the tax withheld at source against his final tax liabilities determined by (domestic) tax law of the country in which he is resident.
CREDIT METHOD -- See: Credit, foreign tax
CREDITOR -- A person who extended credit and to whom money is owed; a lender
CUP METHOD -- Comparable uncontrolled price method
CURRENT ASSETS  -- The cash, accounts receivable, inventory, and other assets that are likely to be converted into cash, sold, exchanged, or expensed in the normal course of business, usually within a year.
CUSTOMS DUTIES -- Taxes on goods imported into a country
 
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DAMAGES -- The amount received (other than worker's compensation) through prosecution of a legal suit or action based on tort or tort-type rights, or through a settlement agreement entered into in lieu of such prosecution.
DEATH DUTIES --Taxes imposed on the transfer of property on account of a person's death.
DEBENTURE -- Interest-bearing bond which is not secured by any specific property, usually issued by a corporation or government to the general public
DEBT CAPITAL -- Funds obtained through various types of loan which normally comprehends debentures and bonds bearing fixed interest.
DEBT DUMPING -- Transferring a bad debt to a group company located in a higher-tax rate country in order to write off the debt in that country.
DEBT/EQUITY RATIO -- Relationship of total debt of a company to its ordinary share capital. If a corporate debt is disproportionately high in comparison with its equity, the debt may be recharacterized as equity, resulting in a disallowance of the interest deduction and taxation of the funds as dividends.
DEBT INSTRUMENT -- A written promise to repay a debt, such as a bill, bond, banker's acceptance, note, certificate of deposit, or commercial paper.
DEBTOR A person who owes money; a borrower
DEDUCTION AT SOURCE See: Withholding tax
DEDUCTIONS  Deduction denotes, in an income tax context, an item which is subtracted (deducted) in arriving at, and which therefore reduces, taxable income.
DEEMED INTEREST If a member of a multinational enterprise (MNE) receives an interest-free loan from an affiliated company, the tax authorities of the lender's country may readjust the lender's profits by adding an amount equal to the interest which would have been payable on the loan had it been made at arm's length.
DEEP DISCOUNT BOND See: Zero coupon bond
DEFAULT The failure of a debtor to make timely payments of interest and principal amounts as they come due or to meet some other provision of a bond, mortgage, lease, or other contract.
DEFERMENT OF TAX The postponement of tax payments from the current year to a later year. A number of countries have introduced legislation to counter the kind of tax avoidance whereby a taxpayer obtains a deferment of tax which is not intended by law. Ex) CFC legislation
DEFERRED INCOME Term used to describe income which will be realized at a future date, thus delaying any tax liability.
DEFICIENCY The excess of a taxpayer's correct tax liability for the taxable year over the amount of taxes previously paid for that year. A US concept
DELINQUENCY Tax which is in default (i.e. due but not yet paid) is often referred to as a "delinquent" tax in North American parlance.
DELIVERY Transfer of goods or an interest in goods from one person to another.
DEMAND LOAN A loan payable on request by the creditor rather than on a specific date.
DE MINIMIS Phrase used in connection with circumstances in which the full rigour of the tax law is not enforced because, in particular, of the small amount or minor breach which may be involved, particularly in the context of under-assessed or underpaid tax which are not pursued on "de minimis" grounds.
DEPENDENT AGENT See: Agency
DEPENDENT PERSONAL SERVICES The OECD model tax treaty provides rules for the treatment of salaries, wages and other similar remuneration (i.e. employment income) under the heading "dependent personal services". As a general rule, with some exceptions, the right to tax income from dependent personal services is allocated to the country where the employment activities are exercised.
DEPLETION  Deductible expense which reflects the decrease of a natural resource due to extraction of the resource.
DEPRECIATION An accounting technique in which the cost of an asset is allocated over its useful life.
DERIVATIVE FINANTIAL INSTRUMENTS Also known as derivatives.  These are financial instruments whose values are linked to or depend on the value of a primary (underlying) asset, e.g. debt assets, liabilities and equity securities, commodities or currency. The primary types of derivatives include forward contracts, futures, options and swaps.
DESTINATION PRINCIPLE Principle under a VAT regime which mandates that VAT on goods be paid in the country where the purchaser is resident (i.e. the country of consumption) at the rate that would have applied had the goods been purchased from a domestic supplier.
DIRECT CHARGE METHOD A method of charging directly for specific intra-group services on a clearly identified basis.
DIRECT COST Cost identified with a particular transaction, such as raw materials, components and goods, wages and other processing expenses.
DIRECT INVESTMENT Description often given to a substantial investment in the shares of a company.
DIRECTIVE An official order or instruction. In EU context, it means one of the legal instruments issued by the competent institutions of the European Union. A directive is addressed to the Member States requiring them to make such changes to their domestic legislation as necessary to satisfy a provision of one of the EC treaties.
DIRECT METHOD OF ALLOCATION OF COSTS Allocation method where the parent company or group service centre of a multinational enterprise providing central management and other services charges each member of the group directly for individual services rendered.
DIRECT TAX Direct taxes are taxes imposed on income, capital gains and net worth. Gift tax, death duties and property tax are also considered direct taxes.
DISCOUNT Amount by which the face value of a debt obligation exceeds its issue or selling price.
DISOLUTION OF CORPORATION The termination of the legal existence of a corporation.
DISTRIBUTION A payout of cash or property from a corporation to a shareholder.
DIVIDENDS A payment by a corporation to shareholders, which is taxable income of shareholders. Most corporations receive no deduction for it.
DOCUMENTATION Official documents that are used to prove that something is true or correct
DOMESTIC CORPORATION Corporation which is organized or has its place of effective management in a country.
DOMICILE A person's domicile in English common law is his permanent home, the place to which he always intends to return. Residence is the place where an individual lives for a certain period of time, while domicile is the place where an individual makes his permanent home.
DOMICILE, FISCAL Term sometimes used to mean the same as residence. Fiscal domicile does not necessarily have the same meaning as domicile.
DOUBLE DIPPING Term used to indicate the possibility for dual resident companies to deduct the same expenses in two jurisdictions.
DOUBLE TAXATION, DOMESTIC AND INTERNATIONAL Domestic double taxation arises when comparable taxes are imposed within a federal state by sovereign tax jurisdictions of equal rank. International double taxation arises when comparable taxes are imposed in two or more states on the same taxpayer in respect of the same taxable income or capital, e.g. where income is taxable in the source country and in the country of residence of the recipient of such income.
DOUBLE TAXATION, ECONOMIC AND JURIDICAL Double taxation is juridical when the same person is taxed twice on the same income by more than one state. Double taxation is economic if more than one person is taxed on the same item.
DOUBLE TAXATION TREATY See: Tax treaty
DTA Double tax agreement. See Tax treaty.
DUAL RESIDENCE Person or company resident in two or more countries under the law of those countries, because the two countries adopt different definitions of residence.
DUTY Customs duties (sometimes called a tariff) levied on imported products.
DUTY-FREE ZONE Zone usually located next to an international port or airport where imported goods may be unloaded, stored and reshipped without payment of customs duties or other types of indirect taxes, provided the goods are not imported.
 
EARNED INCOME
Income or compensation derived from personal services in an employment, trade, business, profession or vocation. (cf. investment income)
EARNINGS & PROFITS (E&P) A term referring to the economic capacity of a corporation to make a distribution to shareholders that is not a return of capital. Such a distribution would constitute a taxable dividend to the shareholder to the extent of current and accumulated earnings and profit under US tax law.
EARNINGS BEFORE TAXES Sales revenue less cost of sales, operating expenses, and interest, before taxes have been paid.
EARNINGS STRIPPING Practice of reducing the taxable income of a corporation by paying excessive amounts of interest to related third parties.
ECONOMIC DOUBLE TAXATION See: Double taxation, economic and juridical
ECO TAX See: Environmental tax
EFFECTIVELY CONNECTED INCOME (ECI) Non-resident alien individuals and foreign corporations engaged in trade or business within the US are subject to US income tax on income, from sources both within and outside the US, which is "effectively connected" with the conduct of the trade or business within the US. Income is effectively connected if it is derived from assets which are used in or held for use in the US, and the activities of the US business were a material factor in the realization of the income.
EFFECTIVE TAX RATE The rate at which a taxpayer would be taxed if his tax liability were taxed at a constant rate rather than progressively. This rate is computed by determining what percentage the taxpayer¡¯s tax liability is of his total taxable income.
EMPLOYEE PROFIT SHARING System under which the employees of an enterprise are entitled by employment contract or by law to a share in the profits made by the enterprise.
EMPLOYEE STOCK OPTION  An opportunity for employees to purchase stock (shares) in the company they work for, often at a discount from fair market value. Generally it is provided as an incentive to stay with the employer until the options vest.
EMPLOYMENT INCOME Income source of individuals, covering income derived from labour or other current or former dependent personal services such as salaries, wages, bonuses, allowances, compensation for loss of office or employment, pensions and, in some countries, certain social security benefits.
ENTERTAINER Income of a professional entertainer e.g. a musician, actor or other artiste, or sportsman is, in many cases, treated differently from income of persons carrying on other independent profession.
ENTITY   In general for tax purposes, an organization, person or party that possesses separate existence. Options include corporations, partnerships, estates and trusts.
ENVIRONMETAL TAX Tax imposed for environmental reasons, e.g. to provide an incentive to reduce certain emissions to an optimal level or taxes on environmentally harmful products.
EQUAL TREATMENT General principle of taxation that requires that taxpayers pay an equal amount of tax if their circumstances are equal.
EQUITABLE INTEREST An equitable interest in an asset is the interest of the beneficial owner; this may or may not be the same person as the legal owner.
EQUITY 1. The extent of a person's beneficial ownership of a particular asset. This is equivalent with the value of the asset minus the liability to which the asset is subject.                                                                            2. Paid-in capital plus retained earnings in a corporation                                                                                                 3. The ownership interest possessed by shareholders in a corporation - stock as opposed to bonds.
EQUITY CAPITAL A method of financing a business where money is received by the issuance of shares in the enterprise.
ESOP Employee stock ownership plan
ESTATE   Broadly, all that a person owns, whether real property or personal property, for instance, the estate one leaves at death.
ESTATE DUTY/TAX See: Death duties
ESTIMATED ASSESSMENT For income tax purposes, where the records kept, particularly by small traders, are inadequate for a precise calculation of tax due, it may be necessary for the taxable income or profits to be calculated by the tax authorities on the basis of an estimate.
ESTOPPEL  Rule under which one is precluded and forbidden by law to speak against his own act or deed. If a certain position has been taken, another person has relied on that, and you are aware of that reliance, there is often an estoppel against you arguing the contrary to your original position in a court proceeding.
EUROBOND International bond issued by a company in a market other than its domestic market. Eurobonds may take the form of loans, debentures or convertible debentures, and maybe designated in any currency.
EURODOLLAR Dollars originally deposited in US banks that are acquired by persons resident outside the United States and held abroad, mainly in Europe. Eurodollars are used by foreign banks as a method of financing loans to other local or foreign banks or to commercial borrowers.
EUROPEAN COMMISSION The Commission is the executive institution of the European Union charged with the task of administering all policy within the Union.
EUROPEAN UNION See: Treaty on European Union
EVASION A term that is difficult to define but which is generally used to mean illegal arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities.
EXAMINATION The checking of a taxpayer's tax return, accounts, self-assessment calculations, etc. The process may or may not include an audit of the taxpayer's own books.
EXCHANGE CONTROL Restriction of the amount of a particular foreign currency that can be bought or sold
EXCHANGE OF INFORMATION Most tax treaties contain a provision under which the tax authorities of one country may request the tax authorities of the other country to supply information on a taxpayer. Information may only be used for tax purposes in the receiving country and it must be kept confidential, i.e. it can only be disclosed to the persons or authorities concerned with the assessment or collection of taxes covered by the treaty.
EXCISE TAX A tax imposed on an act, occupation, privilege, manufacture, sale, or consumption.
EXCLUSIONS Term used to describe income which is exempt, i.e. not included, in the calculation of gross income for tax purposes.
EXEMPTION METHOD See: Foreign tax relief
EXEMPTIONS   Tax laws frequently provide specific exemptions for persons, items or transactions, etc. which would otherwise be taxed. Exemptions may be given for social, economic or other reasons.
EXPATRIATE Persons who have left their country and live abroad.
EXPATRIATION RULES Rules under which a taxpayer continues to be subject to tax when he relinquishes his residence or his citizenship in order to avoid tax.
EXPENSES Costs that are currently deductible, as opposed to capital expenditures, which may not be currently deducted but must be depreciated or amortized over the useful life of the property.
EXPORT DUTY Tax levied on exports of basic commodities entering into world trade, such as rubber, copper, palm oil, sisal, tea, cocoa and coffee
EXTENDED LIMITED TAX LIABILITY Principle according to which certain taxpayers (i.e. those subject to individual income tax, net worth tax and succession duty) who leave a tax jurisdiction and move to a low-tax country are subject to taxation in the former country of residence for a certain period of time after the move.
 
FACTORING
Financial transaction whereby an enterprise sells its debt-claims to a third party in order to obtain cash (although less than the full amount of the debt). The third party then assumes responsibility for the administration and collection of the debt on the due date for its own account.
FAIR MARKET VALUE The price a willing buyer would pay a willing seller in a transaction on the open market.
FEDERAL REGISTER A daily publication by the U.S government that prints the regulations of the various governmental agencies.
FEDERAL TAX In federal states, taxation may exist on two levels: taxation by the federation or confederation, and taxation by the state or provinces.
FEE Fees charged by central or local governments can be distinguished from taxes when they are charged as payments for the supply of particular services by the authorities. Fees are usually not considered taxes when listing taxes to be included in a double tax treaty.
FIDUCIARY A person, company, or association holding assets in trust for a beneficiary.
FIELD AUDIT An examination of a tax return by tax authorities at the taxpayer's place of business.
FIFO Method of valuing inventory on the basis of "first in, first out", where goods or materials purchased first are regarded as those which are sold first.
FINAL TAX Under tax treaties the withholding tax charged by the country of source may be limited to a rate lower than the rate which would be charged in other circumstances - this reduced rate is then the final tax in the country of source.
FINANCE COMPANY A company, usually a wholly owned subsidiary, which borrows funds from within or outside a group of companies and onlends the funds to affiliates. A finance company is, in many cases, established in a low or no tax jurisdiction.
FINANCE LEASE Lease where the lessor is considered only as a financier. The lessee is regarded as the owner of the leased assets. Cf. Operating Lease
FINANCIAL STATEMENT Report which contains all of the financial information about a company. The report generally consists of a balance sheet, income statement and may include other information as well.
FINANCIAL STRUCTURE The makeup of the right-hand side of a company's balance sheet, which includes all the ways it assets are financed.
FIRST IN, FIRST OUT (FIFO) See: FIFO
FISCAL DOMICILE See: Domicile, fiscal
FISCAL NULLITY DOCTRINE Common law doctrine used in the UK in cases of avoidance of tax, whereby certain transactions are ignored for fiscal purposes. Cf. Substance over form doctrine.
FISCAL POLICY Part of economic policy which relates to taxation and public expenditure.
FISCAL RESIDENCE See: Residence
FISCAL TRANSPARENCY "Looking through" an entity and attributing profits and losses directly to the entity's members. The profits of certain forms of enterprises are taxed in the hands of the members rather than at the level of the enterprise. Often occurs in the case of a partnership for example.
FISCAL YEAR Any 12-month period which is set for accounting purpose of an enterprise.
FIXED ASSETS Assets that are held by an enterprise either continuously or for a comparatively long period of time, generally more than one year
FIXED BASE This term was used in the OECD and UN model tax treaties in the context of independent personal services, but the former Article 14 has been removed from the OECD Model and these issues are now generally dealt with under Article 7, dealing with business profits attributed to permanent establishments. It denotes a centre of activity of a fixed or permanent character from which such services can be carried out such as a physician's consulting room. The fixed base provision attributes the right to tax income from independent personal services to the "other" country (i.e. the source country) if the taxpayer has a fixed base available to him in that country and income is attributable to that fixed base.
FIXED INCOME Income which does not fluctuate over a period of time, such as interest on bonds and debentures, or dividends from preference shares as opposed to dividend income from ordinary shares.
FLAG OF CONVENIENCE The flag of ship is the flag of the country where it is registered. This term is used in international shipping where a ship's country of registration is selected on the basis of country's legal requirement and tax regime.
FLAT TAX A tax applied at the same rate to all levels of income. It is often discussed as an alternative to the progressive tax.
FLOORS The lower limits on tax benefits and detriments, e.g. in medical expense. A taxpayer must spend more than the floor for a deduction, and only the amount above the floor is deductible.
FLOW-THROUGH ENTITY See Fiscal transparency
FOB VALUE FOB denotes "free on board". FOB value is value of goods excluding carriage, insurance and freight, i.e. roughly speaking, the domestic price in the country of origin.
FORCE OF ATTRACTION Concept under which a permanent establishment is taxed by the country in which it is located not only on the income and property, but also on all income derived by its foreign head office from source in, and all property owned by the foreign head office situated in, the country where the permanent establishment is located. The OECD model treaty does not allow application of it.
FOREIGN CURRENCY FORWARD See Forward contract.  This contract serves the same purpose as a foreign currency futures contract, except that it is not standardized and entered on the informal, interbank market rather than on a formalized commodities exchange.
FOREIGN CURRENCY FUTURES Exchange traded contract for the delivery of a standardized amount of foreign currency on a specific future date. The price for the foreign currency is agreed on the day the contract is bought or sold. Unlike forward contracts, futures are tradable, reflecting the standardization of contract size, specification and delivery date.
FOREIGN CURRENCY OPTION Contract with an option to buy/sell foreign currency.  See: option.
FOREIGN CURRENCY SWAP An agreement under which two or more parties agree to exchange specified amount of two different currencies for a defined period. Over the term of the agreement, the parties exchange fixed or floating rate interest payments in their swapped currencies.
FOREIGN EXCHANGE CONTROL See: Exchange control
FOREIGN EXCHANGE TAX Special tax imposed on transactions involving sales of foreign exchange by domestic banking institutions and authorized exchange brokers.
FOREIGN-SOURCE INCOME Generally income realized from countries outside the country of residence of the taxpayer.
FOREIGN TAX CREDIT (FTC) See: Credit, foreign tax
FOREIGN TAX RELIEF Relief from domestic tax on income from abroad which has already suffered foreign tax. Generally speaking, two approaches are taken to foreign tax relief, i.e. the credit method or the exemption method.
FORFAIT In a number of countries tax is sometimes levied on an estimated taxable base (forfait), particularly in respect of the imposition of income tax or turnover tax on small enterprises.
FORMS, TAX See: Tax form
FORMULA APPORTIONMENT See: Unitary tax system
FORMULATORY APPROACH See: Unitary tax system
FORWARD CONTRACT Contract for the delivery of an amount of asset (e.g. foreign currency, securities, commodities) on a specific future date.
FRANCHISE TAXES Nearly all states in the US levy an annual franchise tax on resident and non-resident corporations for the privilege of the right to do business in that state.
FRAUD Tax fraud is a form of deliberate evasion of tax which is generally punishable under criminal law. The term includes situations in which deliberately false statements are submitted, fake documents are produced, etc.
FRINGE BENEFITS Benefits supplementing normal wages or salaries. Fringe benefits may be given in the form of a money allowance, e.g. a holiday bonus or in the form of benefits in kind, e.g. free accommodation. Although most countries tax the benefit of employer-provided automobiles and accommodation, the tax treatment of other fringe benefits varies considerably.
FRIVOLOUS POSITOIN A tax position that is knowingly advanced in bad faith and is patently improper.
FRONTIER WORKERS For tax purposes, a frontier worker is a person who commutes across a border (e.g. on a daily basis) between his place of residence and his place of employment.
FRONTING Term used to describe the practice of interposing a third party in a transaction so as to circumvent transfer pricing legislation.
FRUIT AND TREE DOCTRINE A judicial doctrine that an individual who earns income from property of services may not assign such income to another person for tax purposes.
FTC See Foreign tax credit
FUNCTIONAL ANALYSIS An analysis of the functions performed (taking into account assets used and risks assumed) by associated enterprises in controlled transactions and by independent enterprises in comparable uncontrolled transactions.
FURNISS V. DAWSON This case is 1984 UK case, decided by the House of Lords, which is generally considered to be a landmark case. It made ineffective tax avoidance schemes which have no commercial purpose other than the avoidance of tax.
FUTURES CONTRACT An agreement between a buyer and seller to exchange particular goods (e.g. securities or commodities) for a particular price at a future date as specified in a standardized contract common to all participants in a market on an organized futures exchange.
 
GAAP Generally Accepted Accounting Principles are the rules and practices required to be followed in keeping financial records and books of account.
GAIN, CAPITAL See: Capital gain
GEARING Term broadly used in the context of a company's debt/equity ratio. A company is highly geared if the ratio of debt to equity is high. Sometimes referred to as capital gearing or leveraging.
GENERAL PARTNER In a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners. A limited partnership must have at least one general partner and at least one limited partner.
GENERAL PARTNERSHIP See: Partnership
GENERATION-SKIPPING TAX Tax imposed to prevent the avoidance of transfer tax (i.e. estate tax and gift tax) over successive generations.
GIFT CAUSA MORTIS A transfer of property by a person who faces impending death. The donee thereby becomes the owner of the property, but on the condition that the gift is revoked if the donor does not die.
GIFT INTER VIVOS A gratuitous transfer of property made during the transferor's (donor's) lifetime. In many countries the gratuitous transfer of property is subject to a gift tax.
GLOBAL FORMULARY APPORTIONMENT METHOD See: Global method
GLOBAL HEDGING A risk-management strategy to balance positions of different business units or with unrelated third parties.
GLOBAL INCOME TAX Income tax that aggregate income from all sources at the individual (or family unit) level. The income is then taxed at a single progressive rate.
GLOBAL METHOD Under the global method, the profits of each member of a multinational enterprise (MNE) are not calculated on the basis of arm's length dealings, but rather the total profit of the enterprise is allocated to the members of the multinational enterprise on the basis of, for example, the turnover of each member, the expenses incurred by each member or the labour cost of each member.
GLOBAL TRADING Term used to describe transactions carried out by, inter alia, investment banks and securities dealers, involving financial instruments, financial services and financial goods. Also known as 24-hour trading since the transactions are carried out continuously during a day in financial markets worldwide.
GOING CONCERN A business which is actually operating, e.g. at the time of takeover. The advantage of taking over a business as a going concern (if it is operating profitably) is usually recognized by a payment for goodwill as well as for other assets.
GOING CONCERN VALUE The element of value that attaches to property as a result of the ability of a trade or business to continue to operate and generate income after a transfer of ownership.
GOOD FAITH "Good faith" denotes a state of mind, whereby a person honestly and truly believes that certain facts or circumstances are as he says they are.
GOODS AND SALES TAX VAT style multi-stage sales tax levied on purchases (and lessees). Sellers (and lessors) are generally responsible for collection.
 
GOODWILL Intangible asset which consists of the value of the earning capacity, location, marketing organization, reputation, clientele, etc. of a trade or business. Goodwill can be transferred for a consideration to another entrepreneur upon the sale of the business as a going concern.
GORDON REPORT 1981 report submitted to the US Treasury, entitled "Tax Havens and Their Use by United States Taxpayers - An Overview"; it explains the use of US taxpayers make of tax havens, existing anti-abuse measures and proposals for measures to counter such activities.
GRACE PERIOD The period following the due date of taxes during which legal action for recovery of delinquent taxes will not be instituted and interest will not commence to run.
GRADUATED RATE System where the rate of tax increases on marginal amounts as the amount of taxable income rises. Synonym for progressive rate.
GRANDFATHER CLAUSE Clause temporarily preserving legislation which exists at the time a law is modified or a (tax) treaty is concluded (or modified).
GREEN CARD Entry document issued by the US immigration and Naturalization Service (INS) that permits foreign nationals to live permanently in the US and undertake employment.
GREEN CARD TEST A test in the US to determine residence of an alien individual, i.e. an alien is considered resident if at any time during the calendar year he is a lawful permanent resident of the US under the immigration laws.
GROSS INCOME  Gross receipts, whether in the form of cash o
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