Taxation and treasury
Here you can find a list of definitions for terms associated with taxation for Treasury. These terms are listed alphabetically, alternatively you can use the find facility within your internet browser (by pressing control + F simultaneously) to search for terms within this page.
Ad Valorem Tax
Tax which is levied in proportion to the value of goods, property or services.
Advance Tax Ruling
A ruling by the tax authorities given to specific taxpayers concerning their future tax obligations.
Alternative Minimum Tax (AMT) (USA)
Provides an alternative set of tax rules to calculate the minimum amount of tax payable by a US company or individual. The alternative minimum tax is calculated using the alternative minimum taxable income or AMTI as the taxable basis. AMT is payable where the AMT tax exceeds the tax which would otherwise be payable using regular US tax rules.
Annual Interest (UK)
Interest on borrowings capable of exceeding 365 days.
Anti-abuse/Anti-avoidance Regulations
Regulations that aim to combat the abuse of tax rules.
Anti-treaty Shopping Provisions
Clauses in double tax treaties or EU directives that aim to prevent the abuse of the tax advantages offered under that treaty/directive.
Arbitration Convention (90/436/EEC)
Addresses the situation where the tax authorities of one EU Member State unilaterally adjust the transfer prices of a transaction with another Member State potentially leading to double taxation. The arbitration convention sets out the procedures for the resolution of differences between the tax authorities.
Arm's Length Principle
The international standard adopted by the OECD for pricing connected party transactions. The arm's length principle assumes that pricing for transfers between affiliated companies should be identical to that applied to transfers between fully independent companies. See transfer pricing, transfer pricing regulations.
Branch Profit Tax (BPT)
Broadly, a tax levied on the after tax profits (i.e. dividend equivalent amount) of a branch of a foreign company in some jurisdictions (most notably the USA) aimed at putting the branch in a similar position to that of a domestic entity. The branch profits tax is often reduced or eliminated under double tax treaties.
Capital Allowances
Statutory calculated depreciation on fixed assets that is allowable as a deduction in computing taxable profits.
Capital Contribution
A contribution in kind or in cash which is added to the capital reserves of a company but is generally structured to ensure that it is not treated as taxable income but it may be subject to capital duty.
Capital Duty
A levy imposed by some jurisdictions, usually on the increase in a company's capital or on its formation.
Capital Gains/Losses
Realised profits/losses arising from the disposal of capital assets, caused by differences between an asset's initial purchase price and its sale proceeds, related costs and, in certain cases, an allowance for inflation.
Capital Items
Revenue (broadly trading) and capital transactions are often separated for tax purposes. Transactions on capital accounts (e.g. interest on long-term financing) may be subject to different tax rules than trading transactions (e.g. interest payable on short-term working capital balances).
Check the Box Regulations (USA)
Regulations which permit the classification of a US or non-US business as a company, partnership or disregarded entity subject to certain conditions by ticking a box on a form.
Conduit Entity
An entity whose participation in a given financing arrangement is generally designed to minimise withholding tax liabilities. The term may also be used to describe an entity where the tax attributes pass through to the owners for tax purposes, for example a partnership.
Connected Party Transactions
Transactions between affiliates which may be undertaken other than on arms length terms. Precise definitions of a connected party can vary according to transaction type and across jurisdictions.
Co-ordination Centres
Specialised regimes (most notably Belgian Co-ordination Centres - BCCs) designed to enable multinational companies to conduct a wide variety of intra-group administrative and financial operations (including liquidity management schemes) on a favourable tax basis.
Controlled Foreign Company (CFC)
A company typically located in a jurisdiction with a preferential tax regime where the income is attributed to its controlling parent (resident in a higher tax jurisdiction) subject to a number of safeguards.
Controlled Foreign Company (CFC) legislation
Provides the legislative basis for taxing profits retained by a controlled foreign company as if they were profits earned directly by the parent. The legislation is generally targeted at passive income rather than profits arising from manufacturing or trading.
Corporation Tax
Tax applied to companies' income profits and, in some jurisdictions, on their capital gains.
Corresponding Adjustment
Where interest or expense is disallowed under domestic legislation but has been assessed to tax in another jurisdiction. Double tax treaties often provide for the possibility of a corresponding adjustment to mitigate or eliminate the impact of the double taxation.
Cost Plus Basis
A method of determining taxable income which is often agreed by many tax authorities for multinational group entities which perform management, coordination or control functions for other group companies.
Deductibles/Deductions
Amounts incurred or deemed to be incurred on earning income, the value of which is deducted from assessable income in order to determine the amount of income subject to taxation.
Depreciation
An accounting term which is used to describe the notional expense which is created by measuring the reduction in the value of an asset over a certain period (generally its useful life).
Direct Taxation
Taxation that is directly levied on income and assets such as corporation tax.
Disclosure of Tax Avoidance Schemes
The UK recently introduced disclosure requirements for tax avoidance schemes similar to those in the USA and Australia. The aim of these schemes is to ensure that large tax avoidance schemes (which often involve financial instruments/products) are disclosed to the tax authorities around the time when they are first 'sold'.
Dividend Stripping
Payment of a dividend, the receipt of which is taxed in an advantageous form, prior to disposal of shares, thus resulting in a lower taxed gain on disposal.
Double Dip
Achievement of a tax deduction in two countries for what is in effect the same expense, in conjunction with taxation on only one receipt or taxation at lower rates. Typically, the term is used in the context of interest payments but it can also apply to other expenses e.g. lease rental payments.
Double Taxation
Instances where the same income or profit is subject to tax twice.
Double Tax Treaties
Agreements between countries to attribute taxing rights and provide relief where double taxation might otherwise apply.
Dual Resident Company
A company which is tax resident in two jurisdictions.
Earned Income
Funds acquired through employment or trading.
Earnings Stripping
A method of reducing tax obligations by transferring taxable income to another country. It is principally a US term which is used to describe the situation where the tax base was being eroded due to excessive interest paid on foreign related party borrowings disproportionate to the overall borrowing of the worldwide group.
E-commerce Taxation
Taxation applied to the sale or purchase of products/services via the internet.
EU Code of Conduct on Business Taxation
A process signed up to by EU Member States in 1997 thereby committing themselves to respect the principles of fair competition and to refrain from adopting or retaining tax measures that cause harmful competition.
European Economic Interest Groupings (EEIG)
A form of association designed to facilitate co-operation between businesses in different Member States. Whilst having a legal personality, the profits and losses arising from the activities of the grouping are only taxable in the hands of its Members and consequently it has many characteristics of a partnership.
Excise Duty
Sometimes described as excise tax. Generally a tax levied on the production of goods although in some cases it may also be levied on the distribution of goods.
Expatriate Tax Regime
Fiscal regulations applied to the earnings of foreign employees in a particular country.
Export Tax
Tax imposed on a company for exporting products/services. The term export tax benefits is often used to describe the situation where fiscal benefits are available to companies that sell their products overseas as opposed to domestically.
Effective Tax Rate
The actual rate of tax to be paid rather than the headline rate. This is calculated by dividing profit before tax by the tax charge for the year.
Financial Company/Branch
A group company/branch generally set up by multinational enterprises to manage group finances, often subject to special rates of tax or located in lower tax jurisdictions.
Financial Year
See fiscal year.
Fiscal Incentives
Various tax exemptions, tax holidays, etc. often used to attract foreign investment or to encourage or stimulate activity/investment in selected areas.
Fiscal Year
In most cases, the fiscal year corresponds to the calendar year however this is not necessarily the case, for example, in the UK the fiscal year (financial year) runs from 1 April to 31 March for companies. Also known as financial year.
Foreign Tax Credit
An amount representing a reduction of a domestic tax liability on overseas profits by reference to foreign tax suffered directly or indirectly on these profits. See underlying tax.
Foreign Tax Credit Baskets (USA)
The limitation of credit for foreign tax on certain types or 'baskets' of income to the US tax on the income within the same basket.
Franchise Tax
A regressive tax on a business incorporated in a country, usually calculated in accordance with the company's total worldwide profits or capital. US states often levy franchise tax on businesses set up or carrying on a business within the state.
Funding Bonds
Where these are issued to a creditor in the UK in respect of an interest liability the issue of the bond is treated for tax purposes as the payment of interest.
GAAP
Generally accepted accounting practice. Where taxable profits are computed using accounting profits as a starting point, there is often a requirement that the accounting profits have been prepared using local GAAP. This may change in some European jurisdictions with the introduction of International Accounting Standards (IAS) from 1 January 2005.
Group Taxation Regime (Fiscal Unity)
The ability offered by some jurisdictions to groups to consolidate the results of different taxable entities within the same group so that they are treated as a single entity for tax purposes. Often a group taxation regime will only apply to entities resident in the same tax jurisdiction, although in the USA, for example, the 'check the box rules' mean that non-resident entities can also be consolidated for US tax purposes. In other jurisdictions, a similar effect is achieved by grouping provisions whereby losses incurred by one group company may be transferred to another group company and special rules apply for the transfer of assets between group members.
Harmful Tax Competition
A term used in both an EU and an OECD context to refer to certain tax regimes which offer preferential tax treatments to attract investment and savings in a manner which erodes the tax bases of other countries. It focuses on specific incentives as well as tax haven jurisdictions.
Hedge Accounting
Where a company has foreign currency assets and liabilities which act as a commercial hedge and are not required to be brought into the profit and loss account to such an extent that they are economically self cancelling. In some jurisdictions, effective hedges for accounting purposes on a pre-tax basis may not be effective on a post-tax basis. Also referred to as matching.
Holding Companies
Companies with a controlling interest in other companies. In certain jurisdictions, the holding structures benefit from tax advantages.
Hybrid Entity
An entity which is treated differently for tax purposes in different jurisdictions e.g. a corporate entity in one jurisdiction is treated as a look-through entity in another jurisdiction, facilitating a "double dip" for interest costs.
Hybrid Instrument
A financial instrument which is taxed differently in different jurisdictions creating the opportunity for structural arbitrages e.g. an instrument that is treated as debt in one jurisdiction with deductions available for accrued interest but equity in another with no corresponding pick up of the accrued interest.
IAS (International Accounting Standards)
Adopted by the European Commission for periods beginning on or after 1 January 2005.
Indirect Taxation
Taxation that is indirectly levied regardless of income or assets via sales or value-added taxes.
Inheritance Tax
Tax applied on a deceased's estate or on the transfer of inherited assets.
Input VAT
VAT paid to product suppliers and service providers.
Interest and Royalties Directive (2003/49/EEC)
An EU directive that aims to eliminate withholding tax in the case of payments of interest and royalties between an EU company and its 25% parent or subsidiary or directly owned affiliates of the same EU parent.
Investment Company
A company where the main purpose is to hold income generating assets rather than turning over those assets. There may be specific statutory definitions in certain jurisdictions.
Local Tax
Tax imposed by local government.
Marginal Tax Rate
Rate of tax applied to additional taxable income.
Merger Directive (90/434/EEC)
EU Directive on tax applied to mergers, divisions, transfers of assets and exchanges of shares between companies in different EU Member States. It is designed to achieve fiscal neutrality between purely domestic and cross border mergers within the EU.
Non-discrimination
A key principle within the EC Treaty which has been upheld in many European Court of Justice (ECJ) decisions. Basically, a Member State is deemed to be acting in a discriminatory manner if different tax regimes apply to essentially the same basic situations. The ECJ typically upholds the principle that EU non-residents and residents of a particular Member State in similar situations must enjoy a parity of treatment. It is also a key principle underlying international tax treaties, whereby non-residents are entitled to the same tax regime as residents.
Non-trading income
Also known as passive income. Income generated from a capital asset which is often subject to different tax rules than trading income.
OECD Model Tax Convention
A model of tax treaty articles and associated commentary/interpretations issued by the OECD. The model tax convention forms the basis for international double tax treaties. The commentary may be used as guidance where terms of a particular treaty follow those of the model.
OECD Transfer Pricing Guidelines
Guidelines issued by the OECD which advocate the application of the arm's length principle in determining the pricing of transactions between related entities together with detailed commentary explaining how to choose and apply the most appropriate transfer pricing methodology to particular circumstances.
Offshore
It is generally used in the context of transactions with (or) a company resident in a tax haven.
Output Tax
VAT applied to products supplied and services provided.
Parent-Subsidiary Directive (90/435/EEC)
EU directive which provides that profits distributed by an EU subsidiary to its EU parent shall be exempt from withholding tax provided that parent holds at least 25% of the capital of the subsidiary for a period of at least two years.
Pass-through Taxation
Taxation of income and gains of a company in the hands of the company's shareholders or interest holders rather than the company itself.
Passive Income
See non-trading income.
Payroll Tax
Tax applied to and withheld on employees' wages.
Permanent Establishment (PE)
A company has a PE in another jurisdiction where it has a taxable presence there. Broadly, this is a fixed place of business through which a non-resident company carries on a trading activity. Typically, this is recognised as a branch operation.
Pricing Method
Methods adopted for related party transactions, normally in the context of those that are generally accepted to provide a fair market value and not to lead to transfer pricing adjustments. The OECD recognises the comparable uncontrolled price method, the resale price method and the cost plus method as acceptable pricing methods for particular circumstances. In addition, it also accepts that profit-based methods such as the profit-split method and the transactional net margin method may be appropriate in some circumstances.
Quasi Equity
A loan which fulfils an equity function in the accounts of the borrower, for example where a company is thinly capitalized for tax purposes. The tax treatment for the lender will vary across jurisdictions.
Real Estate Tax
Tax assessed against property.
Repatriation of Earnings
The repatriation of overseas earnings usually by way of distribution.
Reserve Accounting
Items charged or credited to reserves without being included in the profit and loss account. There are normally only limited circumstances where reserve accounting is acceptable and these are generally prescribed either by local GAAP or law.
Residence/Non-residence
The territorial status of a legal entity or individual from a point of view of its liability to tax. In most cases, a company will be resident where it is incorporated. However ,it may also be resident in some cases where it is managed and controlled or effectively managed. Where a company is resident for tax purposes in more than one jurisdiction, it is known as a dual resident company. There are tie breaker clauses within double tax treaties which determine residence in such cases to prevent double taxation.
Safe Harbour Legislation
Where excessive debt for thin capitalisation purposes is described as borrowing which exceeds a statutorily defined limit.
Sales Tax(es)
A tax applied on the retail sale of goods/services.
Savings Tax Directive
EU Directive on tax applied to (or disclosure) of savings income i.e. funds acquired via interest payments.
Securities Taxation
Taxes applied to securities transactions, dividends, interest and capital gains.
Service Company
A company where the prime purpose is generally to provide coordination, management and administrative services to other group entities. Often such companies are taxed on a cost plus basis.
Short Interest (UK)
Interest on borrowings the term of which is not capable of exceeding 365 days.
Special Relationship Provisions
Often contained within the interest article of double tax treaties, which effectively limit any treaty benefits available to third parties.
Stamp Duty
Tax applied to the purchase of shares and other assets, including real estate, the rate of which is determined by the value or nature of the transaction.
Stock Dividend
Payment of a dividend in the form of shares.
Surtax/Supertax
Additional tax applied to income on which regular income tax is paid.
Tax Arbitrage
Any type of transaction aimed at reducing a taxpayer's overall liability.
Tax Avoidance
All legally acceptable methods designed to reduce tax liability.
Tax Base
- The total amount of income on which tax can be levied; or
- the activity or area subject to a given tax.
Tax Break
Any type of activity or instrument that attracts tax exemption or tax reduction. Also known as tax shelter or tax shield.
Tax Capacity
The amount of taxable profit available to absorb allowances, credits or losses, without limiting the value obtainable from such reliefs. Alternatively, the extent to which taxable income may increase without raising the tax charge due to reliefs available.
Tax Clearance
The process whereby taxpayers seek and receive recognition from a tax authority that a proposed tax arrangement meets specific requirements.
Tax Co-ordination/Harmonisation
Harmonisation of tax bases, rates and regulations across different countries. Tax harmonisation is a particularly important issue within the European Union.
Tax Credit
Tax allowance used to reduce a tax obligation or which may generate a repayment of tax.
Tax Deferred
Any type of instrument that allows tax to be deferred to maturity. This may lead to the instrument being subject to a lower tax rate.
Tax Haven
Location where companies and/or individuals are subject to a particularly favourable tax environment.
Tax Holidays
Period when one is temporarily exempt from paying tax or when tax paid is temporarily reduced.
Tax Loss Carryback and Carryforward
The ability under certain tax codes to offset losses against taxable gains using losses incurred in preceding or future financial years.
Tax Neutrality
Tax should not interfere with or impact on economic decisions.
Tax Point
Point of time when a transaction is deemed to occur for VAT purposes.
Tax Relief
Tax concessions offered by a country, generally in order to promote certain social or economic objectives.
Tax Sparing
Generally refers to tax treaty provisions which provide for tax credits to be granted for domestic purposes in the absence of any actual foreign tax being levied. In the context of loans that benefit from withholding tax exemption, the resulting tax credit allowed by sparing may allow the lender to offer an interest rate that is significantly below the reference rate. In some cases, the offered interest rate may even be negative.
Tax Shelter
Methods tax payers may use to reduce tax liabilities. For example a company with capital issues may often use their losses to shelter capital gains.
Tax Symmetry
Where two parties to a transaction have an equal and opposite tax treatment so that there is no tax leakage.
Tax Treaty
See double tax treaties.
Tax Year
The year on which taxes are calculated. In most countries, the tax year corresponds to the calendar year. However, in some countries, such as the UK or the USA, the tax year does not necessarily correspond to the calendar year and may straddle two calendar years.
Taxable Equivalent Income (Taxable Equivalent Yield)
Adjusting method that allows tax-free income or yield to be compared to gross taxable income before any taxes are deducted in order to determine how much taxable income/yield is required to equal the income or yield generated by a tax-free investment.
Territoriality
The rules that determine if a legal entity or individual is deemed to be resident of a given state and is therefore liable to pay taxes in that state. See residence/ non-residence.
Thin Capitalisation
The difference between a company's borrowing capacity at market prices (arm's length) and its actual debt. International groups may lend a subsidiary more than it would be able to obtain in the open market place on the basis of its equity (or guarantee such third party borrowings), so as to obtain extra tax relief for their investment through interest deduction on the subsidiary's debt. To prevent this practice, many national authorities impose limits on interest deductions in line with each company's arm's length borrowing capacity.
Trading Account
Income or expenses arising in connection with a trade as distinguished from non-trading income/expenses e.g. dividends and interest which generally arise from the holding/management of investments.
Trading Company
A company carrying on a trading activity.
Transfer Pricing
The practice where companies can take advantage of tax differentials between different jurisdictions to achieve overall tax savings. This is done by applying higher charges to transfers to companies situated in higher tax jurisdictions, thus reducing these subsidiaries' profit and applying lower charges to transfers to subsidiaries based in low-tax jurisdictions so as to increase their profit.
Transfer Pricing Documentation
The documentation that is required to accompany intragroup transactions in order to provide evidence to support the pricing of the transaction.
Transfer Pricing Regulations
Regulations aimed at ensuring that transactions between affiliated companies are done at arm's length, i.e. if the companies are not related. See arm's length principle.
Transfer Tax
Tax levied on the transfer of title on moveable or immoveable property.
Treaty Claim
Claim forms submitted to tax authorities where required to request clearance to apply treaty provisions to specified transactions with non-residents.
Treaty Clearance
Obtaining agreement from the tax authorities to apply treaty provisions to transactions with an overseas resident.
Treaty Shopping
Taking advantage of the tax treaty network to obtain a more beneficial tax position often by the use of a conduit entity. Many treaties contain anti-treaty shopping clauses.
Unallowable Purpose (UK)
Restricts tax relief on transactions involving loan relationships or derivative contracts where tax avoidance is one of the main purposes of the transaction.
Underlying Tax
The tax paid by subsidiary companies on the profits out of which they pay dividends. Most double tax relief claimed relates to underlying tax.
Unilateral Relief
Reduction in a tax obligation on profits acquired from abroad (where income tax has already been applied), even when no double tax treaty exists between the two countries involved.
Value Added Tax (VAT)
A tax applied on the value added to a product/service at each stage of its production/activities.
Wealth Tax
Tax applied to an entity's (or individual's) assets and capital.
Withholding Tax
Tax retained at source, generally on dividend and interest income.
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