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. A-B-C-D-E-F-G-H-I-J-K-L-M-N-O-P-Q-R-S-T-U-V-W--Z -A- ABATEMENT -- A reduction in the assessment of tax, penalty or interest when it is determined the assessment is incorrect 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. -B- BACK-TO-BACK LOAN -- Method of borrowing between related parties where a loan is channelled through an independent third-party intermediary. -C- CAPITAL ASSETS -- All property held for investment by a taxpayer. -D- 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. -E- EARNED INCOME -- Income or compensation derived from personal services in an employment, trade, business, profession or vocation. (cf. investment income) 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. -F- 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. -G- GAAP -- Generally Accepted Accounting Principles are the rules and practices required to be followed in keeping financial records and books of account. 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. -H- HABITUAL ABODE -- In the context of the tie-breaker rule of the OECD model tax treaty, habitual abode is one of the criteria used to resolve the problem of dual residence. It refers to the period of time a taxpayer spends in each country. -I- IMF -- See: International Monetary Fund -J- JEOPARDY ASSESSMENT -- Tax assessment made where there is some danger of tax being lost. -K- -L- LANDED COST -- Term used in relation to the importation of goods which means the sum total of the cost of the goods concerned, the amount of customs duties levied on those goods and the expense incurred in unloading them. LIMITED LIABILITY -- Liability of investor which is limited to the extent of his investment -M- MAINTENANCE EXPENSES -- 1. Expenses incurred by a taxpayer to provide for his family, former spouse or other relatives. 2. Expenses for the upkeep or preservation of a building or equipment. -N- NATIONALITY PRINCIPLE -- The nationality of a taxpayer may affect the manner in which he is taxed and the nature of his tax burden, but comprehensive income tax treaties commonly provide that foreign taxpayers should not suffer discriminatory taxation by reason of their nationality. -O- OECD -- The OECD (Organization for Economic Co-operation and Development) is a multilateral organization comprised of 30 countries, which are mostly Western European countries and other industrialized countries including US and Japan. Founded in 1961, the OECD provides a forum for representatives of countries to discuss and attempt to coordinate economic and social policies. It has an especially significant role in international tax matters. Its website is www.oecd.org. OECD MODEL TAX TREATY -- See: Model tax treaty -P- PAID-IN CAPITAL -- The capital received by a corporation from investors for stock, as distinguished from capital generated by earnings or donated. Some countries treat a partnership as a separate taxpayer and may subject it to tax on its income and losses as a corporation. Other countries do not consider a partnership to be a separate legal entity and the partnership is treated as tax transparent, with each individual partner being taxed on his share of the profits according to his interest in the partnership. Taxation of partnerships is addressed in the Commentary to Article 1 of the OECD Model. -Q- -R- RAMSAY CASE -- The Ramsay case (W.I. Ramsay Ltd. v. IRC, Eilbeck (Inspector of Taxes) v. Rawling), decided by the UK House of Lords in 1981, involved complicated tax avoidance scheme which were marketed in the UK in the 1970s. The case established that a series of transactions with the purpose of tax avoidance, which ultimately cancelled each other out, could be ignored for tax purposes. REMUNERATION -- Employment income and fringe benefits received by an employee for services rendered. REPATRIATION -- Individuals and legal entities investing their capital in a foreign country in order to derive income from such capital may wish to transfer this capital or income back to their home country, i.e. to repatriate it. Repatriation also takes place when expatriate employees working in a foreign country want to send income to their home country. RESALE PRICE MARGIN -- Gross margin measured by reference to the price at which goods purchased from another party are resold to independent enterprises. RESALE PRICE METHOD -- Method used in transfer pricing between affiliated companies, under which an arm's length price is ascertained by deducting a normal profit margin from the resale price at which a buyer of inventory assets resells these assets to an unrelated party. RESEARCH AND DEVELOPMENT (R&D) -- Any systematic or intensive study carried out in the manufacturing and industrial field, the results of which are to be used for the production or improvement of products and processes. RESERVES -- Funds made to fulfil future costs or expenditures. There are legal reserves which may be required by company law and may be necessary before dividends are distributed. RESIDENCE -- Residence is a basis for the imposition of taxation. Usually a resident taxpayer is taxed on a wider range of income or other taxable items than a non-resident. Residence in a state is a criteria for invoking a tax treaty of that state, and residence for treaty purposes involves considering the domestic law of residence for tax purposes, and then the requirements in Article 4 of the OECD Model, especially in the case of tiebreaker tests in cases of dual residence. RESIDENCE PRINCIPLE OF TAXATION -- Principle according to which residents of a country are subject to tax on their worldwide income and non-residents are only subject to tax on domestic-source income. RESIDENT -- A person who is liable for tax in a country or state because of domicile, residence, place of management, or other similar criterion. RESIDENT ALIEN -- A person is said to be a resident alien of a country if he resides in that country but is a citizen of another country. RESIDUAL ANALYSIS -- An analysis used in the profit split method which divides the combined profit from the controlled transactions under examination in two stages. In the first stage, each participant is allocated sufficient profit to provide it with a basic return appropriate for the type of transactions in which it is engaged. Ordinarily this basic return would be determined by reference to the market returns achieved for similar types of transactions by independent enterprises. Thus, the basic return would generally not account for the return that would be generated by any unique and valuable assets possessed by the participants. In the second stage, any residual profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances that might indicate how this residual would have been divided between independent enterprises. RESTRICTED STOCK PLAN -- A stock option plan under which the transferred stock option is subject to restrictions regarding transferability and to substantial risk of forfeiture. Restricted stock is includable in the gross income of the employee in the first taxable year in which the rights become transferable or no longer subject to forfeiture. RETAIL SALES TAX -- Single-stage tax on the sale of goods to ultimate consumers, whether by retailers or other traders. RETAINED EARNINGS -- The portion of a corporation's after-tax profits that is not distributed to the shareholders, but rather is reinvested in the business. RETROACTIVE EFFECT -- The effect of tax law provision towards the past, which is allowed only to the advantage of a taxpayer. RETURN -- Declaration of income, sales and other details made by or on behalf of the taxpayer. Forms are often provided by the tax authorities for this purpose. RETURN OF CAPITAL -- A distribution that is not paid out of the earnings and profits of a corporation. Rather, it is a return of the shareholder's investment in the stock of the company. REVENUE NEUTRALITY -- Constraints on tax reform that it should not change revenues available to government in any significant way. REVENUE PROCEDURE (REV. PROC.) -- An official published statement by the IRS of US about procedural and administration aspects of the tax laws. RING FENCE -- Theoretical enclosure established by tax legislation around certain profits, losses, transactions or groups of transactions in order to isolate them for tax purposes. ROLLOVER RELIEF -- Relief by means of which liability to capital gains tax is deferred. The essential feature of roll-over relief is that a gain which would otherwise have arisen on the occurrence of a taxable event for capital gains tax purposes is deferred, or rolled over, until there is a subsequent disposal of the asset concerned. ROUND TRIP TRANSACTION -- Potential transfer pricing abuse where intangible property is developed by a parent company which licenses it to a related party manufacturer located in a low-tax jurisdiction. The manufactured goods are resold to the parent for distribution to ultimate consumers. ROYALTIES -- Payments of any kind received as consideration for the use of, or the right to use intellectual property, such as a copyright, patent, trade mark, design or model, plan, secret formula or process. RULING -- Decisions or opinions of the tax authorities in respect of actual fact situations which come before it as part of an assessment procedure or in response to taxpayer questions. -S- SAFE HARBOUR -- Where tax authorities give general guidelines on the interpretation of tax laws, these may state that transactions falling within a certain range will be accepted by the tax authorities without further questions. -T- TANGIBLE PROPERTY -- Property with a physical form, e.g. personal property, real property as distinguished from intangible property. TAX DEPOSIT CERTIFICATE -- Certificate available for purchase in US to taxpayers liable to income or corporate tax, etc. Liability to taxes may be paid by cashing in the deposit certificate. Interest is credited on the deposit by the Inland Revenue. TAX CREDIT -- See: Credit, tax TAX DECLARATION -- See: Return TAX EQUALITY -- See: Horizontal equity; Vertical equity TAX EVASION -- See: Evasion TAX EXILE -- Generally speaking, a natural or legal person who severs all ties which make him fiscally resident in a particular country and moves to another jurisdiction for tax reasons. TAX EXPENDITURE -- This term denotes special preferences provided in income tax laws which depart from the normal tax structure and which are designed to favour a particular industry, activity or class of taxpayer. TAX FORECLOSURE -- The process of enforcing a lien against property for non-payment of delinquent property taxes. TAX FORM -- It is usual to design special forms for taxpayers to declare their taxable income, sales, etc. for tax purposes. Forms are designed to facilitate the task of the tax authorities in assessing and collecting tax, and will usually draw the taxpayer's attention to any relief he may claim, etc. as well as to his statutory duty to make accurate declarations and the penalties that may be imposed if his declaration is incomplete or false. TAX-FREE ZONE -- Area within the territory of a country in which customs duties and other types of indirect taxes are not applied. TAX HAVEN -- Tax haven in the "classical" sense refers to a country which imposes a low or no tax, and is used by corporations to avoid tax which otherwise would be payable in a high-tax country. According to OECD report, tax havens have the following key characteristics; No or only nominal taxes; Lack of effective exchange of information; Lack of transparency in the operation of the legislative, legal or administrative provisions. TAX HOLIDAY -- Fiscal policy measure often found in developing countries. A tax holiday offers a period of exemption from income tax for new industries in order to develop or diversify domestic industries. TAX HOME -- A taxpayer's regular place of business or post of duty, regardless of where the taxpayer a family home. TAX INFORMATION EXCHANGE AGREEMENT (TIES) -- Agreement which allows governments to share tax and other information with a view to combating tax evasion, drug trafficking, etc. TAX LAW, SOURCES OF -- The main domestic sources of tax law are primary legislation, such as acts or laws, and secondary legislation such as regulation, decisions, circulars, orders, etc. The main international sources of tax law are bilateral or multilateral treaties, and one important source for the interpretation of treaties is the OECD model tax treaty and the accompanying commentary. Another model is UN model. TAX ON TAX -- The charging of tax on tax-inclusive prices. TAXPAYER IDENTIFICATION NUMBER -- In some countries taxpayers are given an identification number which must be used when filing a tax return and assessing taxes and for all other correspondence between the taxpayer and the tax authorities. TAX PLANNING -- Arrangement of a person's business and /or private affairs in order to minimize tax liability. TAX RELIEF -- Generic term to describe all methods used to reduce tax liability without regard to the particular way it is accomplished. TAX RETURN -- See: Return TAX SECRECY -- Obligation usually imposed on tax officials not to reveal particulars about the identity and personal circumstances of taxpayers, or about any of the various aspects governing their tax liability, except in certain strictly limited circumstances. TAX SHELTER -- (1) An opportunity to use, quite legitimately, a relief or exemption from tax to pay less tax than one might otherwise have to pay in respect of similar activities, or the deferment of tax. (2) The polite term usually given to a contrived scheme to avoid or reduce a liability to taxation. TAX SPARING CREDIT -- Term used to denote a special form of double taxation relief in tax treaties with developing countries. Where a country grants tax incentives to encourage foreign investment and that company is a resident of another country with which a tax treaty has been concluded, the other country may give a credit against its own tax for the tax which the company would have paid if the tax had not been "spared (i.e. given up)" under the provisions of the tax incentives. TAX THRESHOLD -- Level (of income, capital, sales, etc.) at which tax commences to be levied. TAX TREATY -- An agreement between two (or more) countries for the avoidance of double taxation. A tax treaty may be titled a Convention, Treaty or Agreement. TAX UNIT -- Term used in the context of personal income tax, where taxation may be imposed by reference to separate individuals or to a group of individuals treated as one unit. TEMPORARY IMPORTATION -- Many countries allow temporary importation without levying customs duties and turnover tax on items which are to be within their borders for only a short time. TERRTORIALITY PRINCIPLE -- Term used to connote the principle of levying tax only within the territorial jurisdiction of a sovereign tax authority or country, which is adopted by some countries. Residents are not taxed on any foreign-source income. THIN CAPITALISATION -- A company is said to be "thinly capitalised" when its equity capital is small in comparison to its debt capital. THIN CORPORATION -- A corporation whose capital is supplied primarily by shareholder loans rather than stock investment. THREE-FACTOR APPORTIONMENT FORMULA -- A formula used by most US states to apportion total federal business income for out-of-state entities in order to determine the tax due a particular state. The formula equally weights the payroll factor, property factor, and sales factor. TIEA -- See: Tax information Exchange Agreement TIEBREAKER RULE -- Tax treaty provision designed to prevent an individual from being deemed resident, for purpose of the treaty, in both treaty countries. Generally a multi-step procedure will be provided to resolve the problem of dual residence, usually the place of a permanent home available being the first criterion. TORT -- A private and civil wrong or injury, other than breach of contract, for which a court will provide a remedy in the form of an action for damages. TRADE -- A business, profession, or occupation. A trade often implies a skilled handicraft, which is pursued on a continuing basis, such as carpentry. TRADE INTANGIBLE -- A commercial intangible other than a marketing intangible. TRADEMARK -- Legally registered name, word, symbol or design which identifies the goods or services of a particular manufacturer, business or company. TRADE OR BUSINESS -- A regular and continuous activity undertaken for a profit, other than that of an investor trading in securities. TRADITIONAL TRANSACTION METHODS -- The comparable uncontrolled price method, the resale price method, and the cost plus method. TRANSACTIONAL NET MARGIN METHOD -- A transactional profit method that examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that it is appropriate to aggregate under the principles of OECD TP guideline Chapter I). TRANSACTIONAL PROFIT METHOD -- A transfer pricing method that examines the profits that arise from particular controlled transactions of one or more of the associated enterprises participating in those transactions. TRANSACTION TAXES -- Tax that uses a specific type of transaction as its object, e.g. sales tax, immovable property transfer tax, etc. TRANSFER PRICING -- A transfer price is the price charged by a company for goods, services or intangible property to a subsidiary or other related company. Abusive transfer pricing occurs when income and expenses are improperly allocated for the purpose of reducing taxable income. TRANSFER PRICING ADJUSTMENT -- Adjustment made by the tax authorities after making a determination that a transfer price in a controlled transaction between associated enterprises is incorrect or where an allocation of profits fails to conform to the arm's length principle. TRANSFER TAX -- Tax levied on the transfer of goods and rights, e.g. purchase and/or sale of securities and immovable property. TRANSPORTATION TAX -- Tax levied on vehicles, ships and aircraft using public highways, rivers, and airports maintained by the government. TREATY ON EUROPEAN UNION (EU) -- The treaty on European Union was signed on 7 February 1992 and entered into force on 1 November 1993. This treaty creates a single economic and monetary union (EMU). The main characteristics of this union will be a single currency and a more federal political structure. By virtue of the Union Treaty, the former European Economic Community has been extended with additional goals and powers in order to become a single market in a European Union. The member states of the EU are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. On May 2nd 2004, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia newly joined the EU. TREATY OVERRIDE -- Term broadly used to refer to the subsequent enactment of legislation which conflicts with prior treaty obligations. As a general rule, the provisions of a tax treaty implemented domestically prevail over other domestic legislation. However, in some countries the relations is governed by the "last in time" rule. TREATY SHOPPING -- An analysis of tax treaty provisions to structure an international transaction or operation so as to take advantage of a particular tax treaty. The term is normally applied to a situation where a person not resident of either the treaty countries establishes an entity in one of the treaty countries in order to obtain treaty benefits. TRUST -- A trust is a legal arrangement whereby the owner of property (i.e. settlor) transfers ownership to a person(s) (i.e. trustee) who is to hold and control the property according to the owner's instructions, for the benefit of a designated person or persons (i.e. the beneficiaries). Legal title to the trust property is vested in the trustee, while equitable title belongs to the beneficiaries. TRUSTEE -- See: Trust TURNKEY CONTRACT -- Broadly, a contract to construct a complete project; for example, a factory, plant or installation, from the bare site to the stage where the user only need to "turn the key" to put the project to immediate use. TURNOVER -- Volume of business of an enterprise as set forth in the profit and loss account. It is usually measured by reference to the gross receipts, or gross amounts due, from the sale of goods or services, etc. supplied by the entity. TURNOVER TAX -- General term used to refer to the different forms of consumption and sales taxes. -U- UNCONTROLLED TRANSACTION -- Transaction between independent and unrelated enterprises. -V- VALUATION PRINCIPLES -- Tax law principles regarding valuation of business and non-business assets, and inventory. VOTING STOCK -- Shares in a corporation that entitle the shareholder to voting and proxy rights. -W- WAGE TAX Tax -- levied at source as a withholding on wages; taxes thus withheld are usually offset against final income tax liability (if any). -Z- |