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Glossary of Governance, Tax Evasion, and Capital Flight Terms
Abatement: A reduction in the assessment of tax, penalty, or interest when it is determined that 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.
Accountability: The obligation of an individual or an organization (either in the public or the private sectors) to accept responsibility for their activities, and to disclose them in a transparent manner. This includes the responsibility for decision-making processes, money, or other entrusted property.
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 tune 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.
Accounting standards: The main global accounting standards are the International Financial Reporting Standards of the International Accounting Standards Board (IASB). In the US, however, the Generally Accepted Accounting Principles are used. Harmonization of these two standards is a key reform demanded by the G20 and expected by 2011-12.
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: 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.
Active bribery': Active bribery refers to the act of promising or giving the bribe, as opposed to the act of receiving a bribe. The term does not mean the active briber has taken the initiative, since the bribe may have been demanded by the receiving party (who commits “passive bribery”). When a citizen reluctantly makes an informal payment in order to receive medical care, which would be refused otherwise, she is nevertheless committing active bribery. The distinction between active and passive bribery is primarily made in legal definitions, which need to be precise and allow for the possibility to sanction either side of the transaction, as appropriate. The classification is similar to the distinction between supply-side and demand-side corruption, which is used in analyzing the patterns of incentives or drivers of corrupt practices.
Ad valorem tax: A tax on goods or property expressed as a percentage of the sales price or assessed value.
Administrative corruption: Corruption occurring at the interface between the state, represented by public officials/bureaucrats in decisionmaking positions and the public/citizens when they need a service. For example, when a citizen coming to take out an ID card is only provided this seiwice if he/she pays the bureaucrat an unofficial payment in addition to the official fee.
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: 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 tune. 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.
Advanced market commitment: Through advanced market commitments (AMCs), donor governments agree to pay, for example, a predetermined price for a future vaccine when and if the vaccine is developed. The AMC acts as an incentive for pharmaceutical companies to develop vaccines for diseases that might not otherwise be produced because the concentration of users are in developing countries, where there is no profitable market for such vaccines. Developing countries must contribute a small amount per dose for the final vaccine but are not committed to buying the vaccine if they do not need it. In February 2007, Canada was one of the five countries to support a pilot AMC to develop a cheap pneumococcal vaccine.
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, for example, between permanent establishments in various jurisdictions.
Allowance: Deduction or exemptions generally made in computing income taxes, inheritance, and gift taxes and some foims of sales taxes.
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 1 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.
Amortization: Process of writing off the cost of an intangible asset over its useful life.
Anti-corruption: A term used to designate the range of approaches to combat corruption. Many broader good governance and democracypromotion approaches produce similar outcomes, even if they are not explicitly labelled as “anti-corruption.”
Apportionment method: One of the methods used to allocate income and expenses between related enterprises using a formula consisting 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 rales).
Arbitration: Term used for the determination of a dispute by the judgment of one or more person, 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 enteiprise 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.
Article IV consultation: Every year the International Monetaiy Fund (IMF) assesses eveiy member country’s economy to ensure the member is providing a sound macroeconomic framework and corresponding policies to promote financial stability, economic growth, and free exchange rates. These consultations aim at forestalling possible future financial crises. The fund also operates the IMF Institute, a department that provides training in macroeconomic analysis and policy formulation for officials of member countries.
Articles of agreement: The operations of both the World Bank and IMF are defined by the procedures established under their respective articles of agreement or an equivalent founding document. These documents outline the conditions of membership and the general principles of organization, management, and operations.
Asian Monetaiy Fund: Also East Asian Monetaiy Fund. See “Chiang Mai Initiative.”
Assessment: Act of computing the tax due.
Assessment: An assessment analyzes the situation in a country, sector, or institution to identify the system’s shortcomings and other factors (including political dynamics) that enable and sustain corruption.
Asset forfeiture: The seizure and confiscation of assets linked to a crime, usually because they were used in committing the crime, or derived from it.
Asset recovery: The process by which the proceeds of corruption are recovered and returned to individuals, governments, or organizations.
Associated enterprises: Generally speaking, enterprises are associated where the same persons participate directly or independently in the management, control, or capital of both enterprises, that is, both enterprises are under common control.
Association of South East Asian Nations (ASEAN): ASEAN includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. ASEAN +3 add China, Japan, and South Korea.
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.
Auditing: An official inspection of an organization’s (public or private sector) accounts to make sure money is spent and reported on appropriately.
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 sendees to group companies.
Aviation solidarity’ levy: The levy represents a small solidarity tax on airline tickets. The proceeds from the levy are intended to support international development efforts, are pooled, and coordinated through UNITAID, and are donated to existing national and international development institutions (e.g., global fund to fight AIDS, tuberculosis, and malaria and the Clinton Foundation). It is estimated that a worldwide ticket tax of 2.5% could yield up to $10 billion annually. As of 2008, eight countries had put in place legislation to implement the levy and 15 other countries are in the process of following suit.
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.
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.
Bailouts: A common name for the IMF-coordinated emergency rescue loans to economies in crisis. The most immediate beneficiaries of bailouts are typically foreign investors, while citizens are left holding the IMF debt bill.
Balance of payments (BOPs): The total of all international transactions undertaken by a country during a given time. Sales to foreigners are recorded as credits while purchases of goods, services, or assets are recorded as debits. The BOP statement includes summaries of both the cunent account and the capital account.
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 Cost Contribution Arrangements.
Bank for International Settlements (BISs): BIS serves as a bank for central banks, and exists to foster international monetary and financial cooperation. It conducts research in areas of interest to central banks, supports the work of the Basel Committee, and assists central banks and other monetary institutions in the management of their foreign exchange and gold reserves. Approximately 6% of global foreign exchange reserves are invested by central banks with the BIS. By March 2008, total currency deposits amounted to S348 billion. The banking sendees of BIS focus on stability and liquidity provision. The BIS currently has 55 member central banks, all of which are entitled to be represented and vote in the general meetings, though voting power is disproportionate. Established in 1930, the BIS employs 557 staff, and is headquartered in Basel, Switzerland. See also “Basel Committee on Banking Supervision.”
Bank of the South: The “Banco del Sur” was established on December 9, 2007 in Buenos Aires when Presidents from Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, and Venezuela signed the Founding Act. When it was launched in 2008, the Bank was expected to have an initial capital base of between $5 and $7 billion, and it would act as a development bank dispensing loans for infrastructure projects and regional integration plans. The Bank has its headquarters in Caracas, Venezuela, with offices in Bolivia and Argentina.
Bank secrecy provisions: Provisions which require that a bank refuses to disclose information about its customers to third parties, including the tax authorities.
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.
Basel I: The first round of deliberations by central bankers from around the world. In 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992, with Japanese banks permitting an extended transition period. Basel I is now widely viewed as outmoded, and a more comprehensive set of guidelines, known as Basel II, were implemented in 2004. See also “Bank for International Settlements” and “Financial Stability Board.”
Basel II: The second of the Basel Accords, published in 2004. These are recommendations on banking laws and regulations. Basel II has three pillars: (1) minimum capital requirements, (2) supervisory review, and (3) market discipline. The purpose of pillar 1 is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Pillar 1 is the lowest common minimum applied to all Basel compliant banks. Pillar 2 is the discretionary room available to regulators at the national level to impose higher standards on their institutions than the global minimum (in reality most countries have higher national standards than the minimum level), and pillar 3 is to monitor market conduct, principally the self-policing discipline of the markets when necessary information disclosure is mandated. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise, should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.
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.
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.
Benefits in kind: Term which refers to earnings, usually from employment, other than in cash, as part of compensation for services rendered.
Best method rule: Transfer pricing rule requiring that a taxpayer uses the transfer pricing method that results in the most reliable measure of an arm’s length price. This rule does not prescribe priorities between various methods.
Bond: Interest-bearing debt obligation to a government or entrepreneur. The rate of interest is usually fixed.
Bonds: Bonds are a type of loan where borrowers (governments or corporations) receive cash and lenders (investors) receive a guarantee of repayment upon maturity plus interest. Over the past 20 years, bond issues have replaced bank lending as the major source of developing country finance. The trading value of a bond on global bond markets is inversely related to its perceived riskiness (i.e., the likelihood that the government or corporation issuing the bond is likely to default on its repayment agreement).
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 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.
Bribery: The offer or exchange of money, services, or other valuables to influence the judgment or conduct of a person in a position of entrusted power. The benefit does not need to go to the official in question directly—it can go to a spouse, a child, another relative, a friend, or even to the official’s political party as a donation. A bribe is sometimes paid after the fact—for instance, in monthly installments to the official issuing permits to street vendors as long as they are allowed to operate. This form of bribery is called a kickback. Bribeiy is widely criminalized, and both the party paying the bribe and the party receiving may be liable. However, in practice, certain forms of bribery are often exempt from prosecution.
BRICS: This term originates from a 2003 Goldman Sachs paper in which the authors predicted that the economies of the emerging markets of Brazil, Russia, India, China, and South Africa (BRICS) will overtake the world’s wealthiest countries by 2050.
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 puiposes 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 Cost Contribution Arrangements for obtaining an interest in any results of prior Cost Contribution Arrangements activity.
Buy-out payment: Compensation that a participant who withdraws from an already active Cost Contribution Arrangements may receive from the remaining participants for an effective transfer of its interests in the results of past Cost Contribution Arrangements activities.
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 account liberalization: The process by which countries, often at the behest of the IMF, remove restrictions on the flow of foreign capital into and out of their countries.
Capital account: The section of a country’s BOPs statement which totals all international purchases and sales of assets including foreign direct investment, portfolio investment, bank loans, other securities, and foreign currency holdings.
Capital assets: All property held for investment by a taxpayer.
Capital controls: Measures enacted to control foreign exchange transactions in order to manage capital flows.
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 flight: The movement of large sums of money out of a countiy. This movement can be legal (e.g., investors withdraw their money because of a political crisis and a lack of confidence in the economic situation) or illegal. Illegal capital flight often concerns money earned through criminal activity, and the intention is that the money disappears from any record in the countiy of origin. Any earnings on it are not usually returned to the countiy of origin.
Capital flows: The movement of foreign exchange from one country to another. The types of transactions used to move money internationally include: loans and loan repayments, bond issues and payments, foreign direct investment and capital repatriation, and portfolio investment such as stocks, bonds, and derivatives.
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.
Capital: Wealth available for input into the economy. Real capital is invested in equipment, buildings, and production. Finance capital is stored in banks or invested in financial instruments. Human capital is the economic value of people’s knowledge, skills, and physical work.
Carbon cowboys: Unscrupulous entrepreneurs who attempt to acquire rights to carbon in rainforests. They gain the rights by signing indigenous communities to unfair contracts. They often aim to sell on the rights to investors for a quick profit.
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: The accounting method which recognizes income and deductions when money is received or paid.
Central bank: It is a country’s bank, controlled by the national government. It is responsible for issuing currency, setting monetary policy, interest rates, exchange rate policy, and the regulation and super-vision of the private banking sector.
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.
Center 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.
Cherry picking: Tenn used in the USA in R&D arrangements to prevent a contracting party from selecting or funding only the technologies that are successfully developed, that is, “cheny picking.” In transfer pricing (TP) context, it often describes a situation where a tax authority tries to impose a TP adjustment on a taxpayer based on a few of “cheny picked”-related party transactions of other comparable companies with an intention to maximize its adjustment.
Chiang Mai Initiative (CMI): An effort to strengthen economic ties between ASEAN +3 countries (see above), the CMI is an agreement to collectively pool a portion of ASEAN +3 hard currency reserves, and lend a portion of these reserves (“currency swaps”) to member countries to address short-tenn (90 days) BOPs problems and to fend off speculative attacks (see below). It is seen by many as the first step toward establishing an (East) Asian Monetary Fund.
Citizen charters: Agovemment document that lays out standards of service for public and private sector institutions (schools, hospitals, water, and energy suppliers, etc.), and which sets out the rights of citizens to services in that sector, as well as ways in which they can seek redress should the sendees not be provided according to these standards.
Civil law: Systems of law based primarily on statutes or codes rather than judicial decisions. Examples are the French and German systems.
Clientelism: An informal exploitative system of exchanges (of resources, sendees, favors) between a wealthier and/or more powerful “patron” or “boss” and less wealthy/weaker “clients” or “followers.” Such systems are typically found in settings where formal governance structures fail to provide adequate resources (including protection), leaving poor and/or marginalized members of society to seek assistance from powerful figures that can deliver them. The corruption dimension is clear when the “patron” is an elected official who distributes resources under his/her control inequitably (abusing his/her entrusted power), as a reward for electoral support (private benefit). Similar informal systems may not involve elected officials directly, but may nevertheless undermine formal rules and institutions, including efforts to combat corruption.
Closely held company: Company which is owned or controlled by a single shareholder or closely knit group of shareholders of business.
Committee on the Global Financial System (CGFS): Chaired on a rotating basis by a central bank governor (as of July 1, 2010, by Governor of the Bank of Canada, Mark Carney), the CGFS monitors developments in global financial markets for central bank governors. The Committee has a mandate to identify and assess potential sources of stress in global financial markets, to further the understanding of the structural underpinnings of financial markets, and to promote improvements to the functioning and stability of these markets.
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.
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: 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 method: A transfer pricing method that compares the price for property or sendees 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 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: 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 CAto assist aggrieved taxpayers by acting as the official liaison with the foreign competent authority. The competent authority is generally indicated in the definitions sections of tax treaties.
Competitive bidding: A selection process based on open and transparent advertisement of an item or service. It ensures that the best bidder wins according to qualifications, value-for-money, and other objective criteria, through which family or friendship ties, bribery, or threats are removed from the process. Competitive bidding processes are typically required by law on most public contracts and purchases.
Concessional loan: A loan that is offered with longer repayment terms and lower interest rates than might otherwise be offered by the market, often geared toward low-income countries.
Conditionality: The set of conditions that must be met before creditors disburse any loans. Since the early 1980s, for example, the vast majority of IMF and World Bank loans have required recipient countries to commit to “fiscal austerity” measures which include: the privatization of state-owned enterprises, the removal of restrictions on foreign imports and investment, and the weakening of the state through budget and program cuts. These requirements are known as structural adjustment conditions.
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.
Conflict of interest: A conflict of interest is a conflict between an entrusted duty on the one hand, and the private interest of the duty bearer on the other hand. For example, a parliamentarian sitting in the committee for healthcare reform might own stock in a major pharmaceutical company. The existence of this private interest could improperly influence the performance of entrusted responsibilities. Because conflicts of interest creates opportunities for corruption to take place, they should be avoided or managed.
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.
Contagion (financial): The factors by which crises transmit from market to market or country to country. High levels of leverage by a number of banks create increased risk of “common creditor” contagion. This explains why uncorrelated, seemingly unrelated markets, or assets (or for that matter countries) get tangled up in the same crisis cycle. Often behind such contagion is a highly leveraged creditor who needs to sell assets to meet requirements. In this sort of a situation the said creditor will sell into a falling market whatever she/he can, thus deepening the spiral and increasing correlation between fundamentally unrelated assets and markets.
Contingent capital: Scheme to protect banks against reduced credit that may arise during a financial crisis, whereby banks set aside capital, classified as a debt obligation, which would be converted into equity in the event of financial difficulties.
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 countiy and situation.
Controlled foreign companies (CFCs): 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 countiy concerned. Generally, only certain types of income fall within the scope of CFC legislation, that is, 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 center: 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.
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, separate, and distinct from the persons who own it. However, it is now commonly used as another way of referring to a company.
Corporation shopping: Teim 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.
Corruption indices: Corruption indices are multi-country tables with scores or grades reflecting corruption levels or related features, such as the strength of systems for controlling corruption. The assumption for the latter is that robustness of corruption-control systems directly reflects corruption risks and consequently, the likely levels of corruption.
Corruption: The abuse of entrusted power for private gain. Although this is the most common definition, other definitions exist. The World
Bank, for example, defines corruption more narrowly as “abuse of public office for private gain.” All expert/specialist variations nevertheless include three common elements: abuse (misuse, violation) of entrusted power (duty, office, etc.) and private benefit. In everyday language, the term is used more broadly to denote a wide variety of objectionable or immoral acts, and not only those associated with formal duty.
Cost contribution arrangement: A cost contribution arrangement 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, sendees, or rights.
Cost funding: Contribution of an affiliate company to the general research and development costs of another affiliate or group member, in proportion to its turnover or some other criterion.
Cost of goods sold: 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: Purchase price paid for property or the value of the exchange for which property is given.
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.
Countercyclical buffers (or countercyclical provisioning): Most financial institutions are required to hold capital buffers; these are additional buffers above the minimum requirement, but built in a countercyclical manner, that is, putting aside more capital in good times for use in a downturn.
Counterparty risk: The risk of failure by one party due to the failure of a close financial associate. During the 2008 global financial crisis, this sort of risk became apparent when a large financial institution such as AIG collapsed, threatening fallout that would consume other players like Goldman Sachs and other big US investment banks. Stemming this cycle was the main reason AIG had to be bailed out with enormous taxpayer resources.
Credit default swaps (CDSs): Is a form of insurance bought on the probability of default on a debt security. The unregulated nature of the CDS market exacerbated the 2008 global financial crisis, as CDS’ are a very non-transparent market with a small number of large players active in the market, like AIG. The global CDS market grew from under SI trillion in 2001 to over $57 trillion by 2008—almost entirely unregulated. The global crisis has sparked calls for CDS trading to be moved from over-the-counter to centralized counterparties. The CDS index has become a key barometer of the health of credit markets.
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 cany 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 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.
Creditor: A person who extended credit and to whom money is owed; a lender.
Criminal forfeiture: The loss, following a criminal conviction, of the right to a property that was used to commit a crime and which was confiscated by the government.
Cronyism (see also clientelism and patronage): The favorable treatment of friends and associates in the distribution of resources and positions. The concept is related to nepotism, where the favorable treatment extends to family members.
Cross-border Bank Resolution Group (CBRG): Akey subcommittee at the Bank of International Settlements (BIS), the CBRG is comparing the national policies, legal frameworks, and the allocation of responsibilities for the resolution of banks with significant cross-border operations.
Cup method: Comparable uncontrolled price method.
Currency transactions tax: Measures implemented at the national level to tax foreign exchange transactions with a goal of reducing volatility and volume of flows.
Current account: The section of a country’s BOPs statement which totals international transactions for import and export payments, interest on debts, profits from foreign direct investment, and aid grants. The cunent account is a broad measure of a country’s trade balance (a negative current account balance = a trade deficit).
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.
Customer due diligence: Obligation for financial institutions to implement identification processes for customers, that is, to verify that they are who they claim they are by checking their names, residential addresses, etc.
Customs duties: Taxes on goods imported into a country.
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
Debarment: Debarment is the term used for an individual or a company being formally excluded from tendering for a project that the government is funding or supporting. A company is debarred when an enquiiy or examination finds it has been involved with fraud, mismanagement, or corruption.
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 countiy.
Debt/equity ratio: Relationship of total debt of a company to its ordinary share capital. If a coiporate 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.
Debt standstill: The temporary cessation of debt repayments designed to allow countries to reorganize and reschedule their debt repayment obligations.
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 countiy 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.
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.
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.
Demand side: The demand side of the bribe (also known as “passive” bribery) focuses on the person or entity soliciting or receiving the bribe.
Democratic accountability': Democratic accountability refers to the idea that citizens can provide feedback to actors (political parties, parliaments, public officials) that are in charge of policy-setting and decision-making and in this way, shape policies and decisions.
Dependent personal sendees: 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 countiy 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 financial instruments: Also known as derivatives. These are financial instruments whose values are linked to or depend on the value of a primary (underlying) asset, for example, debt assets, liabilities and equity securities, commodities, or currency. The primary types of derivatives include forward contracts, futures, options, and swaps.
Derivatives: Complex securities used by institutions to hedge (protect themselves against the risk of price changes) against market fluctuation. They are financial instillments whose value is derived from the price of an underlying security (e.g., stocks). Primarily, they comprise three instruments: futures, options, and swaps. While their intention is to hedge against risks, the rapid growth in derivatives trading has played a major part in the growing volatility of the global financial system, heightening risks substantially. The over-the-counter (OTC, see below) derivatives market notional value in 2009 was 12 times the size of the global economy.
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.
Devaluation: The drop in the value of one currency relative to another. Developing countries have often been encouraged to devalue their currency as part of IMF/World Bank structural adjustment programs as a means of increasing the costs of imports and decreasing the cost of exports, thereby increasing competitiveness.
Direct charge method A: Method of charging directly for specific intragroup services on a clearly identified basis.
Direct investment: Description often given to a substantial investment in the shares of a company.
Directive: An official order or instruction. 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 center of a MNE 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.
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.
Doha: While references to Doha often refer to the Doha Development Round of trade negotiations through the WTO, on November 29-December 2, 2008, Doha will host the follow-up to the Monterrey Consensus (see below) and review of its implementation.
Domicile, fiscal: Tenn 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, for example, 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: Double taxation is a principle by which a taxpayer is taxed twice for the same asset or income. It happens when tax jurisdictions overlap and a transaction, asset, or income is taxed in both. Double taxation agreements are conventions aiming to eliminate double taxation of residents.
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-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.
Earnings and profits: 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.
Effectively connected income: 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.
East Asian Monetary Fund: Also Asian Monetary Fund. See “Chiang Mai Initiative.”
Economic partnership agreements: They are a scheme to create a free trade area (FTA) between the European Commission of the European Union (EU) and the Group of African, Caribbean, and Pacific (ACP) countries. They are a response to continuing criticism that the nonreciprocal and discriminating preferential trade agreements offered by the EU are incompatible with WTO rales. The EPAs are a key element of the Cotonou Agreement, the latest agreement in the history of ACP-EU Development Cooperation. They took effect as of 2008.
EDC Corporate Account: The regular account through which EDC provides loans, guarantees, insurance, and other financial services.
Efficient market hypothesis (EMH): Developed in the Chicago school tradition by theorists like Eugene Fama, Fischer Black, Robert Merton, and taken up by Myron Scholes, Modligiani, Miller, Malkiel, and others, EMH underpins modem financial theory. The principal idea is that market prices reflect available information about the priced entity. In other words, markets are informationally efficient. Belief in the EMH-centric finance paradigm in policy circles has been argued as a major contributor to the recent crisis, as the theory underplays the possibility of bubbles or momentum in markets and justifies speculation. Economists Stiglitz and Grossman have shown EMH to be flawed and psychologists Daniel Kahneman, Amos Tversky, and Richard Thaler have furthered the challenge underscoring the importance of cognitive and information biases.
Elite capture: Political and social elites take resources intended to benefit the majority of the population. This can include economic, educational, social, and political resources.
Embezzlement: The misappropriation of property or funds legally entrusted to someone in their formal position as an agent or guardian. Accountants and financial managers typically have access to an agency’s funds and so are in a position to embezzle them. Other foims of embezzlement include the taking of supplies, equipment, etc.
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 labor 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.
Entity: In general for tax purposes, an organization, person, or party that possesses separate existence. Options include corporations, partnerships, estates, and trusts.
Endemic corruption: Endemic corruption is corruption that is primarily due to organizational weaknesses. In these cases, corruption is the norm and not the exception.
Enhanced due diligence: Additional identification measures to be taken by financial institutions with regards to high-risk customers and politically exposed persons (PEPs). Measures include validation and documentation by third parties.
Entrusted authority: Refers to the authority, power, duty, or office entrusted to a person through election, appointment, or employment contract, etc. It concerns conduct in a formal or professional capacity as opposed to actions as a private individual.
Environmental tax: Tax imposed for environmental reasons, for example, 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 capital: A method of financing a business where money is received by the issuance of shares in the enterprise.
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.
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, that is, 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, selfassessment calculations, etc. The process may or may not include an audit of the taxpayer’s own books.
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 coiporation—stock as opposed to bonds.
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, that is, it can only be disclosed to the persons or authorities concerned with the assessment or collection of taxes covered by the treaty.
Exchange rates: The price of one country’s currency relative to another (e.g., $1 Cdn = S.67 US). Exchange rates can be managed according to three basic systems: floating, fixed, or pegged.
Excise tax: A tax imposed on an act, occupation, privilege, manufacture, sale, or consumption.
Exclusions: Term used to describe income which is exempt, that is, not included, in the calculation of gross income for tax purposes.
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.
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.
Experience surveys: Questionnaires that ask about direct encounters with corruption, for instance, whether respondents have had to pay a bribe for a particular public service; how many times in the past year they paid a bribe; the amount of the bribe paid.
Export credit agency: Commonly known as ECAs, export credit agencies are public financial institutions that help companies conduct business overseas in developing countries and emerging markets. They do this by providing government-backed loans, guarantees, and insurance to corporations in the home ECA country.
Export credit insurance: Also known as accounts receivable insurance, this insures companies for up to 90% of their losses if their buyers default on a payment, refuse to pay, or go bankrupt. This helps ensure that companies get paid for their goods and services. See also “risk insurance.”
Export credit: An export credit arises whenever a foreign buyer of exported goods or services is allowed to defer payment. As a result, the buyer is required to pay interest on top of the loan. When export credits are provided to buyers in developing countries and emerging markets, companies selling those goods and sendees often take out export credit insurance to insure themselves, among other things, against buyer insolvency.
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.
Extortion: The practice of obtaining something (money, favors, property) through the use of threats or force. For example, extortion takes place when armed guards exact money for passage through a roadblock. Withholding life-saving medical attention unless a bribe is paid could also be considered an act of extortion. See also sextortion, which involves threats or force to obtain sexual benefits.
Facilitation payments: Refers to relatively small, individual amounts paid beyond the official fees to speed up services such as customs clearance, work permits, border crossings, etc. Technically, these are a bribe. In many countries, however, facilitation payments by companies doing business abroad are exempt from prosecution for bribery in their home countries as long as they are used to speed up legal processes, rather than to avoid regulations. This exception recognizes the fact that in certain settings, it is impossible to operate a business without conceding to such payments.
Factoring: Financial transaction whereby an enterprise sells its debtclaims 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.
Favoritism: The biased distribution of resources based on personal preference. For example, giving offices or benefits to friends and family regardless of qualification. Unfair distribution of positions and resources is also known as cronyism or nepotism. It can be a form of corruption.
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 sendees by the authorities. Fees are usually not considered taxes when listing taxes to be included in a double tax treaty.
Fiduciary risk: In the context of development aid, fiduciary risk is the risk that aid funds are used incorrectly, including that they do not achieve value for money, or are not properly accounted for. Fiduciary risk is a particular concern when donors provide direct budget support, because partner governments’ public financial management systems are often relatively weak.
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.
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 countiy of source.
Finance company: A company, usually a wholly owned subsidiary, which borrows funds from within or outside a group of companies and lends 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 activities tax: A tax on profits and remuneration, equivalent to a value added tax for the financial sector, proposed by the IMF in response to a request at the September 2009 G20 Pittsburgh summit to the IMF to review “the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system.”
Financial architecture: Refers broadly to the framework and series of measures at the international level that are deemed necessary to prevent future economic crises and help manage these crises when they occur. It refers to the structures, practices, and rales under which international capital flows take place, the way countries interact with the international financial system, and the role of international financial institutions. Increasingly, because of the interconnectedness of global financial markets, it is recognized that international financial stability also relies on the existence of both regional and national systems.
Financial stability board: The Financial Stability Forum was created in response to the 1999 Asian financial crisis, and became the Financial Stability Board in 2009 following the April G-20 Leaders meeting in London. It aims to promote financial stability, improve financial market workings, and lessen the effects of contagion. It does this by assessing the vulnerabilities affecting the financial system, identifying ways to address these, improving information exchange and coordination among authorities responsible for financial stability. It has no executive authority or powers to force reform. It is composed of the G7 (with a tripartite membership consisting of the finance ministry, the central bank, and a regulator) and one representative from five other major financial centers [Singapore, Switzerland, the Netherlands, Australia, and Hong Kong), as well as representation from the IFIS (two each from the World Bank and IMF, one each from the OECD, and the Bank for International Settlements (BIS)] and from international standard and regulatory groupings (two each from the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO), the International Accounting Standards Board (IASB), and the International Association of Insurance Supervisors (LAIS)]. It has in the past been chaired by the general manager of the BIS. It is located at BIS offices in Basel, Switzerland. See also “Bank for International Settlements.” Financial transaction tax (FTT)—broader than the Tobin tax, this is a proposed global tax that would be levied on all financial market transactions— for example, bonds, equities, and derivatives, not merely foreign exchange. It would be based on the gross value of the assets, thereby helping to discourage the creation of asset bubbles. Unlike a currency transaction tax, that would impose a 0.005% levy on currency transactions in major economies, an FTT would impose a 0.05-1.0% levy on financial transactions, sufficient enough to have some impact on dissuading speculative financial trading. While estimates for how much revenue an FTT would yield, there is considerable uncertainty with respect to the impact of an FTT would on the market and speculative activity. Civil society organization are calling for 50% of the funds generated from such a tax be used for the Millennium Development Goals and climate change mitigation and adaptation in developing countries.
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 its assets are financed.
Fiscal nullity doctrine: Common law doctrine used in cases of avoidance of tax, whereby certain transactions are ignored for fiscal purposes.
Fiscal policy: Government macroeconomic policy that seeks to influence general economic activity through control of taxation and government spending (see also “monetary policy”).
Fiscal policy: Part of economic policy which relates to taxation and public expenditure.
Fiscal space: A hotly debated term that essentially refers to the room a government has to make policy decisions with respect to how it manages its own budget. It has emerged as an issue because of the tight fiscal and monetary policies the World Bank and IMF impose on countries to ensure first and foremost they are able to manage debt service payments. According to the Bank, more space can only be created through more efficient public expenditures, increased revenue, or attracting more loans and grants. Public expenditure is sacrificed at the expense of productive expenditure and short-term considerations played off against long-term gains.
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 1 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 peimanent establishments. It denotes a center 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” countiy (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 countiy 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.
Flexible credit line (FCL): An IMF credit line extended to only three countries Colombia, Poland, and Mexico to date (as of 2010) to safeguard against crisis contagion. The main difference in this sort of lending is that conditionality is not applied ex-post (or after the fact) but ex-ante (i.e., to qualify for FCL countries need to have met stringent criteria).
Floors: The lower limits on tax benefits and detriments, for example, in medical expense. A taxpayer must spend more than the floor for a deduction, and only the amount above the floor is deductible.
Fob value: FOB denotes “free on board.”. FOB value is value of goods excluding carriage, insurance, and freight, that is, roughly speaking, the domestic price in the country of origin.
Force of attraction: Concept under which a peimanent establishment is taxed by the countiy 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.
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 direct investment (FDI): The purchase of land, equipment, or buildings or the construction of new equipment or buildings by a foreign company. FDI also refers to the purchase of a controlling interest in existing operations and businesses (known as mergers and acquisitions). Multinational firms seeking to tap natural resources, access lucrative, or emerging markets, and keep production costs down by accessing low-wage labor pools in developing countries are FDI investors. Classic examples of FDI include American banks taking over Korean ones or Canadian mining companies building mines in Brazil (see also “portfolio investment”).
Foreign exchange tax: Special tax imposed on transactions involving sales of foreign exchange by domestic banking institutions and authorized exchange brokers.
Foreign exchange: It is currency issued by a foreign government. Foreign exchange is required to pay for imported goods and to meet foreign debt repayment obligations. Most of the trade in foreign currencies occurs between large international banks. Unlike stock markets, the “foreign exchange market” does not exist in any specific location.
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, that is, the credit method or the exemption method.
Foreign-source income: Generally income realized from countries outside the country of residence of the taxpayer.
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.
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 coiporations for the privilege of the right to do business in that state.
Fraud: An economic crime involving deceit, trickery, or false pretences by which someone gains unlawfully. Fraud often accompanies corrupt acts, in particular embezzlement, where it is typically used to falsify records to hide stolen resources.
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 noimal wages or salaries. Fringe benefits may be given in the form of a money allowance, for example, a holiday bonus or in the foim of benefits in kind, for example, free accommodation. Although most countries tax the benefit of employer-provided automobiles and accommodation, the tax treatment of other fringe benefits varies considerably.
Frivolous position: 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.
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 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.
G-10: In 1962, eight IMF members agreed—Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom, and the United States—and the central banks of Germany and Sweden agreed to make resources available to the IMF under the General Arrangement to Borrow (GAB) for drawings by participants, and, under certain circumstances, for drawings by nonparticipants. The GAB was strengthened in 1964 by the association of Switzerland, then a nonmember of the Fund. The Group of 10 (G-10) still consult and cooperate on economic, monetary, and financial matters and meet once a year around the annual meetings of the IMF and the World Bank. The G-10 signed the Smithsonian Agreement in December 1971, replacing the world’s fixed exchange rate regime with a floating exchange rate regime. The BIS, the European Commission, IMF, and the OECD are observers. See also “Bank for International Settlements.”
G-20: Is a group composed of the Finance Ministers and central bankers of the following 20 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union. The IMF and the World Bank also participate. The G-20 was set up to respond to the financial turmoil of 1997-99 through the development of policies that “promote international financial stability.”
G-24: The Inter-governmental Group of 24 on International Monetary Affairs and Development, formed in 1971, represents the interests of developing countries in negotiations on international monetary and development finance matters. It brings together countries from Africa (Algeria, Côte d’Ivoire, Egypt, Ethiopia, Gabon, Ghana, Nigeria, South Africa, and the Democratic Republic of Congo), Asia (India, Iran, Lebanon, Pakistan, Philippines, Sri Lanka, and Syrian Arab Republic), and Latin America and the Caribbean (Argentina, Brazil, Colombia, Guatemala, Mexico, Peru, Trinidad and Tobago, and Venezuela).
Finance Ministers of the G-24 meet twice a year prior to the World Bank and IMF’s Spring and Fall meetings.
G-7/G-8: Originally composed of a group of five Finance Ministers from Britain, France, Germany, Japan, and the US, in 1975 it added heads of state and government, and Italy became a member. Canada’s entry in 1996 made it the G7, and with Russia’s involvement in 1997 it became the G8. This should not be confused with the G-77, born at the height of the Cold War. It represented 77 developing countries non-aligned with either the US or former Soviet Union. It now numbers more than 130 countries.
GAVI Alliance: A public-private partnership of multilateral institutions, government, industry, civil society organizations, research institutes, and private foundations who coordinate Alliance activities in the healthcare sector, in particular for vaccines and immunizations.
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.
Generation-skipping tax: Tax imposed to prevent the avoidance of transfer tax (i.e., estate tax and gift tax) over successive generations.
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 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 MNE on the basis of, for example, the turnover of each member, the expenses incurred by each member or the labor cost of each member.
Global trading: Term used to describe transactions carried out by, inter alia, investment banks and securities dealers, involving financial instiuments, financial services, and financial goods. Also known as 24-h trading since the transactions are carried out continuously during a day in financial markets worldwide.
Goods and sales tax vat: Style multi-stage sales tax levied on purchases (and lessees). Sellers (and lessors) are generally responsible for collection.
Ghost workers: Ghost workers are employees who appear on a payroll but do not actually work for the company or the public institution. Paychecks are created and paid to someone who either does not exist, or exists but does not work for the company or the public institution.
Gift giving: People offer present and favor in various circumstances. It is a cultural practice in many societies. Problems arise when gift giving to and by public officials contradicts impartiality, professionalism, and meritocracy. In exchange for a gift, the official is expected to show preferential treatment to the giver. In those cases, gift-giving can be regarded as bribery.
Global reserve system: In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world’s primary reserve currency. This is currently the US dollar. In March 2009, as a result of the global economic crisis, there has been significant pressure for urgent consideration of a global currency and a UN panel has proposed greatly expanding the IMF’s Special Drawing Rights to act in this capacity (See also Special Drawing Rights).
Globalization: Refers to the increasing economic integration and interdependence of countries. Economic globalization in this century has proceeded along two main lines: trade liberalization (the increased circulation of goods) and financial liberalization (the expanded circulation of capital).
Governance: Governance goes further than traditional conceptions of government. It focuses on relationships between leaders, public institutions, and citizens. It includes decision-making and implementation processes. Governance can also apply to companies and NGOs.
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.
Grand corruption: In contrast to “petty corruption,” high-level or “grand” corruption is perpetrated at the highest levels of government and usually involves both substantial benefits for the officials involved and significant losses for the state and its citizens. It can refer to specific acts such as ministers taking multi-million dollar bribes to award lucrative government concessions or embezzling millions from state coffers into a secret bank account. But it also refers to illicit exchanges in the realm of policy formation (see also state capture). Though large sums of money may be involved, other benefits like high-level appointments, inside information, and policy influence can be the currency of grand corruption. Corruption at this level is also sometimes referred to as political corruption.
Grandfather clause: Clause temporarily preserving legislation which exists at the time a law is modified or a (tax) treaty is concluded (or modified).
Grease money: Bribes, seen from the angle of the briber, and alluding to the “drop of oil given to a squeaky wheel” of excessive bureaucracy to make the things move smoothly again. Also called a softener, sweetener, gift.
Gross income, taxes on: In some countries income taxes are levied on gross income (usually at low rates) without deduction for expenses.
Gross profits tax: Tax imposed usually at low rates on the gross receipts of a business.
Gross up: Add back the amount of tax which has been paid to the value of property or other income received. The term includes the process by which corporation add credits (e.g., imputation credits or foreign tax credits) received to net income received before calculating their tax liabilities.
Group treatment: Term used to describe the tax treatment where the profits and losses of associated companies may be grouped together and, in effect, be treated as the aggregated profits of a single enterprise (sometimes called a “fiscal unity”).
Guarantees: Insure a portion of a loan against a default. This gives commercial banks an incentive to lend money to private exporters or investors. Sovereign governments back these guarantees and the government of the ECA that issued the guarantee assumes the liability in the case of default (see also “Canada Account”). Occasionally, the ECA recovers its losses through the government that hosts the project or borrower. In this case, the loss becomes part of the official debt owed to the country that issued the guarantee, essentially transforming a private loan into a public debt. In exchange for the loan guarantee, companies provide ECAs with a guarantee fee, often a portion of their profits for a project.
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 countiy.
Hardship clause: Discretionary power of the tax authorities to mitigate any harsh results of the tax law.
Harmonization of tax: Tenn usually used to refer to the process of removing fiscal barriers and discrepancies between the tax systems of the various countries.
Head office expenses: Where an enterprise with its head office in one country operates through a branch or other permanent establishment in another country, some expenses incurred by the head office, for example, for general management and administrative expenses or the cost of specific services provided to the permanent establishment, may be deducted in computing the taxable profits of the permanent establishment.
Hedge fund: Is a private, unregulated investment fund for wealthy investors (minimum investments typically begin at USS1 million) specializing in high risk, short-term speculation on bonds, currencies, stock options, and derivatives.
Hedging transaction: Transaction where a person tries to protect himself against price, interest rate, or foreign exchange rate fluctuations, for example, by buying or selling commodities or currencies using derivative contracts such as forwards, futures, options, and swaps.
Hedging: The purchasing of foreign exchange in anticipation of future price changes. Hedging is an increasingly necessary business expense in times of high exchange rate volatility.
Herd behavior: The tendency of investors to behave as a pack in response to rumored market changes. This leads to panic in moments of crisis and the sudden withdrawal of enormous quantities of investment from countries suddenly perceived to be vulnerable to collapse (a phenomenon known as “capital flight”).
Hidden reserves: Reserves which are not disclosed on the balance sheet of an enterprise, either by overvaluing debts or undervaluing assets.
Hidden tax: Indirect tax paid by the consumer without his knowledge.
Holding period: The length of time that an investment is owned or expected to be owned.
Horizontal equity: Doctrine which holds that similarly situated taxpayers should receive similar tax treatment, for example, taxpayers who earn the same amount of income or capital should be accorded equal treatment.
Hut tax: Type of poll tax levied on inhabited dwellings or huts generally at an early stage in the development of an economy when it is not feasible to introduce an income tax.
Hybrid accounting methods: Term which refers to the situation where a taxpayer used a combination of accounting methods (such as accruals basis accounting or cash basis accounting) for different items of income.
Hybrid derivative: Financial instrument which has the characteristic of more than one type of instrument, that is, a swap plus an option.
Hybrid entity: Entity that is characterized differently in two or more jurisdictions, for example, an entity that is treated as a partnership in one jurisdiction and as a coiporation in another.
IDA Replenishment: The IBRD raises most of its funds by posting bonds on the world’s financial markets. In contrast, IDA is funded in part by income generated through the IBRD and the International Finance Corporation (“transfers”) by countries repaying previous IDA credits (“reflows”), and for the most part by contributions from the richer member countries (“donors”). Each replenishment covers a 3-year period. For IDA 15, which covers the period July 2008-2011, the donor replenishment contributions accounted for S25.1 billion of the $41.6 billion fund. Canada agreed to contribute CDNS1.3 billion to IDA over the 3-year period.
URSA: The Initiative for the Integration of Regional Infrastructure in South America is an attempt to link the 12 countries of Latin America through a common transportation, energy, and telecommunications network that will help to promote greater regional trade, and physical and economic integration.
Illicit financial flows (IFFs): Cross-border movements of money illegally earned, transferred, or utilized. IFFs involve the transfer of money earned through illegal activities. These activities include corruption, criminal activities, and efforts to hide wealth from tax authorities.
Imbalances: The adjustment of macroeconomic imbalances between surplus “saving” and deficit “spending” countries is seen as a major contributing factor in the global financial crisis that began in 2008. The adjustment of the imbalances would comprise increasing domestic demand in surplus saving countries like China and increased saving in deficit countries like the US and parts of Western Europe. See also “Global Reserve System.”
Impost: The term “impost” means tax and refers particularly to a duty on imported goods and to clarification (by customs) of (imported) goods in order to assess the proper (import) taxes.
Imputation system: System under which at least part of the tax paid by a company on its profits is credited against the tax liability of shareholders in receipt of distributions paid by the company out of those profits.
Imputed income: The economic benefit a taxpayer obtains through performance of self-provided services or through the use of self-owned property.
Imputed interest: Implied interest. In a mortgage that states an insufficient interest rate, tax law will impute a higher rate and a lower principal, which will increase taxes on the receipt of payment.
Inbound transaction: Term which refers to the tax treatment of foreigners doing business and investment in other countries.
Incentive stock option: An equity-type compensation plan under which qualifying stock options are free of tax at the date of grant and the date of exercise but are taxed when sold.
Incidence of tax: The person who bears the tax burden in economic sense, which could be different from the person paying the tax.
Income splitting: A number of arrangements, the essential feature of which is that income, which would have been taxed at a higher rate in the hands of the person who derived it, is taxed in the hands of another person at a lower rate.
Income subject to tax: All sources of income liable to tax without taking account of tax allowances.
Incorporation: The process by which a company receives a government charter allowing it to operate as a corporation.
Indemnification: Amount of money received by persons or entities as compensation for damages or for losses incurred.
Index-linked adjustment: Expedient adopted in many commercial transactions to provide a workable solution to some of the problems created by inflation and monetary depreciation. The mechanism is essentially one of adjusting payments, profits, gains, taxable income brackets, tax allowances, etc. by discounting or other-wise modifying them by reference to an accepted index of inflation or other indices.
Indirect tax: Tax imposed on certain transactions, goods, or events. Examples include VAT, sales tax, excise duties, stamp duty, services tax, and registration duty and transaction tax.
Information return: Declaration made by a person who has economic information about a potential taxpayer, regardless of whether that person is liable for withholding tax.
Innovative financing for development: In response to declining Official Development Assistance (ODA) or aid figures among Northern donors—something explicitly recognized at the Monterrey meeting on Financing Development—various countries are exploring a number of innovative mechanisms for funding development projects. Examples include the following: Aviation Solidarity Levies, Advanced Market Commitments, Currency Transaction Taxes, and the International Finance Facility for Immunization. See also “Leading Group on Solidarity Levies to Fund Development” and “Monterrey Consensus.”
Input tax: Term used in connection with VAT to denote the tax embodied in purchases made by a trader or entrepreneur who will usually be able to obtain a credit for the tax that his suppliers have paid on the goods supplied to him which form his “inputs.”
Insolvency: Inability to pay debts when due.
Instrument: A legal document that records an act or agreement and provides the evidence of that act or agreement. Instruments include contracts, notes, and leases (e.g., a debt instrument).
Integrity pact: An agreement intended to prevent corruption in public contracting. One party represents a central, local, or municipal government; government subdivision; or state-owned enterprise. The other party is usually a private company interested in obtaining or implementing the contract. Both parties agree not to bribe or take bribes, and to punish if they break this pledge.
Integrity: Integrity means following of a set of moral or ethical principles. A National Integrity System is an assessment methodology developed by the NGO Transparency International. It evaluates key “pillars” in a country’s governance system, both in terms of its internal corruption risks and their contribution to fighting corruption in society at large. When all the pillars are functioning well, corruption remains in check. Where some or all of the pillars are weak, this can allow conniption to thrive.
Intercorporate dividends: Dividends distributed between two companies (domestic or foreign) arising from a shareholding or participation in the capital of the paying company.
International Accounting Standards Board (IASB): The IASB aims to create a single set of international financial reporting standards for companies. Accounting standards govern how companies report their accounts. Weak accounting standards are blamed for the ease with which global companies have been able to avoid and evade tax. It is a private institution, governed by a group of 22 trustees from businesses and accounting firms in major industrialized countries. It also includes trustees from the private sector in China, South Africa, Poland, Brazil, and India.
International Bank for Reconstruction and Development: Together with IDA, the two are more commonly known as the World Bank. See “World Bank” and “World Bank Group” for details.
International Center for the Settlement of Investment Disputes: The World Bank forum for the arbitration of international investment disputes between private investors and governments. It was established in 1966 when the Convention on the Settlement of Investment Disputes between States and Nationals of other States came into force. ICSID was created primarily to encourage long-term investment in developing countries. The rationale was that companies would be more inclined to invest in the global South if an international institution was created to mediate potential disputes. The Center is perhaps the least known entity of the World Bank Group.
International Development Association: Together with IBRD, the two are more commonly known as the World Bank. See “World Bank” and “World Bank Group” for details.
International Finance Corporation: Along with the IBRD. IDA and MIGA make up the World Bank Group. See “World Bank” and “World Bank Group” for details.
International Finance Facility for Immunization: Established by the G7 in 2005, IFFIm, like advance market commitments (AMCs), is an example of a new and innovative mechanism for financing vaccine and immunization programs. By committing participating donor countries to pledge 10-20 years of aid to the facility upfront, and borrowing against these pledges to sell bonds on international capital markets, it is able to raise funds to support immunization initiatives in developing countries. The funds are then disbursed through the GAVI Alliance (see “GAVI Alliance” above).
International financial architecture: A catch-all phrase for the policies, programs, and institutions required to manage the increasingly globalized world of finance.
International monetary fund (IMF): An international organization established in 1944, headquartered in Washington, DC. The purposes of the IMF are, inter alia, to promote international monetary cooperation, facilitate the expansion and balance growth of international trade, promote stability in foreign exchange, and provide short-term financial assistance to countries needing to stabilize exchange rates or alleviate balance of payments difficulties. Since the 1980s the IMF has become increasingly involved in the economic decisionmaking of nations through the conditionality associated with its loans.
International taxation: Traditionally, international taxation refers to treaty provisions relieving international double taxation. In broader terms, in includes domestic legislation covering foreign income of residents (worldwide income) and domestic income of non-residents.
Investment allowance: Allowance with respect to a qualifying depreciable asset. It adds a certain percentage of the asset’s initial cost to the full depreciation write-off and is usually given in the year of acquisition or as soon as possible thereafter.
Investment incentives: Financial and tax incentives used to attract local or foreign investment capital to certain activities or particular areas in a country.
Investment income: Income derived from the investment of capital, whether money or other property, in income-producing assets or in a profit-making venture without active participation in the production of the income or in the affairs of the venture.
Investment reserve: This system permits eligible taxpayers to set aside part of their profits as a reserve for future investment and deduct from their income the amount of the annual contribution to the reserve.
Invoice basis: Method of applying VAT to the price at which the goods or service are invoiced, with a deduction for the tax (if any) charged at previous stages.
Invoice company: Term used in the context of transfer pricing to refer to a company established in a low-tax or no-tax jurisdiction for the purpose of shifting profits to that jurisdiction.
Itemized deductions: A deduction as specifically set forth in the Internal Revenue Code. The deductions in this part are individually listed, item by item.
Jeopardy assessment: Tax assessment made where there is some danger of tax being lost.
Joint return: A single return made jointly by husband and wife.
Joint-stock company: Company with legal personality and whose capital is divided into shares. The shareholders are generally liable only to the extent of the nominal value of their shares.
Junk bond: Bonds and debentures issued by companies that have a low credit evaluation (i.e., below investment grade) from a rating agency such as Standard & Poor’s or Moody’s.
Jurisdiction: The power, right, or authority to interpret and apply tax laws or decisions.
Kickback: A bribe paid after the fact for an undue favor or sendee. For instance, a company that receives a government contract might send the responsible official regular payoffs for the duration of the contract. Street vendors may pay the permission-granting authority a small sum each month as long as they are allowed to operate.
Kiddie tax: Term used to describe tax levied in the US on the unearned income of a child under 14. The income is taxed at the parent’s highest rate of tax.
Kleptocracy: A Greek word meaning “rule by thieves,” kleptocracy refers to a system of government in which leaders use their position for private gain at the expense of the governed. It is typically correlated with autocratic regimes with no meaningful accountability mechanism, effectively allowing the leader to plunder the state and its citizens for personal enrichment and to entrench his hold on power. Some well-known former kleptocrats include Francois Duvalier (“Papa Doc”) of Haiti, Mobutu of Zaire, and Suharto of Indonesia.
Know-how: All undivulged technical information, whether or not capable of being patented, that is necessary for the industrial reproduction of a product or process, that is, knowing how a product is made or how a particular process works. Payments for know-how may be taxed as royalties in many cases. The distinction from contracts for the provision of services is addressed in the OECD Commentary to Article 12.
Leading Group on Solidarity Levies to Find Development: An informal group established in 2006 with strong support from France and Brazil whose main objective is to move ahead with discussions around innovative financing mechanisms. Some of the initiatives to have come from this are: an international airlines levy and UNITAID; an International Finance Facility for Immunization; a working group on combating tax havens and capital flight; studies on a currency transaction development levy and migrant’s remittances; and progress on advanced market commitments on vaccine development. These are alternative resources for financing development beyond official development assistance.
Lease: In general, a lease is a contract in respect of real or personal property, under which the owner of the property grants to another the right to possess, use, and enjoy the property for a specified period of time in exchange for periodic payments.
Legal entity: Generally, coiporations, joint-stock companies, and limited liability companies are regarded for tax purposes as having an existence separate from that of their shareholders. Conversely, for tax purposes, a partnership is often not regarded as a separate legal entity, its profits being taxed in the hands of the individual partners. What constitutes a legal entity for tax purposes may or may not coincide with what constitutes a legal entity for general law purposes.
Legal reserve: Under the civil law of some countries corporations are required to maintain a legal reserve for all needs which may arise in the course of the business. Tax law does not allow a deduction for such a reserve.
Level playing field: This term denotes to reduce, by means of tax policy, the differences in the taxation of internationally mobile entities or transactions allowing countries to compete fairly on non-tax factors.
Lien: A charge against property, making it security for the payment of a debt, judgment, mortgage, or taxes.
Lender of last resort: An institution, usually a central bank, that can step in and lend funds to a bank facing a panic (sudden withdrawal of funds by depositors) or when no other institutions will lend to an institution considered high-risk or near collapse.
Leverage (or capital-asset ratio, capitalization, or leverage ratio): The amount of borrowed capital or debt, supporting equity capital. The most common gauge of this is the capital-asset ratio (but more sophisticated measures such as tier-1 capital to risk-weighted assets are used in practice). It is also used interchangeably to simply indicate the amount of indebtedness in the system.
Limitation on benefits provision: Tax treaty provisions designed to restrict treaty-shopping opportunities by limiting treaty benefits to persons who meet one of several enumerated tests, which may require minimum level qualifications, for example, local ownership.
Limited liability company: Business form that combines the flexibility and tax advantages of a partnership with the limited liability features of a joint-stock company. An LLC may be taxed as a partnership or a corporation depending on the nature of the status under which it is organized.
Liquidity (or liquidity coverage ratio—LCR): Cash is the ultimate form of liquidity. Liquidity refers to how fast and cheaply an asset can be converted into its most fungible form or cash. When an asset can only be converted into cash after a long search for a buyer, it is called illiquid. Liquidity is a key feature of John Maynard Keynes’s General Theory. Keynes argued interest is a reward for parting with liquidity. Three factors motivate demand for liquidity in Keynesian analysis: transaction motive (liquidity to make purchases), precautionary motive (in case of unexpected needs), and speculation of interest rates (lower interest rates imply greater demand for money). Modem financial theory and neoclassical economics have a very different understanding of liquidity, in that they consider it abundant. Financial crises are often liquidity crises, caused by imbalances between liquidity suppliers and demanders.
Living wills: Requirement that large and interconnected financial institutions keep orderly resolution and wind-down plans in case of crisis. One of the major lessons from the subprime crisis in 2007-2008
was the need to have orderly resolution plans for financial institutions so that tax payers do not get saddled with the cost of winding down unviable but systemically important entities.
Lobbying: Any activity carried out to influence a government or institution’s policies and decisions in favor of a specific cause or outcome. Lobbying is an essential tool for stakeholders to make their voice heard with politicians and public officials. Citizens engage in lobbying when they write to their elected representative or join a protest, etc. Professional lobbyists, by contrast, are paid to advocate for specific interest of their clients before responsible public officials. They are sometimes former officials themselves, hired due to their knowledge of the issues and contacts in the sector. But terms of engagement of former public officials are usually clear and limited in order to distinguish permissible lobbying from illegal trading in influence.
Local tax: In countries where there is a central or federal government and separate levels of government at state, provincial, county, or city levels, taxes levied at the lower levels of government are commonly referred to as “local” taxes.
Location of assets: The location of an asset is relevant to the determination of whether it is within a taxing authority’s jurisdiction. Location of immovable property in a country means, in most countries that the country taxes the income derived therefrom and possibly the value and capital gains realized on alienation, even if the owner is not a resident of that country.
Location savings: Tenn used in the context of transfer pricing to refer to the savings or benefits such as cheaper production or service costs obtained by siting particular manufacturing operations in an offshore jurisdiction.
Long-term capital gains: In countries where capital gains are subject to special tax treatment, a distinction may be made between capital gains realized after a short period of time and capital gains realized after a longer period of time. Long-term capital gains may be taxed at reduced rates.
Looking through: Term typically used when disregarding the separate legal identity, for example, a company, in order to charge tax on a shareholder in respect of his share of the company profits.
Loophole: Opportunities available in tax law to minimize a taxpayer’s tax burdens.
Loss relief: Most income tax laws provide some form of relief for losses incurred, either by carrying over the loss to offset it against profits in previous years (carryback) or in future years (carryforward) or by setting off the loss against other income of the same taxpayer in the year in which the loss was incurred.
Lottery tax: Tax on the sale of lots or on the receipt of prizes after the drawing of lots.
Low income country: Classification created by the World Bank, calculated according to Gross National Income (GNI) per capita. Low income countries are those with a GNI per capita of $975 or less.
Lump sum deductions: Deduction, often from income, for the computation of taxable income, which does not reflect the factual situation.
Lump sum exempt amounts: Fixed sum of income, net worth, etc., below which no tax is due.
Lump sum rates: In specific cases, income tax (and other taxes) may be levied at a fixed rate instead of the rates usually applicable.
Lump sum taxation: The tax laws of some countries allow the tax authorities to levy a fixed amount of taxes on income in certain circumstances which deviates from the normal method of applying a rate to income to ascertain taxes payable.
Luxury taxes: Indirect ad valorem tax imposed on supplies of specific non-essential and normally expensive commodities that are arbitrarily considered (e.g., toiletries, cosmetics, jewellery, pearls, and precious stones and metals, etc.)
Malpractice: Improper or immoral conduct of a professional in the performance of his duties, done either intentionally or through carelessness or ignorance; commonly applied to accountants, tax preparers, and lawyers to denote negligent or unskillful performance of duties where professional skills are obligatory.
Management fees: Broadly, a fee or charge imposed for management and/or administrative services of a parent company or head office.
Marginal rate of tax: Tax rate applicable to the top slice or bracket of a taxpayer’s income or other taxable income, where the relevant tax on such items is levied at progressive rates.
Minimum tax: In certain countries, corporations are always liable to a certain amount of annual tax, regardless of whether they have realized a profit.
Measurement of corruption: There are two main approaches in appraising/evaluating corruption. One is measurement, which aims to quantify the extent of corruption. The other is assessment, which seeks to identify the factors that allow corruption to take place.
Medium-term strategy: At the 2005 Annual Meetings, then IMF Managing Director Rodrigo de Rato presented his medium-term review— an effort to rethink the IMF’s strategic direction in the context of a dynamically changing global economy. It responded to a perception that the fund had slipped far beyond its mandate of addressing shortterm BOPs problems and promoting international monetary stability. It also addressed concerns about the shocks of some national economies (e.g., China and India) were sending regionally and globally through payments imbalances, fixed exchange rates, and financial market disturbances. In April 2006, de Rato made proposals for implementing this strategy, focusing on four areas: new directions for unproved surveillance of national economies, promoting greater regional dialogue on economic issues, extending the IMF Consultative Group on Exchange Rates to emerging economies, and strengthening its analysis of emerging risks; becoming more responsive to preventing economic crises and responding to them in emerging-market countries; more effective engagement in low-income countries through the traditional poverty reduction strategy papers (PRSPs) and the IMF’s concessional lending window (the Poverty Reduction Growth Facility), but also exploring more flexible instruments of support; and Governance of the Fund itself, including IMF Manager selection process, country quota increases and quota reformulation, better defining the role of the Board, building countiy capacity to implement reforms and streamlining Board operations.
Micro- and macro-prudential regulation: Micro-prudential regulation focuses on risk factors as they relate to an individual institution. Macroprudential regulation on the other hand posits that systemic risks are greater than the sum of their parts. And that focusing on individual rationality may serve to underplay important systemic risks such as counterparty risks (above) and other system driven factors. The lack of attention to macro-prudential risk is seen as a major weakness of the Basel capital standards (see above), and the absence of such regulation is thought to have amplified the impacts of the global financial crisis of 2008.
Middle income country: Classification created by the World Bank, calculated according to GNI per capita. Middle income countries are divided by the World Bank into two sub-categories: lower middle income, $976-83855 and upper middle income, $3856-811,905.
Millennium Declaration: Adopted by 189 nations and signed by 147 heads of state and governments at the UN Millennium Summit in September 2000, the Declaration reaffirms the world’s commitment to the most pressing development challenges and outlines eight key objectives codified in the MDGs.
Millennium Development Goals (MDGs): A set of eight development goals that 189 signatory nations have agreed to achieve by the year 2015. They are: (1) eradicate extreme poverty and hunger, (2) achieve universal primary education, (3) promote gender equality and empower women, (4) reduce child mortality, (5) improve maternal health, (6) combat HIV/AIDS, malaria, and other diseases, (7) ensure environmental sustainability, and (8) develop a global partnership for development. The eight MDGs are further broken down into 18 quantifiable targets that are measured by 48 indicators.
Model tax conventions (treaties): A model tax treaty is designed to streamline and achieve uniformity in the allocation of taxing right between countries in cross-border situations. Model tax treaties developed by OECD and UN are widely used and a number of countries have their own model treaties.
Monetary policy: Government macroeconomic policy that seeks to influence general economic activity by controlling credit and interest rates and the domestic money supply (i.e., the amount of currency in circulation).
Money laundering: Any act or attempted act disguising the source of money or assets from criminal activity. Money laundering includes concealing the origins and the use of the illegal assets. It is often used to hide the proceeds of corruption, and is practiced by drug traffickers, human traffickers, kleptocrats, and white-collar criminals. Bank secrecy makes laundered money particularly hard to trace.
Monterrey Consensus: The 2002 United Nations-led Financing for Development process in Monterrey emerged from a need to examine the internationally supported development goals adopted over the past decade at previous UN summits—and at a minimum the MDGs— and to determine how to mobilize and increase the effective use of financial resources to be able meet these goals. The conference led to the Monterrey Consensus which focuses on six key areas: (1) mobilizing domestic financial resources for development, (2) mobilizing international resources for development, foreign direct investment, and other private flows, (3) international trade as an engine for development, (4) increasing international financial and technical cooperation for development, (5) debt sustainability and cancellation, and (6) enhancing the coherence and consistency of the international monetary, financial and trading systems in support of development.
Moral hazard: A term based on the principle that if actors are allowed to escape the consequences of their risky actions, they are more likely to engage in reckless behavior in the future. The moral hazard argument is often used to argue against the forgiveness of legally contracted debt; it has also been used to criticize IMF rescue packages, which bail out reckless bankers and private investors.
Mortgage tax: Tax on mortgages usually in the form of a stamp duty levied on the mortgage document.
Motive test: Test often found in tax rules which are designed to prevent tax avoidance. For example, the rales may provide that certain consequences will follow if the sole, main, or principal purpose of certain transaction is the reduction of tax.
Multilateral Investment Guarantee Agency: Along with the IBRD, IDA and IFC make up the World Bank Group. See “World Bank” and “World Bank Group” for details.
Multi-stage tax system: Indirect tax charged on the same goods at successive stages of production and distribution.
Mutual agreement procedure: A means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorized by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment.
Mutual fund: A collection of stocks, bonds, or other securities owned by a large group of often-small investors and managed by a professional fund manager.
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.
Negative income tax: A proposed system of providing financial aid to poverty-level individuals and families, using the mechanisms already in place to collect income taxes. Low-income person or family would receive a direct subsidy, called a negative income tax.
Neopatrimonialism: A style of governance based on informal patronclient relationships, where the elite uses resources such as public goods and public offices to secure loyalty from the general population.
Nepotism: A form of favoritism involving family relationships, in which someone exploits his or her authority to procure jobs or other favors for relatives. When this treatment is extended to friends and associates, the appropriate term is cronyism.
Net income: Net income is gross income less deductible income-related expenses. Many countries levy income tax on this basis.
Net operating loss: Amounts by which business expenses exceed income in a tax year. A trader’s operating losses constitute broadly the excess of his operating expenditure over receipts from his operations.
Net profit: Difference between receipts from business transactions and deductible business expenses, subject to any adjustments for tax purposes.
Net profit margin: Ratio of operating profits to gross income (or revenue) Net working capital: Current assets less current liabilities.
Net worth tax: Many European countries impose the net worth tax in the context of property taxation. The taxable base for resident taxpayers is normally the taxpayer’s worldwide net worth, that is, total assets less liabilities along with deductions and exemptions specially allowed by tax laws.
Nexus link: Often a requirement in tax law for determination of taxability or deductibility. For example, expenses are deductible if they have a “nexus” with gross income. In US, the taxable income of a multistate corporation may be apportioned to a specific state only if the corporation has a sufficient nexus in the state.
Nominal capital: Amount of capital that is defined as such in the articles of incorporation. Usually, a certain minimum amount of nominal capital is required to establish a legal entity.
Non-discrimination: Tax treaties frequently contain a “non-discrimination” article which stipulates that citizens or nationals of one country resident in the other country may not be subjected to local taxation which is different from or more burdensome than the tax to which citizens and nationals of the host country are subjected under the same circumstances (including as to residency).
Nou-qualified stock option: A stock option that does not meet the incentive stock option requirement under US tax law. The spread is taxed as ordinary income.
Nou-resident alien: A non-resident individual who is not a citizen or national of the taxing jurisdiction.
Non-resident: Broadly speaking, a person who spends most of the calendar year outside his country of domicile. Non-residents are usually taxed on income derived from sources within the taxing jurisdiction, whereas residents may be taxed on worldwide income.
Notice of assessment: The written decision of the tax authorities after a review of a taxpayer’s return, whereby the amount of taxable income is determined and the amount of tax due is calculated.
OECD: The Organization for Economic Cooperation 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 organization 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.
Off-balance sheet: Exposure to investments and risks not directly related to the asset or liability side of financial institutions balance sheets. Often securitized (see below) assets are held off-balance sheet.
Offence, tax: Tax offences may be specified in the tax laws covering matters such as late filing, late payment, failure to declare taxable income or transactions, and negligent or fraudulent misstatements in tax declarations.
Office: For purpose of the application of a tax treaty, the office of an enterprise normally forms a permanent establishment if the business of that enterprise is wholly or partly carried on through that office.
Office audit: An examination at a tax authority’s office, generally of an uncomplicated tax matter.
Official Development Assistance: Traditionally, official development assistance or aid has been given by members of the Development Assistance Committee (DAC) of the OECD to Part I List of Aid Recipients, that is, developing countries. ODA is geared toward the promotion of economic development and welfare of developing countries, is concessional (see “concessional loans” above) in character with a grant element of at least 25%, and comprises contributions of donor government agencies to developing countries (“bilateral ODA”) and to multilateral institutions. ODA receipts comprise disbursements by bilateral donors and multilateral institutions.
Offshore bank: Offshore banking business basically consists of borrowing in foreign currencies for non-resident depositors outside the country and relending the foreign currencies to other non-residents. A number of countries have special regime for the taxation of offshore banks.
Offshore company: Term usually applied to a company registered in a country (often a tax haven) other than the country or countries in which it carries on its business activities. An offshore (or non-resident owned) company is commonly used for captive insurance, marketing abroad, international shipping, and tax shelter schemes.
Off-shore financial center: A jurisdiction providing tax and regulatory privileges, usually to companies, trusts, and bank account holders. Account holders get privileges on the condition they do not conduct active business within that jurisdiction. Off-shore financial centers host a functional financial service center, the commercial response to provisions offered by tax havens.
One hundred and eighty-three days’ rule: Presence in a country for 183 days or more in any 12-month period may have tax consequences, particularly in respect of an individual’s residence for tax purposes or for the taxation of employment income (although other tests must also be met).
Onshore company: Tenn sometimes used to denote the converse of offshore company.
Onus of proof: The burden and responsibility of proving an assertion. Widely adopted principle in tax law, for example, where the taxpayer has the basic responsibility of declaring his taxable income or transactions.
Operating lease: Lease where the lessor is regarded as the owner of the leased asset for tax purposes.
Option to be taxed: In the VAT context, a VAT exempt entrepreneur sometimes can claim to be subject to VAT, the advantage being that to be entitled to his input tax against his output tax.
Option: Derivative financial instrument consisting of a firm agreement granting one party the right but not the obligation to buy or sell commodities, securities, or currencies at a specified future date at a specified price.
Ordinary shares: Ordinary shares (also known as common stock) are generally shares with an equal par value and bear equal rights and obligations such as the right to participate in the management of the company by voting at the shareholders’ meeting and the right to receive dividends. The rights of ordinary shareholders to receive dividends are generally subordinate to the rights of bond holders and preference shareholders.
Other income: Income not otherwise mentioned in a tax treaty is frequently dealt with in a separate article, entitled “other income.”
Outbound transaction: Term which refers to the tax treatment of a country’s residents (and perhaps citizens) doing business and investing abroad.
Output tax: Tenn used in connection with VAT to denote the tax payable on the sales of goods or services by those who are subject to the tax and in contrast to the input tax for which a credit will be available.
Over-the-counter (OTC) derivatives: Those derivatives not traded on formal stock or futures exchanges or through a centralized counterparty, but over-the-counter or in bilateral transactions among the major parties. The global OTC derivatives market lacks transparency. In 2008, the value outstanding in the global OTC market was around $650 trillion or about 12 times the size of global GDP. Interest rate and currency swaps (along with CDSs) dominate global OTC trading.
Overhead expenses: The general expenses of a business as opposed to the direct cost of producing a good or sendee. “Overhead costs” is a term which may, in tax matters, also be used for costs incurred by the head office of a concern for the benefit of branches or subsidiaries.
Paid-in capital: The capital received by a corporation from investors for stock, as distinguished from capital generated by earnings or donated.
Paris Club: Formed in 1956 as an informal, voluntary group (or “noninstitution”) of creditor governments, the Paris Club works to solve payment difficulties experienced by debtor nations. The group helps by rescheduling or postponing debt payments as a means to provide a country with debt relief, and in the case of concessional rescheduling, a reduction in debt sendee obligations.
Paris Declaration: Building on high-level meetings in Rome and Marrakech, the 2005 Paris Declaration set out a series of common and monitorable actions to enhance aid effectiveness. The five principles of the Declaration, which lay out commitments for both donors and partner countries, are as follows: (1) ownership, (2) alignment, (3) harmonization, (4) managing for results, and (5) mutual accountability. The Paris Declaration promises to increase the impact of aid by going beyond previous agreements, setting out 12 results-oriented indicators and creating strong mechanisms for donor-recipient accountability.
Passive bribery: Refers to the act of receiving the bribe. This does not mean the passive briber has taken no initiative—in many cases he or she may have demanded the bribe in the first place.
Patronage: The support or sponsorship of a patron (wealthy or influential guardian). Patronage is used to make appointments to government jobs, promotions, contracts for work, etc. The desire to gain power, wealth, and status through their behavior motivates most patrons. Patronage violates the boundaries of legitimate political influence and the principles of merit.
Payroll tax: Tax charged on an employer’s payroll (i.e., gross salaries, wages, and other remunerations) paid to his employee without regard to their domicile, family status, or other individual circumstances.
Penalties: Administrative penalties are imposed for tax offences, such as failure to make a timely return or payment, negligence, and making a false return or statement. They take the form of additions to the tax and are assessed as part of the tax. Criminal penalties, on the other hand, are enforceable only by prosecution. A prison sentence may be imposed for serious tax fraud.
Pension fund: Like a mutual fund, except that the investors are long term and bound by some common workplace affiliation (such as a union). In many countries, pension funds represent the largest single institutional investors.
Perception surveys: Questionnaires that ask about the respondent’s views on levels of corruption in a country/sector/institution, and sometimes his or her impression of whether the situation is changing for the better or worse.
Permanent establishment (PE): Term used in double taxation agreement (although it may also be used in national tax legislation) to refer to a situation where a non-resident entrepreneur is taxable in a countiy, that is, an enterprise in one country will not be liable to the income tax of the other country unless it has a “permanent establishment” thorough which it conducts business in that other country. Even if it has a PE, the income to be taxed will only be to the extent that it is “attributable” to the PE.
Petty corruption: Alternatively called “administrative” or “bureaucratic” corruption, the term refers to the everyday corruption that takes place when bureaucrats meet the public. While the sums of money involved tend to be small, they are far from “petty” for the people concerned. Examples include paying bribes to get an ID, enroll in school, or have a phone line installed.
Phantom stock plan: A deferred-compensation plan that uses the employer’s stock in the business as a measuring rod for determining the value of the compensation payment. Hypothetical shares of stock are allocated to the employee, and accrued appreciation and/or dividends to the hypothetical shares are paid in cash to the employee.
Portfolio interest: Category of interest that may be paid from US sources free of withholding tax provided certain requirements are met. The portfolio interest exemption does not apply to bank loans made in the ordinary course of business.
Political corruption: The term is both narrowly used to designate the manipulation of policies, institutions, and rules in the financing of political parties and in electoral campaigns, and also more broadly as a synonym for “grand corruption,” or corruption taking place at the highest levels of government where policies and rales are formulated and executive decisions are made.
Politically exposed persons (PEPs): Individuals who are or were in the past entrusted with prominent public functions in a foreign country, such as heads of state, senior politicians, military officials, senior executives. Many PEPs hold positions that can be abused for the purpose of laundering illicit funds or corruption.
Portfolio investment: A portfolio investment in a company would be a holding of shares amounting to a small portion of the total shares of the company, for example, less than 10%. Portfolio investors may receive different tax relief or other treatment in respect of their dividends under tax treaties from those accorded to other direct investors.
Premium: In the context of a derivative financial instrument, a premium is the amount a purchaser pays for an option. In the context of a bond or other debt instiument, it is the amount paid in excess of the face amount.
Premium at the issue of shares: Excess of issue value over par value in issuing corporate shares. It is a contribution to capital and not taxed as profits.
Portfolio investment: Refers to the purchase of foreign stocks, bonds, or other securities. In contrast to FDI, foreign portfolio investors have no controlling interest in the investment, which is typically a short-term one. The relative ease with which portfolio investment can enter and exit countries has been a major contributing factor to the increasing volatility and instability of the global financial system.
Predicate offence: The criminal activity from which the proceeds of a crime are derived. Money laundering is a derivative crime. Its status as a crime depends on the origin of the funds involved.
Presumptive taxation: Concept of taxation according to which income tax is based on “average” income instead of actual income.
Pre-tax profits: Profit after deducting depreciation, costs, etc., but before deducting taxes.
Price increase reserve: Reserve to take account of expected increase in prices of goods, raw materials, etc. which must be replaced in the course of business.
Primary adjustment: An adjustment that a tax administration in a first jurisdiction makes to a company’s taxable profits as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction.
Principal amount: The face value of an obligation, such as a bond or a loan, which must be repaid at maturity, as separate from the interest.
Principal-agent theory: This theory is based on an economic concept called the principal-agent problem. It assumes that the problem of corruption is one of bureaucrats and other public employees (“agents”) not following the rules and failing to fulfill the expectations of their leaders (“principals”). Agents are delegated the responsibility to implement and enforce rules and regulations, but they can choose to pursue their private interests instead of the public interest represented by the principal. They can do this because principals in complex organizations don’t necessarily have access to all the information about what goes on, and agents can withhold key information, so principals are not fully able to monitor and control what agents do. This “information asymmetry” creates opportunities for corruption. In other words, not participating in corrupt actions is assumed to be the normal state of affairs as mandated by principals, and corruption is a deviation from this norm. The solution, in this way of thinking, is for policy makers (the principals) to change the rules and the monitoring enforcement mechanisms to limit the room for deviation and assure that bureaucrat’s behavior will stay closer to the expected norms of clean management. This thinking gave rise to a number of “technical” reforms, including measures aimed explicitly at corruption, and those that are assumed to implicitly alter incentives for corruption through controls and monitoring of important government processes where corruption can take place.
Private ruling: Ruling granted by the tax authorities to a single taxpayer, usually with respect to a single transaction or series of transactions. Normally the ruling can be relied upon only by the taxpayer to whom it is issued, not by other taxpayers, and is binding upon the tax authority provided all relevant facts have been disclosed.
Private sector corruption: The abuse of professional obligations within a corporation or other non-governmental entity for private gain. For example, private sector corruption occurs when a corporate employee sells commercial secrets to a competitor. The term is also used more broadly for situations where individuals or groups from the private sector influence public officials to take decisions and actions that constitute abuses of entrusted power. One example would be corporations offering bribes to public officials in exchange for favorable legislation or lucrative contracts.
Privilege (diplomatic): Under the general rales of international law or under the provisions of special agreements, diplomatic agents and consular officers are in most cases exempt from tax in the state to which they are seconded. Many tax treaties include a clause that the right to tax income arising from outside the state is reserved to the sending state.
Profit: Broadly, the excess of revenue over expenditure.
Profit mark-up: Method to find an arm’s length price, by taking the vendor’s cost and adding an appropriate profit mark-up.
Privileged tax regime: Euphemism for the tax regime of a tax haven.
Pro rata rule: Under most VAT systems, a credit for part of the input tax is allowed for VAT previously paid on goods and services when they are used in taxable and exempt (without credit) transactions and total transactions occurring during a calendar year.
Procurement: Procurement refers to the different stages of acquiring goods or services from an external source, and where buyers (such as public institutions and organizations), often in a bidding process, look for the best value-for-money offer for the goods and services that need to be procured.
Profit method: Method used in transfer pricing cases that looks at the profits arising from controlled transactions of one or more of the associated enterprises participating in such transactions.
Profit ratio: Term used to denote the ratio of profits of an enterprise to its capital or net worth, and sometimes used as a basis for taxation.
Profit shifting: Allocation of income and expenses between related corporations or branches of the same legal entity (e.g., by using transfer pricing) in order to reduce the overall tax liability of the group or corporation.
Profit split method: Transfer pricing method that allocates the combined operating income or loss from a transaction among the separate parties by determining the relative value of each party’s contribution to such overall profits or loss.
Profits tax: Tax imposed on business profits in addition to ordinary income tax or as distinct from income tax imposed on other forms of income.
Progression: The rates of individual income tax are usually progressive, that is, an increasing proportion of income must be paid in tax as the income increases.
Project finance: In addition to trade financing, there is also project financing which provides longer term loans to overseas projects. This often brings together a large number of investors, from commercial banks, regional development banks such as the Inter-American Development Bank (IDB), the World Bank Group, or export credit agencies (such as Export Development Canada) where the project sponsor is from the ECA country. The initial provision of equity to a project by one of these investors often helps to attract additional financing from other investors.
Property tax: Group of taxes imposed on property owned by individuals and businesses based on the assessed value of each property.
Proprietorship: An unincorporated business owned by a single person. The individual proprietor has the right to all the profits from the business and also the responsibility for all its liabilities.
Protected disclosure: Protected disclosure refers to a statement or report about serious wrongdoing, usually corrupt conduct, maladministration or a waste of public money, and entitles the person who made the disclosure to support and protection from reprisal. Protected Disclosures legislation is in place in many countries to provide the legal framework to encourage people to report wrongdoing without the fear of retaliation.
Provisional assessment: Assessment of tax made before it is possible to make a final assessment which is often based on, for example, estimated figure or the previous year’s figures.
Public financial management (PFM): PFM is the legal and organizational framework for supervising the budget cycle. Fiscal discipline and effective allocation of resources and public services are the underpinning features of a sound PFM. Donor support PFM reforms as part of a wider anti-corruption agenda because of the relative share of public expenditure in a countiy’s economy and the fact that corruption in PFM can directly affect a range of different development outcomes, such as pro-poor growth, or the quality and availability of public services.
Quarantining: In the context of the foreign tax credit system, this term denotes the separate calculation of the foreign tax payable on all foreign income of a particular category which may be credited against the domestic tax payable on that category of foreign income.
Quota: According to the IMF’s Articles of Agreement, each member country is required to have a minimum subscription of quotas in the total capital stock of the institution. The amount of the minimum subscription is roughly proportional to the absolute size of the country’s economy in the world. Member countries are then allocated a certain number of votes according to the size of this subscription. See also “shares.”
Quoted securities: This term denotes the securities which have been admitted to an official stock exchange and are traded therein through sale, purchase, or other disposal.
Rates: Rates are levied on the occupiers of real property on the basis of the annual rental value of the property.
Ratification: The formal legislative consent or acceptance required by the constitution or domestic law of a country before a treaty to which it is a party can come into effect.
Realization: A legal concept referring to a time when rights have become legally receivable or obligations have become legally payable.
Rebate: Term which in certain countries is synonymous with a tax credit.
Reciprocity principle: The principle of give-and-take operates in a variety of tax contexts (particularly in the case of tax treaties) where an exchange of tax privileges between countries is desired. Reciprocity is a basis for relieving a taxpayer under domestic law, for example, relief is granted for foreign tax if the other country gives corresponding or equivalent relief.
Recourse: The ability of a lender to claim money from a borrower in default, in addition to the property pledged as collateral.
Recovery of tax: From the taxpayer’s point of view, this may mean a refund of tax. From the tax authorities’ point of view, it may mean the collection of tax which is in arrears.
REDD (Reducing Emissions from Deforestation and Forest Degradation): REDD refers to the mechanisms or schemes negotiated under the UN Framework Convention on Climate Change. They aim to reduce carbon emissions from deforestation and forest degradation in developing countries. The schemes commonly involve public aid financing. REDD+ schemes aim to go beyond REDD by enhancing forest carbon stocks.
Redemption: The acquisition by a corporation of its own stock in exchange for property, without regard to whether the redeemed stock is cancelled, retired, or held as treasury stock.
Reduced rates: In many countries, the ordinary rates of tax charged under various tax laws may be reduced in particular situations. For example, under tax treaties, reduced withholding tax rates often apply to dividends, interest, and royalties.
Refund (of tax): Tax repaid to a taxpayer.
Registered security: A nominative (or registered) security is a security in respect of which the owner’s name is recorded in a register by the issuing company and the registered owner is the person entitled to all relevant rights.
Registration duty: Fixed or variable duty levied on documents which relate to the transfer of ownership or the right to use movable or immovable property, the formation or any change of status of a company, etc.
Remittances: Are personal cash or in-kind transfers by overseas or migrant workers to their home countries. Remittances often far exceed aid transfers to countries and constitute a large source of revenue for many developing countries. The World Bank estimated that around 150 million migrant workers sent around US $300 billion home in 2006. Recorded remittances to developing countries are estimated to reach $240 billion in 2007 according to the World Bank, although the true size of remittances and unrecorded flows tends to be much larger.
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, that is, to repatriate it. Repatriation also takes place when expatriate employees working in a foreign country want to send income to their home country.
Reserves: Funds made to fulfill 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.
Reserves: The amount that banks are legally required to keep “on hand” to meet short-term repayment obligations (for instance, if a large percentage of depositors suddenly decide to withdraw their money). The amount banks are required to keep in reserve varies by country and has generally declined over time through the process of financial liberalization.
Residence principle of taxation: Principle according to which residents of a country are subject to tax on their worldwide income and nonresidents are only subject to tax on domestic-source income.
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.
Resident: A person who is liable for tax in a country or state because of domicile, residence, place of management, or other similar criterion.
Residual analysis: An analysis used in the profit split method which divides the combined profit from the controlled transactions underexamination 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 toward 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: An official published statement by the IRS of US about procedural and administration aspects of the tax laws.
Revolving doors: Revolving doors refers to individuals’ moves from jobs as legislators or regulators into jobs in companies or lobby firms subject to legislation and regulation. It can be abused if not properly regulated.
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 rollover 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.
Risk assessment: A systematic process of evaluating the potential risks or hazards that may be involved in an activity or undertaking. A corruption risk assessment involves first describing how a given governance mechanisms operates, through a detailed mapping of all relevant subprocesses. Each element is then analyzed to identify the opportunities for corruption. Identified risks are then evaluated for probability of occurrence and the expected impact, so that appropriate mitigation measures can be identified and implemented. Together, the steps constitute a risk management system.
Risk insurance: A type of export insurance. This insulates exporters from various losses stemming from a broader set of commercial and political risks, including buyer insolvency, default on payments, repudiation of goods, contract termination, foreign exchange conversion or transfer payment difficulties, war, revolutionary insurrection preventing payment, cancellation of government import-export permits, wrongful calls on bid/performances letters of guarantee, and inability to repatriate capital or equipment due to political problems. See also “export credit insurance.”
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.
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.
Safe harbor: 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.
Sale and leaseback: In a sale and leaseback transaction, the owner of property will sell it to a buyer who then leases it back to the original owner. This method is sometimes used to release the value of capital assets for use in a business.
Sales tax: Tax imposed as a percentage of the price of goods (and sometimes services). The tax is generally paid by the buyer but the seller is responsible for collecting and remitting the tax to the tax authorities.
Schedular tax system: Tax system in which income from different sources is taxed separately (i.e., under a different “schedule:), thus separate tax assessments are made on industrial and commercial profits, wages and salaries, income from securities and shares, income from land, etc.
Secondary adjustment: An adjustment that arises from imposing tax on a secondary transaction.
Secondary transaction: A constructive transaction that some countries will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment. Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans.
Second-tier subsidiary: A taxable entity controlled by another taxable entity that is in turn controlled by a third entity.
Secrecy jurisdiction: Secrecy jurisdictions are also referred to as “tax havens.” According to the Tax Justice Network, they are defined as “places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use, secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.” Secrecy jurisdictions encourage the relocation of economic transactions to that domain. Low or minimal tax rates to non-residents might apply. They may also host a range of financial service providers.
Secret comparable: A term used in the transfer pricing context. It denotes a comparable whose data is not disclosed to the public or the taxpayer but known only to the tax authority which is making the transfer pricing adjustment.
Securities and Exchange Commission: The main securities regulator in the US.
Securities: These are financial instruments (such as bonds or stocks) that can be traded freely on the open market. “Securitization” refers to the pooling of loans or assets for subsequent sale to investors.
Securitization: Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. The best examples are packaging and repackaging receivables such as mortgage, credit card, or student loan interest into securities, and then selling them to investors. Securitization is said to dramatically increase liquidity in credit markets, but during the 2008 global financial crisis served to increase concentration of risky assets like subprime linked mortgages.
Self-assessment: System under which the taxpayer is required to declare the basis of his assessment (e.g., taxable income), to submit a calculation of the tax due and, usually, to accompany his calculation with payment of the amount he regards as due. The role of tax authorities is to check (perhaps in random cases) that the taxpayer has correctly disclosed his income.
Separate taxation: Separate taxation is a method of taxing a married couple on the basis of their joint income. It is mandatory in some countries and optional in others. Upon exercising an option for separate taxation, a husband and wife are treated as separate individuals for the puipose of computing income tax.
Sextortion: The abuse of power to obtain a sexual benefit or advantage. Related to the concept of extortion.
Shares: According to the World Bank’s Articles of Agreement, each member countiy is required to have a minimum subscription of shares in the total capital stock of the institution. The amount of the minimum subscription is roughly proportional to the absolute size of the country’s economy in the world. Member countries are then allocated a certain number of votes according to the size of this subscription. See also “quota.”
Shell companies: A shell company is a non-trading company, which is used as a vehicle for various financial maneuvers, illicit purposes, or which is kept dormant for future use in some other capacity. Shell companies are usually incorporated in a jurisdiction in which it has no physical presence and is unaffiliated with a regulated group.
Shifting an incidence of taxation: Determination of the economic entity that actually ends up paying a particular tax. In the case of indirect taxation tax is normally intended to fall upon consumption and be borne by consumers, so that entrepreneur who pays the tax on his supplies of goods and services in general passes on the tax, or “shifts” it “forward” to the consumer by adjusting his prices appropriately. Such taxes are said to be shifted “backward” in the case that entrepreneurs are forced to absorb some of new or increased tax.
Short-term capital gains: Capital gain derived from the disposal of assets which have been held for a comparatively short period of time.
Simultaneous tax examination: A simultaneous tax examination, as defined in Part A of the OECD Model Agreement for the Undertaking of Simultaneous Tax Examinations, means an “arrangement between two or more parties to examine simultaneously and independently, each on its own territory, the tax affairs of (a) taxpayer(s) in which they have a common or related interest with a view to exchanging any relevant information which they so obtain.”
Single entity approach: Method of taxing a legal entity that conducts its business through a permanent establishment rather than through a subsidiary company. Under the single entity approach, a head office and a permanent establishment are treated as one taxpayer for tax purposes, even though they may be considered separate entities for purposes of accounting or commercial law.
Single taxpayer: A person who is not married on the last day of the tax year.
Situs rule: Provision of tax law setting out the factors which determine where a particular asset is situated or deemed to be situated for tax purposes.
Small traders, special tax regime for: In many countries, small traders are subject to a special tax regime, particularly in respect of VAT, in which exemption, lower tax burden, or lower administrative burden are granted.
Soak-up tax: Tax or levy which is conditioned on the availability of a foreign tax credit in another country.
Social security contributions: Charges levied on employees, employers, or self-employed or on all persons subject to individual income tax to cover the cost of providing future social security payments.
Solvency: Solvency is the long-term equivalent of liquidity. It is the degree to which current assets can meet current liabilities, or the ability of the entity to meet long-term expenses and other obligations.
Source of income: The place (or countiy) where a particular item of income is deemed to originate or where it is deemed to be generated. National rules vary, depending on which concept of source is used.
Source principle of taxation: Principle for the taxation of international income flows according to which a country consider as taxable income those income arising within its jurisdiction regardless of the residence of the taxpayer, that is, residents and non-residents are taxed on income derived from the countiy.
Source rule: Provision in the national law of a country or in a tax treaty which defined the concept of source for a particular type of income.
Spread: Can be used in many contexts to denote the margins on financial transactions. For example, the spread of an option is the difference between the fair market value of stock at the exercise date and the option price.
Special Drawing Rights (SDRs): An international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is calculated by averaging a “basket” of four major world currencies—the US dollar, UK pound, euro, and Japanese yen— in a weighted formula that is re-evaluated eveiy 5 years to ensure it represents the relative importance of each. When issued, SDRs are allocated relative to a country’s IMF quota. SDRs can be converted into cash and used to accumulate savings for development projects, stimulus packages, or debt payments. But while the SDRs are interest free if they remain part of a country’s reserves, once converted into cash, countries must then pay market interest rates for borrowing that hard currency (be it yen, dollars, euros, or pounds) until the currency is converted back into SDR. Currently, market interest rates are low, but should they increase, this cash conversion could become a burden to countries. Consequently, some civil society groups are calling for a fixed interest rate, flat fee, or no charges to convert SDRs into cash, enhancing the ability of developing countries to access the resource. Technically, developed economies, with higher SDR allocations, can grant or loan their SDRs to countries that need them.
Speculation: The act of betting on changes in exchange rates in hopes of profiting. A speculative “attack” occurs when a large number of investors anticipate a reduction in currency values and sell off large quantities of their holdings, thereby often creating the price crash they predicted.
Spoliation: Spoliation refers to the intentional destruction or alteration of a document required for evidence. More broadly, the concept includes destruction or plunder of something valuable. It occurs when high-ranking officials loot the wealth of their states. The spoils are the benefits reaped, the booty, rewards, profits, etc. from corrupt acts.
Sporadic corruption: Sporadic corruption is the opposite of systemic corruption. Because it occurs irregularly, it does not threaten the mechanisms of control nor the economy as such. It is not crippling, but can seriously undermine morale and sap the economy of resources.
State capture: Coined by the World Bank in the early 2000s, state capture refers to a type of systemic political corruption in which private interests significantly influence a state’s decision-making processes to their own advantage. For example, businesses can improperly influence legislators to pass favorable laws.
Statute of limitations: A statute limiting the period within which a specific legal action may be taken, such as the collection of tax, appeal from a decision of the tax authorities or lower court, etc.
Stock exchange turnover tax: Tax levied on the sale of securities on the stock exchange market.
Substance over form doctrine: Doctrine which allows the tax authorities to ignore the legal form of an arrangement and to look to its actual substance in order to prevent artificial structures form being used for tax avoidance purposes.
Tariff: In general, the term “tariff” refers to a list (schedule) or system of levies (taxes, duties, charges) imposed by countries on foreign trade transactions (especially importations).
Tax: The OECD working definition of a tax is a compulsory unrequited payment to the government.
Taxable base: The thing or amount on which the tax rate is applied, for example, corporate income, personal income, real property.
Supply side: Supply side refers to the person or entities who offer or provide the illicit benefit in corrupt transactions. The officials with entrusted authority who receive illicit benefits constitute the demand side. The distinction is similar to that between active and passive bribery, which is used primarily for legislative purposes. Also similar is the fact that the term “demand side” does not imply that it is the official on the receiving end who proactively solicited the bribe. The distinction between supply and demand can be useful in analyzing the different sets of incentives that contribute to corruption.
Suspicious activity reports (SARs): SARs are documents that financial institutions must file with the national crime authorities following a suspected incident of money laundering or fraud.
Sustainable development goals (SDGs): As part of the 2030 Agenda for Sustainable Development, UN member states adopted 17 sustainable development goals (SDGs) in September 2015. These SDGs build on the millennium development goals (MDGs) and demand action by all countries to combat poverty while protecting the planet. While corruption impedes progress in meeting all of the SDGs, Goal 16 explicitly calls on states to “substantially reduce corruption and bribeiy in all their forms.”
Systemic corruption: Also known as endemic corruption, is a situation when corruption is an integral part of a state’s economic, social, and political system, and where most people have no alternatives to dealing with corrupt officials. Sporadic corruption, in contrast, occurs irregularly and does not compromise the mechanisms of governance in the same crippling way.
Tax agent: Term which refers to a tax adviser who assists the taxpayer in fulfilling his obligations under the legislation.
Tax authorities: The body responsible for administering the tax laws of a particular country or regional or local authority.
Tax bill: Draft law on a tax matter which, after approval by the government of a countiy, is submitted to the Parliament for debate.
Tax burden: For public finance purposes, the tax burden, or tax ratio, in a country is computed by taking the total tax payments for a particular fiscal year as a fraction or percentage of the Gross National Product or national income for that year.
Tax clearance certificate: Document issued to a taxpayer by the tax authorities certifying that the taxpayer has either paid all taxes due or that he is not liable to any taxes. In certain countries, a tax clearance certificate must be produced before a person can leave the country.
Tax compliance: Degree to which a taxpayer complies (or fails to comply) with the tax rules of his countiy, for example, by declaring income, filing a return, and paying the tax due in a timely maimer.
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 exile: Generally speaking, a natural or legal person who serves 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 favor a particular industry, activity, or class of taxpayer.
Tax foreclosure: The process of enforcing a lien against property for nonpayment 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: A place with nominal or no taxes where individuals/compa-nies can mitigate their tax burden. Onshore tax havens include financial centers which are important members of the IMF, such as Luxembourg, Switzerland, the United Kingdom, and the United States. Offshore tax havens include jurisdictions which have been monitored by the IMF in its Offshore Financial Sector Assessment Program. Tax havens often lead to capital flight and tax evasions by individuals/companies, which often results in the erosion of state budgets, among other things.
Tax haven: Tax haven in the “classical” sense refers to a countiy which imposes a low or no tax, and is used by corporations to avoid tax which otherwise would be payable in a high-tax countiy. According to international 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: Agreement which allows governments to share tax and other infoimation 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 information exchange agreements (TIEAs): TIEAs are bilateral agreements under which countries agree to cooperate in tax matters through the exchange of information.
Tax on tax: The charging of tax on tax-inclusive prices.
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 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 tune.
Taxable event: Teim used to define an occurrence which affects the liability of a person to tax.
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.
Territoriality7 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.
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.
The Basel Committee on Banking Supervision: As part of its monetary and financial stability services, the BIS hosts the Basel Committee, which provides a forum for regular cooperation on banking supervisory matters. Its key concern is to ensure the adequate capitalization of banks. As banks’ operations were increasingly internationalized, rich countries launched the committee in 1974 to create comparable and thus compatible systems of supervision to prevent financial instability. The committee created the controversial Basel I and Basel II sets of capital adequacy standards. The committee is governed independently of the BIS. Committee members come from the GIO (the G7 plus the Netherlands, Switzerland, Belgium, and Sweden). There is no member from a developing country. The BCBS reports to a joint committee of central bank Governors and (non-central bank) heads of supervision from the GIO countries. The IMF, through its Financial Sector Assessment Program (FSAP), monitors countries using the Basel committee’s core principles. See also “Bank for International Settlements,” “Basel I,” “Basel II,” and “G-10.”
Tier 1 capital (or capital standards): Is the highest quality capital banks are required to hold. It comprises common equity (shareholder equity) and retained earnings (share of profits), net or various allowances or deductibles (such as corporate goodwill).
Tobin tax: A proposal by Nobel-prize winning economist James Tobin to place a small tax (0.1-0.5%) on all foreign exchange transactions as a means of stabilizing currency markets. Tobin’s tax would also generate hundreds of billions of dollars annually.
Too big to fail: A term used for mega-financial institutions whose failure threatens the stability of the overall economy. These include the likes of AIG, Fannie and Freddie in the US, all of which were bailed out. Mervyn King, Governor of the Bank of England, was purported to say, “If it is too big to fail, then it is too big.”
Trade finance: Trade financing consists of a series of financial services to facilitate the export (or import) of various equipment and services. Export financing includes a range of financial and risk management services, including: (1) export credit insurance, (2) financing to foreign buyers of Canadian goods and sendees, (3) guarantees, and (4) working capital. See also “project finance.”
Trade: A business, profession, or occupation. A trade often implies a skilled handicraft, which is pursued on a continuing basis, such as carpentry.
Trading in influence: Also known as influence peddling, trading in influence occurs when a person who as real or apparent influence on the decision-making of a public official exchanges this influence for an undue advantage. The offence is similar to bribery with one important difference: trading in influence concerns the “middleman,” or the person that serves as the go-between the decision-maker and the party that seeks an improper advantage. The final decision-maker may not even be aware of the illicit exchange. One example is when an MP receives a payment from a company to attempt to convince fellow legislators to support amendments that would benefit that company. Trading in influence is difficult to prove because the legal definitions involve disputable criteria of “intentionality” and “undue”/improper influence. Trading in influence is also often difficult to distinguish from permissible forms of lobbying.
Transaction taxes: Tax that uses a specific type of transaction as its object, for example, sales tax, immovable property transfer tax, etc.
Transfer mispricing: Transfer mispricing refers to the manipulation of import and export prices. Related parties trade at prices meant to manipulate markets or to deceive tax authorities.
Transfer pricing: Refers to the pricing of contributions (assets, tangible and intangible, services, and funds) transferred within an organization. For example, goods from the production division may be sold to the marketing division, or goods from a parent company may be sold to a foreign subsidiary. Since the prices are set within an organization (i.e., controlled), the typical market mechanisms that establish prices for such transactions between third parties may not apply. The choice of the transfer price will affect the allocation of the total profit among the parts of the company. This is a major concern for fiscal authorities who wony that multinational entities may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction.
Transfer tax: Tax levied on the transfer of goods and rights, for example, purchase and/or sale of securities and immovable property.
Transparency: Transparency is the quality of being open, communicative, and accountable. It implies that governments and other agencies have a duty to act visibly and understandably. Transparency can lead to unproved resource allocation, enhanced efficiency, and better prospects for economic growth.
Treats' 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.
Treat)7 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.
Trillion: How much is a trillion? A trillion is a thousand billion. A million dollar pile of stacked SI 00 bills would be two meters tall; a one trillion dollar pile would be 20 km high.
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.
Turnover tax: General term used to refer to the different forms of consumption and sales taxes.
Underlying tax: Tax which is charged on corporate income out of which dividends are paid, but which does not appear as a direct deduction or withholding from the dividend itself.
Undistributed profits tax: Annual tax imposed, in addition to the normal corporate income tax, on the undistributed portion of the profits or surplus of a corporation.
Underground banking: Underground banking refers to informal banking arrangements that ran alongside the formal banking system. They are independent of formal systems and involve the global transfer of currency, for example, remittances from overseas workers. Underground banking systems are, however, also known to be conduits for money laundering. Therefore, a balance needs to be found between regulating the underground banking system to stop illicit financial flows on the one hand, and to allow its continued use for legitimate money transfers on the other hand.
Undue hardship: A substantial financial loss that would result to a taxpayer from making payment on the due date of the amount of taxes with respect to which the extension is desired. Undue hardship is a condition precedent to the granting of an extension of time to make a tax payment.
UNITAID: This International Drag Purchase Facility was founded in 2006 on the initiative of Brazil, France, Chile, Norway, and the UK (currently has 34 member countries). UNITAID’S mission is to provide people in the developing world with long-term access to quality drag treatment for diseases such as malaria, tuberculosis, and HIV and AIDS at the lowest price possible. In order to fulfill this mission, a source of longterm predictable funding is required—an aviation solidarity levy (see above). The UNITAID budget for 2007 is $300 million, and already there are indications that its interventions have helped to reduce drag prices. Canada is not currently a member of UNITAID; the UK and Spain provide budgetary contributions.
Unitary tax system: Under a unitary tax system, the profits of the various branches of an enterprise or the various corporations of a group are calculated as if the entire group is a unity. A formula is used to apportion the net income of the whole group to the various parts of the group. Usually a combination of property, payroll, turnover, capital invested, manufacturing costs, etc. are formula factors.
Use tax: Tax on goods which are used within the taxing jurisdiction although the goods were purchased in another jurisdiction
Valuation principles: Tax law principles regarding valuation of business and non-business assets, and inventory.
Value added tax: Specific type of turnover tax levied at each stage in the production and distribution process. Although VAT ultimately bears on individual consumption of goods or services, liability for VAT is on the supplier of goods or services. VAT normally utilizes a system of tax credits to place the ultimate and real burden of the tax on the final consumer and to relieve the intermediaries of any final tax cost.
Vertical equity: Doctrine which holds that differently situated taxpayers should be treated differently, that is, taxpayers with more income and / or capital should pay more tax.
Vertical fund: An emerging source of global development finance that is vertically earmarked toward a single issue, such as fighting HIV AIDS, malaria, or tuberculosis, rather than horizontally toward a program area, such as building better healthcare systems. Since the late 1990s and the arrival of the Global Fund to Fight AIDS, tuberculosis, and malaria, there has been a boom in such funds, primarily geared toward disease prevention and control. This has come from both the public sector, for example, the US President’s Emergency Plan for AIDS Relief, and through private philanthropy, for example, the Bill and Melinda Gates Foundation.
Volatility: The tendency of financial markets to change abruptly at the whims of investors. As national control over financial markets fall as a result of capital account liberalization and the volume of portfolio investment skyrockets, volatility is increasing in financial markets. While unstable markets are profitable for speculators (see “speculation”), the real economy cannot function properly when exchange rates are fluctuating wildly and capital is flowing in and more often out of a country in tidal waves.
Volcker Rule: Separation of proprietary trading (i.e., Riskier capital market activities) from federally funded deposit taking activities. Similar to Glass-Steagall separation, named after Paul Volcker, the proponent of the idea in the Obama administration.
Vulture fund: A company that buys up foreign debt at low prices from creditors who do not expect to be paid back in full and wish to cut their losses. The vulture funds often take the debtor government(s) to court and demand payments many times larger than the amount the funds paid to acquire the debt. For example, Donegal bought US $40 million worth of Zambia’s debt from Romania for just US S3.2 million and proceeded to sue Zambia in a British court, demanding payments of US $55 million.
Wage tax: Levied at source as a withholding on wages; taxes thus withheld are usually offset against final income tax liability (if any).
Whistleblower: Whistleblowers are people who inform the public or the authorities about corrupt transactions and/or other unlawful or immoral behavior they have witnessed or uncovered. These individuals often require protection from those they expose. Whistleblower protection refers to the measures taken to shield the informer from retaliation.
Withholding tax: Tax on income imposed at source, that is, a third party is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the government. Withholding taxes are found in practically all tax systems and are widely used in respect of dividends, interest, royalties, and similar tax payments. The rates of withholding tax are frequently reduced by tax treaties.
World Bank: An international institution established in 1944 to assist with the reconstruction of post-war Europe. Today, it is the largest public development institution in the world providing long-term loans to governments for development projects in a variety of sectors (see “conditionality”). World Bank total lending for the 2007 fiscal year was $24.7 billion. This amount included loans, credits, guarantees, and grants and exceeded 2006 Bank lending by 4%.
World Bank Group: The largest multilateral group of institutions providing international development financing to developing countries and emerging economies. It includes four agencies: the International
Bank for Reconstruction and Development (IBRD or “World Bank”) which provides hard loans to countries for projects (with relatively high interest rates and shorter repayment periods); the International Development Association (IDA) which provides soft loans or grants to countries (with low or no interest and long repayment periods); the International Finance Corporation (IFC) which is the private sector arm of the World Bank and encourages private business and investment in developing countries; and the Multilateral Investment Guarantee Agency (MIGA) which guarantees funds that private investors direct to developing countries.
Worldwide income: Criterion for the income tax liability of a resident company or individual of a certain country. In many countries, a resident company or individual is subject to corporate/individual income tax on its worldwide income, subject to double taxation relief.
Written down value: The value of an asset which is depreciable for income tax purposes, determined by deducting from the total cost, including installation, etc. The deduction that have been made for wear and tear or depreciation in previous tax years.
Zero coupon bond: Long-term bond on which interest is not payable on a regular basis, but rather upon maturity of the bond. It is sold at a deep discount from its face value.
Zero rate: The term is used in relation to VAT, where the rate of tax which is in principle levied but at a rate of 0% so that in effect no tax is payable, but will result in refunds of input tax credits.