Automatic tax information exchange A system of tax information exchange whereby jurisdictions automatically share information on a taxpayer’s assets with the home jurisdiction of that taxpayer. Civil society organisations want to see a multilateral agreement for tax havens to share information automatically with all other jurisdictions.
Capital gains taxes A tax on the profits from the sale of capital assets such as stocks and shares, land and buildings, businesses, and valuable assets such as works of art.
Consumption taxes Most countries apply consumption taxes such as value added tax, general sales taxes, and excise taxes.
Corporate taxes Taxes on the profits made by limited liability companies and other similar entities. The tax is generally imposed on net taxable income, specified in the company’s financial statement.
Country-by-country reporting A proposed accounting standard under which a multinational corporation would be required to report in its annual accounts key financial information in each country and territory in which it operates.
Deferred tax Deferred tax assets are tax credits, for example related to current losses, from which the company can set off future tax liabilities.
Direct taxes Taxes that are charged on physical or legal persons directly upon their salary, profits, dividends, rents or other types of income.
Equitable taxation Equitable taxation refers to tax policies that reduce income, wealth or other social inequalities. Horizontal equity refers to persons and businesses in similar circumstances in terms of their welfare who should be treated in a similar manner, while vertical equity refers to the idea that people with a greater ability to pay taxes should pay more.
Excise taxes These are taxes usually imposed on a limited range of goods, such as luxury goods, or on products that can have a harmful impact on the consumer.
Export processing zone (EPZ) An artificial ring-fenced territory within a state, in which export-orientated industries with little interaction to domestic markets operate while the usual laws and regulation are suspended or relaxed.
False invoicing A similar practice to transfer-pricing abuse, but between unrelated companies.
Flat tax A tax system in which, as income increases above an agreed tax-free sum, the amount of tax paid remains constant in proportion to total income.
General sales tax (GST) A tax added to the value of all sales with no allowance for claiming a rebate on tax paid. Different from the value added tax which is only paid by the final consumer, as each other stage of production needs a documented proof of not being a final consumer.
Goods and services tax (GST) Same as general sales tax – name differs from country to country.
High net-worth individual Otherwise known as HNWIs (‘hen-wees’) in the wealth management sector. Generally categorised as individuals with more than US$1 million in liquid financial assets available for investment, which excludes their primary residence and motor vehicle.
Illicit capital flight The process whereby wealth-holders and businesses place their funds and other assets outside the country of residence. The process is illicit if funds are of criminal origin, are illegally transferred, or used for illicit purposes.
Income taxes Taxes on income, profits, inheritance, payroll and capital gains are generally divided between taxes payable by individuals and corporations.
Indirect taxes A form of tax charged upon transactions, usually on their gross value. Examples include sales taxes, value added taxes, goods and services taxes, stamp duties, land taxes, excise and customs duties, and levies of all sorts.
Money laundering The practice of processing money from criminal or otherwise illicit activities to give it the appearance of originating from a legitimate source.
Progressive taxes A tax system in which, as income rises, the amount of tax paid increases in proportion to the income as well as in absolute amount, that is the percentage tax rate increases as the income rises.
Regressive taxes Regressive taxes are the opposite of ‘progressive taxes’.
Royalties Royalties are usage-based payments for ongoing use of an asset as prescribed in a licence agreement, for example natural resources such as oil, minerals, fisheries and forests but also intellectual property including music and pharmaceutical products. Royalties are typically agreed upon as a percentage of revenues raised from the use or gradual depletion of an asset.
Secrecy jurisdiction Secrecy jurisdictions are countries and territories that provide financial secrecy which undermines the regulation of another jurisdiction for the primary benefit and use of those not resident in their geographical domain.
Social security payments Payments made towards maintaining government-provided health, unemployment, pensions and other basic social rights. Frequently considered as taxes.
Special economic zone (SEZ) Similar to the EPZ, but the activities can include domestic market-orientated business activities.
Tax A fee levied by a government or a regional entity on a transaction, product or activity in order to finance government expenditure.Tax rates and the tax base are decided by a representative legislative body, based on constitutional provisions.
Tax arbitrage The process by which a sophisticated taxpayer plays off the tax systems of two or more different countries to obtain a tax benefit as a result.
Tax avoidance The term given to the practice of seeking to minimise a tax bill within the letter of the law (as opposed to illegal methods which would be classed as tax evasion or fraud). This often involves manipulating the tax base to minimise the tax payable.
Tax base The collective value of transactions, assets, items and other activities that a jurisdiction chooses to tax.
Tax burden The total amount of tax paid by an individual, organisation or population. Also referred to as tax incidence.
Tax capacity A term that denotes the capacity of a sovereign country to raise revenue with regard to its fiscal architecture.
Tax competition The pressure on governments to reduce taxes, usually to attract investment, either by way of reduction in declared tax rates or through the granting of special allowances and incentives.
Tax compliance Payment of tax due without engaging in tax avoidance or evasion.
Tax consensus A set of tax policies promoted by the International Monetary Fund in view of macroeconomic stability, but disregarding equity concerns. Policies include in particular: reductions in the rates of corporate and other income taxes; reduction of trade taxes in support of trade and investment liberalisation; expansion of indirect taxation such as value added tax; simplification of the tax code; and promoting significant structural overhaul of tax administrations.
Tax dodging A legally imprecise term that is often used by tax justice campaigners when it is not clear whether tax is being avoided or evaded. It highlights the fact that many tax avoidance strategies are abusive, while being considered legal.
Tax effort A term used to determine the extent to which a government translates tax capacity into revenue.
Tax evasion A term used to denote illegal methods used to pay less tax. Also known as tax fraud.
Tax expenditure Used to describe the cost of tax incentives of all types in terms of lost potential tax revenue. As with any other expenditure, it should be considered as an investment and evaluated on the basis of cost and benefit.
Tax gap The difference between nominal tax ratios and actual tax revenues. This can be calculated by using various methodologies, for instance the difference between tax capacity and tax effort, or random tax inspections of taxpayers.
Tax haven See ‘secrecy jurisdiction’.
Tax holiday A period during which a company investing in a country does not have to pay tax under an agreement with the government.
Tax incentives A tax incentive is an aspect of the tax code designed to encourage a certain type of behaviour. This may be accomplished through means such as limited periods of tax holidays or permanent tax deductions on certain items.
Tax planning When tax legislation allows more than one possible treatment of a proposed transaction, the term may legitimately be used for comparing various means of complying with taxation law.
Thin capitalisation A company is thinly capitalised when its capital is made up more of debt than equity. For tax purposes, a problem arises when a company claims tax deductions on inflated debt interest payments. Subsidiaries of a company based in tax havens can overcharge interest payments to other related subsidiaries, and thus shift profits to low-tax jurisdictions. In most countries, the practice is regulated or outright illegal, but hard to detect.
Trade mispricing The term used to cover both transfer mispricing and false invoicing.
Transfer pricing A transfer-pricing arrangement occurs when two or more businesses that are owned or controlled directly or indirectly by the same group trade with each other. If a transfer price can be shown to be the same as the market price (the arm’s length price) then it is acceptable for tax purposes.
Transfer-pricing abuse This involves the manipulation of prices of transactions between subsidiaries of multinationals, or, more specifically, the sale of goods and services by affiliated companies within a multinational corporation to each other at artificially high or low prices (outside the arm’s length range). This may occur for a number of reasons, including to shift profits to low-tax jurisdictions or countries providing preferred tax treatment to certain types of income. (Can also be referred to as ‘transfer mispricing’.)
Value added tax (VAT) A tax charged by businesses on sales and services but which allows businesses to claim credit from the government for any tax they are charged by other businesses in the production chain. Different from the general services tax, which does not require proof of being an intermediate producer. VAT is often criticised for being regressive.
Withholding tax Tax deducted from a payment made to a person outside the country. Generally applied to investment income, such as interest, dividends, royalties and licence fees according to a Double Tax Treaty (DTT) signed between the two jurisdictions.