The Tax Research glossary seeks to explain the terms used on this blog that refer to more technical aspects of economics, accounting and tax. It recognises that understanding these terms is critical to understanding the economic issues that affect us all the time.

Like the rest of the Tax Research blog, this glossary is written by Richard Murphy unless there is a note to the contrary. It is normative approach and reflects post-Keynesian, heterodox economic opinion with a bias towards modern monetary theory. The fact that many items in that sentence are hyperlinked shows that they are explained in the glossary.

The copyright notices pertaining to the Tax Research blog apply to this glossary.

The glossary is designed to achieve three goals:

  • It seeks to provide a short, hopefully straightforward, definition of what a term might mean.
  • It then seeks, when appropriate, to explain what the term means within the context in which it is used. This is meant to elaborate the definition to add to understanding.
  • It then critiques the term, explaining, if appropriate, what the weaknesses inherent in the term or the situation it describes are. The aim here is to empower the reader to understand the issues behind the nonsense that most professions create around their activity to provide them with a mystique that they rarely deserve and which often hides what they are really up to.

The glossary is not complete. It will grow over time. If you think there are entries that need adding please let me know by emailing Please also feel free to suggest edits. The best way to do this is to copy an entry into Word and then send me a track-changed document indicating the changes that you suggest.

Because of the way in which it is coded this glossary automatically cross refers entries within itself and to the blog that it supports and within the glossary itself but if you think a link is missing please let me know.

Finally, if you like this glossary then you might like to buy me a coffee. It has required the support of a fair few to write it. You can do so here.

Glossary Entries

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Capital flight

Capital flight describes the process where wealth holders deposit their funds and other assets offshore rather than in their country of residence. The usual consequences is that these assets and the resulting income to which they give rise are not declared in the country in which their beneficial owner  resides. Capital flight and tax evasion are intimately linked phenomena.

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Capital gain

The profit made on the sale or gift of an asset not usually owned in the course of a trade such as land and buildings, artwork or shares and other investments.

Capital gains can be subject to capital gains tax.

If these assets are traded on a regular basis the person doing so is considered to have established a trade and capital gains tax does not apply to the profits realised on their sale in that case.

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The Greek God Apollo was supposedly spurned by Cassandra. She was, supposedly, the daughter of the king of Troy.

As a result Apollo is supposed to have cursed Cassandra with a gift of prophecy. He did, however, add a twist. He guaranteed that she would always be right, but that no one would ever believe her.

Today the term is usually reserved for those forecasting difficulties in the future which those hearing the prediction would rather ignore.

Neoliberal economists, defending the economic hegemony, like to use the term of those predicting that their  theories have no answer to the economic problems that we face.

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Cell company

A protected cell company, or PCC, is like a standard limited company that has been separated into legally distinct portions or cells.

The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC's overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole. The undertakings of one cell have no bearing on the other cells. Each cell is identified by a unique name, and the assets, liabilities and ac­tivities of each cell are ring-fenced from the others. If one cell becomes insolvent, creditors only have recourse to the assets of that particular cell and not to any other.

It is claimed that PCCs can provide a means of entry into captive insurance market to entities for which it was previously uneconomic. The overheads of a protected cell captive can be shared between the owners of each of the cells, making the captive cheaper to run from the point of view of the insured. Without strong regulation they do, however, create considerable financial opacity characteristic of tax haven or secrecy jurisdiction  activity.

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Central Bank

A bank usually owned by, and always answerable to, the government that is responsible for the day-to-day management of the money supply in the jurisdiction for which that government is responsible; for the regulation of commercial banks in that country and for managing the settlement of inter-bank debts in the currency of that country, for the issue of which it is responsible.

Since the 1990s many central banks have been responsible for the management of monetary policy in their jurisdictions in which activity they are notionally independent of the governments to which they are accountable.

The issue of central bank independence is controversial. See separate entry for discussion of this issue.

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Central bank reserve accounts

See also base money.

This entry explains how central bank reserve accounts are created.

Central bank reserve accounts (CBRAs) are held by the UK's commercial banks with the UK's central bank – the Bank of England.

As a central bank, the Bank of England is owned by the UK government. It is responsible for the day-to-day management of the money supply in the UK; for the regulation of commercial banks in the UK and for managing the settlement of inter-bank debts in sterling, for the issue of which currency it is responsible.

The central bank reserve accounts serve two purposes.  Firstly, they provide the mechanism by which payments from commercial banks and their customers are made to and from the government. Secondly, they are the mechanism used by commercial banks to make settlement of the liabilities that they owe each other when fulfilling the obligations that their customers' request be settled with customers of another bank.

These accounts are as a result restricted for the use of commercial banks and some other regulated entities in the financial services industry. It is believed that there are only a few hundred of them as a result.

Second, note that before 2007 there were almost no such balances, at least in total. The commercial banks and the Bank of England sought to achieve this result each day but used other very short-term overdraft and loan arrangements if that was not possible at that time. The current situation where all CBRAs are, in effect, bank deposit accounts held by the UK's commercial banks as a mechanism to guarantee their ability to make settlement to each other is almost entirely a creation of the post-2008 global financial crisis as a result.

Third, note that this change was in no small part motivated by those banks refusal to trust each other to make settlement after 2007, in which year it became clear that major commercial banks could fail when none had effectively done so since the 1860s.  Once banks had demonstrated their own inability to manage their balance sheets at the time of the global financial crisis it became apparent that these banks would need to hold funds with the Bank of England to prove their ability to fulfil their own promises to pay.

Fourth, the central bank reserve accounts were deliberately boosted in value by the Bank of England to facilitate this inter-bank payment process. This was the way in which banks were bailed out post-2008 to prevent them failing again.

In that case the way in which these reserve accounts have been increased in value needs to be noted. Doing so requires four things to be understood:

  1. Overall, the sum held on these accounts is not within the control of the commercial banks. The sum that each bank might hold will vary from day to day. However, that is the consequence of payments between banks varying. However, the quantum of funds held in the CBRAs as a whole is determined by the Bank of England on behalf of the government because it is the sole creator of what is called ‘base money'.
  2. Base money' is sometimes called ‘central bank money'. It comprises the currency issued by central banks in the form of notes and coins plus the balances on the CBRAs.
  3. Base moneyis created as a result of the CBRAs being used to transfer funds from the Bank of England into commercial banks on behalf of the government, to whom it acts as primary banker through the Consolidated Fund, and to also receive payments from those banks that are due to the government.
  4. In summary, payments from the Bank of England Consolidated Fund account to the commercial banks increases the sums held in the central bank reserve accounts and so create what is called base money. These payments are made in the ordinary course of government business to make settlement to whomsoever the government chooses to make payment to, from an old age pensioner to the sums used to redeem gilts when they reached their repayment date. Payments to the government via the CBRAs include taxes due, the proceeds of new gilt issues and the receipt of the many trading sums owed to government agencies.

In that case the only way in which the balances on the central bank reserve accounts can increase is by the government spending more into the economy than it receives back from it. There is no other way in which this can happen. In turn that is only possible because the government can decide to fund its expenditure with new money created on its behalf by the Bank of England. That new money that the Bank of England creates for the government is base money.

The corollary is also true. The only way in which the balances on the CBRAs can be reduced is by the government collecting more money from the commercial banking system than it spends into the economy e.g., as a consequence of taxes paid being in excess of government expenditure, or by raising new borrowing in excess of current requirements e.g. because of quantitative tightening.

In this context, the role of quantitative easing can appear to be confusing, although it is actually quite straightforward. The pattern is as follows:

  1. At any time it wishes the government can decide to issue new financial instruments. These can be very short term, in which case they are described as Treasury Bills and are redeemed in days. Alternatively, they can issue bonds or gilts, which can have duration from a year or so to fifty years or more. It has been government practice to only issue such bonds when there is a deficit on its Consolidated Fund account with the Bank of England, the aim being to restore a neutral balance on that account. This, however, is not a necessity and before 2008 it was commonplace for this account to also be cleared through the so-called Ways and Means Accountthat the government maintained with the Bank of England, which was an overdraft in all but name.
  2. The issue of new financial instruments, of whatever their nature, results in new financial flows from the commercial banks to the government either because the banks themselves buy these instruments or, more commonly, because their customers do. These flows move through the CBRAs in either case since this financial conduit to and from the government is only available to the banking sector and a very select limited number of other financial services sector entities. Whether the payment the commercial bank makes is as principal or agent for their customer makes no difference: the flow is from them to the government via the central bank reserve accounts. The result of the issue of new bonds is to reduce the balance in the CBRAs, meaning that the balances on those accounts created by government spending being in excess of routine income are cancelled in whole or part. Bond issuance of this sort, it is stressed, is not a part of the quantitative easing process.
  3. If the Bank of England then decides to undertake quantitative easing all that it does is lend funds to its legal subsidiary, the Bank of England Asset Purchase FacilityFund Limited (the ‘APF'). This company is fully indemnified with regard to its activities by HM Treasury and as such an agent of Treasury and is not under the effective control of the Bank. That company then uses the loan funds provided to it by the Bank of England to buy bonds issued by HM Treasury on the open financial markets. There is no reason why these bonds need to be owned by the commercial banks, and it is likely that most of them will not be. This is inconsequential to the resulting movement through the central bank reserve accounts, which is represented by a flow of funds from the account of the APF to the commercial banks, which as a result increases the central bank reserve accounts balances.
  4. As a result bond issues cancel the CBRAs created by government spending being in excess of government income, and QE then in turn cancels that process, as if the bond issue never took place., effectively restoring the CBRA balances created by expenditure exceeding income. Given that the bond that was issued is, after being repurchased using QE under the effective ownership and control of HM Treasury it is easy to argue that the bond in question has effectvely been cancelled. This is the accounting position reflected in the Whole of Government Accounts, which are the only true and fair accounting representation of this transaction[1].
  5. QE is then a simple way of swapping bonds that need never have been issued for base money, and QT reverses that swap.

As a result the reality is that QE and QT are window dressing and it is the excess of government spending over income and routine bond issuance since 2008 that has created the CBRA balances.


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Central banks

Central banks are created by governments to:

Most central banks are structured to be institutionally independent of the government that appoints the members of its Board and key committees, but almost all governments also retain powers to overrule the central bank and its decision making if they deem it appropriate. This provision is included in The Bank of England Act 1998. The degree to which impendence is constrained as a result is always open to question. The existence of such rules does undoubtedly allow a government to exert pressure on supposedly independent central bankers.

Central banks have existed for hundreds of years. The Bank of England was created in 1694. Their usefulness cannot be doubted.

The idea that central banks should be independent is much more recent and is a neoliberal construct. The neoliberal arguments for independent central banks include:

  • Elected governments cannot be trusted to control inflation because the measures required to do so are electorally unpopular and so will not be implemented. Independent central bankers have to implement such measures instead.
  • Central bankers have to impose discipline government spending because elected politicians cannot be trusted to do so.
  • Politicians cannot set interest rates reliably.

In essence the argument is that democratically elected politicians fail markets to appease petiole and so must not be allowed to do so. The whole argument opposes democratic accountability in government.

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Charitable Trust

A trust established for purposes accepted by law as having a charitable purpose.

These arrangements can abused because of their tax-free status. For example, in some jurisdictions they can be used to pass as­sets between generations, free of inheritance tax, while keeping them firmly under family control. Money can be extracted by family members via fees or salaries, for ex­ample, meaning that despite the charitable structure there may be little or no benefit to charity.

Many charities now prefer to undertake their activities as limited liability companies.

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A company is legal entity created by law through a registration process that is treated as a separate legal person from those who set it up. It is called a corporation in some countries.

Almost all countries allow for the creation of companies but the rules by which they do so vary considerably. Most offer limited liability, which means the members of the company are not liable for its debts if it were to go bankrupt.

When companies were first made available it was thought that this was a privilege, and certain duties were demanded in return, not least that accounts and information concerning the ownership and management of the company should be put on public record. That principle has been undermined by offshore secrecy and a resulting downward trend in domestic regulation in many jurisdictions. This is part of the so-called race to the bottom in regulation.

The members of a company are either shareholders or guarantors. Shareholders own shares in a company. Most companies have shares. Those that do not are usually described as limited by guarantee. Their members agree to make a fixed donation not exceeding an agreed sum in the event that the company becomes insolvent and has to cease to trade. Companies limited by guarantee cannot usually pay dividends to their members and as such are usually used for not-for-profit activities such as community groups, charities, non-governmental organisations and the like.

Companies are regulated by the legislation of the jurisdiction in which they are incorporated. This regulation can vary. At best it requires that the following be made available on public record:

  • The constitution of the organisation
  • A full list of members
  • The names of those who manage the organisation (its directors)
  • The locations where the company trades and its registered offices with contact details being provided
  • The full financial statements or accounts of the company for each accounting period to an accounting reference date.

Few countries require all this data for all companies and many provide considerable exemptions for smaller companies meaning that limited liability companies can frequently be operated almost anonymously. As such they are very often a perfect vehicle for those wishing to unaccountably evade tax, most especially on trading income. This is facilitated if there is a weak Registrar of Companies in a jurisdiction as there is in the UK.

The directors of a company are supposedly answerable to its shareholders but in most cases shareholders actually have very limited control over the activities of those directors.

Shareholders have no direct claim over any of the assets of the company in which they own a share if it is solvent and continuing in trade. They usually only have entitlement to vote at annual general meetings (and then usually only to accept the accounts as presented to them and to appoint directors) and to receive dividends from the company if it decides to pay them.

If a person has more than 50% control of a company then they have the power to appoint its board and this gives them considerable power over its operations. If the person owning more than 50% of the shares in a company is another company then the company y whose shares are owned is called a subsidiary company and the company that owns them is called a parent company and together they are called a group of companies.

Each company within a group has to prepare its own accounts. The parent company is usually required to prepare what are called consolidated accounts for the group as a whole.

Limited liability companies can create considerable problems in creating fair markets, as Adam Smith, the reputed founder of modern economics noted in his seminal work on this issue, the Wealth of Nations. These include:

  • Reckless behaviour because of the provision of limited liability resulting in fraud on the creditors and members of a company.
  • Tax fraud because the shareholders are not liable for the tax debts due by the company that they own.
  • Fraudulent trading hidden behind the anonymity that companies frequently permit.
  • Difficulty in holding a company to account for its actions because it fails to file information required of it with a Registrar of Companies.

Despite considerable awareness of those issues few governments anywhere seem willing to tackle them.

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Consolidated accounts

A group of companies is made up of two or more member companies with one company owning or controlling, either directly or indirectly, more than 50% of each of the other members. When this happens the shareholders of the ultimate parent company can only ap­praise the return on their investment if they can see the combined result of the parent company in which they have invested and that of all the subsidiary companies that it controls. This outcome is achieved by preparing consolidated accounts.

In consoli­dated accounts all the trading between members of the group of companies is elimi­nated because this cannot generate profit for the ultimate parent company sharehold­ers, which can only be earned by trading with independent third parties. It is only third-party trading that is reflected in consolidated accounts. The balance sheet in a set of consolidated accounts only reflects liabilities owing to or from third parties, those between group companies being eliminated.

See also group accounts for commentary on the weaknesses in consolidated accounts.

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The constitution of a company is often called its articles and memorandum of associa­tion, or in the USA its articles and memorandum of incorporation. For a trust the con­stitution is the trust deed, for a partnership it is either the partnership deed or agree­ment.

It is important that third parties have access to such constitutions, not least because they often include limitations on the activities of the entities in question and if they trade beyond those agreed limitations their actions can be deemed to be ultra vires i.e. acting beyond their powers, and in that case the person trading with the entity that has acted in this way may find themselves without legal recourse for recovery of their funds.

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Consumption tax

See indirect tax or sales tax.

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Contingent liability

A liability that might arise depending upon an uncertain future event occurs, or for which payment is not probable, or the amount due cannot be measured reliably, is considered to be a contingent liability.

A contingent liability's existence is noted in the narrative commentary within a set of accounts but is not included as a cost in the accounts of a reporting entity because of the uncertainty as to their existence or potential value.

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Contingent tax liability

A contingent tax liability is a sum of tax that will only be due if a conditional event occurs. For example, it is a tax liability that will only be due if a tax return is challenged as inaccurate by a tax authority. The liability can be calculated as the total possible sum due, multiplied by the probability of the conditional event occurring.

If the resulting figure is small it is customary for little or no liability to be included in the accounts of a company.

If the probability is small but the potential liability is big, the risk of the liability arising may be separately disclosed in the accounts of a company, but this is not always the case.

In the USA this issue is addressed by Financial Accounting Standards Board (FASB) Financial Interpretation Note 48 (FIN 48) ‘Accounting for uncertain tax positions'. This requires that all tax positions where there is uncertainty as to the out­come be disclosed and quantified. This provides an indication of how much tax companies are trying to hold back through tax planning schemes.

The effect of this can be material. For example, in its December 2008 accounts, Google Inc said:

In addition, as a result of having adopted Financial Accounting Standards Board Inter­pretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) in January 2007, we increased long-term taxes payable by $400.4 million in the year ended December 31, 2007 as FIN 48 specifies that tax positions for which the timing of the ultimate res­olution is uncertain should be recognized as long- term liabilities. We also recognized additional long-term taxes payable of $362.8 million in the year ended December 31, 2008.

The practice is slowly becoming more commonplace around the world.

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Controlled foreign company

A controlled foreign company (CFC) is a subsidiary company or corporation of another (parent) company registered in a location where it might secure a tax advantage by being so located.

The CFC is registered in a tax haven or other territory where little or no tax is charged on the subsidiary's profit. This clearly opens up opportunities for profits to be shifted from the parent company to the offshore subsidiary with the aim of avoiding tax.

To prevent this, CFC rules provided that profits declared by the subsidiary could, in some cases, be subjected to tax in the country of residence of the parent company even though it is not actually resident there.

Since the turn of the millennium, EU court rulings and new legislation in many countries have dramatically undermined the effectiveness, of CFC rules. New measures, such as country-by-country reporting, have been adopted instead to locate profits shifting into tax havens.

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Conventional monetary policy

Conventional monetary policy describes the actions of a central bank that tries to control the rate of inflation in the jurisdiction for which it is responsible by changing the base rate of interest that it pays to that jurisdiction's commercial banks on the deposits that they hold with it on what are called their central bank reserve accounts.

Conventional monetary policy is used by the central bank of a jurisdiction when the bank base rate that they are able to set is significantly positive. Quite what significantly positive might mean is open to interpretation, but it is likely to mean that the rate in question is at last two per cent, meaning that the option to both increase and decrease it to a significant extent is available to the central bank in question.

If the base rate of interest in a jurisdiction approaches zero then base rate is said to be at the zero bound and unconventional monetary policy is likely to be used as an alternative to conventional monetary policy.

Given that the primary aim of central banks is to control inflation and central banks do not usually engage in direct lending to the public the range of options available to them to influence interest rates is quite limited. In practice, during periods when conventional monetary policy can be used central banks influence the interest rate policy of commercial banks within their jurisdiction by making payment of interest to those commercial banks on the money held on deposit by those commercial banks with the central bank on what are called their central bank reserve accounts, with that interest being paid at the base interest rate that the central bank sets. This payment on the central bank reserve accounts then sets the base rate for interbank lending, which is then in turn used to establish the rate for other lending, on which the loan interest rate to be charged is often specified to be at fixed percentage rate above the base rate set by the central bank.

Conventional monetary policy has only this one instrument available to it.

Conventional monetary policy fails at what is called the zero bound.

It can be argued that the conventional monetary policy is always a blunt instrument for controlling inflation because:

  • There is a significant time lag between changes in bank base rate and changes in the rate of inflation because there are many imperfections in the signalling mechanism between base rate and the market, which imperfections have increased significantly in the modern era when longer term fixed rate loans have become commonplace, particularly in mortgage markets.
  • By no means all market participants are borrowers and those that are not may be very little impacted by changes in base rate as a consequence, meaning that this instrument is ineffective in large parts of the population.
  • By increasing the disposable income of those with wealth as a consequence of interest rate rises on savings when base rates are increased conventional monetary policy can increase the likelihood of inflation in some product categories, negating its impact on the spending of those borrowers whose disposable incomes are squeezed by interest rate rises.
  • In the case of corporate borrowing the policy assumes that a company cannot retain profits to fund their investment as an alternative to borrowing, and yet many can do that. An increase in interest rates will not necessarily reduce investment activity as a consequence and so inflationary pressure as a result.
  • There is no guarantee that commercial bank intermediaries will pass in the impact of all base rate changes to their customers. They might increase their own profit margins instead, negating the impact of the policy.
  • The policy is operated independently of fiscal policy, which can also be used to manage inflation. This was very apparent in the disastrous Truss budget of September 2022 in the UK but the separation of these two intimately related tools and their management by separate agencies always has the potential to create this conflict that reduces the effectiveness of both policies.
  • Central banks have a poor record of forecasting and when their ability to forecast is central to effective conventional monetary policy this seriously impedes the likelihood that any such policy will work, let alone well.

To be compared with unconventional monetary policy.

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Corporate bonds

Corporate bonds are a type of debt security issued by a firm and sold to investors, usually via a stock exchange placing organised by underwriting agents, who might be investment banks but need not be so.

The stock exchange quotation of corporate bonds is crucial to their tax status in many countries, allowing interest to be paid to persons outside the jurisdiction without deduction of tax at source.

Corporate bonds earn interest, usually at a fixed rate. This is paid whether the company is profitable or not. This contrasts with shares, which can only have dividends paid upon them when there are realised profits available for that purpose.

Bond interest attracts tax relief, whereas share dividends do not. Bonds tend as a result to be a cheaper form of finance for companies. This has led to their use in preference to share capital for many years. It has also led to the potential over-leverage of many companies at potential risk to its creditors.

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Corporation Tax

Corproation tax on the profits made by limited liability companies and other similar entities in some countries. This is usually a form of income tax, but it can also embrace a capital gains tax.

Corporation tax rates are typically lower than those used for personal income tax purposes, especially for high net-worth individuals , giving those persons a considerable incen­tive to transfer their personal income and wealth into corporate income. Low corporation tax rates do as a consequence create considerable risk of tax spillovers from income taxes and even capital gains taxes charged on individuals. As such they provide considerable opportunity for tax avoidance by those with significant income who can lock it up within corporate entities for reasonable periods of time.

The UK's corporation tax was introduced in 1965 and for most of its history there were two rates available. One was for larger companies, and the other for smaller companies, with a rate differential of around 10% being provided between the two. This has now been eliminated to the considerable advantage of larger companies in the United Kingdom, whilst imposing a comparative disadvantage to smaller companies whose costs of capital compared to larger companies are higher, meaning that they are much more dependent upon retained after-tax earnings to fund investment than are larger corporations. This apparent upward redistribution of economic advantage within the corporate sector has been ignored by recent UK governments.

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Cost of sales

A term used to describe part of the income statement in the accounts or financial statements of a reporting entity.

The cost of sales is the best estimate of the direct cost of producing the goods or services supplied by an organisation. It is calculated by adding the direct costs incurred for this purpose during a period to the value of the opening stock of goods or work in progress and then taking off the closing stock of goods all work in progress.

Distribution costs is another term for cost of sales.

See also stock and work in progress.

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Country-by-country reporting

Country-by-country reporting is a form of accounting created by Richard Murphy in 2003 as a result of which a multinational corporation is required to report in its accounts:

  • In which countries it operates
  • What the names of its subsidiaries are in each and every jurisdiction in which it operates
  • A consolidated profit and loss account for each such jurisdiction, without exception, showing:
    • Its sales and pur­chases, both from third parties and intra-group
    • The number of employees it has and the cost of employing them
    • Its financing costs, both third-party and intra-group,
    • Its profit before tax
    • Its tax charge split between current and deferred tax.
  • A sum­mary of its assets and liabilities in the location.

A form of this accounting, closely according to the above description was adopted by the Organisation for Economic Cooperation and Development in 2015 for tax return purposes by transnational corporations and has been widely adopted around the world under the OECD Base Erosion and Profits Shifting programme.

Reduced forms of this disclosure were adopted by the European Union for the extractive industries and banks and some other financial institutions in 2014. These versions are required to be on public record and have now demonstrated that this accounting method can be used to identify those companies that are seeking to shift profits to low tax jurisdictions, which was always the aim of its creator.

More public forms of country-by-country reporting are now anticipated in the European Union and Australia.

See also group accounts.

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A creditor is a person to whom an obligation to make payment is due as a result of a transaction arising before a specified date. This is usually an accounting reference date when discussed in the context of any form of accounting.

Creditors are usually contractual i.e., the payment owing is due as a result of an obligation voluntarily entered into that is enforceable in law.

Creditors can also be assumed constructively e.g., a person has given a public undertaking to make a payment and is then considered duty-bound to honour it. Examples include commitments to charitable programmes of work or with regard to completion of a course of action such as closing a business activity to which a company has committed itself.

If a liability is of uncertain timing or amount it is referred to as a provision.

A liability that might arise depending upon an uncertain future event occurs, or for which payment is not probable or the amount due cannot be measured reliably is considered a contingent liability and is noted but not otherwise included in the accounts or a reporting entity.

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The money  in use in a country at any point in time and declared to be legal tender by its government. See also fiat currency.

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Currency transaction tax

A form of financial transaction tax: it is a tax levied by a country that issues a currency on all the trades in that currency worldwide at very low rates e.g. 0.005 per cent. See Tobin tax for more details.

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Current assets

Like all assets, current assets represent legal claims to ownership of property that will give rise to a future cash flow benefits for the organisation that owns them.

In the case of current assets, this future cash flow benefit is expected to arise within twelve months of the reporting entity's accounting reference date.

Current assets are generally grouped into the following categories:

  • Stock and work in progress.
  • Trade debtors, i.e. sums owing from customers. In the USA, these are generally called receivables.
  • Prepayments and other debtors. These are sums paid in cash in advance of the economic benefit of the payment arising, which means that the value attributable to future periods is carried forward as a prepayment.
  • Cash and sums on deposit.

For the relationship between current assets and current liabilities see Quick Ratio

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Current Liabilities

Like all liabilities, or creditors, current liabilities represent sums that a reporting entity will have to settle in cash in future periods that arise as a consequence of transactions that have taken place before its accounting reference date (see creditors).

In the case of current liabilities, the cash settlement of the sum owing as a consequence of the transactions taking place before the accounting reference date are expected to be paid within twelve months of that date.

A wide variety of descriptions of current liabilities might be included in any accounts (or financial statements), but those that are more commonplace include:

  • Trade creditors i.e., sums owing to suppliers who have submitted their invoices in respect of those liabilities before the accounting reference date. In the USA, these sums tend to be referred to as payables.
  • These are estimated sums payable in respect of benefits arising to the organisation as a result of services supplied to it before its accounting reference date for which an invoice has not been received by that date but which must be recognised as giving rise to a likely future cash outflow in a following accounting period, even though supporting paperwork is absent at the period end date.
  • Payroll taxes owed.
  • Taxes on corporate profits owed.
  • Other taxes owed.
  • Bank overdrafts.
  • Other borrowings due for payment within 12 months

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Current ratio

The current ratio is the ratio of current assets to current liabilities within the accounts of financial statements of a reporting.

The ratio is a measure of liquidity and assumes that a sufficient timescale is available for the conversion of all current assets into cash, including the collection of trade debtors and the sale of stock and work in progress.

It is generally assumed that the higher the ratio of current assets to current liabilities is then the more financially secure a company is. However, care must be exercised. For example, a food retailer will turn all its stock into cash in days but might have sixty or more days to pay its suppliers for the items in question and can, as a consequence, have a negative current ratio without any stress arising.

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Customs Duty

Customs duties are charged when goods move across international borders.

Customs duties are usually imposed for revenue-raising purposes but also have other goals, including the protection of domestic industries from what is seen as unfair competition from overseas competitors.

Customs duties are also described as tariffs.

Tariffs and customs duties were much derided by the so-called Washington Consensus as impediments to free trade and those countries (most especially in the global south) seeking to impose them faced demands that they be withdrawn as a result. As a consequence customs duties and tariffs have been substantially reduced around the world but are still a significant issue in international trade.

In practice, all the major economies in the world were developed behind substantial customs duty or tariff barriers and so their opposition to them now can be seen as deeply hypocritical.

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