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 firstname.lastname@example.org. 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.
- Race to the bottom
- Real interest rate
- Realised loss
- Realised profit
- Reasons to Tax
- Registered Office
- Registrar of Companies
- Registration Data
- Remittance basis taxation
- Reporting Entity
- Residence basis taxation
Race to the bottom
This term refers to the downward trend in tax rates and of regulatory requirements on capital arising from competition between sovereign states to attract and retain investment.
Considered to be ‘tragically ironic' by many development theorists as empirical analysis shows that low tax regimes are in fact not determinant factors in whether or not multinational corporations invest in a particular jurisdiction. More important are factors such as infrastructure quality, political stability and workforce capability.
It is a feature of the race to the bottom that jurisdictions now attempt to “compete” by cutting tax rates erroneously believing this will attract investment, and paradoxically harming their development prospects by forsaking the domestic tax returns required for purposeful economic development.
Real interest rate
The real rate of interest on a loan takes into consideration the impact of inflation on the cost of interest on that loan.
For example, if the nominal rate of interest on a one-year loan is 5% and £100 is borrowed then the nominal rate of interest is £5. However, if the inflation rate over this period was 3% then the real rate of interest would be 2%. That is because when the loan repayment takes place at the end of the loan period the value of money borrowed has reduced by 3% meaning that the real cost of repayment has reduced as a result, which fact needs tio be taken into account when estimating the real interest rate on the loan.
It is important to note that interest rates are forward-looking and inflation rates are backward-looking. The real interest rate is at a moment in time and liable to change often as a result.
Also called the effective interest rate.
The outcome of a transaction undertaken during the course of trade that results in the income generated from that trade being less than the expenses associated with it meaning that a loss is earned that might result in cash being paid out to the reporting entity undertaking the trade.
Realised losses reduce the capital of a reporting entity.
A realised profit is the outcome of a transaction undertaken during the course of trade that results in the income generated from that trade exceeding the expenses associated with it meaning that a profit is earned that might result in cash being returned to the reporting entity undertaking the trade.
Realised profits increase the capital of a reporting entity by increasing its retained reserves.
Reasons to Tax
According to Richard Murphy in his book The Joy of Tax, there are six reasons to tax:
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate.
3) To redistribute income and wealth.
4) To reprice goods and services.
5) To raise democratic representation - people who pay tax vote.
6) To reorganise the economy i.e., fiscal policy.
Note that tax is not used to fund government spending but is instead used to reclaim the money created as a result of that spending as a mechanism to control inflation
Corporate redomiciliation is the process by which a company moves its domicile from one jurisdiction to another by changing the country under whose laws it is registered or incorporated while maintaining the same legal identity.
Redomiciliation can pose problems when a company is able to redomicile without leaving trace of its previous existence, allowing it to evade investigation by law enforcement and other authorities. Redomiciliation is becoming more commonplace and is now a major issue in international law corporate, money laundering and tax enforcement.
The official address at which a company may be contacted. Unfortunately, this is very often the address of a lawyer or accountant and as a result often provides no clue as to the real whereabouts of the company. This can be used to help create a veil of secrecy over a company's activities.
Campaigning organisations, such as the Corporate Accountability Network and the Fair Tax Mark suggest that companies should be required to also disclose the addresses of all their places of business in a jurisdiction on their annual declarations to regulatory authorities and in their accounts, either by way of a list or a link to such a list.
Registrar of Companies
The Registrar of Companies is the agency appointed by a state to hold the data that is required to be published on public record with regard to the limited liability companies and other entities such as limited liability partnerships, foundations and trusts whose existence is regulated by the jurisdiction in question as a consequence of their registration or incorporation in that place.
In many countries this responsibility is outsourced to agencies such as Chambers of Commerce and it is often very difficult to locate the precise place where information on any entity may be located as a result. There may also be fees charge to secure that information.
In the UK this service is provided by Companies House, which is an executive agency of the UK government's Department of Business under whatever name variant it is currently operating (as it is subject to frequent name changes at the whim of successive prime ministers).
Companies House is particularly ineffective organisation. It will register companies without requiring proof of the identity of owners or shareholders, contrary to the most recognised money laundering standards.
Companies House will also place accounts on public record without ever undertaking any proper checks to ensure that full disclosure required by law is made, or whether appropriate accounting standards or generally accepted accounting principles are complied with.
In addition, if a company fails to comply with its regulatory obligations to file either accounts or an annual statement with regard to its ownership and management, then the working assumption of Companies House is not that there has been a regulatory failure but that instead the company in question is no longer in operation, and as a consequence it takes the necessary steps to remove it from the register, meaning that those who have committed a breach in the law with regard to their obligations to file information are removed from almost all risk of penalty for doing so, This action by Companies House also means that very large numbers of companies about whom there might be quite appropriate public concern never file information that is required to hold them to account for their abuse of limited liability. It is almost as if Companies House wishes to facilitate fraud and other abuse undertaken through the operation of UK registered limited liability companies, limited liability partnerships and other entities that they make it as hard as possible to trace, let alone hold to account. This failure undoubtedly contributes to the UK tax gap.
It would seem that the UK ministers are aware of these failings but take no steps as a result to either create a proper enforcement agency for company law in the UK or to increase the fees charged by Companies House so that resources are made available to ensure that proper standards of accounting and disclosure are made by all limited liability companies that are registered in the UK. It does instead appear to be minister's aim to reduce the charges made by Companies House to the lowest possible sum since they believe that to do so reduces the regulatory burdens upon UK business. In the process UK government ministers ignore the enormous cost, they impose upon UK society and its government from fraud and tax loss.
Formal registration is the process required to create a legal person such as a limited company or corporation, limited partnership or foundation. It is usually achieved by submitting the registration data required by the jurisdiction in which it is to be legally located.
Such arrangements rarely applied to trusts until very recently because it was uncommon for there to be a formal registration process for trusts until recent changes in EU law required this in member states and the UK. As a result registers of trusts are becoming more commonplace but with different registration data standards applying.
In the case of a limited liability entity this might be the constitution, details of members, directors and the secretary. In the case of a trust the required documents might be the constitution, the name of settlor, details of the trustees and any instructions such as side letters regarding management of the arrangement, and so on.
The quality and quantity of registration data required differs vastly depending on the type of legal entity or arrangement chosen and the requirements of the jurisdiction in which this structure is created. In some cases, little or no data need be filed with central authorities. These are most often tax haven or secrecy jurisdiction locations. In others rather more is required, and data requirements and proof of identity of beneficial owners are rigorously enforced. Usually data requirements are more onerous for companies and foundations than for trusts, where in most cases little or no registration data is needed. The requirement to hold such data for trusts is often devolved to those professional persons helping establish such entities in many jurisdictions.
The weaknesses in registration data are not exclusive to tax haven / secrecy jurisdiction locations. Neither the UK nor USA requires proven data on the beneficial ownership of limited liability entities to be made available to regulatory authorities when companies or corporations are formed within their domains.
The weaker the registration data is the more likely it is that ‘shell corporations' will be created for the purposes of abuse that will be difficult to trace.
See also incorporation.
Remittance basis taxation
The remittance basis is one of the ways in which income earned outside the country in which a person is tax resident can be brought within the scope of tax in that place.
The remittance basis says that tax is only due in the year when income is remitted to the country in which the taxpayer is resident: it is not taxable when it actually arises.
The remittance basis enables a person to avoid tax indefinitely in their country of residence provided their overseas income is kept and / or spent abroad. Compare with the arising basis. Both have relevance within the context of residence basis taxation.
The UK domicile law permits the use of the remittance basis of taxation within the UK when the vast majority of people are taxed on residence based taxation rules. As such it is discriminatory.
The remittance basis for companies is a compromise between the residence basis for companies and the territorial basis for companies.
In countries using the remittance basis for corporations the income of the subsidiaries of the parent company can be taxed in the parent company jurisdiction but only when that income of the subsidiary companies is paid to the parent company by way of dividend. The result is that there is a very strong incentive to keep funds in subsidiaries outside the parent company's jurisdiction and to reinvest them overseas rather than remit them to the parent company location where they would be taxed. This basis of corporate taxation is only really found in the USA. This basis of taxation does explain the widespread tax abuse still found within US corporations. Measures introduced by Donald Trump have still not succeeded in entirely eliminating this abuse.
Under a repo arrangement a bank sells a security - which is usually a government bond such as a US Treasury bond or UK gilt, but can also be issued by another country - to a customer and simultaneously agrees to repurchase it on a pre-agreed date at an agreed price.
Most repo deals are done overnight. A large company with cash it has no use for overnight does not deposit it with a bank for fear that bank will fail (as Lehman did) but does instead enter into a repo deal. It does not, as a result, own a debt owed by a bank that might fail but instead owns a government bond for which there is both a ready market and an implicit government guarantee. The sale back to the bank the following morning (or later, if agreed) is at a higher price than that paid for the bond. The difference is the interest earned overnight.
For the company using repo there is a guarantee in the deal that makes it worthwhile depositing funds.
The bank earns from the liquidity the deposit provides.
Governments are keen to support repo deals as they act as a short-term and very effective way of communicating its interest rate intentions into financial markets: the repo rate will reflect that on short-term government bonds.
All parties win from the arrangement in the absence of their being deposit guarantees in most countries over what most commercial companies would consider to her very modest amounts.
This may be a company, limited liability partnership, foundation, trust, partnership, individual, government, sub-national government, agency or other organisation. All are likely to have to report their trading, whether undertaken for profit or otherwise if they engage in such activity. As such they must prepare accounts or financial statements.
For an individual, the person's settled or usual home.
It may be possible to be resident in more than one country at one time (although double tax treaties aim to prevent this in legal terms). Some individuals may also try to avoid being resident anywhere.
Tax haven companies formed for non-resident owners are usually defined not to be resident in their country of incorporation. If they use secrecy to deny their presence in another state where they really trade they can achieve non-residence through stealth. This might represent tax evasion, and is a major cause of the tax losses attributable to tax havens / secrecy jurisdictions.
Residence basis taxation
Under the residence basis of taxation residents of a territory pay tax in that place on all their worldwide income wherever it arises, usually with credit being given for tax already paid overseas. The aim is to discourage residents from investing abroad in lower-tax countries by ensuring that income is taxed at the resident country rate if it is higher. Compare with source basis taxation and unitary basis taxation.
The residence basis for companies is in some ways more complex than for individuals as companies can be made up of many individual subsidiaries all reporting to a parent company. The term ‘residence basis' will usually be applied in this situation to the tax regime that applies to the parent company. If it is taxed on a residence basis then the jurisdiction in which it is based will seek to charge the income it earns to tax, either through taxing dividends received from those subsidiaries when they are remitted to that jurisdiction or through the operation of controlled foreign company rules. In combination with transfer pricing arrangements these provided a triumvirate of controls to make sure all group income is likely to be eventually be taxed in the parent company jurisdiction, with credit having been given for foreign tax already paid. Compare with remittance basis taxation and territorial basis for companies.
The residence basis of taxation has been considerably undermined in the last decade or so as many countries abandon taxing income received by way of dividends from other companies outside the jurisdiction. For example, dividends are always deemed to have been taxed at source in the EU and are tax-free in the country of residence of the recipient whether tax has been charged to tax or not at source. This has been abused by countries like Ireland, Luxembourg and the Netherlands, all of which are corporate tax havens.
Compare with residence basis taxation and unitary basis taxation.
A payment due to the owner of an intangible asset for the use of that property by another person.
Royalties are most commonly due for the use of copyrights and patents.
Licence fees for the use of software rented to a user are closely akin to royalties.
As the quantity and value of intangible assets have risen in the world, so have the number and value of royalty payments.
Royalties have often been used as part of tax avoidance activity by transnational corporations. By registering the ownership of intellectual property in low or no-tax locations (whether tax havens or secrecy jurisdictions) they seek to transfer income from high-tax to low-tax jurisdictions to save tax overall.
The extent to which the number of patents and other intellectual property claims in the world has risen as a result of tax planning is not known, but the two are almost certainly correlated.
This has been the subject of scrutiny by the Organisation for Economic Cooperation and Development as part of its Base Erosion and Profits Shifting programme.