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.
- Tangible Assets
- Tax arbitrage
- Tax avoidance
- Tax evasion
- Tax gap
- Tax Haven
- Tax information exchange agreements
- Tax Justice Consensus
- Tax Spend
- Tax spillover
- Tax spillover assessment
- Tax system
- Tax transparency
- Tax transparency framework
- Tax transparency standard
- Territorial basis taxation
- Territorial ring fencing
- The QE process
- Tourist Tax
- Tracing of Assets
- Trade Creditors
- Trade debtors
- Transnational Corporations
- Trickle down
- Trust Settlor
Fixed assets represent those legal claims made by reporting entity to own property that is likely to give rise to a cash flow benefit that will wholly or partly arise more than twelve months after the accounting reference date of that reporting entity. They can be contrasted to current assets, which are those legal claims to own property that are likely to give rise to a cash flow benefit in a period less than twelve months after the accounting reference date.
Fixed assets can be split between:
- Tangible assets, which represent physical property such as land and buildings, machinery, vehicles, IT equipment and the like.
- Intangible assets, which represent legal claims to own potential income streams such as investments, royalties, copyrights and goodwill.
See customs duties
Tax arbitrage refers to the process of selecting the regulation, law or legal system that will be applied to a transaction, or more likely a series of related transactions, with the usual intention of securing a profit, although this might be by way of reduced cost than by increased revenue.
Situations where such choices might be made relate, for example, to the use of differing accounting standards, or with regard to different regulatory environments e.g., by recording transactions in a tax haven or secrecy jurisdiction rather than the location where the transaction might be more obviously located.
Tax avoidance is the term given to the practice of seeking to minimise a tax bill without deliberate deception (which would be tax evasion or fraud). The practice may be summarised as ‘seeking to get around the law'.
Tax avoidance usually entails setting up artificial transactions or entities to re-characterise the nature, recipient or timing of payments with the intention that a resulting saving in tax should arise. Motive is generally considered important in the identification of tax avoidance activity.
Where the entity is located or the transaction is routed through another country, it is international avoidance. Special, complex schemes are often created purely for this purpose.
Since avoidance often entails concealment of information and it is hard to prove intention or deliberate deception, the dividing line between avoidance and evasion is often unclear, and depends on the standards of responsibility of the professionals and specialist tax advisers.
An avoidance scheme which is found to be invalid entails repayment of the taxes due plus penalties for lateness.
Some claim that this term refers to any activity that reduces the amount of a person's income subject to tax, for example, claiming of allowances and reliefs clearly provided for in national tax law. This is not the case. If the law provides that no tax is due on a transaction then no tax can have been avoided by undertaking it. This practice is now generally described as tax compliant. Tax avoidance instead refers to the practice of seeking to not pay tax contrary to the spirit of the law. Some also call this aggressive tax avoidance.
Tax evasion is the illegal non-payment or underpayment of taxes, usually resulting from making a false declaration or no declaration to tax authorities; it entails criminal or civil legal penalties.
There are five tax gaps that can be measured:
- Tax base gaps;
- Tax spend gaps;
- Tax evasion;
- Tax avoidance;
- Tax known to be owing but not settled i.e. unpaid tax.
Tax base gaps represent the cost of tax bases that a jurisdiction decides for its own reasons not to tax. Wealth is a common tax base that is not taxed, but there are many other examples.
Tax spend gaps represent the cost of the exemptions, allowances and reliefs granted within tax bases that are otherwise subject to tax.
The tax evasion gap is the tax cost of the illegal non-declaration of income, that should be taxed, by a taxpayer or the tax cost of their illegal claim for a tax exemption, allowance or relief to which they are not entitled.
The tax avoidance gap is the tax cost arising from a taxpayer arranging their affairs in such a way that they pay less tax as a result of their manipulation of the tax laws of a jurisdiction in a way that the tax authority of that jurisdiction thinks is contrary to the spirit of the laws in place.
The unpaid tax gap is the tax cost of sums known to be owing to the tax authority that is not paid e.g. due to the insolvency of a taxpayer before payment can be collected.
A tax haven is country or territory whose laws may be used to avoid or evade taxes which may be due in another country under that country's laws.
The Organisation for Economic Cooperation and Development defined tax havens in 1998 as jurisdictions where:
- Non-residents undertaking activities pay little or no tax;
- There is no effective exchange of taxation information with other countries;
- A lack of transparency is legally guaranteed to the organisations based there;
- There is no requirement that local corporations owned by non-residents carry out any substantial domestic (local) activity. Indeed, such corporations may be prohibited from doing business in the jurisdiction in which they are incorporated.
Not all of these criteria need to apply for a territory to be a tax haven, but a majority must.
See also secrecy jurisdiction for wider definition of this issue because the term tax haven is widely disputed as to meaning and has to some extent replaced by the term secrecy jurisdiction.
For a broader discussion of this issue, see here.
Tax information exchange agreements
Tax information exchange agreements (TIEAs) are bilateral agreements under which territories agree to cooperate in tax matters through the exchange of information.
In practice, the model was little used until the G20 applied considerable pressure on tax havens / secrecy jurisdictions to sign such agreements. There have been hundreds signed since 2009 as a result but the evidence is that they are little used because of the considerable obstacles to making requests that are inherent within the agreements themselves.
These deals have now been very largely replaced by automatic information exchange agreements brokered by the OECD since 2015.
Tax Justice Consensus
Written as an alternative to the Washington Consensus by Richard Murphy in 2012 and published by the Class think tank, the tax justice consensus suggested a new approach to development and taxation embracing the following:
- Progressive taxation playing a pivotal role in addressing inequality.
- Barriers to the effective taxation and distribution of wealth being removed.
- Taxation helping sustain family relationships whilst promoting gender equality.
- Taxation policy facilitating the creation of sustainable employment in sustainable businesses that have access to the capital needed to deliver long-term security.
- Taxation policy holding government to account for the delivery of sustainable public services.
- Taxation policy assisting the process of holding global capital to account both internationally and locally so that it contributes to the common good.
- Capturing the information needed to enable the effective decision-making required on the allocation of resources, which information is seen as a public good.
- Taxation policy tackling the supply-side incentives for corruption, most especially in a tax haven / secrecy jurisdiction.
- Tax policy being integrated and coordinated internationally to deliver a race to the top in delivering effective policies to tackle inequality, poverty and in promoting a genuine level playing field in market competition.
- Tackling the free flow of financial capital that undermines the stability of world markets, nations and the well-being of the vast majority of people (the gainers being a tiny minority of rent seekers). On the other hand, the flow of productive capital that encourages the creation of real wealth, whether through work or the creation of human capital, sustainable ecologies and the promotion of learning, must be encouraged.
Tax spends are tax revenues forgone as a result of tax exemptions, reliefs and allowances.
In many jurisdictions tax spends might be considerable but receive very much less attention than declared budget expenditure, or even none at all.
Tax spillover assessment
Tax spillovers are the consequences of the interactions between different tax systems or different parts of the same tax system that can often (sometimes unintentionally) reduce tax revenues and the size of a tax base.
In short, spillovers are the often hidden externalities that result from efforts by governments to pursue more competitive tax policies in an effort to attract investment and paper profits which can have harmful consequences for the coherence and effectiveness of the tax system as a whole, or for the tax systems of other jurisdictions. Tax spillovers can therefore be of domestic and international form.
Tax spillovers have been talked about in relation to corporation tax by the International Monetary Fund, but most commonly exist between a wider range of taxes and tax practices.
A tax spillover assessment is a risk assessment tool, that seeks to document and evaluate the extent of tax spillovers, thus helping to explain how tax gaps arise. A tax spillover assessment seeks to determine the ways in which one part of a tax system within the jurisdiction being appraised undermines another part of that same tax system. It will also appraise how that part of the tax system being appraised might undermine the tax system of another country or jurisdiction. A tax spillover assessment also appraises whether the tax system of the jurisdiction being considered is undermined by the tax system of other locations, treated as a whole.
A tax spillover assessment is designed to identifies the areas of greatest risk and vulnerability within a tax system and, because of the documentation process used in the appraisal methodology, makes it relatively straightforward to identify which issues need to be addressed to improve the quality of the tax system. In doing so it makes a significant contribution to tax transparency and represents a significant level of tax transparency in its own right.
- An elected and accountable government
- Tax legislation
- A tax authority
- Tax collection mechanisms including tax return systems and payment processing mechanisms
- Tax courts to enforce tax law
- An appeal mechanisms
- A budget process
- Tax reporting mechanisms for government and tax authority accounts to show the outcomes of actions compared to a budget
- Processes to make changes to the tax system, including mechanisms for legislative reform; consultations on those processes; budget setting processes and accounting mechanisms to provide feedback on the effectiveness of the reform process.
A tax system is not any one of these items in isolation: it comprises the whole.
Tax transparency is the process that supplies the quantitative and qualitative data that a society needs to ensure that its tax system is working for the benefit of its tax authority, government, legislators, those who elected them, those who pay taxes and all other stakeholders of its tax system.
See also tax transparency standard.
Tax transparency framework
Tax transparency standard
A tax transparency standard is a high-level statement of policy.
The object of a Tax Transparency Standard is to set out those reports that should exist within a tax system if it is to meet the standards of transparency that are required to assist all of its stakeholders attain the level of desired understanding of the way in which the tax system is both operating and intended to operate.
Territorial basis taxation
A basis for taxation that only charges the income of the residents of a territory to tax if it comes from a source also located in that territory.
The obvious weakness in this basis for tax, which is uncommon for individuals but increasingly common for companies, is that it encourages the artificial relocation of a source of income out of a territory and to a tax haven.
Broadly speaking the UK adopted this basis of taxing companies and their subsidiaries from 2010 onwards, undermining other attempts to tackle corporate tax abuse.
Territorial ring fencing
The tax and regulation regime in a jurisdiction may vary depending on where the business activity geographically takes place.
Territorial ring-fencing is created by a jurisdiction that offers designated territorial areas in which non-residents and/or foreign business activity is privileged over locals and/or domestic economic activity.
This privilege may take the form of lower tax rates or of lower reporting and/or regulatory requirements.
For example, a jurisdiction may create "export processing zones" or freeports in which all production must be exported and/or only foreigners can invest that secure tax advantages as a result.
Most of this production is untaxed and applicable environmental and social standards are often low.
The QE process
The QE process describes the whole process of quantitative easing (QE). It ignores the fact that there are three apparent stages to this process and instead views them as a whole.
In the first stage of the QE process the government instructs its central bank to make a payment, as is its normal practice, day in and day out. Presume that the payment is for £100. The central bank records this by:
A) Increasing the value on the loan account that the government has with it by £100.
B) Increasing the value of the central bank reserve account that the commercial bank that will make payment to the intended recipient has with it by £100.
The commercial bank will then match its receipt of £100 from the government via the central bank reserve accounts by making the required payment to the account that the recipient maintains with it.
In summary, each of the following has increased by £100:
1) The sum owed by the government to the central bank.
2) The sum owed by the central bank to the commercial bank on its CBRA.
3) The sum owed by the commercial bank to the intended recipient.
Note that as a result the commercial bank is a neutral player in this. It only gets a sum on deposit because existing rules do not allow individuals to bank with most countries' central banks.
The process could end at this stage. It does not because by convention, backed in some countries by regulation, central banks cannot make loans to the governments that own them.
As a result, stage two happens. In this stage, the government sells a bond (which is just a form of deposit account) to someone other than the central bank. It does not matter who they are. The result is that the following payments are made:
A) The purchaser of the bond pays the commercial bank £100 for the bond by reducing the balance on their account with that commercial bank.
B) The commercial bank then pays the central bank £100 by reducing the balance on their central bank reserve account with the central bank.
C) The central bank pays the government by reducing the sum owed by the government to it.
The central bank reserve accounts are now back where they were before this process started.
So is the loan between the central bank and government back where it started.
But the recipient of the government's payment still has their money, and the government now owes someone else £100.
The process could be ended here, at stage 2. In fact, it is very often the case that it does.
However, when the QE process is in operation, the process was never intended to stop at stage one or two. Stage three was always intended.
In stage 3 the central bank buys the £100 bond that the government sold to someone in the private sector economy. To do this:
A) The central bank pays the commercial bank that holds the account of the person who owns the £100 bond by increasing the balance on that commercial bank's central bank reserve account.
B) The commercial bank in question then pays £100 to the owner of the bond.
C) The central bank now owns the bond. As a result, it is now owed £100 by the government. The previous bond owner has been repaid in full.
But note that the position now achieved is in substance identical to that achieved at the end of stage 1. The recipient has their money, the commercial bank central bank reserve account is up £100, and the government owes the central bank £100 as a result. All that has changed is the government now owes the central bank £100 in respect of a bond rather than £100 in respect of an overdraft. Everything else is the same as at the end of stage 1.
This now requires interpretation. First, note that to consider each of these stages in isolation is wrong when the QE process plans that all three be undertaken. It is a straightforward error to claim that they are separable if QE is planned. In particular, it cannot be claimed that stage 3, which some describe as QE, is independent of stages 1 and 2 when that clearly cannot be the case. Stage 3 is wholly dependent on stages 1 and 2 taking place.
What that then means is that stage 3, and so QE itself, is not, as some claim, a simple asset swap by a commercial bank that gives up a bond to hold a central bank reserve account balance instead. That is not true because the central bank reserve account balance already existed at the end of stage 1 of this process and is still there at the end of stage 3. So there was in effect no asset swap involving a central bank reserve account in stage 3: a balance was restored, not swapped.
Instead what there is instead is a wholly bogus or sham sale of a bond which the government always intended to repurchase. In fact, the only asset swap is that the government now owes the central bank on a bond and not on a bank overdraft account.
If QE is only stage 3 it would be correct to say that QE does not create new money because that stage does not involve new money creation.
But the QE process is stages 1, 2 and 3 together. As a result new money is created, and is the balance of £100 that exists at the end of stages 1 and 3 and which only disappeared at stage 2 because of the sham bond transaction that then took place.
As such QE does create money, albeit at stage 1, and those claiming otherwise have failed to view the transaction as a whole.
The unintended consequence of all this is that it is the government's spending at stage 1 (not the transactions at stage 3) that creates a central bank reserve account balance that a commercial bank has no role in creating except by acting as a conduit and yet, as a result, it is owed base rate interest on the resulting balance by the Bank of England. It is that outcome that makes almost no sense in all this.
Also note that if QE does create money for the reason noted then quantitative tightening does, when properly understood, destroy money by removing it from use.
A tax aimed at tourists to a location. These can include airport taxes, landing fees and hotel and other accommodation taxes. Often applied by subnational governments.
Tracing of Assets
Trade creditors are sums owing by a reporting entity to suppliers who have submitted their invoices in respect of the services that they have supplied before the accounting reference date of that reporting entity but who remain unpaid on it.
In the USA these sums tend to be referred to as payables.
Trade creditors will usually be disclosed as part of current liabilities in the accounts or financial statements of a reporting entity but can also be long-term liabilities if due more than twelve months after the accounting reference date.
In the USA, these are generally called receivables.
The major issues to which TNCs give rise are:
- A lack of accountability in the jurisdictions in which their subsidiary companies trade, and
- The difficulty in holding such companies to account for the tax that they might owe in all the jurisdictions in which they might operate, most especially if some of those are in tax havens or secrecy jurisdictions.
Country-by-country reporting was created to tackle these issues of accountability within TNCs.
The supposed theory underpinning trickle-down economics presumes that benefits provided to the largest companies and wealthiest people within a society, whether by way of reduced taxation liabilities, light touch regulation or incentives and subsidies provided as a consequence of fiscal policy will give rise to benefits that will eventually trickle down to everyone in the society in question. The suggestion made as a result is that everyone gains by making the richest in a society even richer at immediate direct cost to everyone else.
There is not and never has been any evidence that this policy has worked anywhere where it has been tried. The only and inevitable result if the policy is a growth in inequality in the jurisdiction in which the policy is pursued by politicians whose interests always appear to be most closely aligned with the wealthy in that place.
The person who establishes a trust by gifting assets to it.
Having made the gift the trust settlor is usually supposed to have no further influence over a trust. However, in many tax havens / secrecy jurisdictions that is not the case and the settlor often remains in complete control of the assets of the trust despite having supposedly gifted them for the benefit of others. These trust arrangements can be considered to be shams by some other jurisdictions.