Tax Glossary

A corporation that generally is exempt from federal income tax. Its shareholders include on their tax returns their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of income or loss not separately stated. An S corporation may have no more than 100 shareholders, may have only one class of stock, and must be a domestic corporation.

Where tax authorities give general guidelines on the interpretation of tax laws, these may state that transactions falling within a certain range will be accepted by the tax authorities without further questions.

In a sale and leaseback transaction, the owner of property will sell it to a buyer who then leases it back to the original owner. This method is sometimes used to release the value of capital assets for use in a business.

Tax imposed as a percentage of the price of goods (and sometimes services). The tax is generally paid by the buyer, but the seller is responsible for collecting and remitting the tax to the tax authorities.

The estimated value of property at the end of its useful life. Salvage value is not used under the Modified Accelerated Cost Recovery System.

Tax system in which income from various sources is taxed separately (i.e. under a different "schedule"; thus, separate tax assessments are made on industrial and commercial profits, wages and salaries, income from securities and shares, income from land, etc.

Generally, an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies.

A money substitute, such as a card or paper certificate, that is used in exchange for goods and services.

A taxable entity controlled by another taxable entity that is in turn controlled by a third entity.

An adjustment that arises from imposing tax on a secondary transaction.

A constructive transaction that some countries will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment. Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans.

A term used in the transfer pricing context. It denotes a comparable whose data is not disclosed to the public or the taxpayer but known only to the tax authority which is making the transfer pricing adjustment.

Sales, exchanges, and involuntary conversions of business, rental, and royalty property held longer than one year.

Any property that is or has been subject to depreciation or amortization and is personal property, a single purpose agricultural or horticultural structure, or a storage facility (other than a building or its structural components) used for the distribution of petroleum.

Real property (other than section 1245 property) that is or has been subject to an allowance for depreciation.

Property defined under section 179 of the IRS code for which a taxpayer can choose to recover all or part of the cost of the property (up to a limit) by deducting it in the year they place the property in service.

Assets listed in section 197 of the IRS code that a taxpayer can choose to amortize over a period of 15 years.

The part of the US income tax code that gives the IRS the power to adjust distribute, apportion, or allocate gross income, deductions, credits, or allowances in order to prevent evasion of taxes or to clearly reflect income (often between controlled taxpayers); in short, US transfer pricing rule provision.

Study of intercompany pricing transactions made by the Office of International Tax Counsel at the US Treasury Department which presented a new methodology to govern transactions involving the sale, licensing or transfer of intangible property, published in 1988.

Documents providing evidence of a share in the capital of a company (e.g. share certificate), or the indebtedness of some person to the holder (e.g. government or corporate bonds) or similar legal rights.

System under which the taxpayer is required to declare the basis of his assessment (e.g., taxable income), to submit a calculation of the tax due and, usually, to accompany his calculation with payment of the amount due. The role of tax authorities is to check that the taxpayer has correctly disclosed his income.

An independent contractor, a person who carries on a trade or business as a sole proprietor, an active member of a partnership, or a person who is in business for themselves in any other way.

Social Security tax and Medicare tax primarily for individuals who work for themselves.

A committee of the US Senate that hears proposed new tax laws.

A legal document, court order, or agreement specifying amounts paid to one spouse by another spouse while they live apart.

Property belonging to one spouse that is not community property.

Separate taxation is a method of taxing a married couple based on their joint income. It is mandatory in some countries and optional in others. Upon exercising an option for separate taxation, a husband and wife are treated as separate individuals for the purpose of computing income tax.

The beneficiary, partner, or shareholder's distributive share of income and deductions from an estate, trust, partnership, or S corporation reported on a Schedule K-1.

Company within a multinational group of companies which generally provides support services, such as administration, sales information, post-sales service or market research, for the operating divisions of the group.

A fee for the rendering of services is regarded as income from business activities or, in the case of a liberal profession, as income from independent personal services.

The date by which property must be delivered and payment must be made.

Payment made as a result of the termination of any office or employment of a person.

A transaction without substance which will be ignored for tax purposes.

Some companies grant directors and employees an option to acquire at a future date shares or stock in the company at a predetermined price. It gives an employee the opportunity to benefit from the future success of the company when the market value of the shares increases over the predetermined option acquisition price.

An agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit (including the land), and one or more co-owners are entitled to occupy the unit as their main home upon payment of rent ot the other co-owner or owners.

An activity which is performed by a member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder.

The total assets minus total liabilities of a corporation, also called stockholders' equity or net worth.

A company set up by fraudulent operators as a front to conceal tax evasion schemes.

A school operated by certain tax-exempt organizations (or by a state, a U.S. possession, a political subdivision of a state or possession, the U.S., or the District of Columbia) that provides special instruction or training designed to alleviate the disability of an individual.

Determination of the economic entity that ends up paying a particular tax. In the case of indirect taxation tax is normally intended to fall upon consumption and be borne by consumers, so that entrepreneur who pays the tax on his supplies of goods and services in general passes on the tax, or "shifts" it "forward" to the consumer by adjusting his prices appropriately. Such taxes are said to be shifted "backward" in the case that entrepreneurs are forced to absorb some of new or increased tax.

Capital gain derived from the disposal of assets which have been held for a comparatively short period of time.

A period of one year or less.

A payment to an employee to replace regular wages while they are temporarily absent from work due to sickness or personal injury.

A qualified retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees.

A qualified retirement plan, using IRAs, that certain small employers (including self-employed individuals) can set up for the benefit of their employees.

A written qualified retirement plan that allows self-employed individuals to make contributions toward their own, and their employees', retirement using a traditional individual retirement arrangement (called a SEP-IRA).

The required method of calculating the taxable portion of benefits from a qualified retirement plan with an annuity starting date after November 18, 1996.

A simultaneous tax examination, as defined in Part A of the OECD Model Agreement for the Undertaking of Simultaneous Tax Examinations, means an "arrangement between two or more parties to examine simultaneously and independently, each on its own territory, the tax affairs of (a) taxpayer(s) in which they have a common or related interest with a view to exchanging any relevant information which they so obtain".

Method of taxing a legal entity that conducts its business through a permanent establishment rather than through a subsidiary company. Under the single entity approach, a head office and a permanent establishment are treated as one taxpayer for tax purposes, even though they may be considered separate entities for purposes of accounting or commercial law.

A person who is not married on the last day of the tax year.

Provision of tax law setting out the factors which determine where a particular asset is situated or deemed to be situated for tax purposes.

Under US tax law, this term refers to a domestic corporation which does not have more than 35 individual shareholders, all of whom are US citizens or residents, and which does not have more than one class of stock. Also known as an "S corporation", this form permits income at the corporate level to be taxed only once at the shareholder level.

Term used to denote tax concessions which are available only to or principally to small businesses.

In many countries, small traders are subject to a special tax regime, particularly in respect of VAT, in which exemption, lower tax burden, or lower administrative burden are granted.

Tax or levy which is conditioned on the availability of a foreign tax credit in another country.

Charges levied on employees, employers or self-employed or on all persons subject to individual income tax to cover the cost of providing future social security payments.

Someone who owns an unincorporated business by themselves.

A business that is owned by one individual and is not incorporated.

The place (or country) where a particular item of income is deemed to originate or where it is deemed to be generated. National rules vary, depending on which concept of source is used.

Principle for the taxation of international income flows according to which a country considers as taxable income those incomes arising within its jurisdiction regardless of the residence of the taxpayer, i.e. residents and non-residents are taxed on income derived from the country.

Provision in the national law of a country or in a tax treaty which defined the concept of source for a particular type of income.

Gains from the disposal of capital assets which were originally acquired with a view to selling them for more than the cost of acquisition.

A type of corporate reorganization by which the shares of a new corporation (or the subsidiary company) are distributed to the original shareholders (or the parent's shareholders) without these shareholders surrendering any of their stock in the original (or parent) corporation.

A type of corporate reorganization by which the shares of a new corporation (or the subsidiary company) are distributed to the original shareholders (or the parent's shareholders) with these shareholders surrendering part of their stock in the original (or parent) corporation.

Under a split-up the shareholders of a parent company surrender all their stock in liquidation of that company and in return receive new shares in the corporation which the parent controlled or created immediately before the distribution.

A trustee or other administrator of a retirement plan.

The difference between an incentive stock option's exercise price and the stock's fair market value on the date of exercise.

Duty levied upon the issue of official documents such as passports, deeds, contracts for the transfer of ownership, etc. Usually, stamp duties are "levied" by way of a stamp being fixed to the document in question.

A predetermined dollar amount that reduces the income subject to tax. The amount varies depending on the taxpayer's filing status, age, blindness, and dependency status.

A per mile rate, established by statute, that a taxpayer uses to calculate deductible vehicle expenses based on miles driven. Specific rates apply based on whether the use is for business, charity, moving, or medical reasons.

Costs for creating an active trade or business or investigating the creation of acquisition of an active trade or business. Start-up costs include any amounts paid or incurred in connection with any activity engaged in for profit and for the production of income in anticipation of the activity becoming an active trade or business.

A legislative act or law.

A statute limiting the period within which a specific legal action may be taken, such as the collection of tax, appeal from a decision of the tax authorities or lower court, etc.

A worker who would normally be considered an independent contractor, but is treated by statute as an employee. Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons, and certain home workers.

A share in a company that represents the portion of the company's earnings and assets that a shareholder owns.

Dividend distribution by a company to its shareholders in the form of additional shares in the company.

Tax levied on the sale of securities on the stock exchange market.

(1). The right to purchase or sell a stock at a specified price within a stated period (2). Employee stock option.

The ability to buy more shares in a company at a specified price for a limited time.

A method of calculating the depreciation for property that uses a percentage rate to deduct the same amount for each year in the recovery period. The percentage rate is determined by dividing one by the number of years in the recovery period.

Bond or debenture from which the interest coupons have been removed and sold separately.

Term which refers to those sections of the US tax code which provide for the taxation of US shareholders of controlled foreign corporations (CFC) in order to prevent the tax-free accumulation of earnings outside the US.

Latin for "under penalty"; a writ issued under the authority of a court to compel the appearance of a witness or of documents for a tax judicial proceeding.

Company effectively controlled by another company (i.e. the parent company). A variety of criteria, including share ownership ratio, may be employed to determine whether one company is a subsidiary of another company for tax purposes.

Doctrine which allows the tax authorities to ignore the legal form of an arrangement and to look to its actual substance in order to prevent artificial structures form being used for tax avoidance purposes.

An activity in which the taxpayer must perform significant duties over a reasonable period of time while working for pay or profit or in work generally done for pay or profit.

Test used to determine residence status based on the number of days, months, etc. of physical presence within a country.

The US Income Tax Reform Act of 1986 says that royalties for the transfer (by sale, license, or otherwise) of intangible property to related foreign companies, which have been determined at the time of the transfer on an arm's length basis, may be adjusted in future years by the IRS if they are not commensurate with the income attributable to that intangible.

Determination of tax liabilities at the discretion of the tax authorities if an original assessment is incomplete or incorrect in any material respect.

The value resulting from the future acquisition of goods or services used or sold by a business because of business relationships with suppliers including a favorable credit rating or a favorable supply contract.

Additional amount which is calculated on and added to the normal charge or levy. In other words, the base on which a surcharge is assessed is the normal or basic amount due.

The widow or widower of a deceased individual.

Derivative financial instrument in which two parties agree to exchange payments calculated by reference to a notional principal amount. In the classic interest rate swap agreement two parties contract to exchange interest payments based on the same amount of indebtedness of the same maturity and with the same payment dates; one party provides fixed interest rate payments in return for variable rate payments from the other party and vice versa.

A group of individuals who have formed a joint venture to undertake a project that the participants would be unable or unwilling to pursue alone.