International Tax Glossary

This guide provides plain English explanations of International Tax terms frequently used by Braxton Consulting:

Allowable losses
If you make a loss when you sell or otherwise dispose of an asset that is liable to Capital Gains Tax, the loss will normally be an allowable loss – allowable as a deduction from chargeable gains (see ‘chargeable gains’ below). A loss resulting from use of a tax avoidance scheme is not an allowable loss.

An allowable loss must usually be deducted from chargeable gains made in the same year and, if any loss remains, a later year. This will reduce the amount on which Capital Gains Tax is charged. A loss is not usually an allowable loss unless you notify your Tax authority of the amount. There is a time limit for this notification generally.

Annual Exempt Amount
This is the annual tax-free amount you as an individual are usually entitled to each year before you have to pay Capital Gains Tax. This amount is subtracted from your total capital gains in each tax year, after you have included any reliefs, deducted allowable losses, and, if it is the case, applied Taper Relief. The resulting amount (if any) is your taxable gain.

The above also applies to the personal representatives of a deceased person for the tax year in which an individual dies and the next years, depending on the country.

Most trustees of a settlement are only entitled to no more than half the Annual Exempt Amount that individuals are entitled to.

Acquisition
Acquisitions are something you get or acquire. For Capital Gains Tax purposes these can be items you buy, inherit, or receive as a gift or in exchange for something else. It does not necessarily mean you paid money for them.

Advance pricing agreements (APAs)
Binding advance agreements between the tax authorities and the taxpayer that set out the method for determining transfer pricing for intercompany transactions.

Arm’s length disposal
When you sell or dispose of an asset ‘at arm’s length’ you do so as in a normal commercial transaction – you seek to obtain the best deal, as does the person acquiring the asset from you.

You may make a non-arm’s length disposal if, for example, you deliberately sell an asset to someone for a lower amount than they were prepared to give you. If you sell or otherwise dispose of an asset to a ‘connected person’, for example to your husband, wife, civil partner or child, you are treated as if the disposal was not at arm’s length. See also ‘connected persons’ below.

Arm’s length principle
The arm’s-length principle requires that transfer prices charged between related parties are equivalent to those that would have been charged between independent parties in the same circumstances.

Berry ratio
A ratio sometimes used in transfer pricing analyses, equal to gross margin divided by operating expenses.

Comparable profits method (CPM)
A transfer pricing method based on the comparison of the operating profit derived from related party transactions with the operating profit earned by third parties undertaking similar business activities.

Comparable uncontrolled price (CUP) method
A method of pricing based on the price charged between unrelated entities in respect of a comparable transaction in comparable circumstances.

Competent authority procedure
A procedure under which different tax authorities may consult each other to reach a mutual agreement on a taxpayer’s position.

Cost plus method
A method of pricing based on the costs incurred plus a percentage of those costs.

Capital gain
You may make a capital gain when you sell or dispose of an asset that has increased in value since you acquired it. If the gain or profit also attracts liability to Income Tax, Income Tax takes priority over Capital Gains Tax. For example, if you are trading in antiques you will pay Income Tax on your trading profits and will not pay Capital Gains Tax on gains you make selling your trading stock.

Capital loss
You may make a capital loss when you sell or dispose of an asset that has decreased in value since you acquired it (see also ‘allowable losses’ above). If the loss is also taken into account for Income Tax purposes, Income Tax takes priority over Capital Gains Tax. For example, if you are trading in antiques you will pay Income Tax on your trading profits and may be able to claim relief against your income for trading losses, you will not be able to claim losses you make in selling your trading stock as allowable capital losses.

Capital sum
This refers to a sum in money, or in money’s worth, which is neither charged to Income Tax as your income nor taken into account in computing your income or losses for Income Tax purposes. An example could be a sum of money you receive as an insurance payout for damage to an asset (see also ‘disposal’ below).

Chargeable asset
A phrase commonly used to refer to an asset that may attract Capital Gains Tax when you sell or dispose of it.

Chargeable gain
You may have a chargeable gain when you sell or dispose of a chargeable asset (see ‘chargeable asset’ above). This is the amount of the gain before you take account of allowable losses and the annual tax-free amount. See ‘Annual Exempt Amount’ above and also ‘taxable gain’ below.

Not every gain that you make is a chargeable gain.

You may have chargeable gains even if you have not disposed of any assets in the year. For example, gains made by certain trustees or companies may be treated as yours or a gain deferred from earlier years may become chargeable in the year.

Consideration
Consideration is usually what you sell or dispose of an asset for. In some cases you use the market value of the asset disposed of. When working out a capital gain or loss, you do not include any money or money’s worth taken into account in your income for Income Tax purposes.

Costs
These are the costs you can deduct when you work out a gain or loss on a disposal of an asset. Only some costs are ‘allowable’. They include the price paid to acquire the asset, Stamp Duty (in the case of UK), other incidental costs of acquiring or disposing of the asset, and the costs of any improvements made to your assets. You exclude sums that are or could be deducted in computing income or losses for Income Tax purposes.

Disposal
When you dispose of an asset you might be selling it, giving it away, transferring or exchanging it for something else. For Capital Gains Tax purposes a disposal includes a ‘part-disposal’, which may be the disposal of part of an asset, or an interest or right in the whole or part of an asset.

Sometimes you might be treated as if you have disposed of all or part of an asset. For example, if you receive a capital sum (such as an insurance payout for damage to an asset) or make a claim that an asset has become of negligible value.

Double taxation treaty
A treaty made between two countries agreeing on the tax treatment of residents of one country under the other country’s tax system.

Functional analysis
The analysis of a business by reference to the location of functions, risks and intangible assets.

Market value
This is the price your assets might reasonably have been expected to fetch on the open market at the time that the assets needed to be valued – typically when you acquired them or disposed of them.

There are special rules to work out the market value of shares quoted on the Stock Exchanges.

Ownership (beneficial ownership)
Capital Gains Tax is charged on the beneficial owner of an asset. The beneficial owner is the true owner of the asset. The true owner is the person entitled to the benefit of owning the asset.

Usually the beneficial owner of the asset will also be the legal owner. The legal owner is the person in whose name the asset is held.

Sometimes the beneficial owner is not the legal owner. For example, a bare trustee is the legal owner – but not the beneficial owner – of assets held in a bare trust. In this case the beneficial owner has to pay any Capital Gains Tax due.

Reliefs
In some cases, you may be able to use tax reliefs to reduce or defer your taxable gains. These include Entrepreneurs’ Relief, Private Residence Relief and Business Asset Roll-Over Relief. Some are automatic, but others have to be claimed.

Royalty
A payment (often periodic) in respect of property (often intangible), e.g. a sum paid for the use of patented technology.

Share identification
In some cases, you might buy shares of the same type in the same company, but at different times, and then sell or dispose of some of them. In these cases, share identification rules will determine which of your shares you are considered to have disposed of. This determines what costs you can deduct when you work out your gain or loss when you dispose of them.

Taper Relief
If you sold or disposed of an asset before 6 April 2008 you may qualify for Taper Relief. Taper Relief reduces the amount of the gain on which you will pay Capital Gains Tax. The amount of Taper Relief due is dependent upon how long you held the asset from 6 April 1998 and, in some cases, whether you held the asset on or before 17 March 1998.

There are two rates of Taper Relief: one for business assets and one for non-business assets.

Taxable gains
This is the net amount of a person’s total chargeable gains for a tax year, after any reliefs and allowable losses have been taken into account.

Capital Gains Tax is charged on the taxable gains for a tax year – after deducting the annual tax-free allowance. See also ‘chargeable gains’ .

Thin capitalisation
A situation in which a company has a high level of borrowing relative to its equity base. The term is usually used when the high levels of debt are derived from related companies.

Wasting asset
A wasting asset is one that has a predictable life of 50 years or less. All plant and machinery are treated as wasting assets. When you sell a wasting asset, there may be some restriction of the costs you can deduct in calculating your gain or loss.

Personal possessions that are wasting assets may be exempt from Capital Gains Tax.