Chapter INTM539000
| Published date | 09 April 2016 |
| Record Number | INTM539000 |
| Court | HM Revenue & Customs |
Disclaimer
This glossary is intended to be used as a quick reference for some of the specialist and technical terms contained in the financial transfer pricing sections of the International Manual, not a definitive guide on HMRC interpretation. Important terms within the legislation are generally considered within the guidance itself. These definitions and descriptions should not be relied on in isolation in any important context. The more extensive Corporate Finance Manual glossary partly overlaps with this one, but has a different emphasis.
Suggestions, comments and better definitions would be welcomed by Miles Nelson.
A B C D E F G H I J L M P R S T U V W Y Z
A| Accruals basis | An accounting basis that recognises income and expenses in the accounting period in which they are earned or incurred, rather than that in which they are received or paid. |
| Acting Together | 1. This refers to the indirect participation legislation at TIOPA10/S158 (previously Sch 28AA Para 4A) which can extend the scope of transfer pricing legislation beyond the usual related party concept. The scope can be wide and tends to affect private equity deals and debt reconstructions, where lenders can be more akin to stakeholders. SeeINTM519040. |
| Amortisation | 1. The equivalent of depreciation, for intangible assets. Amortisation of goodwill or other intangible assets involves writing off over a period of years the amount paid for a business acquisition over and above the value of the assets acquired. As such, it does not usually indicate current or future cash expenditure (unlike depreciation), so adding it back to profits is not likely to be an issue for thin cap purposes. |
| Amortisation | 1. The gradual reduction of a debt by means of periodic payments which are sufficient to cover interest and repay the principal over the life of the loan. |
| Amortising loan | A loan where the principal is paid down gradually over the life of the loan. |
| Arbitrage | Exploitation of differences in tax rules between different countries; for example tax rates, income recognition or timing. This relies on contrasts such as interest/dividend, capital/revenue, or (for the entity itself) recognition/disregard. The 2005 anti-arbitrage legislation (see INTM590000) focuses on hybrid entities and hybrid instruments i.e. those attracting different treatment between tax jurisdictions. |
| Asset-backed security (ABS) | Tradeable debt (normally issued by a company) backed by a pool of assets, such as stocks of finished goods or raw materials, trade debts, bonds, loans or mortgages. If the issuer defaults, the bondholders have first claim on the asset(s) backing the bond. |
| Asset-linked security | Security whose value is linked to the value of an underlying asset, such as land or shares. |
| Assign or assignment | A transfer of rights associated with an asset, such as the right to receive payment on a loan, from the original beneficiary (the assignor) to another (the assignee). This is different from novation, which represents an absolute transfer of ownership. In assignment, the parties to the contract do not change. |
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B| Back-to-back loan | 1. Indirect lending where funds are loaned through an intermediary, which enters into separate but linked agreements with a lender and a borrower who are typically related parties. This practice may raise treaty clearance issues if the intermediary is not the beneficial owner of the UK interest, though the nature of the arrangement may not always be immediately obvious. |
| 1. The term is also used to describe parallel loans, whereby companies in different countries each advance sums in their own currency to fund the other company, a US company providing a UK company with dollars, the UK reciprocating in sterling. Other forms of currency management make this arrangement rare. | |
| Balloon loan or repayment | This is very similar to a bullet loan or repayment, except that the term “balloon” refers to a very large payment and does not necessarily imply that the principal is repaid in a single sum. The repayment terms may be heavily back-loaded. |
| Base case | Any kind of model, a business plan for the next five years, say, where the assumptions about performance are neither optimistic nor pessimistic. |
| Base rate | This usually refers to the rate at which the Bank of England lends to other banks, though it can mean an interest rate which is used as a basis for pricing loans. Particular rates are arrived at by adding a margin to the base rate reflecting the risk of the lending proposition. It is not the same as LIBOR, which is a reference rate. |
| Basis point | One hundred basis points (bp) make up one percentage point, so a single basis point represents a hundredth of one per cent. It is a convenient way of expressing small differences in interest rates in an intelligible way: “seventy-five basis points” is easier than “point seven five per cent”. It is used for expressing margins. For example, a loan might be made at LIBOR + 225 bp i.e. LIBOR + 2.25%. |
| BBA | British Bankers’ Association - the leading trade association for the UK banking and financial services sector, which sets LIBOR and publishes it on the BBA LIBOR website. See INTM516035. |
| Beneficial ownership | In international tax, a term mainly relevant to double taxation issues, specifically treaty clearance. The beneficial owner has rights of ownership over a source of income - to enjoy, dispose, etc, as they wish - even where legal ownership lies elsewhere. Under most double taxation agreements, a claim to receive interest gross must be made by the beneficial owner of the income concerned, not merely an intermediary or conduit. See conduit financing. |
| Bond | A debt instrument issued for a period in excess of a year. The issuer (borrower) is obliged to repay the principal on a specified future date, as well as (usually) making periodic interest payments. Corporate bonds are issued by companies, but governments, local authorities and other public bodies may also issue them. They can be bought and sold. See INTM571030 and the Corporate Finance Manual. |
| Bullet loan | This is a type of loan where repayment of the entire principal, and sometimes the interest, falls due at the end of the loan period. |
| BVCA | The British Venture Capital Association, now the British Private Equity and Venture Capital Association, the representative body for the industry, acts as a lobby group and is involved in negotiating memoranda of understanding with HMRC. It has an extensive website. |
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C| Cap | See Debt Cap. |
| Capital contribution | An injection of equity into a company, in cash or in kind, which increases the equity reserves of a company without being linked to shares, and which does not generally constitute taxable income for the company or earn a return for the contributor. Its UK accounting status is unclear, and it can be useful to define status and treatment for the period of any thin cap agreement. |
| Capital distribution | Distribution of funds not derived from the profits of a company, being either a return of the original subscribed capital or derived from a sale of capital assets. |
| Capitalisation | The amount of equity in a company, or the value of the equity, as in market capitalisation. Expense may be capitalised e.g. R&D costs treated as an intangible asset. |
| Capital redemption reserve | Under Section 170 of the Companies Act 1985, when a company buys back its own shares using either company’s profits or a fresh issue of shares, the amount by which the company’s issued share capital is diminished on cancellation of the shares must be transferred to a reserve called the ‘capital redemption reserve’. This counterbalances the reduction in equity caused by the cancellation of the repurchased shares. |
| Cash basis | Accounting method in which only cash receipts and cash expenditure are used in computing taxable income. |
| Check-the-box regulations | Method used since 1997 to determine the classification of a domestic or foreign business as a corporation, a partnership or a “disregarded entity” for US tax purposes. A disregarded entity is treated as a branch or division of its owner, not as a taxable entity in its own right The term comes from the practice of ticking a box on an Internal Revenue Service Form 8832 to opt for a particular treatment. If no election is made, default rules apply based upon the liability, and the number of members/owners. Previously slated for reform by Barack Obama, but now appear safe for the moment. |
| Collar | Interest rate collar - a term used for variable-rate debt, setting a range within which the interest rate may vary between a maximum (the “cap”) and a minimum (the “floor”). |
| Commercial paper | Unsecured, short-term loans (less than a year) issued by companies. The debt is usually sold at a discount to face value, and then redeemed at face value. The funds are typically used for working capital, rather than fixed assets such as a new building. They can serve as a cheaper alternative to a bank overdraft. |
| Commitment Fee | A fee charged annually by the lender for holding funds available, whether they are used or not, for example where a company has a facility of £5m but has only drawn £2m. The lender charges for the continuing availability of the remainder. If a transfer pricing adjustment reduces the size of a company’s facility, there should be a corresponding reduction in the fee. |
| Conduit financing | Transaction involving one or more intermediate or “conduit” companies, used at times to reduce withholding tax. A company in a zero withholding territory is placed between the UK and the true lender, who is either in a country with a residual rate of tax (e.g. 10%) or in a tax haven. Such arrangements can be challenged. (See also back-to-back loan, treaty shopping and beneficial ownership) |
| Convertible debt | A bond |
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