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.
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.
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.
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.
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.
A loan where the principal is paid down gradually over the life of the loan.
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.
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.