Glossary of Terms Related to Illicit Financial Flows

Arm's Length Principle (ALP) bonds, precious metals, and Financial Secrecy Index (FSI) A method of calculating transfer property. A ranking methodology developed price between related entities Common Reporting Standard by the Tax Justice Network that belonging to the same parent (CRS) ranks jurisdictions according to organisation, such that the net A set of guidelines developed by their secrecy and the scale of their business income which an entity the OECD which provides offshore financial activities. It is a might expect to derive if it were an countries various details about how tool for understanding trends of independent enterprise engaged in to engage in automatic exchange global financial secrecy, tax havens the same or similar activities under of information with other countries. or secrecy jurisdictions, and illicit the same or similar conditions. financial flows or capital flight. Country-by-Country Reporting Automation Exchange of (CBCR) Foreign Account Tax Information (AEOI) Compliance Act (FATCA) A form of financial reporting in A process where two or more which multinational corporations A U.S. law which requires financial countries share financial produce certain financial and institutions outside the United information of foreigners with their organisational data (revenue, cost, States to determine whether they home countries, automatically and payroll, etc.)disaggregated by each have any customers who are U.S. at a predefined interval. country in which they operate. citizens and report their financial information to the U.S. Internal Base Erosion and Profit Shifting Domestic Resource Mobilisation (BEPS) Revenue Service (IRS). Generation of government revenue General Anti-Avoidance Rules Tax avoidance strategies that from domestic sources, from tax or (GAAR) exploit gaps and mismatches in tax non-tax sources (royalties, licenses, rules to artificially shift profits to low levies or other income), towards Rules which provides tax authorities or no-tax locations. The G20 and the objective of sustainable power to investigate and re- the OECD have also developed a development financing. characterise the financial BEPS Action Plan to combat tax transactions, which are conducted Double Tax Agreements (DTAs), avoidance by multinational without commercial substance and or Double Tax Avoidance corporations using base erosion and are aimed at tax avoidance. Agreements (DTAAs) profit shifting tools. Hawala Agreements between two (or more) Beneficial Ownership (BO) countries to allocate taxing rights An informal process of funnelling The natural person(s) who on income generated from cross money from one country to another ultimately owns and/or controls an border capital flows between them, through a trusted and widespread asset or legal entity (company, primarily for the avoidance of network of hawaladars (or hawala trust, etc.), or the natural person on double taxation. facilitators) where the money is whose behalf a transaction is being hardly physically moved around. Equalisation Levy conducted. Illicit Financial Flows (IFFs) A withholding tax in India, which Capital Gains Tax requires that all businesses An umbrella term which covers Taxes on capital gains, where the operating in India that pay any cross-border movements related to profit realised on the sale of a non- foreign entity in lieu of specified tax avoidance, tax evasion, inventory asset was greater than service received from that foreign regulatory abuses, bribery and the the amount realised on the sale. entity, to withhold 6% of the theft of state assets, the laundering The most common capital gains payment amount. of the proceeds of crime and the are realised from the sale of stocks, financing of terrorism. International Tax Competition Special Economic Zones (SEZs) the general tax code of a country. A process in which a country Demarcated area within a Trade Mis-invoicing provides more beneficial tax jurisdiction, such that businesses A method for moving money illicitly regime to attract foreign operating here are granted various across borders which involves the investment, in reaction to the tax tax and non-tax incentives, as well deliberate falsification of the value policy of its competitor country(ies). as regulated by laws different from or volume of an international The benefits can be inform of those that govern the rest of the commercial transaction of goods reduced tax rates or increased tax country. or services by at least one party to incentives. Sustainable Development Goals the transaction. Millennium Development Goals (SDGs) Transfer Pricing Abuse (MDGs) A collection of 17 global Manipulation of the arm's length A set of development goals development goals to address principle of transfer pricing, targeted by UN to be achieved by poverty, hunger, health, education, especially by multinational 2015, to reduce poverty, improve gender and economic inequality, corporations, in order to avoid health and education access, etc. water and sanitation, climate paying taxes in jurisdictions where Money Laundering change, etc. by 2030. they create value. A process through which proceeds Tax Avoidance Unitary Taxation with Formula generated from illegal activities are The legal practice of seeking to Apportionment integrated in the mainstream minimise a tax bill by taking A method to allocate the combined financial system to hide the origin advantage of a loophole or profit of a corporation among the and nature of proceeds, and make exception to the rules, or adopting different subsidiaries situated in them appear legal. an unintended interpretation of the different countries. This is Offshore Financial Centres tax code. It usually refers to the advocated as the replacement of practice of seeking to avoid paying Countries or jurisdictions that current arm's length principle used tax by adhering to the letter of the provide financial services to non- for transfer pricing. law but opposed to the spirit of the residents on a disproportionate law. scale to the domestic economy as a result of financial incentives, such Tax Evasion as minimum government The illegal non-payment or under- interference and very low or zero payment of taxes, usually by tax rates. deliberately making a false Secrecy Jurisdictions declaration or no declaration to tax authorities – such as by declaring Jurisdictions, countries, cities or less income, profits or gains than regions within countries that offer the amounts actually earned, or by financial and corporate secrecy, overstating deductions. and lack transparency and effective exchange of information. Tax Havens Shell Companies Tax havens are jurisdictions, countries, cities or regions within A limited liability entity which has countries that have low or no taxes little or no physical presence in the (especially to foreigners), lack of jurisdiction it is registered in, few or transparency, lack of effective zero employees and commercial exchange of information, and no activity. These companies are substantial value creation activity. usually formed in a tax haven or secrecy jurisdiction and their Tax Incentives primary purpose is to insulate the Any special tax provision granted real beneficial owner from taxes, to qualified projects or firms that disclosure or both. provides favourable deviation from