Glossary: Beginner's Guide to Taxation International Edition
🅰️ A–C
Adjusted Gross Income (AGI):
Income after allowable deductions.
Example: You earn ₦5,000,000 and deduct ₦500,000 in pension contributions—your AGI is ₦4,500,000.
Advance Tax:
Tax paid before the financial year ends, based on estimated income.
Example: A freelance designer in Lagos pays advance tax quarterly to avoid penalties.
Arm’s Length Principle:
Related companies must price transactions like they’re unrelated.
Example: A Nigerian company sells goods to its UK branch at market price—not a discounted rate.
Audit Trail:
A record of financial transactions for tracking and verification.
Example: Your business keeps receipts, invoices, and bank statements as an audit trail.
Base Erosion and Profit Shifting (BEPS):
Moving profits to low-tax countries to avoid tax.
Example: A multinational routes profits to a tax haven like Bermuda to reduce tax bills.
Capital Allowance:
Tax deduction for business assets like equipment.
Example: You buy a delivery van for your business—you can claim capital allowance over time.
Capital Gains Tax:
Tax on profit from selling assets.
Example: You sell land for ₦10M after buying it for ₦6M—you may pay tax on ₦4M.
Consumption Tax:
Tax on goods and services.
Example: Nigeria’s VAT is 7.5% on most purchases like groceries and electronics.
Corporate Income Tax:
Tax on company profits.
Example: A large company in Abuja earns ₦100M and pays 30% corporate tax.
Customs Duty:
Tax on imported goods.
Example: You import smartphones from China—customs duty applies at the port.
🅳 D–F
Deduction:
Expenses you subtract from income to reduce tax.
Example: School fees, medical bills, and pension contributions may be deductible.
Digital Services Tax (DST):
Tax on online services by digital companies.
Example: Streaming platforms like Netflix may pay DST in Nigeria.
Direct Tax:
Tax paid straight to the government.
Example: Personal income tax is a direct tax paid by individuals.
Double Taxation Agreement (DTA):
Treaty to avoid taxing the same income twice.
Example: Nigeria and the UK have a DTA to protect citizens working abroad.
Effective Tax Rate:
Average rate you pay after deductions.
Example: You earn ₦5M and pay ₦500K—your effective rate is 10%.
Excise Duty:
Tax on specific goods like fuel or alcohol.
Example: Buying petrol includes excise duty in the price.
Exemption:
Income or entities not taxed under certain rules.
Example: Registered charities may be exempt from income tax.
🅶 G–I
General Anti-Avoidance Rule (GAAR):
Law to stop aggressive tax avoidance.
Example: Fake transactions to dodge tax may be blocked by GAAR.
Goods and Services Tax (GST):
A type of VAT used in some countries.
Example: India’s GST is around 18% on most goods.
Gross Income:
Total income before deductions.
Example: Salary + bonuses + rent = gross income.
Indirect Tax:
Tax collected by someone else, like a seller.
Example: VAT added at checkout is an indirect tax.
Income Tax:
Tax on earnings.
Example: Paid monthly or yearly depending on your country’s rules.
Inheritance Tax:
Tax on assets received after someone dies.
Example: Nigeria doesn’t currently charge inheritance tax.
International Tax Treaty:
Agreement between countries to manage tax rules.
Example: Helps businesses avoid double taxation when operating globally.
🅹 J–L
Joint Filing:
Two people file one tax return together.
Example: A married couple combines their income for tax purposes.
Jurisdiction:
The country or area that sets tax laws.
Example: Nigeria is a tax jurisdiction with its own tax rules.
Kickback:
Illegal payment for favors, often hidden from tax.
Example: A contractor pays secretly to win a government job.
Local Tax:
Tax charged by local governments.
Example: Property tax in Kano is a local tax.
🅼 M–P
Marginal Tax Rate:
Tax rate on your last ₦1 earned.
Example: Higher income = higher marginal rate.
Multilateral Instrument (MLI):
Global treaty to fix tax loopholes.
Example: Over 100 countries signed the MLI to fight BEPS.
Non-Resident Taxpayer:
Someone earning in a country they don’t live in.
Example: A foreign consultant working in Nigeria.
Permanent Establishment (PE):
A fixed business location that triggers tax.
Example: A branch office abroad may be a PE.
Progressive Tax System:
Higher income = higher tax rate.
Example: Earn ₦10M, pay more tax than someone earning ₦2M.
Property Tax:
Tax on land or buildings.
Example: You pay yearly tax on your house in Abuja.
🆀 Q–R
Quarterly Tax Payment:
Paying tax every three months.
Example: Freelancers often pay quarterly to avoid penalties.
Qualifying Child:
A child who meets rules for tax benefits.
Example: In the U.S., a child under 17 may qualify for a credit.
Quick Ratio (Tax Use):
Shows how easily a business can pay short-term debts.
Example: ₦1M in cash vs ₦500K in bills = 2:1 quick ratio.
Refund:
Money returned if you overpaid tax.
Example: You paid too much—you get a refund.
Regressive Tax:
Tax that hits low-income earners harder.
Example: Flat VAT affects everyone the same, rich or poor.
Residence-Based Taxation:
Tax based on where you live.
Example: You live in Nigeria but earn abroad—you may still pay tax.
🆂 S–T
Self-Assessment:
You calculate and report your own tax.
Example: Nigeria uses self-assessment for personal income tax.
Stamp Duty:
Tax on legal documents.
Example: Buying land? Stamp duty applies.
Tax Avoidance:
Legal ways to reduce tax.
Example: Using deductions and credits wisely.
Tax Credit:
Direct reduction in tax owed.
Example: Installing solar panels may earn you a credit.
Tax Evasion:
Illegal way to avoid paying tax.
Example: Hiding income is tax evasion.
Tax Haven:
Country with low or no taxes.
Example: Cayman Islands is a tax haven.
Tax Liability:
Total tax you owe.
Example: Your final tax bill is your liability.
Tax Residency:
Where you're considered a taxpayer.
Example: Based on where you live or work.
Transfer Pricing:
Setting prices for deals between related companies.
Example: A Nigerian company sells to its UK branch at fair market value.
🆄 U–Z
Unclaimed Tax Refund:
Money owed to you that you haven’t collected.
Example: You filed late—your refund is still waiting.
Use Tax:
Tax on items bought elsewhere but used locally.
Example: You buy a laptop abroad and use it in Nigeria—use tax may apply.
Unilateral Relief:
Tax relief from one country to avoid double tax.
Example: Nigeria may give relief even without a treaty.
Value-Added Tax (VAT):
Tax added at each stage of production.
Example: Nigeria’s VAT is 7.5% on most goods and services.
Withholding Tax:
Tax taken from payments before you get them.
Example: Common on salaries and dividends in Nigeria.
Zero-Rated Supply:
Goods taxed at 0%, but still tracked.
Example: Basic food or medicine may be zero-rated.
🌇Tax Glossary Quiz (1 - 10 Questions)🌇
1. What does the Arm’s Length Principle mean?
- A) Companies must report all income in their home country
- B) Companies can avoid taxes by working with subsidiaries
- C) Companies must treat deals with related businesses like they would with outsiders ✅
- D) Companies should pay the same tax rate everywhere
Explanation: This principle ensures fairness by requiring related companies to price transactions as if they were unrelated.
2. Which tax is paid ahead of time based on expected income?
- A) Corporate Income Tax
- B) Consumption Tax
- C) Advance Tax ✅
- D) Capital Gains Tax
Explanation:
Advance Tax is paid during the year based on estimated income, helping governments collect revenue early.
3. Which of these is an indirect tax?
- A) Inheritance Tax
- B) Income Tax
- C) Value-Added Tax (VAT) ✅
- D) Corporate Tax
Explanation: VAT is collected by sellers from buyers and then paid to the government.
4. What does a Double Taxation Agreement (DTA) do?
- A) Prevents the same income from being taxed in two countries ✅
- B) Increases tax rates on foreign income
- C) Makes all international income tax-free
- D) Allows companies to avoid paying any tax
Explanation: DTAs help businesses avoid being taxed twice on the same income when operating across borders.
5. What is a Tax Haven?
- A) A place where taxes are very high
- B) A place with low or no taxes, often used for tax planning ✅
- C) A country that gives tax refunds to everyone
- D) A government office that helps people file taxes
Explanation: Tax Havens attract individuals and companies looking to reduce their tax bills legally.
6. What is Capital Gains Tax charged on?
- A) Income from employment
- B) Company revenue
- C) Interest earned on savings
- D) Profits from selling capital assets ✅
Explanation: Capital Gains Tax is charged on profits made from selling assets like stocks or real estate.
7. Which tax is applied to goods and services at each stage of production?
- A) Income Tax
- B) Excise Duty
- C) Stamp Duty
- D) Value-Added Tax (VAT) ✅
Explanation: VAT is added at each stage of production and distribution of goods and services.
8. What is the purpose of a Tax Credit?
- A) To directly reduce the amount of tax owed ✅
- B) To reduce taxable income
- C) To increase the amount of tax owed
- D) To delay tax payments
Explanation: A Tax Credit directly lowers the tax you owe, often given for education, green energy, or childcare.
9. What is a Permanent Establishment (PE)?
- A) A government tax office
- B) A fixed place of business that triggers tax obligations in a foreign country ✅
- C) A temporary office set up for marketing
- D) A company’s headquarters.
Explanation: A PE is a physical business location in another country that creates tax responsibilities there.
10. What does the term 'Withholding Tax' refer to?
- A) Tax refunded by the government
- B) Tax paid after receiving income
- C) Tax withheld from payments before reaching the recipient ✅
- D) Tax paid voluntarily by employees
Explanation: Withholding Tax is taken out of payments like salaries or dividends before they are received.
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