Tax consolidation
From Wikipedia, the free encyclopedia
Tax consolidation is a regime adopted in the tax or revenue legislation of a number of countries which treats a group of wholly owned or majority-owned companies and other entities (such as trusts and partnerships) as a single entity for tax purposes. This generally means that the head entity of the group is responsible for all or most of the group's tax obligations (such as paying tax and lodging tax returns).
The aim of a tax consolidation regime is to reduce administrative costs for government revenue departments and reduce compliance costs for corporate taxpayers. However, consolidation regimes can include onerous rules and regulations.
Countries which have adopted a tax consolidation regime include the United States, France, Australia and New Zealand.
There are four main reasons for consolidating.
- losses in one group company reduce profits in other group companies
- assets can be transferred between group companies without triggering tax on any gain
- dividends can be paid between group companies without tax liabilities arising
- tax attributes (for example imputation credits) of one group company can be used by other group companies
In some jurisdictions there may be other benefits, such as the ability to look through the acquisition of shares of acquired companies to depreciate the underlying assets.
Consolidation is usually an all or nothing event - once the decision to consolidate has been made, companies are irrevocably bound, and only by having a less than 100% interest in a subsidiary, can it be left out of the consolidation.
There are typically complex rules to deal with the acquisition of companies with tax losses or other tax attributes. Both the US and Australia have rules which restrict the use of such losses in the wider group.
In Australia, fixed trusts and 100% partnerships can be members of a consolidated group, but the head company must be a company and cannot be a trust or partnership.
Countries which do not permit tax consolidation often have rules which provide some of the benefits. For example, the United Kingdom has a system of group relief, which permits profits of one group company to be reduced by losses of another group company.
