Tax consolidation
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 cost
s 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.
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.
The aim of a tax consolidation regime is to reduce administrative costs for government revenue departments and reduce compliance cost
Compliance cost
A compliance cost is expenditure of time or money in conforming with government requirements such as legislation or regulation. For example, people or organizations registered for value added tax have the extra burden of having to keep detailed records of all input tax and output tax to facilitate...
s for corporate taxpayers. However, consolidation regimes can include onerous rules and regulations.
Countries which have adopted a tax consolidation regime include the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
and New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
.
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
United Kingdom corporation tax
Corporation tax is a tax levied in the United Kingdom on the profits made by companies and on the profits of permanent establishments of non-UK resident companies and associations that trade in the EU. Prior to the tax's enactment on 1 April 1965, companies and individuals paid the same income tax,...
has a system of group relief, which permits profits of one group company to be reduced by losses of another group company.