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The aim of a tax consolidation regime is to reduce administrative costs for government revenue departments and reduce compliance costs for corporate taxpayers.
For companies, consolidating can help understate profits by having losses in one group company reduce profits for another.
To the extent a member recognizes losses in excess of the owner's basis, such excess loss is treated as negative basis for all U. The adjustments “tier up” to consolidated return members who own shares of the entity making the adjustment. All members of the group must use the same tax year as the common parent.
This may be adopted or changed by the common parent.
In addition, if a member enters or leaves the group, certain adjustments to earnings and profits, basis, and other tax attributes apply.
Several countries allow related groups of corporations to compute income tax on a consolidated basis, in a manner similar to consolidation for financial reporting purposes.
The income tax and credits of the consolidated group are computed as if the group were a single taxpayer. Once a group has elected to file a consolidated return, all members joining the group must participate in the filing.Consolidation is usually an all-or-nothing event: once the decision to consolidate has been made, companies are irrevocably bound.Only by having less than a 100% interest in a subsidiary can that subsidiary be left out of the consolidation.Assets can be transferred between group companies without triggering a tax on gain for the company receiving assets, dividends can be paid between group companies without incurring tax liabilities, and tax attributes of one group company such as imputation credits can be used by other companies in the group.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.
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.