Tax Sharing Agreement Us

by admin on December 17th, 2020

(ii) the amounts paid under a cost-sharing agreement are reimbursements; and consider a parent company (parent company) that owns 100% of the shares of two subsidiaries (subsidiary 1 and subsidiary 2). The parent company is a pure holding company and does not generate separate corporate profits or losses. Suppose the consolidated group has a tax allocation agreement allocating the group`s tax debt on the basis of each member`s separate tax debt (i.e., members are required to pay the parent company an amount equal to the amount of tax they would be owed if they had filed a separate return for the year). In the absence of a binding agreement, members are not required to pay the parent for their share of the group`s tax debt and the parent is not required to compensate members for the use of their tax attributes. To ensure that members receive adequate compensation for the group`s use of their tax attributes and that their assets are not depleted by excessive taxes paid to the parent company, many tax advisors recommend that groups sign legally binding tax allocation agreements that define how cash payments and refunds are made between members. The written tax allowance is particularly important when a group includes members who are regulated entities, have minority shareholders or have external debt with separate corporate financial pacts. In year 2, the consolidated group has no taxable income as the taxable income of subsidiary 1, $1,000, is fully offset by the loss of $1,000 by Subsidiary 2 (Figure 2). As in Year 1, Subsidiary 1 is required to pay the parent company an amount equal to the tax it owes if it had filed a separate return for the year ($210). However, in two years, the question arises as to whether Subsidiary 2 should be compensated for using the group`s US$1,000 loss. The answer depends on the terms of the tax agreement. In the absence of a tax agreement, Subsidiary 2 will find it difficult to compel the parent company to do so for the loss of a potentially valuable tax attribute as a whole. One of the advantages of filing a consolidated tax return is that losses suffered by members can be used to protect the income of other members; However, if the loss of a member is absorbed by the consolidated group, the member cannot use that loss to protect the income it will generate in the future.

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