In Year 2, the consolidated group has no taxable income, since the taxable income of Subsidiary 1 is fully offset by the loss of Subsidiary 2 of $1,000 this year (Figure 2). As in Year 1, Subsidiary 1 is required to pay the parent company an amount equal to the tax it would have owed if it had filed a separate tax return for the year (USD 210). In year 2, however, the question arises as to whether Subsidiary 2 should be compensated for the group`s use of the $1,000 loss. The answer depends on the terms of the tax allocation agreement. In the absence of a tax sharing agreement, Subsidiary 2 will find it difficult to force the parent company to make it a whole for the loss of a potentially valuable tax feature. 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 profits or losses. Assuming that the consolidated group has a tax allocation agreement that allocates 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 will have to pay if they had filed a separate tax return for the year). If the group did not have a tax-sharing agreement, the parent company would not be required to remit the $100 refund to Subsidiary 2. If an agreement exists, it could require subsidiary 2 to be compensated if its $100 tax credit is recovered and taken over by the group (i.e. In Year 2).
The agreement could also take a “waiting-and-see” approach to the distribution of tax refunds. In accordance with the discussion below, the group would wait to see whether, subsequently, Subsidiary 2 had made sufficient profits, which would have enabled it to benefit if it had not been previously absorbed by the group. Under the new International Financial Reporting Standards, tax groups must ensure that they have a tax financing agreement that applies an “acceptable allocation method” according to the Urgent Issues Group`s (UIG) 1052 Tax Consolidation Accounting interpretation. If the tax financing agreement does not provide for an “acceptable allocation method”, group members may be required to account for dividends and capital distributions or capital injections considered capital deposits in their accounts. Figure 1 summarizes the consolidated group`s taxable income for year 1, which is $1,000. His tax debt is $210. Under the tax allocation agreement, Subsidiary 1 would be required to make a payment of $210 to the parent company that would pay that money to the IRS on behalf of the group. . . .