What Is Tax Sharing Agreement
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What Is Tax Sharing Agreement
Tax financing agreements also determine tax accounting inflows into the financial statements of tax group members (i.e., deferred tax assets and deferred tax liabilities). We have developed a wide range of precedents that document tax-sharing and tax financing regimes. Among these precedents are: business groups are encouraged to consider entering into tax-sharing and tax financing agreements as part of their entry into the tax consolidation system. 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 the example above, USD 1,400 (3,000 CNOL carried over to year 4, 1,600 CNOL used to compensate for the group`s taxable year 4) of the CNOL at the end of the 4th year. If the remaining loss is attributable to a member who then leaves the group, several complex questions arise. While an in-depth discussion of these issues goes beyond the scope of this section, you should consider the following circumstances: If a parent company sells a subsidiary`s stock at a loss and the member is deconsolidated, the consolidated refund rules may allow the superior entity to reassign some of the member`s tax attributes.
[See section 1.1502-36 of Treasury Regulations; see also Internal Income Code (IRC) Section 108 and Treasury Regulations section 1.1502-28.] This allows the parent company to retain the outgoing member`s tax attributes and prevents that member from using these attributes in subsequent separate return years. To avoid this, a buyer may require, prior to the closing of the transaction, that the group`s tax allowance agreement be amended to contain a language that expressly prohibits the parent from reallocating a member`s tax attributes. If they join the tax consolidation system, business groups need to think about how best to minimize the application of joint and several liability related to group income taxes. They must also consider the extent to which subsidiaries finance the payment of these debts by the main company. Both issues can be managed by business groups through tax-sharing agreements and tax financing agreements. To date, most consolidated tax groups have decided to allocate their income tax commitments based on the fictitious individual taxable income of each member of the group or on the basis of each member`s accounting income as a percentage of the group`s total accounting income. Acceptance of the allocation on these bases will ultimately depend on the facts and circumstances related to the tax situation of the various groups, as well as legislation, regulations and ATO guidelines, which generally apply to tax-sharing agreements.
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