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. Therefore, tax allocation agreements should address the question of whether and how group members are compensated for the use of their tax attributes (e.g. B operating losses, excess capital losses, tax credits). When several companies are grouped into a large group, the parent company acts directly with the IRS, pays the group`s tax debts and receives repayments. Tax allocation agreements are often used by members of a consolidated group to determine how these funds will be allocated and distributed. The authors describe the issues that companies must consider when developing such agreements, including how the loss of return and loss of net operating was influenced by the Tax Reduction and Employment Act of 2017. If there is a tax-granting agreement, it could require the parent company to compensate 2 if the loss of subsidiary 2 is compensated by the group. Under this approach, a subsidiary is compensated for the loss of its tax attributes, whether or not those attributes have benefited the subsidiary. In addition, some tax allocation agreements take a “wait-and-see” approach. Under this approach, Subsidiary 2 would not be compensated for the use of its loss in year 2. Instead, the group would wait to see if Subsidiary 2 subsequently receives revenue to take advantage of its loss, provided the loss has not previously been offset by the consolidated group.
If Subsidiary 2 continues to generate losses, it can never be compensated for the benefit the group derived from its loss in Year 2. Given the potential difference between the time the payment is made, it is important to ensure that all parties understand when members are compensated for the use of their attributes. If the group did not have a tax allowance agreement, Parent would not be required to pay the refund of 100 $US to subsidiary 2. If there is an agreement, it could require that subsidiary 2 be compensated if its USD 100 tax credit is repatriated and absorbed by the group (i.e. in year 2). The agreement could also take a “wait-and-see” approach to the distribution of tax refunds. In accordance with the discussion above, the group expected in this approach to find out whether Subsidiary 2 subsequently generated sufficient revenue, so that it could have benefited from the credit had it not been previously absorbed by the group. In addition to the allocation and allocation of tax refunds, tax allocation agreements should also explicitly state whether the parent company, as the group`s representative, receives refunds or whether the group intends the parent company to own the refunded amounts.
In the absence of a language that clearly communicates the group`s intentions, a parent company is more likely to be considered an owner when an agreement gives the parent company a margin of appreciation for the payment of its share of a refund or balance of that amount in the future payment of the subsidiary`s tax. Some courts have also argued that a parent company would be treated as an owner if the agreement does not expressly require that refunds be separated or limited in use.