The purpose of this article is to identify some of the federal income tax issues that should be considered when developing or revising a tax allocation treaty. There are many ways to write tax distribution agreements and these differences can have far-reaching economic consequences. When included in the tax consolidation regime, enterprise groups should consider how best to minimize the application of joint and several liability in respect of the group`s income tax liabilities. They must also consider how the subsidiaries finance the payment of these debts by the main company. Both of these issues can be managed by groups of companies through tax-sharing agreements and tax financing agreements. Tax financing agreements complement tax-sharing agreements and determine how subsidiaries finance the payment of taxes by the main company and when the main company is required to make payments to subsidiaries for certain tax attributes generated by those subsidiaries and which benefit the group as a whole (e.g. B tax losses and tax credits). Tax allocation agreements should be developed to ensure that profitable group members assume their share of consolidated tax liabilities. One way to do this is to allocate the group`s liabilities on the basis of each member`s autonomous tax debt or on the basis of each member`s taxable income as a percentage of consolidated taxable income. It is often necessary to take a stand-alone approach when a group includes a regulated member.
Typically, the rates that authorize a regulatory distribution undertaking are based in part on its service costs, including taxes. Where taxes are allocated in a manner other than on a stand-alone basis, utility customers may pay rates that reflect the costs or benefits of other unregulated members of the consolidated group. Therefore, in many countries, a regulated member`s share of its group`s tax debt should not exceed the tax debt that the company would have owed to the IRS as a full taxable person. Few States provide for a distribution of unregulated tax benefits through consolidated tax-sharing adjustments, the discussion of which would go beyond the scope of this article. Tax financing treaties also determine the tax accounting entries in the financial statements of members of tax groups (i.e. .