Intercompany Tax Sharing Agreement
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. 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. Tax allocation agreements should be developed to ensure that beneficiary members of the group bear their share of the consolidated tax liabilities. One option is to allocate the group`s liabilities as a percentage of consolidated taxable income on the basis of each member`s own tax debt or on the basis of each member`s taxable income. It is often necessary to take a stand-alone approach when a group includes a regulated member. As a general rule, the rates that regulators can charge a distribution company are based in part on its service costs, including taxes.
When taxes are awarded in a different way than a separate base, customers can pay rates that reflect costs or benefits for other unregulated members of the consolidated group. As a result, a regulated member`s share of his group`s tax debt cannot, in many states, exceed the tax debt that the company would have owed to the IRS as a self-employed tax liability. Only a few states provide for a distribution of unregulated tax benefits through consolidated tax-sharing adjustments, the discussion of which goes beyond the scope of this article. Some, but not all, tax groups include written ASDs to address these intragroup problems. Unfortunately, these documents often present ambiguities or uncertainties and do not take into account all relevant considerations regarding the allocation and distribution of tax debts, refunds and tax attributes. Regardless of what an ASD provides (or not), the group`s operation is not always in line with the text of the agreement.