the unthinkable policy option? key design issues under a

canadian tax journal / revue fiscale canadienne (2011) 59:3, 421 - 62

421

The Unthinkable Policy Option? Key Design Issues Under a System of Full Consolidation

Antony Ting*

P R É C I S

En 2010, le ministère des Finances du Canada a lancé un processus de consultation visant à considérer l’établissement éventuel d’un régime officiel d’imposition des groupes de sociétés. La consultation s’est concentreé surtout sur le choix du meilleur type de régime pour le Canada. Les deux principales solutions adoptées dans d’autres pays sont le régime de transfert des pertes et le régime de consolidation intégrale. Il est difficile de faire un choix entre les deux régimes. Néanmoins, il est évident que l’intérêt provincial serait mieux servi par le système de consolidation intégrale, particulièrement en ce qui a trait à la question de la répartition interprovinciale du revenu.

L’objet de cet article est de fournir une analyse comparative détaillée des régimes de consolidation adoptés dans huit pays : l’Australie, la France, l’Italie, le Japon, les Pays-Bas, la Nouvelle-Zélande, l’Espagne et les États-Unis. Ce sont les pays qui, dès la fin de 2009, avaient introduit des régimes de consolidation intégrale touchant à la fois la compensation des pertes à l’intérieur d’un groupe et les transferts d’actifs en franchise d’impôt. L’article fait une comparaison critique des options de politique alternatives en ce qui a trait aux paramètres de conception et aux principaux aspects structurels des huit régimes de consolidation choisis dans le but de trouver un système pouvant servir de modèle ou de base quant à l’élaboration d’un régime canadien. En réponse aux préoccupations touchant l’apparente complexité d’un régime de consolidation, l’article classe les huit régimes au moyen d’un indice de complexité. Cet exercice a pour but de souligner deux aspects de la question : premièrement, les huit régimes représentent un éventail des divers degrés de complexité, permettant de croire qu’un régime de consolidation n’a pas besoin d’être aussi complexe que les modèles australien et américain; et deuxièmement, la complexité d’un régime dépend en grande partie des choix de politique à l’égard des principaux aspects structurels.

* OftheUniversityofSydneyBusinessSchool(e-mail:[email protected]).IwouldliketothankRichardVannforhiscontinuoussupportandcommentsonearlierversionsofthisarticle.IamalsoindebtedtoAlanMacnaughtonandTimEdgarfortheirvaluablesuggestionsandinsightfulcomments,especiallywithrespecttotheissuessurroundingtheproposedintroductionofagrouptaxationregimeinCanada.

422 n canadian tax journal / revue fiscale canadienne (2011) 59:3

A B S T R A C T

In 2010, Canada’s Department of Finance initiated a consultation process to consider the possible introduction of a formal corporate group taxation system. A principal focus of the consultation process has been the type of group taxation system that would be best for Canada. The two most common alternatives that have been adopted in other countries are the loss transfer and full consolidation systems. The choice between these two systems is a difficult one. Nevertheless, provincial interest in a full consolidation regime is evident, especially as a means to address the interprovincial allocation issue.

The purpose of this article is to provide an in-depth comparative analysis of the consolidation regimes adopted in eight countries: Australia, France, Italy, Japan, the Netherlands, New Zealand, Spain, and the United States. These are the countries that, by the end of 2009, had introduced full consolidation regimes providing for both intragroup loss offsets and tax-free asset transfers. The article critically compares the alternative policy options with respect to the design features and key structural elements of the eight selected consolidation regimes in an attempt to identify a model regime or template that might serve as a starting point for a Canadian system. In response to concern about the perceived complexity of a consolidation regime, the article ranks the eight consolidation regimes by applying a complexity index. This exercise is designed to highlight two aspects of the issue: first, the eight regimes represent a spectrum of varying degrees of complexity, indicating that a consolidation regime need not be as complex as the Australian and US models; and second, the complexity of a regime depends to a large extent on the policy choices with respect to the key structural elements.

KEYWORDS: COMPARATIVE ANALYSIS n CONSOLIDATION n CORPORATE TAXES n GROUP TAXATION n

LOSSES

C O N T E N T S

Introduction 423Overview of Group Taxation Regimes 427

Group Relief 429Group Contribution 430Group Pooling 430Organschaft 430

Design Features of Consolidation Regimes 432Application of the Single Entity Concept 432

Pooling 432Attribution 433Absorption 434

Definition of an Eligible Corporate Group and Mandatory Versus Elective Application of the Regime 434

Treatment of Preconsolidation Losses 441Quarantine 441Transfer to the Parent 442Cancellation 444

Treatment of Group Losses on Exit 445Treatment of Assets 445

On Entry 445

key design issues under a full consolidation system n 423

INTRO DUC TIO N

TheCanadiangovernmentannouncedinits2010budgetthatitwillconsidertheintroduction of a “formal system of loss transfer or consolidated reporting”1(sometimesreferredtoas“corporategroupreporting”or“grouptaxation”).ThisannouncementwasfollowedbythereleaseofaconsultationpaperonthetaxationofcorporategroupsinNovember2010.2Sincethattime,aprincipalfocusoftheconsultationprocesshasbeenthetypeofgroupreportingsystemthatwouldbebestforCanada.Therearemanysystemsofgroupreportinginusearoundtheworld,butthetwomostcommonarethosereferredtoas“losstransfer”and“fullconsoli-dation”systems.Theformertermincludesthosesystemsthattreatthemembersofacorporategroupasseparatetaxpayersfilingseparatereturnsbutpermitlossestobetransferredfromonemembertoanother.Thelatterterm,asusedinthisarticle,referstoaregimeunderwhichagroupofresidentcompaniesis,ingeneral,treatedasasingletaxpayerandfilesasingleconsolidatedtaxreturn,allowingbothintra-grouplossoffsets3andtax-freeassettransfers.4

During Consolidation 449On Exit 450

Treatment of Intragroup Shareholdings 450On Entry 450During Consolidation 452On Exit 453

A Model Consolidation Regime? 454The Complexity Index—Comparison of the Eight Consolidation Regimes 459Conclusion 461

1 Canada,DepartmentofFinance,2010Budget,BudgetPlan,March4,2010,at386.Thegovernmentsuggested,ibid.,thattheproposalwasmadeinresponseto“variousconcernsfromthebusinesscommunityandfromtheprovincesregardingtheutilizationoftaxlosseswithincorporategroups,”andthatitwouldfocusinparticularonwhetherconsolidatedreportingcould“improvethecompetitivenessofthetaxsystemforCanadianbusinesses.”

2 Canada,DepartmentofFinance,The Taxation of Corporate Groups,ConsultationPaper(Ottawa:DepartmentofFinance,November2010)(hereinreferredtoas“theconsultationpaper”).

3 Lossoffsetsincludebothnon-capitalandcapitallosses.Fullconsolidationsystemsalsoextendconsolidatedreportingtoincludeothertaxattributes,suchastaxcredits.

4 Theterm“consolidation”maymeandifferenttypesofregimesindifferentcontexts.Itmaybeusedtoincludeothergrouptaxationregimes,suchasgrouplossreliefintheUnitedKingdomortheOrganschaftsysteminGermany:see,forexample,thebroaderdefinitionof“consolidation”inTonyStolarek,“TheTaxTreatmentofConsolidatedGroups:ManagingMajorTaxChange,”inChrisEvansandRichardKrever,eds.,Australian Business Tax Reform in Retrospect and Prospect(Sydney:ThomsonReuters,2009),201-22,atfootnote10.Theterm“consolidation”hasevenbeenusedtocovervirtuallyallformsofgrouptaxation:forexample,seeErnst&Young,Barometer of Tax Competitiveness for 2009: Comparative Analysis of Tax Systems Within the OECD(Paris:Ernst&Young,2009),at4.


In1985,whenthenotionofaformalgrouptaxationsystemwaslastbroachedbytheCanadiangovernment,theDepartmentofFinancearticulatedaclearprefer-enceforagrouplosstransfersystem.5Thegovernment’scurrentpreferencewasnotdisclosed,however, in the2010consultationpaper,norhasanypreferencebeenindicatedinotherannouncements.

Theprivatesectorappearstofavouragrouplosstransfersystem.Forexample,theconsultationbriefssubmittedbytwolargeaccountingfirms,DeloitteandPrice-waterhouseCoopers,areclearinthisregard.Deloittestates:

Werecommendtheadoptionofagrouplosstransfersystem....Ontheotherhand,webelievethatafullconsolidationsystemwouldintroducealevelofcomplexityfarbeyondwhatisnecessarytoachievethebenefitssought.6

Similarly,PricewaterhouseCoopersendorsesalosstransfersystembecause

[it]wouldresultintheleastdisruptiontoCanada’staxsystemanditisthesystemtowhichtaxpayers,inparticular,smallandmedium-sizedcompanies,andthefederalandprovincialrevenueagenciescanmosteasilytransition.7

Incontrasttothefederalgovernment’sposition,thereappearstobemuteden-thusiasmfromtheprovincesforaformalsystemofgrouptaxationbecauseofitspotential impactonprovincial taxrevenues.Althoughmuchof thisdiscussion istakingplaceinprivate,anexpressionofthecurrentconcernsoftheprovinceswasprovidedinOntario’sfall2010economicupdate:

CanadahasasystemforsharingtheCorporateIncomeTaxbaseunderwhicheachprovinceisentitledtotaxtheeconomicactivitytakingplacewithinits jurisdiction.Anynewapproachtocorporategrouptaxationmustconsidertheimpactonprovincialrevenueswhenlossesaretransferredfromoneprovincetooffsetincomefromeco-nomicactivityinanotherprovince.Thetaxationofcorporategroupsmustnotdistorttheprinciplesofinterprovincialincomeallocationandshouldtreatlossesinafairandreasonablemanner.8

5 Canada,DepartmentofFinance,A Corporate Loss Transfer System for Canada(Ottawa:DepartmentofFinance,May1985).

6 LetteraccompanyingthebriefsubmittedbyDeloittetotheDepartmentofFinance,“TheTaxationofCorporateGroups—Deloitte’sComments,”April15,2011(www.deloitte.com/view/en_CA/ca/services/tax/eff59db12ad6f210VgnVCM1000001a56f00aRCRD.htm).

7 LetteraccompanyingthebriefsubmittedbyPricewaterhouseCooperstotheDepartmentofFinance,“TaxationofCorporateGroups:SubmissiontotheDepartmentofFinance,”April8,2011(www.pwc.com/ca/en/canadian-national-tax-service/publications/2011-04-taxation-corporate-groups-2011-04-en.pdf ),at6.

8 TheHonourableDwightDuncan,ministeroffinance,2010 Ontario Economic Outlook and Fiscal Review(Toronto:Queen’sPrinterforOntario,2010),at166.ConcernsabouttheeffectofsuchasystemonthedistributionofcorporatetaxrevenuesamongtheprovinceshavealsobeenexpressedinAlberta,MinistryofFinance,2011Budget,February24,2011,at147.


Thisconcernaboutrevenueshiftingbetweenprovinceswasamajorreasonforthedemiseoftheconsultationprocessin1985.9Atthattime,itwassuggestedthataconsolidationregimemightbemoreacceptabletotheprovincesthanacorporatelosstransferregime.10Theinclusionofaconsolidationregimeasapolicyoptioninthe2010consultationpapermayhavebeenmotivatedbyprovincialinterestinsucharegime.Infact,suchinterestisevidentinarecentformalresponsetotheconsulta-tionpaperbytheOntarioMinistryofFinance,whichsignalsthatprovince’sclearpreferenceforasystemoffullconsolidationoveralosstransfersystemasameanstoaddresstheinterprovincialallocationissue:

Bytreatingacorporategroupasasingleeconomicunit,aconsolidationsystemwouldallow lossutilizationandminimize thedistortions toprovincial incomeallocationcreatedbyintra-grouptransactionsandtheallocationofthird-partyfinancingwithinthegroup....

However,alosstransfersystemgenerallydoesnottreatanentirecorporategroupasasingleeconomicentityandthereforemaynotadequatelyaddressprovincialcon-cernsaboutincomeallocation.11

Ontario’sresponsealsosuggeststhatthewidelytoutedsimplicityofalosstransfersystemmaybeoverstated,whilethecomplexityofasystemoffullconsolidationiscontingentonthetypeofsystemchosen—achoicethatcanbemadeinamannerthatminimizessuchconcerns.12

Atabroadconceptuallevel,thereappeartobetwopossibleapproachestofullcon-solidationintheCanadiancontext.Onepossibilityisapoolingsystem,underwhicheachconsolidatedsubsidiaryremainsasaseparateentityforincometaxpurposes.Eachconsolidatedcompanyisstillrequiredtofileastand-alonetaxcomputationwiththetaxauthorities,whilethetaxresultsofallgroupmembersareaggregatedatthegroupleveltoarriveattheconsolidatedgroup’staxableincomeorloss.Undersucha system, it ispossible for theprovinces to impose taxon individualgroupmembersbasedontheirstand-alonetaxreturnswhilethefederalgovernmentcouldimposetaxontheconsolidatedincomeofthegroup.Adisadvantageofthisapproachisadivergenceoffederalandprovincialtaxbases,whichincreasescomplianceandadministrativecosts.ThismaybeundesirableinCanada,giventhecurrent“highlyharmonized”taxsystematthefederalandprovinciallevels.13

9 NicholasLePan,“FederalandProvincialIssuesintheCorporateLossTransferProposal,”inReport of Proceedings of the Thirty-Seventh Tax Conference,1985ConferenceReport(Toronto:CanadianTaxFoundation,1986),13:1-11.

10 Ibid.,at13:9.

11 LetteraccompanyingthesubmissionbytheOntarioMinistryofFinancetotheDepartmentofFinance,“TaxationofCorporateGroups—ResponsetotheFederalConsultationPaperReleasedNovember23,2010,”April23,2011,at6.

12 Ibid.,at8.

13 Consultationpaper,supranote2,at5.


Ifaconsistenttaxbaseisapriority,anobviousalternativeapproachistoadoptagroup’sconsolidatedtaxableincomeasthetaxbaseofthegroupforbothfederalandprovincialtaxpurposes.14Eachprovincecouldthenbeallocatedaportionofthattaxbaseaccordingtotheexistingformularyapportionmentrules.15Theadvan-tageofthisoptionisthatitmay(onthebasisofonthe1985experience)havesomepromiseasamethodofremovingtheopportunitiesforcorporategroupstoshiftincomebetweenprovinces.16

Inresponsetothefederalgovernment’sinterestinafullconsolidationregime,thesubmissionsbyDeloitteandPricewaterhouseCoopers,aswellasarecentpaperby Pantaleo and Johns,17 have provided some analysis of consolidation regimesaroundtheworld.ThesepapershavealsotriedtodeterminehowsucharegimecouldfitwithinexistingCanadiantaxlaw.Thepurposeofthepresentarticleistoprovideamorein-depthanalysisofeightspecificconsolidationregimesaroundtheworld:Australia,France,Italy,Japan,theNetherlands,NewZealand,Spain,andtheUnitedStates.18Thesearethecountriesthat,bytheendof2009,hadintro-ducedregimesprovidingforbothintragrouplossoffsetsandtax-freeassettransfers.Althoughitwouldbedesirabletoalsoconsidertheapplicationoftheseregimestothe Canadian context and recommend a specific structure to address provincialconcerns,analysisoftheeightregimesisasufficientlycomplexendeavourthattheirspecificapplicationtotheCanadiancontextisataskbestleftforfuturework.

Nonetheless,withthe idea thatsomeformof fullconsolidationsystemcouldmostreadilyaddressprovincialrevenueconcerns,thisarticlecomparesthedesignfeaturesoftheeightselectedconsolidationregimesinanattempttoidentifyamodel

14 SeeOntario,MinistryofFinance,supranote11,at7:“Thefederalgovernmentandtheprovincesgenerallyshareaharmonizedcorporatetaxbase,haveuniforminterprovincialallocationrules,andmanyprovinces,includingOntario,haveharmonizedcorporateincometaxcollection.ThesesignificantaccomplishmentscontributetotheefficiencyoftheCanadiantaxsystemandwereachievedthroughpartnershipbetweenthefederalandprovincialgovernments.”

15 AsimilarregimehasbeensuggestedbyAlexandreLaurin,Cleaning Up the Books: A Proposal for Revamping Corporate Group Taxation in Canada,C.D.HoweInstituteCommentaryno.284(Toronto:C.D.HoweInstitute,March2009).

16 Forabriefdiscussionoftheissue,seetheconsultationpaper,supranote2,at6;andOntario,MinistryofFinance,supranote11,at5-8.TheexperienceintheUnitedStatesalsosuggeststhatmorestateshaveadoptedcombinedreportinginrecentyearstodealwiththeinterstateincome-shiftingissue:consultationpaper,supranote2,at32.

17 NickPantaleoandJeffreyC.Johns,“TowardaNewSystemfortheTaxationofCorporateGroupsinCanada:HastheTime(Finally)Come?”inReport of Proceedings of the Sixty-Second Tax Conference,2010ConferenceReport(Toronto:CanadianTaxFoundation)35:1-38.

18 SouthKoreaintroducedaconsolidationregimein2010:seeInternationalBureauofFiscalDocumentation,Corporate Taxation Database(Amsterdam:IBFD)(www.ibfd.org),searchunder“CountryAnalysis”—“RepublicofKorea.”Sincelittleinformationisyetavailableonthedetailedrulesandactualimplementationoftheregime,itisnotanalyzedindetailinthisarticle.


regimethatmightprovideatemplateasastartingpointfortheCanadiancontext.19Inanefforttoprovideabroadercontextforthemorelimitedcountrycomparison,thenextpartofthearticleprovidesabriefoverviewofgrouptaxationregimes,rang-ingfromlosstransfersystemstofullconsolidationsystems.Theoverviewisfollowedbyadiscussionofthekeystructuralelementsoftheconsolidationregimesoftheeightselectedcountries.Thisinturnisfollowedbyadiscussionofthepossibleele-mentsofamodelconsolidationregime,basedonanassessmentoftheeightregimes.Asaresponsetotheconcernregardingtheperceivedcomplexityofaconsolidationregime,theeightconsolidationregimesarethenrankedbyapplyingacomplexityindex.Thisexerciseisdesignedtohighlighttwoaspectsoftheissue:first,theeightregimesrepresentaspectrumofvaryingdegreesofcomplexity,indicatingthatcon-solidationregimesneednotbeascomplexastheAustralianandUSmodels;andsecond,thecomplexityofaregimedependstoalargeextentonthepolicychoiceswithrespecttothekeystructuralelements.

OV ERV IE W O F GRO UP TA X ATIO N REGIME S

Thegroup taxationregimes indifferentcountriesoftendiffer substantially, thuspresentingachallengetotheconstructionofasystematicanalysis.Ithasbeenob-servedthat it is“difficulttoestablishanexact ‘familytree’ofthegrouptaxationregimesaroundtheworld.Linesarehardtodraw.Exceptionsabound.”20Neverthe-less,thefollowingoverviewaimstoillustratethedifferentformsofgrouptaxationregimes.21Theregimesareclassifiedaccordingtotheextenttowhichasingleentityconceptisappliedinrespectoftwokeytaxattributesthatagrouptaxationregimenormallycovers:intragrouplossoffsetsandintragroupassettransfers.

Thegrouptaxationregimesclassifiedaccordingtothesetwotaxattributesaresummarizedinfigure1.

19 Althoughtheeightconsolidationregimeshavebeendescribedelsewhereinconsiderabledepth,verylittlecomparativeanalysishasbeendone.See,inthisrespect,AntonyTing,“PolicyandMembershipRequirementsforConsolidation:AComparisonBetweenAustralia,NewZealandandtheUS”[2005]no.3British Tax Review311-34.ForacomparisonoftheconsolidationregimesinAustraliaandtheUnitedStates,andthetreatmentofcorporatelossesinCanada,seeMaureenDonnellyandAllisterYoung,“PolicyOptionsforTaxLossTreatment:HowDoesCanadaCompare?”(2002)50:2Canadian Tax Journal429-88,at449-70.

20 YoshihiroMasui,“GeneralReport,”inInternationalFiscalAssociation(IFA),Group Taxation,Cahiersdedroitfiscalinternational,vol.89b(Amersfoort,theNetherlands:SduFiscale&FinanciëleUtigevers,2004),21-67,at29.

21 Theoverviewisnotintendedtobeexhaustiveanddoesnotcoverallgrouptaxationregimesineverycountry.ItisbasedprimarilyonMasui’sreport,ibid.,supplementedandupdatedbyinformationfromvarioussources,includinginparticulartheCorporate Taxation Database,supranote18,searchunder“CountryAnalysis.”AnotherIFAreportalsoprovidessomevaluableinformationonthetreatmentoflossesinacorporategroup:InternationalFiscalAssociation,Tax Treatment of Corporate Losses,Cahiersdedroitfiscalinternational,vol.83a(TheHague:KluwerLawInternational,1998).


FIGURE 1 Group Taxation Regimes Allowing Intragroup Loss Offsets and/or Intragroup Asset Transfers

Only one regime for either loss offsets or asset transfers

Two separate regimes for loss offsets and asset transfers

One regime for both loss offsets and asset transfers

No regime for either tax attribute

Group contribution

Intragroup asset transfers

Group relief

Group pooling

Worldwide loss relief

Consolidation

Organschaft

Group contribution and asset transfers

Group relief and asset transfers

Australia, France, Italy,b Japan, the Netherlands, New Zealand, Spain, and the United States

Belgium, Canada, Hungary, South Africa, and Switzerland

India

Finland

Germany

Austria and Denmark

Norway and Sweden

United Kingdom

Malaysia, New Zealand, and Singapore

Italy,a Luxembourg, Mexico, Poland, and Portugal

Weaker

App

licat

ion

of th

e si

ngle

ent

ity c

once

pt

Stronger

a Since 2008.b Before 2008.

Sources: Yoshihiro Masui, “General Report,” in International Fiscal Association (IFA), Group Taxation, Cahiers de droit fiscal international, vol. 89b (Amersfoort, the Netherlands: Sdu Fiscale & Financiële Utigevers, 2004), 21-67, at 29; International Bureau of Fiscal Documentation, Corporate Taxation Database (Amsterdam: IBFD) (www.ibfd.org).


Somecountries(Belgium,Canada,Hungary,SouthAfrica,andSwitzerland)donothaveaspecificregimeallowingeitherintragrouplossoffsetsorassettransfers.Corporategroupsinthesecountriesoftenhavetoresorttocomplicatedtax-planningstructurestoachievesimilartaxoutcomes;however,suchplanningisuncertaininpracticeandsubjecttochallengebytaxauthorities.22Forinstance,inCanada,de-spitethegenerallyaccommodatingattitudeofthetaxauthorities,thetaxstructurestoachieveintragrouplossoffsetsareoftennotonlycomplex,butalsouncertainintermsofoutcome.23

Manycountrieshaveatleastoneregimecateringforoneorbothofthesetaxattributes.Thegrouptaxationregimes,otherthanconsolidationregimes,thatallowintragrouplossoffsetsaredescribedbelow.

Group Relief

Malaysia,NewZealand,Singapore,andtheUnitedKingdom24haveagroupreliefregimeunderwhich,ingeneral,lossesmaybetransferredwithinagroupofresidentcompanies.25Forexample, intheUnitedKingdom,ifaparentcompanyownsatleast75percentofthesharesofasubsidiary,tradinglossescanbesurrenderedfromonecompanytotheother.26Eveniftheshareholdingislessthan100percent,thewholeamountofthelossescanbetransferred.27

22 Forageneraldiscussionofthecommonplanningtechniques,seeMasui,supranote20,at47-51.

23 Laurin,supranote15,at5-7.SeealsoMaureenDonnellyandAllisterW.Young,“GroupReliefforCanadianCorporateTaxpayers—AtLast?”(2011)59:2Canadian Tax Journal239-63.

24 TheUKgroupreliefregimewasintroducedin1967toreplacethe1953provisionsrelatingtosubventionpayments(underwhichanintragrouplossoffsetwaseffectivelyallowedbypermittingaprofit-makinggroupmembertomakeadeductiblepaymenttoanotherloss-makingmember).Thegroupreliefregimewasregarded“asaconcessiontothosewhowouldliketoseefullgrouping,withasinglegroupassessment....Itwasahalf-wayhouse,inwhichthegroupcompaniescouldmakeearlyuseofeachother’slosseswithout...needingtomakeactualpaymentstoeachother”:D.deM.Carey,“CompanyBran-Tub1967”( July-August1967)British Tax Review239-44,at239.

25 Since2006,thescopeoftheUKgroupreliefregimeingeneralhasbeenextendedtocovernon-residentsubsidiariesresidentintheEuropeanEconomicArea(EEA)undercertaincircumstances:Corporate Taxation Database,supranote18,searchunder“CountryAnalysis”—“UnitedKingdom,”atparagraph8.1.ForadiscussionoftheUKpositiononEEAlosses,seeJohnTiley,Revenue Law,6thed.(Oxford:HartPublishing,2008),at959.Incontrast,inAustralia,thescopeofgroupreliefhasbeensubstantiallyrestrictedsincetheintroductionofaconsolidationregimein2002.Inparticular,groupreliefisnowavailableonlyifoneofthepartiesinvolvedisanAustralianbranchofaforeignbank:IncomeTaxAssessmentAct1997(ITAA1997),subdivisions170-Aand170-B.

26 IncomeandCorporationTaxesAct1988(UK),1988,c.1,section402.Thesurrenderoftradinglossesisalsoallowedbetweentwo75percentsubsidiariesofaparentcompany.ForadetaileddiscussionoftheUKgrouplossreliefregime,see,forexample,Tiley,supranote25,section49.6.

27 HughJ.AultandBrianJ.Arnold,Comparative Income Taxation: A Structural Analysis,3ded.(AlphenaandenRijn,theNetherlands:KluwerLawInternational,2010),at400.


Incontrast tothegeneralpolicyofrestrictingthegrouplossreliefregimetoresidentgroupsintheabovecountries,AustriaandDenmarkhaveextendedtheirgrouplossreliefregimestocoverlossesfromnon-residentsubsidiaries.

Group Contribution

Finland,Norway,andSwedenhaveagroupcontributionregime,underwhichaprofit-makinggroupmembercanmakeacontributiontoa loss-makingmemberwithinagroupofresidentcompanies.Thecontributionisdeductiblefortheformerandtaxabletothelatter,thuseffectivelyachievinganintragrouplossoffset.Thereisnorequirementtoeffectatransferofcashorproperty,andthecontributioncanbebookedasanintragrouploan.28

Group Pooling

CountrieswithagrouppoolingregimeincludeItaly(since2008),29Luxembourg,Mexico,30Poland,andPortugal.Underthisregime,agroupofresidentcompaniesisdefinedtobeataxableunitandcomputesitstaxableincomeorlossbyaggregatingindividualresultsofeachgroupmember.Anintragrouplossoffsetisthusachieved.Themajordifferencebetweenthisregimeandafullconsolidationsystemisthatgrouppoolingdoesnotallowtax-freeintragroupassettransfers.Thegrouppoolingregimeisthereforenotascomprehensiveasaconsolidationregime.

Organschaft

UnderGermany’sOrganschaft regime,31aparentcompanyand its subsidiarycanelecttohavethetaxableincomeorlossofthesubsidiarytransferredtotheparent

28 Masui,supranote20,at30;andDunjaEdvinsson,“NewRulesSeekToMakeGroupContributionRegimeEULawCompliant”(2010)50:7European Taxation329-32,at329.

29 Italyintroducedadomesticconsolidationregimein2004,allowingbothintragrouplossoffsetsandtax-freeassettransfers.However,intragroupassettransferswereabolishedin2008,thuschangingthesystemtoagrouppoolingregime.

30 InMexico,beginningin1991,non-residentsubsidiariescouldalsoparticipateingrouppooling:AageMichelsen,“GeneralReport,”inTax Treatment of Corporate Losses,supranote21,21-69,at57-58.However,few(ifany)taxpayerstookuptheoption,owingtoonerousrequirements,anditwassubsequentlyremoved:MarioCalderónDanel,“Mexico,”inTax Treatment of Corporate Losses,ibid.,629-51,at645-46.

31 ForabriefdiscussionoftheregimeinGermany,seeAultandArnold,supranote27,at401-2;andSimonPatrickLink,“Germany,”inGuglielmoMaisto,ed.,International and EC Tax Aspects of Groups of Companies,ECandInternationalTaxLawSeriesvol.4(Amsterdam:InternationalBureauofFiscalDocumentation,2008),301-25,at314-19.Before2005,AustriaalsohadanOrganschaftregime.Itwasreplacedbyanewgrouptaxationregime(Unternehmensgruppe)inresponsetocriticismsoftheOrganschaft—inparticular,theinabilitytooffsetcross-borderlosses:GeraldGahleitnerandStefanRatzinger,“Austria:InternationalGroupTaxation—AnOverviewofAustria’sNewTaxIncentive”(2005)45:11European Taxation509-14,at510.


company,thusachievinganintragrouplossoffsetattheparentcompanylevel.Aprofit-and-losspoolingagreement,whichmusthaveaminimumtermoffiveyears,isrequiredbetweentheparentandthesubsidiary.Undertheregime,asubsidiaryremainsasaseparateentityfortaxpurposesandisrequiredtofileataxreturnre-portingataxableincomeofnil.Thetaxableincomeorlossofthesubsidiaryis,ingeneral,calculatedonaseparateentitybasisandintragrouptransactions(includingintragroupassettransfers)arenoteliminated.32

Organschaftappliestonotonlyincometax,butalsotradetaxandvalue-addedtax.33 Furthermore, it pools both taxable income and losses of subsidiaries. It isthereforeregardedasrepresentingastrongerapplicationofthesingleentitycon-ceptthanthegrouptaxationregimesdescribedabove.

Regimesallowingintragrouplossoffsetsaremorecommonthanthoseallowingintragroupassettransfers.Inthe2004CongressreportoftheInternationalFiscalAssociation(IFA),ofthe20countriesthatreportedatleastoneregimeforeitherofthetaxattributes,19hadanintragrouplossoffsetregimewhileonly12hadanintra-groupassettransferregime.34AsurveyofthecountriesinDecember2009revealsnomaterialchangeinthispattern.35Mostcountrieshavethesameregimesasin2004.Theexceptionsnotedinclude:

n Austria,whichhadanOrganschaftregimein2004,replaceditwithanUnter-nehmensgrupperegimein2005,allowingcross-borderlossoffsets;

n Poland, which was not included in the 2004 report, has a group poolingregime;

n Malaysia,whichwasnotincludedinthe2004report,hasagroupreliefre-gime;and

n South Korea, which had no regime for either of the two tax attributes in2004,introducedaconsolidationregimein2010.

Infigure1,11countriesallowbothintragrouplossoffsetsandtax-freeintragroupassettransfers.Eightofthem—Australia,France,Italy,36Japan,theNetherlands,NewZealand,Spain,andtheUnitedStates—implementaconsolidationregimetodealcomprehensivelywithbothtaxattributes.Thesearethecountriesselectedforcomparisoninthisarticle.Onlythreecountries—Norway,Sweden,andtheUnitedKingdom—haveseparateregimescateringforthetwotaxattributes.

32 AnunusualfeatureoftheOrganschaftregimeisthatpre-groupinglossesofasubsidiaryaresuspended.Theyarenotavailabletotheparentcompany,butcanbeusedbythesubsidiaryafteritleavestheregime:Link,supranote31,at317.

33 Corporate Taxation Database,supranote18,searchunder“CountryAnalysis”—“Germany,”atparagraph8.1.

34 Masui,supranote20,at33-34.

35 ThesurveywasdoneonDecember10,2009ontheIBFDdatabases:seenote21fordetails.

36 Seesupranote29.


DE SIGN FE AT URE S O F CO NSO LIDATIO N REGIME S

Asaparticularformofgrouptaxationregime,consolidationregimesrequirethearticulationofthefollowingkeystructuralelements:

n applicationofthesingleentityconcept;n definitionofaneligiblecorporategroupandmandatoryversuselectiveap-

plicationoftheregime;n treatmentofpreconsolidationlosses;n treatmentofgrouplossesonexit;n treatmentofassetsonentry,duringconsolidation,andonexit;andn treatmentofintragroupshareholdingsonentry,duringconsolidation,and

onexit.

Thesestructuralelementsarediscussedinturnbelowwithreferencetotheirpres-enceintheconsolidationregimesoftheeightcountries.

Application of the Single Entity Concept

Theconsolidationregimesoftheeightselectedcountriesgenerallytreatcorporategroupsasonesingleentity.However,theydemonstratesomevariationintheextenttowhichthissingleentityconceptisapplied.Inparticular,thereappeartobethreedifferentapplicationsoftheconcept:(1)pooling,(2)attribution,and(3)absorption.

PoolingThepoolingsystemisthepredominantapplicationofthesingleentityconceptintheeightcountries;indeed,sixofthem—allexceptAustraliaandtheNetherlands—applythissystem.37Theparentcompanyanditssubsidiariesinaconsolidatedgrouparetreated,toalargeextent,asseparateentitiesforincometaxpurposes,withthetaxable incomeor lossof eachgroupmemberbeing computedon an individualbasis.Theseparateentityresultsarethenaggregatedatthegrouplevel—oftenad-justedforintragrouptransactions—toarriveatconsolidatedtaxableincomeorloss.

Themajoradvantageofthisapproachisitssimplicity.Mostoftheexistingtaxrulesforcompaniesarefoundedonthetraditionalseparateentitydoctrine,accord-ingtowhicheachcompanyistreatedasaseparatetaxpayer.Therulescanthereforebe applied comfortably to consolidated group members under a pooling systemthat,forthemostpart,preservesthisseparateentitytreatment.Theinteractionsbetweentheconsolidationregimeandotherincometaxregimesarealsosimpler,

37 GeneralTaxCode(GTC),France,articles223Aand223B;IncomeTaxCode(ITC),Italy,articles118and121;CorporationTaxAct(CTA),Japan,article4-2;IncomeTaxAct2007(ITA2007),NewZealand,sectionsFM3(1)and(2);CorporateIncomeTaxLaw(CITL),Spain,section65(1);andInternalRevenueCode(IRC),UnitedStates,IRCReg.sections1.1502-11(a)and1.1502-13.


sincetheformerembracestoalargeextenttheseparateentitydoctrinethatisthefundamentalunderlyingprincipleofthelatter.

Arelatedpolicyissuewithrespecttothepoolingsystemiswhethertheindivid-ual tax computations of a consolidated group member should be prepared on astand-aloneoragroupbasis.Forexample,anexpenditureofasubsidiarymayberegardedascapitalinnatureonastand-alonebasisandthusnotdeductible.How-ever, iftheitemisexaminedonagroupbasis,sothatfactsandcircumstancesofothergroupmembersaretakenintoconsideration,theexpendituremaybejudgedtohavearevenuecharacterandthusbecurrentlydeductible.

Fiveofthesixcountrieswithapoolingsystem(allexceptNewZealand)adoptthe stand-alonebasis.That is,eachsubsidiaryprepares its taxcomputationonastand-alonebasisbeforeaggregationatthegrouplevel.Taxabilityanddeductibilityofvarious itemsaregenerallydeterminedas if thesubsidiarywereastand-aloneunconsolidatedcompany.Thereareexceptionstothegeneralrule,butthestand-alonebasisisthepredominantapproach.

Incontrast,inNewZealand,eachcompanyinthegrouppreparesitstaxcompu-tationonagroupbasis.38Whencalculatingthetaxableincomeofagroupmemberfor consolidation purposes, measures are in place to ensure that a consolidatedgroupisgenerallyliabletoincometaxasifitwereasinglecompany.Thus,incomederivedbyagroupmember—whichwouldbenon-taxableonastand-alonebasis—istreatedastaxableiftheincomewouldbetaxabletotheconsolidatedgroupifthegroupwereacompany.Similarrulesapplytoexpenditures.

Inpractice,thestand-alonebasisimplieslowercompliancecoststhanthegroupbasis.Theindividualtaxcomputationofaconsolidatedcompanycanbepreparedasifthecompanyhadnotconsolidated.Ordinarytaxrulesforcompaniescanbeapplied,avoidingreassessmentof the taxabilityanddeductibilityofeach incomeandexpenseitemofaconsolidatedmemberinlightofthefactsandcircumstancesofothergroupmembers.

AttributionTheNetherlandsistheonlycountrythathasadoptedtheattributionoptionreferredtoas“fiscalunity.”39Assets,liabilities,andactivitiesofconsolidatedsubsidiariesareattributedtotheparentcompany.Inotherwords,incomeandexpensesofthesubsidi-ariesaredeemedtobethoseoftheparentcompany,thusachievingtheaggregationoftaxableincomeandlossesofthegroupmembers.Oneimportantfeatureofthisoptionisthatthesubsidiariescontinuetobetreatedasseparateentitiesforincometaxpurposes,anapproachthathasprovedtobeespeciallyimportantintheapplica-tionoftaxtreaties.40

38 ITA2007sectionsFM9,11,and12.

39 CorporateIncomeTaxLawof1969(CITL1969),article15(1).

40 RudolfJ.deVries,“Netherlands,”inGroup Taxation,supranote20,461-84,at467.Before2003,theNetherlandsadoptedanabsorptionmodelunderwhichaconsolidatedsubsidiarywas


AbsorptionAustraliaiscurrentlytheonlycountrythatappliestheabsorptionoption.41Underthissingleentityconcept,knownasthe“singleentityrule”(SER),consolidatedsub-sidiariesaredeemedtohavebecomedivisionsoftheparentcompanyandtohaveceasedtoexistasindividualcompaniesforincometaxpurposes.42Assetsofsubsidi-ariesaredeemedtobehelddirectlybytheparentcompany.Asaresult,unlikethetreatmentinmostotherconsolidationregimes,intragroupassettransferswithinaconsolidatedgrouparecompletelyignored.Thetransfersnotonlyhavenoimmedi-atetaximplications,butalsodonotrequirethepartiestotraceassetmovements,keeparecordofanydeferredgainorloss,orrecapturethegainorlosswheneitherthetransferororthetransfereeleavesthegroup.Moreover,preconsolidationlossesofajoiningsubsidiaryaretransferredtoandcanbeusedbytheparentcompany,with-outtheneedtocomputethesubsidiary’sstand-alonetaxableincomeeveryyear.43

Asdescribedbelow,thepricetopayfortheseapparentadvantagesishigh.Prob-lematicandhighlycomplexrules,knownasthe“tax-cost-setting”(TCS)rules,arerequiredtoadjustthecostbasesofassetsandsharesinajoiningsubsidiary.44Therulesonpreconsolidationlossesarealsocomplexandproblematic.45AnotherproblemassociatedwiththeSERisthedifficultinteractionsitcreatesbetweentheconsolida-tionregimeandotherpartsoftheincometaxsystembasedontheseparateentitydoctrine.TheAustralianexperiencesuggeststhatapplicationoftheSERrenderstheapplicationofothertaxregimestoconsolidatedgroupsmoredifficult.

Definition of an Eligible Corporate Group and Mandatory Versus Elective Application of the Regime

Consolidationregimestendtoberestrictedtoresidentcompaniesundercommoncontrol.Therestrictiontoresidentcompaniesreflectsthepoliticalrealitythatex-tendinggeneralresidencetaxingrightstonon-residentcompaniesisproblematic.Extending consolidation to non-resident entities also raises revenue and anti-avoidanceconcerns.Therefore,alloftheeightconsolidationregimesconsidered

treatedashavingbeen“absorbed”intotheparentcompany.However,theexactmeaningof“absorption”wascontroversial,especiallywithrespecttowhetherthesubsidiarywasstilleligiblefortreatybenefits.Thetaxlawwasamendedin2003toreplacetheabsorptionmodelwiththecurrentattributionmodel,inordertoremovethetreatyissue.

41 ThediscussionofAustralia’sconsolidationregimeinthisarticleisbasedonthemoredetailedanalysisinAntonyTing,“Australia’sConsolidationRegime:ARoadofNoReturn?”[2010]no.2British Tax Review162-93.

42 ITAA1997section701.1.

43 Theuserateofthetransferredlossesissubjecttothe“availablefraction”rules,whicharediscussedbelowundertheheading“TreatmentofPreconsolidationLosses.”

44 Seethediscussionbelowundertheheadings“TreatmentofAssets—OnEntry”and“TreatmentofIntragroupShareholdings—OnExit,”respectively.

45 Seethediscussionoftheserulesbelowundertheheading“TreatmentofPreconsolidationLosses.”


hereare, ingeneral, restricted toresidentcompanygroupsundercommoncon-trol.46Unincorporatedentitiesare, ingeneral,excludedfromconsolidation.TheAustralianregimeisanexceptiontothisgeneralrule;itallowstrustsandpartner-shipstobeincludedasmembersofaconsolidatedgroup.47Aswell,allofthefourEUcountriesextendthescopeofconsolidationtocoverpermanentestablishmentsof non-resident companies.48 This policy represents a response to the EU non-discriminationrulesandtocertaindecisionsoftheEuropeanCourtofJusticeontheapplicationofthoserules.49

Mostcountriesspecificallyexcludecertainentitiesfromconsolidation.Besidesnon-residents,themostcommonexclusionisforcompaniesthatarenotsubjecttothenormalcorporateincometaxrates—forexample,thosesubjecttoareducedtaxrateorexemptfromtax.50Companiesinbankruptcyandliquidationarealsooftenexcludedfromaconsolidatedgroup.51BothNewZealandandtheUnitedStateshavespecificrestrictionsoncompanies thatare taxedasflowthroughentities. Inparticular,NewZealandonlyallowssuchcompanies(knownas“qualifyingcom-panies”)toformaconsolidatedgroupwitheachother.52FlowthroughentitiesintheUnitedStates(forexample,Scorporations)arenoteligibletojoinanyconsolidatedgroup.53

46 Exceptionstothisresidencerequirementarerareingrouptaxationregimes.Forinstance,FranceandItalypermitworldwidegrouppooling,butithasverylimiteduseinpractice.Forabriefdiscussion,seeCorporate Taxation Database,supranote18,searchunder“CountryAnalysis”—“France”and“Italy.”

47 ITAA1997sections703.15(2),tableitem2,and719.10(1)(b).Somecountriesdoallowconsolidationofcertainunincorporatedentitiesthataretaxedascorporations—forexample,limitedpartnershipsinItaly,NewZealand,andSpain(aswellasAustralia).Ananalysisoftheissuesrelatingtotheinclusionofunincorporatedentitiesinaconsolidatedgroupisbeyondthescopeofthisarticle.Forfurtherdiscussion,seeTing,supranote19,at324-25.

48 ForabriefsurveyoftheEUcountriesthatallowpermanentestablishmentsintheirgroupingregimes,seeMarcoAdda,“CanaPermanentEstablishmentBea‘LegitimateHeir’inaDomesticConsolidatedTaxRegime?”(2008)48:5European Taxation238-44,at239-40.SeealsoMasui,supranote20,at53-55and58-62.

49 Forexample,since2003,theNetherlandshasallowedapermanentestablishmentofanon-residentcompanytobeeithertheheadentityorasubsidiarymemberofaconsolidatedgroup:CITL1969article15(4).AlsoseedeVries,supranote40,at475.

50 CountriesthathavethisexclusionincludeAustralia(ITAA1997section703.15(2)),Italy(ITCarticle126(1)),Japan(CTAarticle4-2),NewZealand(ITA2007sectionFM31(1)(c)),Spain(CITLsection67(4)),andtheUnitedStates(IRCsections1504(b)(1)and(2)).Theexclusioncoverscompaniesthataresubjecttospecifictaxregimes,suchasinsurancecompaniesandspecialinvestmententities.

51 CountriesthatexcludethesecompaniesincludeItaly(ITCarticle126(2)),Japan(CTAarticle4-2),andSpain(CITLsection67(4)(b)).

52 ITA2007sectionFM31(2)(a).Miningcompaniesaresubjecttosimilarrestrictions:ITA2007sectionFM31(2)(b).TheUnitedStateshassimilarrulesforinsurancecompanies:IRCsection1504(c).

53 IRCsection1504(b)(8).


Inpractice,itisnoteasytoprovideasimpleandeffectivedefinitionofcommoncontrol.Abright-linedefinition—forexample, specificationof aminimumper-centageofvotingrights—maybesimple,butmaynotbeeffective.Controlcanbeestablishedbyvariousmeans, suchasoptions andconvertible securities, controloverthecompositionoftheboardofdirectorsorkeyexecutives,orspecialshare-holders’agreements.54Amoregeneraldefinition—forexample,defactocontrol—may be more effective in capturing a control relationship, but is not easy toadminister, being “too uncertain and unpredictable.”55 Most countries adopt abright-lineoptionbasedonshareownership,butprotectitfromabusewithsupple-mentarytestsoranti-avoidanceprovisions.

Withrespecttotheownershipthreshold,thecomparativeanalysisoftheeightcountries reveals two different specifications: (1) substantially 100 percent and(2) substantially less than 100 percent. Five of the eight countries—Australia,France,Japan,theNetherlands,andNewZealand—useasubstantially100percentownershipstandard.56Specifically,FranceandtheNetherlandshavea95percentthreshold;theotherthreecountries,100percent.ThethresholdintheNetherlandswas100percentbefore2003.The95percentthresholdisintendedtoaccommo-dateemployeeshareschemesorsmallshareholdingsthattheparentcompanyfailstopurchaseinanacquisition.

Ahighownershipthresholdcanbejustifiedonanumberofbases.Perhapsmostimportantly,asubsidiaryunderthecontrolofaparentcompanyshouldbetreatedina similarmannerasabranchof theparent.Realizationof thisconsistencyoftreatmentrequiresthataparentcompanymustwhollyownthesubsidiary,withnoallowanceforminorityinterests.Inotherwords,thethresholdshouldbe100per-cent.57Moreover,sincelossoffsetamonggroupmembersislikelytohaveanadverseimpactonrevenue,governmentsmaytrytominimizetheimpactbyrestrictingaccesstotheregimethroughtheapplicationofahigherthreshold.Forexample,theDutchgovernmenthasbeenreluctanttolowerthe95percentthresholdbecauseofrevenueconcerns.58Furthermore,thepresenceofaminorityinterestintroducescomplexityintoconsolidationregimes.Forthisreason,duringthedesignphaseoftheAustralian

54 Foradetailedanalysisofthedefinitionofcontrolindifferentregimes,seeAntonyTing,“Definitionof‘Control’UndertheConsolidationandControlledForeignCompanyRegimes:AComparisonBetweenAustralia,NewZealandandtheUnitedStates”(2006)12:1New Zealand Journal of Taxation Law and Policy37-60.

55 BrianJ.Arnold,The Taxation of Controlled Foreign Corporations: An International Comparison,CanadianTaxPaperno.78(Toronto:CanadianTaxFoundation,1986),at417.

56 ITAA1997section703.15(2)(Australia),GTCarticle223A(France),CTAarticle4-2( Japan),CITL1969article15(1)(theNetherlands),andITA2007sectionFM35(1)(NewZealand).

57 Manycountriesallowasmallpercentagetobeownedbyemployeesthroughemployeeshareschemes.Thispolicyispragmaticandreasonable,sincethiskindofholdingingeneralwouldnotsignificantlyaffectthecontroloftheparentcompanyoverthesubsidiary.

58 DeVries,supranote40,at471.


consolidationregime,USofficialsspecificallywarnedtheirAustraliancounterpartsnottoallowminorityinterestsinsubsidiariesastheUnitedStatesdoes.59

Interestingly,itseemsthatcorporategroupsinpracticedonothavemajorobjec-tionstotheuseofahighownershipthresholdtodetermineeligibilityforconsolidatedtreatment.Giventhesignificantbenefitoflossoffsetsandtax-freeassettransfers,itisreasonabletoexpectastrictownershiprequirementtoscreenforeligiblegroupmembers. Furthermore, in practice, most subsidiaries of corporate groups arewhollyownedforcommercialreasons.60Ahighthresholdthereforedoesnotposeasignificantobstacletoconsolidation.

Nonetheless,threeoftheeightcountriesuseanownershipthresholdsubstan-tiallylowerthan100percent:Italy,50percent;Spain,75percent;andtheUnitedStates,80percent.61TheunusuallylowthresholdinItalymaybeduetohistoricalreasons.62Beforetheconsolidationregimewasintroduced,Italyhadan“implicit”grouptaxationregime,knownasthe“excessimputationcreditsurrender”regime.Inbroadterms,theregimeallowedintragrouplossutilizationbysurrenderingex-cesstaxcreditofalosscompanytoprofitablerelatedcompanies.Theownershipthresholdunderthisregimewas50percent,possibly(atleastinpart)accountingfortheuseofthesamelowthresholdintheconsolidationregime.

InSpain, theownership thresholdhasfluctuated.63 Initially set at 50percentwhentheconsolidationregimewasintroducedin1977,thethresholdwassubse-quentlyincreasedto90percentin1982,andthenreducedto75percentin2002.TheownershipthresholdundertheUSconsolidationregimehasalsofluctuated.64Whentheregimewasfirstintroducedin1917,itrequiredthattheparentcompanyown “substantially all” of the shares of another company.65 The threshold was

59 GeoffreyLehmann,“AnAssessmentofAustralia’sTaxConsolidationRegime,”inGeoffreyLehmann,ed.,Business Tax Reform: Meet the Critics,AustralianTaxResearchFoundationConferenceSeriesno.24(Sydney:AustralianTaxResearchFoundation,2007),at277.

60 StatisticsoncorporategroupsinCanadashowthatbetween2005and2008,onaverageabout85percentofthecorporategroupscontainedcorporationswith100percentownership:consultationpaper,supranote2,at27.Similarly,inAustralia,itwasfoundthatover90percentofsubsidiariesinlistedcorporategroupswerewhollyownedsubsidiaries:IanM.RamsayandG.P.Stapledon,“CorporateGroupsinAustralia”(2001)29:1Australian Business Law Review7-32.

61 ITCarticles117and120(Italy),CITLsection67(2)(b)(Spain),andIRCsection1504(a)(1)(B)(ii)(UnitedStates).

62 MassimoGiaconia,“Italy,”inGroup Taxation,supranote20,369-91,at375-76.

63 MaríaAmparoGrauRuiz,“Spain,”inGroup Taxation,ibid.,609-32,at615;andJoséIgnacioGarciaMuniozguren,“Spain:NewCorporateTaxMeasuresfor2002”(2002)42:3European Taxation138-40,at139.

64 ForadetaileddiscussionofthehistoricaldevelopmentoftheownershiprequirementintheUnitedStates,seeKevinM.Hennessey,RichardYates,JamesBanks,andPatriciaPellervo,The Consolidated Tax Return: Principles, Practice, Planning,6thed.(NewYork:RIA)(looseleaf ),chapter1.

65 The1917regimewasmandatoryandbasicallyananti-avoidancemeasure.Consequently,“substantiallyall”didnotmeanafixedpercentage;instead,ownershipwasdeterminedonthebasisofthefactsineachparticularcase:ibid.,atparagraph1.04[2][a].


changedto95percentofvotingstockin1924,andwasagainamendedin1942torequireownershipof95percentof thevotingpowerofall classesof sharesand95percentofnon-votingshares.Thethresholdwasthenreducedto80percentin1954asameanstoallowmorecompaniestoconsolidate.Themajorproblemwiththislowerthresholdisthepresenceofminorityinterestsinsubsidiaries(asdiscussedabove).TheUSexperiencestronglysuggeststhatthepresenceofasignificantmin-orityinterestshouldbeavoided.66

Theownershipthresholdundereachoftheeightconsolidationregimesisappliedonthebasisofsomespecificationofshareownership.Atoneextreme,AustraliaandSpainadoptaformalisticapproachandapplythespecifiedthresholdprimarilyonthebasisoflegalownership.Theabsenceofconstructiveownershiprulesthataccountforthird-partyarrangementsaffectingvotingrightsandeconomicexposureother-wiseassociatedwithshareownershipprovidessubstantialpotentialforabuse.67

Incontrast,othercountrieshavemorerobustownershiprequirements in thesensethatarrangementsaffectingeconomicownershipofsharesandtheabilitytoexercisevotingrightsarerelevant.France’sownershipthresholdrequires95percentholdingsinbothsharecapitalandvotingrightsinthesubsidiary.68TheNetherlands’ownershipthresholdrequires95percentownershipinbothsharecapitaland“rightstoprofits,”69whileItaly’s50percentownershiprequirementappliestoallthreefac-torsofsharecapital,votingrights,andrightstoprofits.70Japanprotectsitssharecapitalthresholdbyaspecificanti-avoidanceprovisiontargetingabuseofitscon-solidationregime.71

Thevotingrightfactorisdesignedtodefineacontrolrelationshipbetweentheparentcompanyanditssubsidiaries.InadditiontoFranceandItaly,NewZealand72

66 Lehmann,supranote59,at277.

67 Forexample,inAustralia,awhollyownedsubsidiarymayescapeconsolidationtreatmentifathirdpartyholdssomeofitsnon-votingpreferenceshares,eventhoughthesubsidiaryisfullycontrolledbytheparentcompany.Thisviolatesthe“all-in”principleoftheAustralianconsolidationregime.Alternatively,evenifaparentcompanyholdsallthesharesinasubsidiary,thelattermaybeeffectivelycontrolledbyathirdpartythatholdsoptionsoverallthesharesinthesubsidiary.Inthatcase,theparentcompanymaystillconsolidatewiththesubsidiary,eventhoughthelatterisinsubstancecontrolledbyanotherparty.Incontrast,bothNewZealandandtheUnitedStateshavespecialprovisionstodealwithoptionsandotherfinancialinstrumentsintheirconsolidationregimes.

68 GTCarticle223A.SeealsoNicolasMessage,“France,”inInternational and EC Tax Aspects of Groups of Companies,supranote31,277-99,at283.

69 CITL1969article15(1).SeealsodeVries,supranote40,at469;andJohannMüller,The Netherlands in International Tax Planning(Amsterdam:InternationalBureauofFiscalDocumentation,2005),at248.

70 ITCarticles117and120;ItalianCivilCode,articles2346and2359.

71 CTAarticle132-3.

72 ITA2007sectionIC4.


and the United States73 also adopt this factor in their ownership requirements.WhileFranceandItalyadoptthevotingrightfactorinconjunctionwiththesharecapitalfactor,NewZealandandtheUnitedStatesdonotstipulatesharecapitalintheirownershiprequirements.Instead,theybasetheirownershiptestsprimarilyonvotingrights,supplementedbysharevalueasananti-avoidancemeasure.

Alloftheeightselectedcountriesallowcorporategroupstoelecttoconsolidate;infact,noneoftheseconsolidationregimesismandatory.However,theeightcoun-triesaredividedontheissueofwhethertheelectiontoconsolidateisrevocable.Threecountries—theNetherlands,74NewZealand,75andSpain76—allowagrouptorevoketheelection.Fourcountries—France,Italy,Japan,andtheUnitedStates—donot,ingeneral,allowrevocation.77TheelectiontoconsolidateinJapanandtheUnitedStatesisforanindefiniteterm.Incontrast,therelativelyshorttermofanelectioninFrance(fiveyears)andinItaly(threeyears)representsalessrigorousanti-avoidancepolicyobjective.Theremainingcountry,Australia,doesnothaveaconsistentpolicyonthisissue.Anelectiontoconsolidateisirrevocablefordomes-ticallyownedgroups78buteffectivelyrevocableforforeign-ownedgroups.79Thedivergentpoliciesamongtheeightcountriesonthiskeystructuralelementillus-tratethedifficultcompromisesthatgovernmentshavetomakebetweencompetingpolicyobjectives.Thepolicychoicebetweenrevocableand irrevocableelectionsdependsonthetradeoffbetweenanti-avoidance(whichwouldsuggestanirrevo-cableelection)andflexibility(whichwouldsuggestthattheelectionberevocable).

Giventheassociatedbenefits,mosteligiblecorporategroupselectconsolidatedtreatment.Anotableexceptionissmallandmedium-sizedenterprises,whichseemtohaveatendencynottoelectconsolidatedtreatmentbecauseofperceivedcompliancecosts.80Theavailabilityofconsolidatedtreatmentonanelectivebasisforeligible

73 IRCsection1504(a)(1)(B)(ii). 74 CITL1969article15(6).Ananti-avoidanceprovisionpreventsasubsidiaryfromjoiningand

leavingaconsolidatedgroupinthesameyear:CITL1969article15(7). 75 ITA2007sectionFM37.NewZealand’srulesofelectiontoconsolidateareveryflexible.They

notonlyallowagrouptoelecttoconsolidate,butalsoallowagroupmembertoelecttoleaveaconsolidatedgroup.Therefore,itisunnecessaryforthelawtostipulatewhetherthechoicetoconsolidateisrevocableornot.

76 CITLsection70(5). 77 GTCarticle223A(France),ITCarticle117(3)(Italy),CTAarticle4-5(3)( Japan),andIRC

Reg.section1.1502-75(a)(2)(UnitedStates). 78 ITAA1997section703.50. 79 ITAA1997sections719.60and719.80. 80 Forexample,inAustralia,morethan90percentoflargecorporategroups(thatis,havinga

groupturnoverofmorethanA$1billion)haveelectedtoconsolidate,whilelessthan30percentofsmallcorporategroups(havingagroupturnoveroflessthanA$10million)haveformedaconsolidatedgroup:Australia,TheBoardofTaxation,Post-Implementation Review into Certain Aspects of the Consolidation Regime,DiscussionPaper(Canberra:CommonwealthofAustralia,2009)(www.taxboard.gov.au/content/reviews_and_consultations/aspects_of_the_consolidation_regime/discussion_paper/consolidation_regime_discussion_paper.pdf ),at54.


corporategroupsiscontrarytotheapparentpreferenceamongCanada’sprovincestohavesucharegimeapplyonamandatorybasis.Itappearsthatthereasonforthispreferenceistoensurethatcorporategroupsthatmeettherequirementsforconsoli-datedtreatmentcannotescapeapplicationoftheregimeandengageininterprovincialincomeshifting.81

Themorecommon issueofelectivityunder theconsolidationregimesof theeightselectedcountriesconcernstheinclusionofalloronlysomeoftheotherwiseeligiblemembersinaconsolidatedgroup.Indeed,inclusionofotherwiseeligiblecompanieswithinaconsolidatedgroupmaybeelectiveormandatory.Thecompara-tiveanalysisoftheeightcountriesrevealsnopredominantpolicyonthisstructuralelement.Fourcountries—France,82Italy,83theNetherlands,84andNewZealand85—allowcherry-pickingofsubsidiaries.Threecountries—Japan,Spain,andtheUnitedStates—imposetheall-inrule.86Australiadoesnothaveaconsistentpolicyinthisrespect.Itimposestheall-inrulefordomesticallyownedconsolidatedgroups,butallowscherry-pickingofsubgroupsownedbyforeignparentcompanies.87

Itisdifficulttodeterminewhichapproachisbetter.Thediversepolicychoicesamongtheeightcountriesagainreflectthedifficultcompromisesthatgovernmentshavetomakebetweencompetingpolicyobjectives.Ontheonehand,theall-inruleservesananti-avoidanceobjectivebyinsistingthat,wheretheelectiontoconsoli-dateismade,alleligiblemembersofthecorporategroupmustjointheconsolidatedgroup.Ontheotherhand,allowingcherry-pickingprovidesflexibilityoftreatment.

81 See,forexample,Ontario,MinistryofFinance,supranote11,at7.

82 FrankLeMentec,“FrenchTaxGroupRegimes,”inThe European Union and Group Relief: How Will the Marks & Spencer Case Impact?BNAInternationalSpecialReport(London:BNAInternational,2006),at3.Thisflexiblepolicyhasbeeninplacesincetheconsolidationregimewasintroducedin1988:PierreKnoepflerandJackAnderson,“France:TowardsaRealGroupTaxHarmonization”(1988)28:6European Taxation171-77,at172.

83 Giaconia,supranote62,at379.

84 ThebasicbuildingblockofaconsolidatedgroupintheNetherlandsisdefinedtobebetweentwocompanies,aparentanditssubsidiary:CITL1969article15.

85 Anytwo or moreeligiblecompaniesofawhollyownedgroupmayelecttoformaconsolidatedgroup:ITA2007sectionFM35(1).

86 CTAarticle4-2( Japan),CITLsection67(1)(Spain),andIRCReg.sections1.1502-75(a)and(e)(UnitedStates).

87 Australia’sall-inpolicyfordomesticallyownedgroupsisachievedquiteindirectlybythecombinationofseveralprovisions.ITAA1997section703.10definesa“consolidatablegroup”asconsistingoftheheadcompanyandallthesubsidiarymembersofthegroup.Section703.5(1)(a)inturndefinesa“consolidatedgroup”ascomingintoexistenceupontheelectionbytheheadcompanytoconsolidatetheconsolidatablegroup.Newsubsidiarymembersacquiredbyanexistingconsolidatedgroupmustalsobeincludedintheconsolidationpursuanttosection703.5(3).Thecontrastingpolicyforforeign-ownedgroups,knownas“MEC”(multipleentryconsolidated)groups,iscontainedinsection719.5.


Treatment of Preconsolidation Losses

Onentryofacompanyintoaconsolidatedgroup,thetreatmentofpreconsolidationlosses incurredbythecompanymustbedetermined.88Thecomparativeanalysisrevealsthreealternativetreatmentsofsuchlosses:(1)quarantine,(2)transfertotheparent,and(3)cancellation.89

QuarantineUnderthequarantineapproach,preconsolidationlossesincurredbyajoiningsub-sidiaryarequarantinedandareavailableforoffsetonlyagainstprofitsgeneratedbythatsubsidiary.Thepolicyrationaleforquarantineisthatsincethepreconsolida-tion losseswere incurredwhenthesubsidiarywas treatedasaseparate taxpayer,thoselossesshouldremainwiththesubsidiaryandbeavailableonlyforoffsetagainstitsfuturetaxableincome.Aprerequisiteforthispolicyisthatthesubsidiarymain-tainsitsseparateidentityforincometaxpurposesduringconsolidation.Insixoftheeightcountries—allexceptAustraliaandJapan—preconsolidationlossesofajoiningsubsidiaryarequarantined.90AllofthesesixcountriesexcepttheNetherlandsadoptthepoolingsystem,whichisalogicalcompanionofthequarantinepolicy.

Arelatedissueiswhetherthepreconsolidationlossesshouldbeappliedbeforeor after aggregation of the group members’ taxable income and losses. The sixcountries that adopt the quarantine approach are divided between two differentversionsof itsapplication:offsetbeforeaggregationandoffsetafteraggregation.Threecountries—France,Italy,andNewZealand—adopttheoffsetbeforeaggre-gationoption.Underthisoption,preconsolidationlossesofasubsidiaryareappliedfirsttooffsettaxableincomeofthecompany.Remainingtaxableincome(ifany)isthenpooledwiththeresultsofothergroupmemberstoarriveatthegroup’scon-solidatedtaxableincomeorloss.

Theadvantageofthispolicyoptionisitssimplicity:thepreconsolidationlossesaredeterminedandcarriedforwardonthebasisofthegeneralrulesapplicableto

88 Theamountinvolvedisoftensubstantial.InCanada,thebalancesofunutilizednon-capitallossesandcapitallossesin2008were$206billionand$78billion,respectively:consultationpaper,supranote2,at23.Similarly,theAustraliangovernmentestimatedthattheamountofcarryforwardlossesinentitiesbeforetheintroductionoftheconsolidationregimewasintheorderofA$66billion:ReviewofBusinessTaxation,A Platform for Consultation: Building on a Strong Foundation(Canberra:CommonwealthofAustralia,1999),vol.2,at561.

89 Theoretically,anotheralternativepolicyistosuspendpreconsolidationlossesofasubsidiaryduringconsolidation,andrevertthembacktothecompanywhenitleavestheconsolidatedgroup.However,inpractice,noneoftheeightcountriesadoptthispolicy,perhapsbecauseoftheundesirabledeferraloflossutilization,andthepossibilityofeitherlossexpiry(unlesslossescanbecarriedforwardindefinitelyinacountry)orunusablelossesifthesubsidiaryneverleavesthegroup.Germanyisarareexceptionamonggrouptaxationregimesinadoptingthesuspensionpolicy:Link,supranote31,at317.

90 GTCarticle223I(France),ITCarticle118(2)(Italy),CITL1969articles15ae(1)(a)and15ah(theNetherlands),ITA2007sectionsID2(2)and3(NewZealand),CITLsection74(2)(Spain),andIRCReg.1.1502-21(c)(1)(i)(UnitedStates).


companylosses.Thisoptionmayalsohaveimplicationsincountriesthatimposeatimelimitonthecarryoveroflosses.Ascomparedwiththealternativeapproach,offsetbeforeaggregationprovidesa fasterrateofuseofpreconsolidation losses,thusreducingtheriskoflossexpiry—thoughthismaynotbeasignificantissueifthelosscarryforwardperiodislong.

TheNetherlands,Spain,andtheUnitedStatesadoptthereverseorderunderanoffset-after-aggregationapproach.Preconsolidationlossesofasubsidiaryareavail-able for offset only after the taxable income of the company is aggregated withothergroupmembers’results.Thisapproachisrelativelycomplex.Experienceofthethreecountriessuggeststhattheapportionmentrulesallocatingthegroup’snettaxableincometoaparticularsubsidiarytendtobecomplicated.91Anotherpoten-tialproblemistheriskoflossexpiry.Preconsolidationlossescanbeusedonlyifthegroupasawholehasnettaxableincome.Allthreeofthecountriesadoptingthispolicyoptionhavelosscarryforwardtimelimits;however,thecarryforwardperiodisrelativelylong.92Itthusappearsthattheriskoflossexpiryisnotamajorconcerntopolicymakersinthesecountries.

Transfer to the ParentUnderthesecondofthethreealternativetreatments,preconsolidationlossesofasubsidiaryaretransferredtotheparentcompanyuponconsolidation.Thepolicyispremisedonastrongsingleentityconcept,underwhichsubsidiariesaredeemedtohaveceasedtoexistasseparateentitiesforincometaxpurposes.Whentheirpre-consolidationlossesaretransferredtotheparentcompany,theyareavailableforoffsetagainsttheconsolidatedgroup’staxableincome.

Australiaistheonlycountrythathasadoptedthisapproach.Underitsstrongsingleentityrule(SER),subsidiariesaredeemedtohaveceasedtoexistduringcon-solidation.Thisdeemed“disappearance”ofsubsidiariesmeansthatthequarantineapproachisnotanoption,sinceittypicallyrestrictsthelossutilizationratebyal-lowingoffsetofpreconsolidationlossesonlyagainsttaxableincomegeneratedbythesamesubsidiary.Moreover,theSERassumesthatthedeemeddisappearanceofsubsidiariesduringconsolidationmeansthatitisimpossibletocalculateasubsidi-ary’staxableincomeonastand-alonebasis.93

91 Forinstance,intheNetherlandstheallocationofthegroupprofitattributabletoaparticularsubsidiaryissubjecttoasetofcomplexprofit-splitrules.Foradetaileddiscussionoftherules,seeMüller,supranote69,at263-68.IntheUnitedStates,theallocationissubjecttothehighlycomplex“separatereturnlimitationyear”rules.Foradetaileddiscussionoftherules,see,forexample,Hennesseyetal.,supranote64,section8.05.

92 Thetimelimitsare9yearsintheNetherlands,15yearsinSpain,and20yearsintheUnitedStates.

93 A Platform for Consultation,supranote88,at563.Itisdoubtfulthatthisassumptioniscorrect.Experienceinothercountriesthatadoptthequarantinepolicystronglysuggeststhatinpracticeitisstillpossibletocomputeasubsidiary’sprofitandlossonastand-alonebasisduringconsolidation.


Australianpolicymakersnonethelessfacedanimportantconstraintinthedesignoftherulesonpreconsolidationlosses.Beforetheconsolidationregimewasintro-ducedin2002,Australiahadagrouplossregime,which,inbroadterms,allowedintragrouplosstransfersamongwhollyownedresidentcompanies.94Thisplacedconsiderablepressureonpolicymakerstocomeupwithamodelthatwouldbeatleastasattractiveastheexistingregime.Thepressurewasintensifiedbythefactthatmostcompanieswouldbedeniedaccesstotheformergrouplossreliefregimeaftertheintroductionoftheconsolidationregime.95Australia’ssolutionwastoallowthetransferofpreconsolidationlossesofsubsidiariestotheparentcompanyuponconsolidation,96andtoprovidethatthetransferisnotreversedwhenthesubsidiaryleavesthegroup.

Thepolicyoftransferringpreconsolidationlossestoaparentcompanypresentedaseriousproblemtothegovernment:unrestrictedutilizationofsuchtransferredlosseswouldhaveasignificantrevenueimpact.97Theresponsewastoadoptanin-ventedconcept,theavailablefraction(AF).98Inbroadterms,preconsolidationlossesofajoiningsubsidiaryareassignedanAFthatiscalculatedastheratioofthemarketvalueofthesubsidiarytothatoftheconsolidatedgrouponentry.Themaximumamountofthelossesthattheparentcompanymayuseinayearisequaltotheprod-uctoftheAFandthegroup’sconsolidatedprofitsforthatyear.

TheAustraliangovernmentclaimsthattheobjectiveoftheAFrulesistoreflectthelossuseratethatwouldapplyifthesubsidiaryhadnotjoinedtheconsolidatedgroup.However,thequestionableuseofmarketvalueasaproxyfortheactualtaxpositionsofacompany,andthefailuretoadjustthemarketvaluationsonaregularbasis,maketheAFaveryroughproxy.Nevertheless,ifoneacceptsthatthemostim-portantobjectiveoftheAFrulesistorestricttheuserateofpreconsolidationlosses,theirmechanicaloperationarguablyservesthatpurposewell.ThisisespeciallysogiventhattheAFsofagroupcanneverbeadjustedupwardunderadjustmentevents.99

94 ITAA1997division170.Upontheintroductionoftheconsolidationregime,thescopeofthegrouplossreliefregimewassubstantiallycurtailed;currently,itisapplicableonlytoforeignbankgroupswithAustralianbranchesandsubsidiaries.

95 NewZealandfacedasimilarconstraintinthedesignofitsconsolidationregimebutcameupwithamoreflexibleandtaxpayer-friendlyapproach,inwhichconsolidationandgrouplossreliefregimescoexist.

96 ITAA1997section707.120.Thetransferissubjecttoamodifiedcontinuity-of-ownershiptestandasamebusinesstest.Adetaileddiscussionofthesetestsisbeyondthescopeofthisarticle.

97 Atthetime,itwasestimatedthattherewasa“largestoreofpastlossesinentities...approximately$44.6billionrevenuelossesand$21.7billioncapitallosses”:A Platform for Consultation,supranote88,at561.Toputthenumbersintoperspective,theaggregatetaxableincomeofcompaniesinthe1999-2000incomeyearwas$129billion:AustralianTaxOffice,Tax Statistics 1999-2000(Canberra:CommonwealthofAustralia,2002).

98 ITAA1997division707.

99 Thisisclearlythegovernment’sintention:Australia,TreasuryDepartment,New Business Tax System (Consolidation) and Other Measures Bill (No. 1) 2002: Explanatory Memorandum(Canberra:CommonwealthofAustralia,2002),atparagraph8.5.


ItmaybemoreaccuratetodescribetheAFrulesassimplyaroughandarbitrarymeasuretoallocateagroup’staxableincometoindividualgroupmembersforthepurposeofcontrollingtheuseratesofpreconsolidationlosses.

Ironically,anotheradvantageoftheAFrulesisaresultofthearbitrarynatureoftheAF.Incontrasttocountriesthathaveadoptedaquarantinepolicy,specificanti-avoidance provisions are not required in Australia to prevent abuses of the lossoffsetrules.ItalyandtheNetherlands,forexample,havefounditnecessarytoenactprovisionstopreventaccelerationoftheuseofpreconsolidationlossesbyanintra-grouptransferofassetswithhiddenreserves.100ThiskindofprovisionisunnecessaryundertheAFmodelsincetheutilizationrateisnotdependentonasubsidiary’sin-dividualtaxableincome.

Evenso,itisdoubtfulwhetherthisadvantageissufficienttojustifytheproblem-aticAFrules,theoutcomeofwhichisdetachedfromtheactualcircumstancesofacompany.Asnotedabove,theAFofpreconsolidationlossesofasubsidiaryisdeter-minedonentry,onthebasisoftheprevailingmarketvaluesofthecompanyandthegroup.ThevalueoftheAFdeterminedatthatpointintimeisnotsubjecttoregularrevaluation,even though themarketvaluesof thecompanyand thegroupmostlikelywouldchangeovertime.Evenifthesubsidiarysuccessfullyturnsaroundandmakesasubstantialprofitduringconsolidation,thetransferredlossesarestillsub-ject to theoldAF limitfixedat the joining time.Theoutcome is thereforeverydifferent from that under the more common quarantine policy. The method ofcalculatingtheAFalsoimpliesthattheoutcomewouldbeverydifferentifthesub-sidiaryhadnotjoinedaconsolidatedcorporategroup.Finally,theheavyrelianceonmarketvaluationsofsubsidiariesandthegroupimplieshighcompliancecostsfortaxpayersandmonitoringcostsfortheAustralianTaxationOffice(ATO).

CancellationInJapan,generallypreconsolidationlossesofasubsidiaryarecancelleduponentryintoaconsolidatedgroup.101Thisharshpolicyisdrivenprimarilybytax-avoidanceconcerns.Infact,thegovernmentdidnotappeartobetooenthusiasticaboutintro-ducingaconsolidationregime.Thisreluctanceisimplicitinotheraspectsoftheregime,includingthedeemeddisposalofcertainassetsatmarketvalueatjoiningtime,anda2percentconsolidationsurchargeinadditiontothenormalcorporatetaxrate(imposedforthefirsttwoyearsfollowingtheintroductionoftheregime).

The cancellation approach is simple, avoiding the need for complex rules tocontroltheuserateofpreconsolidationlosses.However,thetaxoutcomeforanunconsolidatedcompanywithunusedlossesisverydifferentonceitjoinsaconsoli-datedgroup.Toavoidsuchdiscontinuityintaxtreatment,theothercountriesallowtheoffset of preconsolidation lossesof a subsidiary at a rate approximating thatwhichwouldapplyifthecompanyhadnotconsolidated.

100 ITCarticle123(2)(Italy),andCITL1969article15ae(2)(theNetherlands).

101 CTAarticle81-9(1).


Thecancellationofpreconsolidation lossesof joining subsidiarieshasbeen amajordisincentivetoconsolidationforcorporategroupsinJapanthatwouldqualifytoelectconsolidatedtreatment.ItisthereforenotsurprisingthattheJapanesegov-ernmenthasrecentlyrelaxedtherulesunderits2010taxreform.EffectiveApril1,2010,preconsolidationlossesofajoiningsubsidiaryarenotcancelledbutaresub-jecttoquarantineprovidedthat,amongotherthings,thesubsidiaryhasbeenwhollyownedbytheparentcompanyforfiveyearsbeforethejoiningtime.102

Treatment of Group Losses on Exit

Themostsignificantadvantageofconsolidationistheabilitytooffsettaxablein-comeandlossesamongconsolidatedgroupmembers.Allof theeightcountriesallowintragroupoffsetoflossesincurredbygroupmembersduringconsolidation.However,thetreatmentofgrouplossesonexit(thatis,whenasubsidiaryleavesaconsolidatedgroup)ismorevaried.Therearetwomainpolicyapproachestothisdesignissue:(1)staywiththegroupand(2)apportionment.

Under the stay-with-the-group approach, group losses stay with the consoli-datedgroupevenifaleavingsubsidiaryhascontributedtothoselosses.Thisoptionissimpletooperatesincethereisnoneedforcomplexallocationrulestoapportiontheconsolidatedgrouplossestoaleavingsubsidiary.Fivecountrieshaveadoptedthisoption—Australia,France,Italy,theNetherlands,andNewZealand.103How-ever,ItalyandtheNetherlandsprovideanoptiontoapplyforapportionmentofthegroup’sconsolidatedlossestoaleavingsubsidiary.Thisapportionmentoptionincreasesthecomplexityoftheregime.

InJapan,Spain,andtheUnitedStates,agroup’sconsolidatedlossesareallocatedtoaleavingsubsidiary.104Thisoptionrequirescomplexallocationrulestoapportiontheconsolidatedgroup’slossestotheleavingsubsidiary.

Treatment of Assets

On EntryThetax-freetransferofassetsamongconsolidatedgroupmembersisanothersig-nificantadvantageofconsolidation.Taxpolicymakersmustdecide,however,asaseparateissue,howtotreattheassetsofacompanyonentryintoaconsolidatedgroup.Thecomparativeanalysisof theeight selectedcountries reveals,broadly,three alternative approaches to the treatment of assets (other than intragroup

102 Corporate Taxation Database,supranote18,searchunder“CountryAnalysis”—“Japan”—“CorporateTaxation,”atparagraph8.2;andErnst&Young,“Japan”(May2010)APAC Tax Matters14-15,at15.

103 ITAA1997section707.410(Australia),GTCarticle223E(France),ITCarticle118(1)(Italy),CITL1969articles15af(1)(b)and(2)(theNetherlands),andITA2007sectionID1(1)(NewZealand).

104 CTAarticle57(6)( Japan),CITLsection81(1)(b)(Spain),andIRCReg.section1.1502-21(b)(2)(i)(UnitedStates).


shares)105onentry:(1)rollovertreatment,(2)mark-to-markettreatment,and(3)costbasereset.

Rollover Treatment

Undertherolloverapproach,preconsolidationtaxattributesarerolledovertotheconsolidatedgroup,andassetsofajoiningsubsidiaryaretreatedasownedbythecon-solidatedgroupat theoriginalcostbases.Thewholeamountofgainor lossondisposal—includingtheamountattributabletothepreconsolidationperiod—isat-tributedtothegroup.Sixoftheeightcountries(excludingAustraliaandJapan)haveadoptedthisapproach,withnoimmediatetaxconsequencesforassetsofsubsidi-ariesonentrytoaconsolidatedcorporategroup.106

Mark-to-Market Treatment

Underthemark-to-marketapproach,assetsaredeemedtohavebeenpassedtotheconsolidatedgroupattheirrespectivemarketvalues.Unrealizedgainsorlossesonassets owned by a subsidiary before entry are recognized immediately on entry.Presumablybecauseofvaluationissues,andtheeffectofimmediatetaxationontheattractivenessofaconsolidationregime,Japanistheonlycountrythathasadoptedthemark-to-marketapproachapplicabletofixedassets,land,securitiesheldascap-ital assets, andmonetary assetsheldby a joining subsidiary.107TheNetherlandsadopts a general policy of rollover except for intragroup shares and receivables,whicharemarkedtomarketonentry.108

Cost Base Reset

Australia is the only country that has adopted an “asset-based” approach to thetreatmentoftheassetsofajoiningsubsidiary.Adoptionofthisapproachwasdrivenprimarilybyadeterminationtodealwiththedualcostbaseissue—thatis,therec-ognitionofthesameeconomicgainorlossmorethanonceinacorporategroupbecauseofmultiplelevelsofownership.109Becausethisapproachisnewandun-usual,andpossiblyunfamiliartomostreaders,itisanalyzedinmoredetailhere.

105 Treatmentofintragroupsharesisdiscussedseparatelybelow.

106 Therolloverpolicyonassetsinsubsidiariesisoftentheconsequenceofapoolingsystem,underwhichthesubsidiariesremain,toalargeextent,separateentitiesforincometaxpurposes.Theirassetsthusattractnoimmediatetaxconsequencesuponconsolidation.TheNetherlandsprovidesforanexceptiontothisgeneralrule:seethediscussionbelowunder“Mark-to-MarketTreatment.”

107 CTAarticle61-11.Thedeemedsaleruleissubjecttoanumberofexceptions,includingassetsoftheparentcompanyandofsubsidiariesownedbytheparentcompanyformorethanfiveyears.

108 CITL1969articles15ab(1)and(6).Thisexceptionisprimarilyanti-avoidanceinnature:Müller,supranote69,at253.

109 ITAA1997division705.Thegovernment’sdeterminationtousetheconsolidationregimetodealwiththedualcostbaseissuewasevidentinthelegislationdesignprocess:seeA Platform for Consultation,supranote88,atparagraphs25.5and25.6.SeealsoGraemeS.Cooper,“AFew


UnlikemostEuropeancountries,Australiadoesnothaveacomprehensivedo-mesticparticipationexemption (PEX)regimeforcorporateequity.Thedualcostbase issue therefore represents a serious challenge to the tax system, includingdoubletaxationofthesameeconomicgain,doubledeductionofthesameeconomicloss,andvalueshiftingamonggroupmembers.Thegovernmentbelievedthattheintroductionofaconsolidationregimeprovidedavaluableopportunitytodealwiththeseproblemsby adopting the SER andeffectively collapsingmultiple levelsofownershipinacorporategroupintoonesinglelevel.Inparticular,allsubsidiariesaredeemedtohavebecomedivisionsoftheparentcompany,andtheirassetsaredeemedtobeowneddirectlybytheparent.Becausemultiplelevelsofownershiparecollapsedintoone,thedualcostbaseissuebecomesanon-issuewithinacon-solidatedgroup.110

TheadoptionoftheSER,however,raisesanimportantissue:Whatshouldbethecostbasesofsubsidiaries’assetsthatarenowdeemedtobeowneddirectlybythepar-entcompany?Asnotedearlier,sinceintragroupassettransfersareignoredcompletelyforincometaxpurposes,thereisnoneedtotraceintragroupassetmovementsdur-ingconsolidation,tokeeptrackofanydeferredgainorlossonthosetransfers,ortorecapturethegainor losswheneitherthetransferororthetransfereeleavesthegroup.Thegovernmentapparentlybelievedthatthemorecommonrolloverpolicywasincompatiblewithitsdeterminationtocollapsemultiplelevelsofownershipinaconsolidatedgroupintoone.

Thisdeterminationtodealwiththedualcostbaseissuecomesatahighcompli-anceandadministrativeprice.Amongotherthings,thepreconsolidationcostbasesofsharesinasubsidiarybecomeirrelevant,sincethecompanymaycarryverydifferentassetswhenitlaterleavesthegroup.Thecostbaseofsharesofaleavingsubsidiarythereforehastobereconstructed.Thegovernmentconsideredtwopolicyoptionsto reconstruct the cost bases of shares in a leaving subsidiary: the entity-basedmodel111andtheasset-basedmodel.112Under the latter,uponconsolidation, thecostbaseofsharesinasubsidiaryispusheddowntotheunderlyingassets.Precon-solidationcostbasesofassetsingeneralareerasedandpermanentlyreplacedbytheresetcostbases.Onexit fromthegroup, thesharecostbase isreconstructedbypushingupthecostbasesofassetsthatthecompanytakesawayfromthegroup.

ObservationsonManagingtheTaxationofCorporateGroups—TheAustralianExperience”(2011)59:2Canadian Tax Journal265-94.

110 However,consolidationcandealwiththedualcostbaseissueonlyinrelationtocorporategroupsthatelecttoconsolidate.Thetaxlawstillrequiresotherspecificprovisionstodealwiththeissuefornon-consolidatedgroups.Incontrast,acomprehensiveparticipationexemptionwouldbeamorecomprehensivesolutionforallcorporategroups.

111 ThisisbasicallythemodelintheUSconsolidationregime.Seethediscussionbelowundertheheading“TreatmentofIntragroupShareholdings—OnExit.”

112 A Platform for Consultation,supranote88,at572-78.


AsomewhatbitterironyisthatAustraliachoseitsasset-basedapproachinordertoavoidthecomplianceandadministrativecostsoftracingintragroupassettrans-fersunderanentity-basedapproachsuchas that in theUnitedStates,describedbelow.113Infact,asnotedearlier,thedecisiontoadopttheasset-basedapproachwasinfluencedbytheUSexperiencewiththeentity-basedapproach;inparticular,UStaxofficialsapparentlywarnedtheirAustraliancounterpartsthattheentity-basedap-proachrequirescomplexandongoingequitytaxbasisadjustmentsforintragroupassettransfersduringconsolidation.114However,theAustralianapproachishardlyaclearimprovementintermsofsimplicity.Theasset-basedmodelincludesacom-plexsetofrules—theTCS,ortax-cost-setting,rules—thataredesignedtoachievethepushdownofsharecostbasestotheunderlyingassets.UndertheTCSrules,asubsidiary’sliabilities(identifiedandmeasuredunderaccountingrules)areaddedtothecostbasesofsharesinthecompany,andadjustmentsaremadeforcertainprofitsand losses of the company, to arrive at an amount known as the “allocable costamount”(ACA).115TheACAisthengenerallyallocatedtotheassetsinthesubsidiaryaccording to their respectivemarket valuesonentry.116 Inotherwords, thecostbasesofmany assets are “reset”on entry,with the reset costbase replacing the“real”costbaseandremainingpermanentlywiththeasset,evenifthesubsidiarysubsequentlyleavesthegroup.117

Theresetcostbaseofanassetmaybehigherorlowerthantheoriginalcostbase.Inpractice,thecreativityoftaxpayersandtheiradvisersismorelikelytoproducea

113 ReviewofBusinessTaxation,A Tax System Redesigned: More Certain, Equitable and Durable,Report:Overview,Recommendations,EstimatedImpacts(Canberra:CommonwealthofAustralia,1999),at528.ForabriefdescriptionoftheUSentity-basedmodel,seeYarivBrauner,“UnitedStates”inInternational and EC Tax Aspects of Groups of Companies,supranote31,503-34,at524-25.

114 Lehmann,supranote59,at277.

115 ITAA1997section705.60.

116 ITAA1997section705.35(1)(c).Certainassets(suchasAustraliancurrencyandreceivables)—knownas“retainedcostbaseassets”—retaintheircostbases:ITAA1997section705.25.ThetotalamountoftheseretainedcostbasesissubtractedfromtheACAbeforethebalanceisallocatedtotheremainingassets(knownas“resetcostbaseassets”):ITAA1997section705.35(1)(b).

117 AdetaileddiscussionofthehighlytechnicalandcomplexTCScalculationsisbeyondthescopeofthisarticle.Nevertheless,theproblemsbecomeobviousifonelooksattheendproduct—thatis,theresetcostbaseofanasset.Ironically,theATO’sConsolidation Reference Manual—whichisintendedtohelptaxpayerstounderstandhowtheconsolidationregimeworks—providesatellingexampleillustratingtheproblemswiththeTCSrules:AustralianTaxationOffice,Consolidation Reference Manual: Taxing Wholly-Owned Corporate Groups as Single Entities(Canberra:CommonwealthofAustralia,2008),exampleinsectionC2-2-110.Intheexample,asubsidiaryhadapieceoflandwhosecostbaseandmarketvaluebothwereandremained$100.Atthejoiningtime,after16pagesofTCScalculations,thecostbaseofthelandwasresetto$74.Theimplicationisthatiftheconsolidatedgroupsoldthelandforitsmarketvalueof$100(whichisequaltoitsoriginalcostbase),thegroupwouldbetaxedonanartificialgainof$26.


stepped-up,insteadofastepped-down,resetcostbase.TheTCSrulesthusprovidefertilegroundfortaxpayers’ingenuity.

Thepolicyofallowingastepped-upcostbaseisuniqueamongtheeightcoun-tries.Infact,theresultofthispolicyundertheTCSrulesissurprisinglygenerous.Theruleseffectivelypermitconversionofpartofshareacquisitioncostsintodepre-ciable cost bases, with the extent of the conversion depending on the relativeamountofdepreciableassetsof thesubsidiary involved, theirmarketvalues,andalsotheaggressivenessoftaxpayerstakingadvantageoftherules.Thestepped-upbasiscanalsoreducegainonfuturedisposalofcapitalassets.

Finally,asinthecaseoftheAFrulesdiscussedabove,theheavyrelianceonmarketvaluationofassetsatthejoiningtimealsoimplieshighcompliancecostsfortaxpay-ersandpolicingcostsfortaxauthorities.

During ConsolidationUnderthesingleentityconcept,anintragroupassettransferduringconsolidationshouldhavenoimmediatetaxconsequencesforthegroup.Thatis,thetransfershouldbetreatedasifitwereatransferbetweendivisionsofacompany.Amongtheeightcountries,threeapproachesareusedtoaddressthisstructuralelement:(1)rollovertreatment,(2)non-recognitionofatransfer,and(3)realizationtreatment.

Therolloverapproachisthepredominantchoiceamongtheeightcountries;sixofthem(excludingAustraliaandItaly)haveadoptedthisoption.118Undertherolloverapproach,anygainorlossonintragroupassettransfersisdeferred,andthedeferredgainorlossis,ingeneral,recapturedwheneitherthetransferororthetransfereeleavestheconsolidatedgroup.

Asdiscussedearlier,theSERadoptedinAustraliadictatesthatallassetsofsubsidi-ariesbeconsideredassetsoftheparentcompanyduringconsolidation.Intragroupassettransfersarethereforecompletelyignored.Theadvantagesofthistreatmentovertherolloverapproachhavebeendescribedabove:thereisnoneedtotracethemovementofassetswithinaconsolidatedgroup,tokeeparecordofanydeferredgainorloss,ortorecapturethegainorlosswheneitherthetransferororthetrans-fereeleavesthegroup.However,thebenefitcomesatahighpriceintermsofthecomplexandproblematicTCSrules.

Italyoriginally allowed rollover treatmentwhen its consolidation regimewasintroducedin2004.However,becauseofavoidanceconcerns,thepolicywasabol-ishedin2008,andintragroupassettransferswithinaconsolidatedgrouparenowsubjecttorealizationtreatment.119

118 GTCarticle223F(France),CTAarticle81-10( Japan),ITA2007sectionsFM8and10(NewZealand),CITLsection72(Spain),andIRCReg.section1.1502-13(a)(2)(UnitedStates).

119 ITCarticle121.SeealsoFabrizioBendotti,“Italy,”inInternational and EC Tax Aspects of Groups of Companies,supranote31,327-62,atfootnote7.


On ExitOntheexitofacompanyfromaconsolidatedgroup,policymakersmustdecidehowtotreattheassetsandassociatedtaxattributesthatgowiththeleavingsubsidiary.Thetaxattributesmaybeamixtureofpreconsolidationtaxattributes(forexample,gainsaccruedduringthepreconsolidationperiod)andtaxattributesgenerateddur-ingconsolidation(forexample,gainsaccruedduringconsolidation).Tosomeextent,theapproachtothetreatmentofassetsonexitisdictatedbythetreatmentofintra-groupassettransfersduringconsolidation.Thecomparativeanalysisoftheeightcountriesrevealsthreeapproachestothisstructuralelement:(1)recapturetreat-ment,(2)inheritanceofresetcostbases,and(3)non-recognitiontreatment.

Whereacountryadoptsrollover treatment for intragroupasset transfers, thedeferredgainis,ingeneral,recapturedwheneitherthetransferororthetransfereeleavestheconsolidatedgroup.Sixoftheeightselectedcountries(excludingAus-traliaandItaly)haveadoptedthisrealizationapproach.120However,therearesomesubtle differences. In three of the six countries (France, Spain, and the UnitedStates),recaptureistriggeredifeitherthetransferororthetransfereeoftheprevi-ousassettransferleavestheconsolidatedgroup.IntheNetherlands,recaptureistriggeredbytheexitofthetransferororthetransfereeonlyifthepreviousintra-group asset transfer is regarded as tax-driven.121 Recapture is triggered in NewZealandwhenthetransfereeleavesthegroup,whileonlythedepartureofthetrans-ferortriggersrecaptureinJapan.Triggeringofrealizationtreatmentontheexitofthetransferorappearstobebasedonthepremisethat,intheabsenceoftherollover,thedeferredgainorlosswouldhavebeentaxedtothetransferor.Alternatively,acountrymayrecapturedeferredgainorlossuponthedepartureofthetransfereesoastopreventthetransfereefromtakinganassetwithhiddenreservesawayfromthegrouptax-free.

Undertheuniqueasset-basedmodelinAustralia,aleavingsubsidiaryinheritsthecostbasesofassets—includingtheresetcostbasescreatedundertheTCSrules—thatittakesawayfromtheconsolidatedgroup.122Noimmediatetaxationarisesonexit.

InItaly,sinceintragroupassettransfersduringconsolidationaresubjecttorealiza-tiontreatment,therearenoadditionaltaxconsequencesforassetsthatasubsidiarytakeswithitonleavingthegroup.

Treatment of Intragroup Shareholdings

On EntryIntragroupshareholdingsgiverisetothedualcostbase issuenotedabove.Mostmoderncorporatetaxsystemsaddress,invaryingdegrees,thedoublerecognition

120 GTCarticle223F(France),CTAarticle61-13( Japan),CITL1969article15ai(1)(theNetherlands),ITA2007sectionFM21(2)(NewZealand),CITLsection73(2)(Spain),andIRCReg.section1.1502-13(a)(5)(UnitedStates).

121 Forabriefdiscussionoftherules,seeMüller,supranote69,at270and274-77.

122 Thisisoneoftheimplicationsofthe“exithistory”rule:ITAA1997section701.40.


ofgainorlossassociatedwithsuchshareholdings.123OnecomprehensiveapproachisthePEX(participationexemption)regimeusedbymanyEuropeancountries.Byexemptingdividendsandgainsderivedfromsharesinasubsidiary,aswellasdeny-ingtherecognitionoflosses,sucharegimeeffectivelyremovesoneofthetwolevelsoftaxationassociatedwithintragroupshareholdings.Inotherwords,itdealsdirectlywiththeprimarycauseoftheissueandcomprehensivelyresolvesit.124CountrieswithoutageneralPEXregimehavechosentoadoptother,andoftenmorecompli-cated,policiestodealwiththedualcostbaseissueinthecontextoftheirconsolidationregimes.Asdescribedabove,Australiacollapsesmultiplelevelsofownershipinacorporate group. The United States adopts an entity-based model under whichadjustmentstothecostbaseofsharesaremadecontinuouslyduringconsolidationtoremoveduplicationofincomeorlosses.

Onentryintoacorporategroup,thecomparativeanalysisrevealsthreealterna-tiveapproachestothetreatmentofintragroupshareholdings:(1)rollovertreatment,(2)mark-to-markettreatment,and(3)deemedelimination.Thepreferredoptiontendstobeafunctionofacountry’sgeneralapproachtothedualcostbaseissue.

Sixoftheeightcountries—France,Italy,Japan,Spain,NewZealand,andtheUnitedStates—haveadoptedrollovertreatmentforintragroupsharesonentryintoaconsolidatedgroup,consistentwithrollovertreatmentoftheassetsofajoiningsubsidiary.125TheNetherlandsistheonlycountrythatdoesnotextenditsgeneralrolloverpolicyforassetstointragroupshares;instead,suchsharesaremarkedtomarketonentry.126Thisapproachwasapparentlyadoptedtopreventanotherwisetaxablegainonthesharesfromescapingtaxationthroughconsolidation.127

UnderAustralia’sasset-basedmodel, shares insubsidiariesheldby theparentcompanyaredeemedtohaveceasedtoexist.Ontheexitofacompany,thecostbaseofthesharesintheleavingsubsidiarymustbereconstitutedundertheTCSrules.128

123 See,forexample,AultandArnold,supranote27,at358-62.Attemptstodealwiththeissueinthecontextofunrealizedgainsorlossesinassetshaveprovedtobeparticularlycomplex.Forexample,seeITAA1997subdivisions165-CCand165-CDfortheAustralianrulesdealingwiththemultiplicationoflosses.

124 AnotheradvantageofthePEXregimeisthatitisgenerallyapplicabletobothconsolidatedandunconsolidatedgroups.Itisalsoapplicableequallytoresidentandnon-residentshareholders.Inotherwords,itprovidesageneralandneutralsolutiontointracorporateshareholdings.Incontrast,othersolutions,suchastheasset-basedmodelinAustralia,donotapplyoutsideconsolidationregimes.Ofcourse,thePEXregimehasitsdrawbacks.Thegeneralexemptionpolicytendstoattracttaxavoidance.Specificanti-avoidanceprovisionsareoftennecessarytoprotecttheregimefromabuse.

125 Rollovertreatmentisagainalogicalconsequenceofthepoolingsystem,underwhichthetaxattributesofsharesinasubsidiaryaremaintainedatthejoiningtime.

126 CITL1969article15ab(1).

127 Müller,supranote69,at253.

128 Seethediscussionbelowundertheheading“OnExit.”


During ConsolidationUnderastrongapplicationofthesingleentityconcept,intragroupsharetransfersshould have no tax implications, consistent with the treatment of divisions of asinglecompany.Thispolicyis,infact,followedbyamajorityoftheeightcountries,thoughsomecountriesadoptadifferentapproach,primarilytodealwiththedualcostbaseissue.Nonetheless,inalleightcountries,thereisnoimmediatetaxationofintragroupsharetransfersduringconsolidation.

Four countries—France, Japan, Spain, and the United States—have adoptedrollovertreatment.129Whileeachgroupmemberaccountsforthegainorlossontheintragrouptransferinitsowntaxcomputation,thetransferisneutralizedatthegrouplevelwhentheparentcompanypreparestheconsolidatedtaxcomputation.Thisisthesameapproachthatappliestoanintragrouptransferofnon-shareassetsduringconsolidation.InallofthesefourcountriesexceptJapan,thedeferredgainorlossisrecapturedwheneitherthetransferororthetransfereeleavestheconsoli-dated group. In France and Spain, the recaptured gain or loss may qualify forexemptionunderthePEXregime.InJapan,recaptureistriggeredonlybythede-partureofthetransferor.

ItalyandtheNetherlandsrelyontheirgeneralPEXregimestoexemptintragroupsharetransfers.Inbothcountries,thePEXregimeappliestocompaniesingeneral,whetherornottheyaremembersofaconsolidatedgroup.130Inmostcases,intra-groupsharetransferwillbeeligibleforexemptionsincetheownershipthresholdrequirementsunderconsolidationareoftenstricterthanthoseunderthePEXre-gime.Anadvantageofthisapproachisitssimplicity,sinceadditionalprovisionsarenotrequiredintheconsolidationregimetodealwithintragroupsharetransfers.ThePEXregimealsoappliesconsistentlythroughouttheconsolidationcycle,coveringentry,theconsolidationperiod,andexit.Apossibledrawbackofapplyingtheregimetointragroupsharetransfersisthatitmaybelessbeneficialthannon-recognitiontreatment(forexample,inFranceandSpain).ThisissoifthePEXregimeexemptsonly,say,95percentofthegain,thusleavingtheremaining5percenttobetaxedatthetransfertime.

InAustralia,asdiscussedabove,intragroupsharesinsubsidiariesaredeemedtohaveceasedtoexistduringconsolidation.Thisfictiondictatesthattherebenotaximplicationsforintragroupsharetransfers,sincetheyaredeemednottohaveoc-curred.Butagain,thisapproachrequiresapplicationoftheTCSrulestoreconstructthecostbaseofsharesinaleavingsubsidiary.

TheabsenceofageneraltaxoncapitalgainsinNewZealandmeansa“notaxa-tion”outcomefor intragroupsharetransfers.Intherarecaseswhereshares inasubsidiaryareheldasrevenueassets(receivables),anintragrouptransferofthese

129 GTCarticle223F(France),CTAarticle61-13( Japan),CITLsection72(Spain),andIRCReg.section1.1502-13(a)(2)(UnitedStates).

130 ITCarticle87(Italy)andCITL1969article13(theNetherlands).


assetsissubjecttorollovertreatmentconsistentwiththetreatmentofintragroupassettransfers.131

On ExitOntheexitofacompanyfromaconsolidatedgroup,taxattributesthathavebeendeferredduringconsolidationhavetobeaddressed,withintragroupshareholdingspresentingthetroublesomedualcostbaseissue.Theapproachesoftheeightcoun-triestothisstructuralelementoftheirconsolidationregimesarediverse,especiallyamongthecountriesthatdonothaveacomprehensivePEXregimefordomesticcorporate groups. In particular, the comparative analysis reveals two broad ap-proaches:(1)applicationofthePEXregimeand(2)realizationtreatment.

AllofthefourEuropeancountriesenjoythebenefitofanexistingPEXregime,withgainorlossonadisposalofsharesinaleavingsubsidiarygenerallybeingeli-gibleforexemption.132NewZealandagainenjoystheluxuryofthegeneralpolicyofnottaxingcapitalgains.Disposalofsharesinaleavingsubsidiarythereforedoesnothaveanytaximplications,unlessthesharesareheldasrevenueassets.Inthatcase,NewZealandrecapturesanydeferredgainorlossontheshares.133Thereisnospecificprovisiontoadjustthecostbasesoftheshares,probablybecauseitisrareforsharesinaconsolidatedsubsidiarytobeheldasrevenueassets.

Australia,Japan,andtheUnitedStates,lackingthebenefitofageneralPEXre-gimefordomesticcorporategroups,allimposetaxationonthedisposalofsharesina leavingsubsidiary.However,eachof the threecountriesadoptsadifferentap-proach to the determination of the cost bases of the shares in the subsidiary—thoughwiththesameobjectiveofdealingwiththedualcostbaseissue.

InAustralia,thesharesinaleavingsubsidiary,whicharedeemedtohavedisap-pearedduringconsolidation,springbacktolifeandareassignedacostbasethatisreconstitutedfromthecostbases—includingresetcostbasescreatedundertheTCSrulesonentry—of theunderlyingassets that the subsidiary takesaway fromtheconsolidated group.134 As discussed earlier, the disadvantages of this asset-basedmodelarethecomplexandproblematicTCSrulesandthefailureofthemodeltoprovideacomprehensivesolutiontothedualcostbaseissue.Inparticular,doubletaxationisstillpossibleifasubsidiaryleavesaconsolidatedgroupandtakeswithitassetswithhiddenreserves.OwingtothearbitrarinessoftheTCSrules,artificialgainorlosscanbecreatedandevenduplicatedatleavingtime,sincethecostbasesof shares in a leaving subsidiary are reconstitutedon thebasisof the reset costbasesofassetsinthesubsidiary.Theheavyrelianceonmarketvaluationofassets

131 ITAsectionFM15.

132 GTCarticle219(France),ITCarticle87(Italy),CITC1969article13(theNetherlands),andCITCsection30(Spain).

133 ITAarticleFM15.

134 ITAA1997division711.


undertheTCSrules implieshighcompliancecosts fortaxpayersandmonitoringcostsforthetaxauthorities,andcreatesavoidanceopportunities.

IntheUnitedStates,undertheentity-basedmodel,thecostbasesofintragroupshares are adjusted continuously during consolidation. The model provides for“investmentadjustments”underwhichthecostbasesofsharesinasubsidiaryareadjustedforvariousitems,includingdistributions,profits,andlossesofthesub-sidiary.135Forexample,assumethataparentcompany(P)acquiresasubsidiary(S)for$100andthenformsaconsolidatedgroup.136IfShastaxableincomeof$10,thatamountisincludedinthegroup’sconsolidatedtaxableincomeandissubjecttotaxatthegrouplevel.TheinvestmentadjustmentrulesadjustthecostbaseofS’ssharesto$110.IfPsubsequentlysellsS,the$10oftaxableincomeisnottaxedagain.Therulesarecomplexandimposehighcompliancecosts.Theyrequirecon-tinuousadjustmentsthroughoutconsolidation,137andtheruleshavetobeappliedon a bottom-up approach if multiple levels of shareholdings are involved.138Furthermore,ifacompanyhasmorethanoneclassofshares,theadjustmentrulesareevenmorecomplicated.139

InJapan,thecostbasesofsharesinaleavingsubsidiaryareadjustedattheleav-ingtime,reflectingingeneralthenetchangeinretainedprofitsofthecompany.140Althougharguablylessprecise,theJapaneseapproachismuchsimplerthantheap-proachesinAustraliaandtheUnitedStates.

A MO DEL CO NSO LIDATIO N REGIME?

Thedifferentapproachestothemajorstructuralelementsofconsolidationregimesintheeightcountriesaresummarizedintable1,withthecountriesarrangedfromlefttorightaccordingtotheextentoftheapplicationofthesingleentityconcept(weakesttostrongest).

Theprecedingdiscussionhasindicatedthat,amongtheeightcountries,Australiastandsoutashavingadoptedthestrongestversionofthesingleentityconcept,andthisisborneoutbyitspositionatthefarrightofthetable.UndertheAustralian

135 Theinvestmentadjustmentrules,containedinIRCReg.section1.1502-32,arecomplex,andadetaileddiscussionoftheirapplicationisbeyondthescopeofthisarticle.Formoreinformationabouttherules,see,forexample,Hennesseyetal.,supranote64,chapter13.

136 ThescenariodescribedhereisbasedontheexampleprovidedinIRCReg.section1.1502-32(a)(1).

137 Inparticular,theadjustmentshavetobemade“asofthecloseofeachconsolidatedreturnyear,andasofanyothertime...ifadeterminationatthattimeisnecessarytodetermineataxliabilityofanyperson”:IRCReg.section1.1502-32(b)(1).

138 IRCReg.section1.1502-32(a)(3)(iii).

139 IRCReg.section1.1502-32(c).

140 SeeFumihiroKomamiya,“Japan,”inGroup Taxation,supranote20,393-405,at397;andJapan,MinistryofFinanceTaxBureau,Comprehensive Handbook of Japanese Taxes 2006(Tokyo:MinistryofFinance,2006),at82;andYujiGomiandTasukuHonjo,eds.,2007 Corporation Tax Act of Japan(Tokyo:SozeiShiroyokan,2007),at457-58.


TAB

LE 1

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100%

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Fact

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SC+

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regime,subsidiariesarenotonlydeemedtohavebecomedivisionsoftheparentcompany,butalsodeemedtohaveceasedtoexistforincometaxpurposes.Multiplelevelsofownership in a corporategroup are collapsed intoone, and intragroupshareholdingsaredeemedtohavevanishedduringconsolidation.Theimplicationsofthesepropositionsaresignificant.Theoriginalcostbasesofunderlyingassetsandsharesinthesubsidiariesareerasedandlostforeveronenteringconsolidation.

TheNetherlandscomessecondwithitsattributionconcept,underwhichassets,liabilities,andactivitiesofsubsidiariesareattributedtotheparentcompany,butthesubsidiaries are still regarded as existing separate entities during consolidation.Amongthesixremainingcountries,allofwhichadoptthepoolingsystem,NewZealandstandsoutwithitsgeneralpolicyofdeterminingthetaxabilityanddeduct-ibilityofvariousitemsforeachindividualgroupmemberonagroupbasis.

Amongtheremainingfivecountries,FranceandItalyallowcherry-pickingofsubsidiariestojoinconsolidation,whicharguablyiscontrarytotheprinciplethatacorporategroupshouldbetreatedasasingleentity.Theythereforerepresentaweakerapplicationoftheconceptthanthatintheotherthreecountries.Italydevi-atessignificantlyfromthesingleentityconceptbyimposingimmediatetaxationonintragroupassettransfersduringconsolidation,andisthereforeregardedashavingtheweakestapplicationoftheconceptamongtheeightcountries.

Theremainingthreecountries—Japan,Spain,andtheUnitedStates—aremoredifficult to rank since theydonotexhibit significantdifferences in theextentoftheirapplicationofthesingleentityconcept.Theirpositionsinthetabletakethefollowingfeaturesintoconsideration:

n Japanhasadoptedtheuniqueapproachofcancellingpreconsolidationlossesofacompanyonentryintoaconsolidatedcorporategroup,whicharguablyisnotsupportedbythesingleentityconcept.

n ForSpainandtheUnitedStates,theonlymajordifferencelieswiththetreat-mentofintragroupshareholdings.SpainreliesonitsgeneralPEXregimetoaddressthedualcostbase issue,whiletheUnitedStatesapplies itsuniqueentity-basedmodel,underwhichthecostbasesofsharesinasubsidiaryareadjustedcontinuouslyduringconsolidation.

Isitpossibletoidentifyamodelconsolidationregimefromtheapproachesofthe eight selected countries?Thediscussion so far suggests that a consolidationregimeisoftentheproductofcompromisesbetweencompetingpolicyobjectivesandconstraints.Nevertheless,itisworthwhiletoattempttoidentifyamodelregimerepresentingthebestpracticeina“cleanslate”scenario.Infact,comparativeanaly-sisoftheeightcountriesrevealsconvergencearoundthebestpracticewithrespecttomanystructuralelements.Apoolingsystemispreferredtootherversionsofthesingleentityconceptintermsofsimplicity.Interactionbetweentheconsolidationregimeandotherpartsoftheincometaxsystemiseasiersincethepoolingsystempreserves,toalargeextent,theseparateidentityofasubsidiary,andthusoperatesundera similar conceptual frameworkas the separateentitydoctrine.Australia’s


experiencewithitsasset-basedmodeldemonstratesthatastrongsingleentitycon-ceptcanbeverycomplexandproblematictooperateinpractice.

Thecomparativeanalysisoftheownershiprequirementssuggeststhattheowner-shipthresholdshouldbesubstantially100percent,therebyavoidingthecomplicatingpresenceofminorityinterests.Inrespectofthefactorsintheownershipthreshold,theconceptofcommoncontrolsuggeststhatvotingrightsshouldbeonefactor.Ashareholding requirement without some form of constructive ownership rule issimpletoapplyinpractice,butpronetoabuse.

Withrespecttothetreatmentofpreconsolidationlosses,thequarantineapproachistheapparentpreference.Theirreversibletransferofthelossestotheparentcom-panyinAustraliaprovestobeveryproblematic.ThepotentialrevenueimpactissosubstantialthattheAustraliangovernmenthashadtoadoptanarbitraryregimetolimittheuserateofthetransferredlosses.Theheavyrelianceonmarketvaluationofsubsidiariesandtheconsolidatedgroupnotonlyimplieshighcompliancecostsfortaxpayersandmonitoringcostsfortaxauthorities,butalsoprovidesavoidanceopportunities.Japan’scancellationapproachisharshandhasseverelydiminishedtheattractivenessofitsconsolidationregime.

Therolloverandrecapturepolicy—beingthemostcommonapproachtodealwiththeassetsofajoiningsubsidiary—isthepreferredapproach,presumablybecauseofitssimplicity.Australia’sasset-basedmodelprovidesatax-friendlyenvironmentforcorporategroupsduringconsolidation.However,theproblemsandcomplexityatthetransitiontimes(onentryandonexitofacompany)areahighpricetopay.Italy’seliminationofrollovertreatmentin2008,justfouryearsaftertheintroductionofits consolidationregime, illustrates thedifficultcompromisebetweencompetingobjectives.

Thecomparativeanalysisoftheotherstructuralelementsfailstorevealclearlypreferredapproaches.Theall-inruleisaclassicexampleofthedifficultcompromisebetweencompetingpolicyobjectives.Ontheonehand,theruleshouldbeimple-mentedasananti-avoidancemeasure.Ontheotherhand,somecountriesbelievethatanall-inrulewouldrendertheirconsolidationregimelessattractive.Thede-cisiononwhetherornottoadopttheall-inruledependsontherelativeweightthatpolicymakersplaceontheseobjectives.Thediversetreatmentofgrouplossesonexitillustratesasimilarproblem.

Theapproachtointragroupshareholdingsisperhapsthemostdifficultstruc-turalelement.Theassociateddualcostbaseissuehastroubledpolicymakersfordecades.ThesolutiondependstoalargeextentonwhetheracomprehensivePEXregimeexistsfordomesticcorporategroups.Ifso,theanswerisstraightforward.NewZealand achieves anoutcome similar toparticipation exemption treatmentowingtotheabsenceofageneraltaxationregimeforcapitalgains.OthercountrieswithoutacomprehensivePEXregimedonothavethisluxury.Australia,Japan,andtheUnitedStateshavetoincorporateoftencomplexrulesintotheirconsolidatedregimestodealwiththedualcostbaseissue.Thefactthateachofthethreecoun-trieshasadoptedadifferentapproachtothisissueistelling.


THE COMPLE X IT Y INDE X—COMPA RISO N O F THE EIGHT CO NSO LIDATIO N REGIME S

OneofthemajorconcernsregardingtheintroductionofafullconsolidationregimeinCanadaistheperceivedcomplexityofsucharegime.AustraliaandtheUnitedStatesarethetwoexamplescommonlycitedtosubstantiatethisconcern.However,thecomparativestudyoftheeightcountriessetoutabovesuggeststhataconsolida-tionregimeneednotnecessarilybeascomplexasthoseregimes.Infact,theothersix regimes appear tobemuch simpler than theAustralianand USmodels.Thestudyfurthersuggeststhatthecomplexityofaconsolidationregimedependstoalarge extent on the policy choices that a country makes with respect to the keystructuralelementsoftheregime.

Toillustratetherelativecomplexityoftheeightconsolidationregimes,acom-plexity indexcanbeconstructed,withacomplexityscorebeingassignedtoeachregime.Therankingoftheeightregimesispresentedintable2.Somecriticsmayarguethatthescoreassignedtoaregimeisarbitraryandperhapssubjective.How-ever,itisimportanttobearinmindthattheindexservesprimarilytohighlighttherelativecomplexityoftheeightregimes.Therelativemagnitudeofascoredoesnotimplyaproportionallevelofcomplexity.Forexample,ifaregimehasacomplexityscoreof40,thisdoesnotnecessarilymeanthatitistwiceascomplexasaregimewithascoreof20.Instead,thesetwoscoressimplyindicatethatthefirstregimeismorecomplexthanthesecond.

Thecomplexityscoreofaconsolidationregimeis theoutcomeofa two-stepprocedure.Thefirststepistoidentifythekeystructuralelementsinthedesignofaregimethatsignificantlyaffectitscomplexity.Theseelementsinclude

1. applicationofthesingleentityconcept, 2. thetreatmentofpreconsolidationlosses, 3. thetreatmentofgrouplossesonexit, 4. thetreatmentofassets,and 5. thetreatmentofintragroupshares.

Thesecondstepistoassignascoretoeachofthealternativepolicyoptionsforeachdesign featureorstructuralelement.Themostcomplexpolicyoptionreceivesascoreof10andthesimplestoptionascoreof0.Theoptionwithcomplexity inbetweenthetwoextremeshasascoreof5.Forexample,withrespecttotheapplica-tionofthesingleentityconcept,Australia’sabsorptionmodelhasascoreof10sinceit is the most complex policy option, especially with respect to the complicatedinteractionsbetweentheconsolidationregimeandtheotherpartsofthetaxsystem.Thepoolingsystemadoptedinsixoftheothercountriesisrelativelythesimplestoptionandgetsascoreof0.TheNetherlands’attributionsystemscores5since,intermsofcomplexity,itfallsbetweenthesetwoextremes.

Theresultofthisexerciseispresentedintable2,withtheeightcountriesrankedaccordingtotheiraggregatedcomplexityscores.

460 n canadian tax journal / revue fiscale canadienne (2011) 59:3TA

BLE

2

Com

plex

ity

of C

onso

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tion

Reg

imes

in th

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ght C

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t0

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10(a

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5(q

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1520

3040


Thetableshowsthatonthebasisoftherespectivescores,theAustralianandUSregimes are the most complex. This is consistent with the common perception.NewZealandscoresaperfect0,suggestingthatitisthesimplestregimeamongtheeightcountries.However,oneimportantqualification,notedpreviously,isthatNewZealandenjoystherareluxuryoftheabsenceofageneraltaxoncapitalgains.Thisparticularfeatureofitstaxsystemremovesmostofthepressureonitspolicieswithrespecttothetreatmentofassetsandintragroupshares.

CO NCLUSIO N

Thechoicebetweenasystemoffullconsolidationandagrouplossreliefregimeisadifficultone.Itoftenrepresentsatradeoffbetweenconflictingpolicyobjectivesaswellasconstraintsimposedbytheexistingtaxsystem.Nevertheless,Canadashouldconsideraconsolidationregimeforthefollowingreasons:

n First,aconsolidationregimeismorecomprehensivethanothergrouptaxationregimes,allowingbothintragrouplossoffsetsandintragroupassettransfers.

n Second, intragrouptransactionsotherthanassettransfersaregenerally ig-noredwithinaconsolidatedgroup,afeaturethatcanconstraininterprovincialincome-shiftingopportunitiesbetweenconsolidatedgroupmembers.

n Third,althoughaconsolidationregimetendstobemorecomplexthanothergrouptaxationregimes,thefactthatanincreasingnumberofcountrieshaveadoptedconsolidationinrecentyearssuggeststhatmanygovernmentspreferthistypeofregimeoverothergrouptaxationregimes,andthattheybelievethatthecomplexityinvolvedisjustified.

n Fourth,somecountriesthatalreadyhadothergrouptaxationregimeshavedecidedtointroduceaconsolidationregime.

n Finally,asystemoffullconsolidationmayprovideanelegantsolutiontothetroublesomeissueofinterprovincialallocationofthecorporategrouptaxbase.

Thecomparativeanalysissuggeststhatastrongerapplicationofthesingleentityconcept inaconsolidationregimedoesnotnecessarily implyabetterregimeonpolicy grounds. Australia has adopted the world’s first asset-based model, whichrepresentsthestrongestapplicationofthesingleentityconceptamongtheeightcountries.Itssingleentityruledictatesthefictionthat,afterconsolidation,onlyonecompany remains—the parent company. Australia’s consolidation regime offerssomedistinctattractions,includingtheabilitytocompletelyignoreintragroupassettransferswithinaconsolidatedgroup.However,thepricetopayfortheadvantagesishigh,especiallyatthetransitionpointswhenacompanyentersorexitsthecon-solidatedgroup.TheTCSrulesarecomplexandcangenerateartificialgainorloss,whichcanevenbeduplicatedatthetimeacompanyleavesthegroup.Therulesonpreconsolidationlossescanalsoproducearbitraryandanomalousresults.Bothsetsofrulesrelyheavilyonmarketvaluationsofassetsandcompanies,implyinghighcomplianceandpolicingcosts,andcreatingavoidanceopportunities.Anotherproblem


withthestrongapplicationofthesingleentityconceptisthedifficultinteractionbetweentheconsolidationregimeandotherpartsoftheincometaxsystem.Mostregimesinthetaxlawaredesignedtooperateunderthetraditionalseparateentitydoctrine,whichbydefinitioncontradictsthesingleentityconcept.Experiencesug-geststhatthestrongertheapplicationofthesingleentityconcept,themoredifficulttheinteractionstendtobe.

Foramajorityofthekeystructuralelementsofaconsolidationregime,thecom-parativeanalysispointsquiteclearlytoapredominantpolicyoptionintheeightcountries.ThepoolingsystemisadoptedinalloftheeightcountriesexceptAustraliaand the Netherlands. Preconsolidation losses are quarantined in all of the eightcountriesexceptAustraliaandJapan.AlloftheeightcountriesexceptAustraliaandItalyadopttherolloverandrecapturepolicyforassetsonentryandexit,andforintragroupasset transfers.Thecomparativeanalysis suggests that theownershipthresholdshouldbesubstantially100percentinordertoavoidminorityinterestproblems.

Fortheotherkeystructuralelements,theeightcountriesexhibitconsiderablevariationsandrevealnoclearpreferreddesignchoice.Theall-inruleandthetreat-mentofgrouplossesonexitareexamplesofthedifficultcompromisesthatpolicymakers have to make. The approach to intragroup shareholdings is perhaps themostdifficultchoice.Itdepends,toalargeextent,onthepresence(orabsence)ofageneralPEXregimedealingwiththedualcostbaseissue.

Experiencesuggeststhatonceaconsolidationregimeisintroduced,majorstruc-turalchangesareunlikely.Businessesenjoythebenefitsofintragrouplossoffsetsandtax-freeassettransfersundertheconsolidationregime.Repealoftheregimeisthereforelikelytobepoliticallyunacceptable.Fine-tuningisoftentheonlyfeasibleapproachinpractice.Therefore,itisimportantforCanada,ifitdecidestointro-duceaconsolidationregime,togetthelegislationrightwhenitisfirstintroduced.Thecomparativeanalysisoftheeightconsolidationregimespresentedinthisarticleattemptstoshedsomelightonthestructuraldesignchoices.

the unthinkable policy option? key design issues under a

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