Countries which have adopted a tax consolidation regime include the United States, France, Australia and New Zealand.
United States federal income tax rules permit commonly controlled corporations to file a consolidated return.
The common parent corporation files returns, and is entitled to make all elections related to tax matters.
[2] Only entities organized in the United States and treated as corporations may file a consolidated Federal income tax return.
Additional adjustments apply in the case of intra-group reorganizations or acquisition of the common parent,[11] and upon entry to or exit from the group by a member.
In addition, if a member enters or leaves the group, certain adjustments to earnings and profits, basis, and other tax attributes apply.
In a late June, 1983 decision, the US Supreme Court first sanctioned worldwide combined reporting in Container Corp. v. Franchise Tax Board (CA).
The court's majority decision was written by Justice Brennan, joined by White, Marshall, Blackmun, and Rehnquist.
Friend-of-the-court amicus curiae briefs were filed in support of California by the Attorneys General of Idaho, Utah, Illinois, Montana, New Mexico, New York, North Dakota, Oregon, Alaska, Colorado, Connecticut, Delaware, Indiana, Kansas, Massachusetts, Michigan, Nebraska, Minnesota, Missouri, New Hampshire, North Carolina, Hawaii, and Vermont.
In support of the Container Corporation, amicus briefs were filed by Allied Lyons, Coca-Cola, Colgate-Palmolive, EMI Limited, Firestone Tire & Rubber, Canadian Imperial Bank of Commerce, Caterpillar Tractor, Gulf Oil, Phillips Petroleum, Shell Oil, and Sony.
Also, in support of Container, were briefs filed by the U.S. Chamber of Commerce's Committee on State Taxation, the Financial Executives Institute, the Government of the Kingdom of the Netherlands, the Confederation of British Industry, the International Bankers Association in California, and the Union of Industries of the European Union.
The Working Group agreed on three principles that should guide state taxation of the income of multinational corporations:[17] California adopted a requirement that both United States and foreign corporations be included in a worldwide unitary group filing, absent a “water's edge” election and fee.
An example of why a state would adopt unitary combined reporting is in the Statement of Intent in section 152 of Vermont's 2004 Act: In recognition of the fact that corporate business is increasingly conducted on a national and international basis, it is the intent of the general assembly to adopt a unitary combined system of income tax reporting for corporations, and as an integral part of this proposal, to lower the corporate income tax rates.
As a result, under water's edge combined reporting, separate accounting is only ignored for purely domestic businesses but retained for multinational corporations.
Per the 2003-2004 Biennial Report of the Vermont Commissioner of Taxes, the adoption of unitary combined reporting "will diminish opportunities for certain aggressive tax management strategies that were available to multi-state corporations and will help create a level playing field with respect to Vermont-based corporations.
Therefore, under water's edge, U.S. based and foreign-based multinationals have the ability to shift U.S. profits to foreign subsidiaries and avoid federal and state income taxes.
In 1999, in Caterpillar Inc. v. New Hampshire Department of Revenue, the court stated "We point out that the water's edge method was adopted for the benefit of foreign businesses.
Bloomberg reporter Jesse Drucker demonstrates that separate accounting/arm's length pricing favors the multinationals in an October 2010 article titled "Google 2.4% Rate Shows How $60 Billion Lost to Loopholes" with tax strategies known as the "Double Irish" and the "Dutch Sandwich."
[21] In a New York Times October 2012 Dealbook column, Victor Fleischer wrote about "Overseas Cash And The Tax Games Multinationals Play."
Although billions in corporate profits are reported to be on the books of foreign subsidiaries located in tax havens, a New York Times article by David Kocieniewski titled "For U.S. Companies, Money Offshore Mean Manhattan" dated May 2013, indicates that those corporate profits are being utilized in the U.S.[22] This is supported by a more recent report by Kitty Richards and John Craig at the Center for American Progress titled "Offshore Corporate Profits - The Only Thing 'Trapped' is Tax Revenue" [23] An article by Floyd Norris in the May 23, 2013 New York Times, "The Corrosive Effect of Apple's Tax Avoidance", points out how these tax avoidance strategies will most likely be followed by many other multinational corporations.
California, following the Barclays case, modified its rules to include in the combined reporting only the taxable income of United States corporations.
California's computation of apportionment factors is still based on worldwide group amounts unless a “water's edge” election is made.