Single Entity Concept and Separate Entity Concept under Consolidated Return System
Asian Tax Journal Vol. 11 No. 3 (2010), pp. 153-177
Abstract
Under consolidated return system, the single entity concept which treats a consolidated group as one corporation and a consolidated corporation as a division of the consolidated group should apply. However it is necessary to apply the separate entity concept in some aspects for the simplicity of the system and the prevention of the tax evasion. This paper reviews and analyzes the adequacy of applying the separate entity concept in the current consolidated return system and suggests the remedy as follows ; First, it is not consistent with the single entity concept that deferring intercompany gain and loss are limited to certain items even though it is designed to simplify the system. Deferring intercompany gain and loss should apply for all kinds of transactions except those with small amount of gain or losses. Second, tax attributes such as character, exemptions and holding periods should be redetermined on a consolidated basis in order to maintain the single entity concept in intercompany transactions Third, since the effect of pooling separate limitations exists for credit for research and human development expenses, foreign tax credit, credit for casualty losses and minimum taxes, those items should be determined on a consolidated basis. Fourth, in order to elimination of double taxation and double deduction effect for gains or losses from disposition of subsidiary stocks, stock basis adjustments as in partnership taxation should be introduced.
Keywords
- Consolidated Return
- Single Entity Concept
- Separate Entity Concept
- Consolidated Taxable Income