Consolidated tax returns and separate filings: how groups handle income taxes under different filing regimes

The decision to file a consolidated tax return or separate returns affects both tax liabilities and disclosures.

In many jurisdictions, corporate groups have the option—or in some cases the obligation—to file a consolidated tax return. This means reporting the income, deductions, and tax positions of all eligible group members on a single return. Alternatively, entities may be required to file separate returns, even if they are fully consolidated for accounting purposes.

The distinction has direct implications for deferred taxes, tax losses, intercompany eliminations, and overall tax strategy. Financial reporting must reflect the actual filing structure to properly present current and deferred income tax expense.

Consolidated tax returns allow loss offsets and simplified intercompany treatment.

A group return treats eligible entities as a single taxpayer for tax purposes.

In jurisdictions like the United States (Form 1120 Consolidated Return), groups that meet ownership and eligibility requirements can file a single consolidated tax return. The benefits include:

• Offsetting profits and losses across entities

• Eliminating intercompany dividends and gains for tax purposes

• Deferring gain recognition on intercompany asset transfers until sold outside the group

From an accounting perspective, consolidated financial statements already reflect group-level performance. The tax consolidation mirrors this at the fiscal level, reducing the need for certain deferred tax adjustments.

Separate filings require entity-level taxation and increase complexity.

Intercompany profits may be taxed and then reversed only through deferred tax entries.

When entities file separate tax returns, even though they are consolidated for accounting purposes, intra-group transactions may trigger real taxable events. For example:

• SubCo sells inventory to ParentCo at a profit

• The profit is eliminated in the consolidated accounts

• But SubCo pays taxes on it under separate tax reporting

This creates a temporary difference, resulting in a deferred tax asset for the consolidated group. These effects must be tracked and reversed when the profit is realized outside the group.

Journal entries must reflect the filing status of the group.

Whether deferred taxes are recorded depends on how tax laws interact with consolidation adjustments.

In practice:

• If filing is consolidated for tax purposes, many intra-group eliminations do not generate deferred taxes

• If filing is separate, these eliminations do create deferred tax effects

Therefore, when preparing group-level journal entries:

• Dr. Deferred tax asset (for unrealized profit taxed at seller level)

• Cr. Income tax expense (to reduce current tax cost at group level)

Such entries align tax expense with the economic substance of group performance.

Disclosures must explain how tax filings affect reported taxes.

IFRS and US GAAP require transparency regarding group tax structure and policies.

The notes to consolidated financial statements must clearly disclose:

• Whether the group files consolidated or separate returns

• Which subsidiaries are included in the tax group

• The impact of tax filing decisions on effective tax rate

• The treatment of tax losses, credits, and deferred taxes

This disclosure is important for analysts and investors seeking to understand the sustainability and timing of group tax obligations.

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