Intercompany sales and deferred taxes: how unrealized profits affect tax timing in consolidated reportin
- Graziano Stefanelli
- Jul 30
- 2 min read
Intra-group transactions can lead to temporary differences when profits are eliminated but already taxed.
When one entity in a group sells goods or services to another at a profit, that profit is eliminated during consolidation if the asset has not been resold outside the group. However, the selling entity may have already recognized revenue and paid taxes on the profit. This mismatch between accounting and tax recognition creates a temporary difference that must be accounted for through deferred tax.
IFRS and US GAAP both require recognition of deferred taxes in these cases to properly reflect future tax recoveries or obligations.
Intra-group sales of inventory: a classic source of deferred tax assets.
When inventory is unsold at group level, profit is deferred for accounting but not for tax.
Example:
SubCo sells inventory to ParentCo for €50,000
The cost of the inventory was €30,000 → intra-group profit = €20,000
At year-end, ParentCo still holds the inventory
For accounting purposes, the €20,000 profit is eliminated in the consolidated financials. But SubCo has already:
Recorded the gain in its income statement
Paid tax on the €20,000 profit
This creates a deductible temporary difference. The group records a deferred tax asset of:
€20,000 × tax rate (e.g. 24%) = €4,800
When the inventory is sold externally, the temporary difference will reverse, and the deferred tax asset will be settled.
Deferred taxes apply to other intercompany transfers as well.
Fixed assets, intangible assets, and services can also create timing differences.
Examples:
Intercompany sale of equipment at a gain → deferred tax liability
Transfer of internally generated intangibles → deferred tax on unamortized profit
Management fees or royalties invoiced between entities → timing mismatches if eliminated in consolidation
In each case, the accounting profit is deferred, but the tax treatment may be immediate, requiring deferred tax adjustment.
Tax consolidation status changes the deferred tax treatment.
If the group files a consolidated tax return, no deferred tax may be necessary.
In jurisdictions where the group is treated as a single taxpayer, intra-group profits are not taxed until external realization. Therefore:
No tax is paid at the intercompany stage
No temporary difference arises
No deferred tax is recorded
However, if the group files separate tax returns, deferred tax must be recognized in full.
Thus, deferred tax treatment of intercompany transactions depends on the group’s tax filing structure and the jurisdictional rules in place.
Disclosure requirements cover intercompany deferred taxes.
The group must explain the nature, timing, and reversals of such taxes.
In the notes to the financial statements, the group must disclose:
The amount of deferred tax assets or liabilities arising from intercompany transactions
The expected period of reversal
The tax rates applied
Any limitations or unrecognized deferred tax items due to recoverability concerns
This provides users of the financial statements with insight into how internal activity impacts future tax positions and earnings volatility.
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