The Group’s tax returns are a means of allowing companies, which are all part of an affiliated group, to submit a consideration for the annual period, instead of each entity submitting a separate tax return.
The possibility of filing a consolidated tax return depends on the exact nature of the relationship between the parent company and any subsidiaries that make up the group.
Along with simplifying the tax reporting process, sometimes filing a consolidated tax return allows conglomerates and other affiliated groups to benefit from certain tax incentives that would not be possible with individual applications.
The history of the US consolidated tax return dates back to the early 20th century
During this period, the government sought ways to limit businesses from avoiding paying taxes on shift what was considered to be excess profits from one highly profitable subsidiary of another member of the corporate family operating with a small profit or even loss. In 1917, the Commissioner of the Internal Revenue Service has developed the consolidated tax return format as a means of preventing this shift in profits.
The end result is that the corporation tax family that included several companies could file as one unit and assessed tax on the total earnings generated by the parent company and all the subsidiaries. This arrangement was considered fair to determine the overall tax liability without creating an unrealistic burden on any business entity. In 1918, Congress made the consolidated tax return mandatory to ensure compliance with laws on income tax and excess profit taxes.
After the end of World War I
Resource interest taxes were abolished and the main purpose of the consolidated tax return ceased to exist. The Congress repealed laws mandated the use of the consolidated tax return. But the Great Depression led to a resurgence in interest in this kind of tax filing, as the practice of routing profits through unprofitable subsidiaries again became commonplace. In 1942, again Congress made it possible for companies to file consolidated returns, which helped minimize channel activity.
The function of the consolidated tax return has been more or less constant since the 1940s. For a time, there was a two percent penalty on consolidated taxable income, but the penalty was abolished in 1964. Currently, corporate structures that include a parent and subsidiaries are free to use a consolidated tax return or file as individual entities.