Taxation of Corporate Groups

Transcription

1 Taxation of Corporate Groups Miguel Correia Law & Business

2 About the Author vii Preface xv List of Abbreviations xvii List of Figures xix Introduction: Problem, Approach and Structure 1 I II III IV Problem Nature of Approach Structure CIT Law of the Study CHAPTER 1 Policy Approach 1.01 Core Structure of the CIT System 9 [A] Concept of Realization 9 [1] Advantages of Realization 10 [2] Problems of Realization, 13 [B] Alternatives to~a Realization-Based CIT System 15 [1] Accretion-Based Taxation 15 [2] Consumption-Based Taxation 18 [C] Taxing the Corporate Sector through a Corporate-Level Tax. 23 [1] Corporate-Level Taxation and the Firm's Agency Problems 23 [a] Reliability Effect 23 [b] Deterrent Effect 24 [c] Reversal of Clientele Effect 26 [d] Control Effect 26 [2] Traditional Arguments for Defense of Corporate-Level Taxation 27 [D] Taxing the Corporate Sector in an Imperfect World Corporation Income Tax and Corporate Behavioral Control 33 IX

3 [A] Structural Distortions 33 [B] CIT and Corporate Behavioral Control 35 [C] Behavioral Control Instruments under a CIT System 36 [D] Types of Possible Behavioral Control 38 [E] Interaction Problems of CIT Behavioral Intervention 39 [F] Firm's Reaction to the Behavioral Control Instruments 41 [1] Current and Expected Future Tax Position of the Taxpayer 42 [2] Degree of Substitution to the Specific Tax Provision 42 [3] Stage of Development of the Firm 47 [G] Complexity of the CIT System When Used For Behavioral Control 49 [H] Other Negative Consequences of Behavioral Control 51 [I] CIT's Behavioral Control Instruments versus Direct Subsidies 52 [J] CIT and Corporate Behavioral Control A New Policy Approach 58 [A] A New Policy Approach to CIT 58 [B] Issues Raised by the New Policy Approach 61 CHAPTER 2 Taxation of Corporate Groups under the Standard CIT System Nature of Corporate Groups 65 [A] Economic Nature of Corporate Groups 65 [1] Beyond the Classic Distinction of Firm and Market 65 [2] Unitary Economic Direction and Organized Internal Markets 68 [3] "Chameleon-like" Governance Structure 69 [B] Legal Nature of Corporate Groups 71 [1] Distortions to the Legal Structure of a Corporation Introduced by Intercorporate Control 71 [2] Corporate Group as a Legal Person 72 [3] Corporate Group as a Polycorporative Network 74 [C] Functional Nature of Corporate Groups 75 [1] Evolution of Functional Structures 75 [a] From the Single-Unit and Single-Corporate Enterprise to the Multi-Unit and Polycorporate Enterprise 76 [b] Centralized and Decentralized Governance Structures - 77 [2] Functional Structures of Multinational Corporate Groups 78 [a] Modern Multinational Corporate Groups: Beyond the M-Form 78

4 [i] Transnationality 79 [ii] Heterarchy 80 [D] Reconsidering the Nature of Corporate Groups 81 [E] Tax Policy and the Nature of Corporate Groups Mechanics of the Standard CIT System 83 [A] Basic Operational Structure of the Standard CIT System 83 [1] Three Core Structural Pillars of the Standard CIT System 84 [a] Corporate-Level Tax 84. [b] Realization-Based Taxation 84 [c] Yearly Tax Assessment Rule" 86 [2] Secondary Structural Pillars 88 [a] Capital/Ordinary Income Divide 88 [b] Limitations on the Use of Losses 91 [c] Continuity of Interest Principle 92 [d] Dual Set of Tax Attributes 93 [e] Rules to Define and Treat Distributions 93 [f] Capitalization, Depreciation and Amortization Rules 94 [B] Transactional Mechanics of the Standard CIT System 98 [1] Nature of Good Transferred 98 [2] Direction of Transactional Flow 102 [3] Ownership Thresholds 104 [4] Legal Instrument Adopted 106 [C] Structure, Form and Substance under the Standard CIT System 106 [1] Basic CIT Principles and the Operational Structure of the CIT System 106 [2] Significance of Form on Tax Treatment 108 [3] Economic Integration and Tax Treatment 111 [a] Economic Integration, Substitution and Discontinuity 111 [b] Economic Integration and Anti-abuse Nature of Corporate Groups and the Standard CIT System Dynamic Effects of Taxing Corporate Groups under the Standard CIT System 123 [A] Manipulation of Legal Characterization 123 [1] Discontinuity, Substitution and Transaction Costs 123 [2] Perfect and Imperfect Substitution 124 [B] Manipulation of Timing 126 [C] Consequences of Manipulating the CIT System 126 [1] Complexity and Transaction Costs 126 [2] Reduction of Ability to Shift Capital to Its Most Efficient Use 127 [3] Agency Problems 127 XI

5 [4] Rigid and Potentially Sub-optimal Functional and Legal Structures 128 CHAPTER 3 Tax Integration of Corporate Groups Mechanics of Tax Integration 131 [A] Tax Integration Solutions 131 [B] Tax Integration of Corporate Groups through the Relaxation ^ of the Standard CIT System's Anti-abuse Arsenal 132 [C] Interaction of Tax Integration Solutions with the Outside Environment 133 [D] Mechanic Structure of Tax Integration Solutions Closed Setting Framework: Common Issues 138 [A] Common Issues of Tax Integration Solutions 138 [B] Eligible Entities 138 [1] Residency 139 [2] Control 139 [a] Definition of Corporate Group for General Regulatory Purposes 139 [b] Definition of Corporate Group for Tax Integration Purposes 141 [i] Criteria to Determine Control 141 [ii] Power and Ownership 142 [iii] Power and Economic Integration 147 [iv] Definition of the Boundaries of the Tax Group 149 [3] Business Characteristics 149 [C] Applicability Regime 152 [1] Mandatory versus Elective Applicability 152 [2] Procedural Aspects 155 [D] Proportional versus Full Consolidation Closed Setting Framework: Mechanic Analysis 159 [A] General Conceptual Framework 159 [B] Common Tax Base 167 [1] Entry Issues 168 [a] Entry Issues: Tax Losses 168 [b] Entry Issues: Assets 174 [2] Transfer of Tax Losses ' 176 [a] US Group Taxation Regime 178 [i] Floating Outside Basis 178 [ii] Determination of the Tax Liability of the Corporate Group 181 xn

6 [ill] Problem of Transfers of Tax Group Members' Stock 182 [b] Participation Exemption 185 [c] Integration Approaches under a Common Tax Base with a Participation Exemption Regime 186 [3] Transfer of Assets 188 [a] Option 1: Recognition Mechanics with Deferment of Tax Liability 190 [b] Option 2: Disregard of Transaction 192 [c] Option 3: Carryover Mechanics 193 [d] Other Considerations 193 [4] Transfer of Income 194 [5] Exit Issues 197 [C] Separate Tax Base 200 [1] Entry Issues 202 [2] Transfer of Tax Losses 204 [3] Transfers of Assets and Income 208 [4] Exit Issues 208 [D] Single Tax Base 209 [1] Entry Issues 210 [2] Exit Issues 215 [3] Other Considerations 217 [E] Flow-Through Model with Multiple Owners 218 [F] Hybrid Models 222 [1] Molecular Model 222 [2] Other Hybrid Models Tax Rate Tax Amount Payable Conclusion: Mechanics of Tax Integration under a Closed Setting Framework Dynamics of Tax Integration under a Closed Setting Framework 241 [A] Considerations on Efficiency 242 [1] Continuity of the Tax Rules in Intra-group Transactions 242 [2] Optimization of Group Resources 243 [3] Flexibility for Restructurings of Corporate Structures 244 [4] Simplified Combination of Tax Attributes 244 [B] Analysis of Distortions and their Interactions 245 [1] Structural Distortions 245 [a] CIT System and Corporate Risk-Taking 245 [b] No Relief for Losses 247 [c] Relief with Full Refund 247 [d] Relief without Refund but with Carryover Allowed 249 Xlll

7 [i] Inter-Entity Loss Carryovers and Tax Integration 250 [ii] Year Carryovers and Tax Integration 253 [iii] Source Carryovers and Tax Integration 257 [2] Affirmative Use of Non-tax Law Frictions 257 [3] Nature of Corporate Groups 258 [4] Tax and Regulation Conclusion: Dynamics of Tax Integration under a Closed Setting Framework Taxing Corporate Groups under an Open Setting Framework 261 [A] Efficiency under an Open Setting Framework 262 [1] Internal Efficiency of the MNG 262 [2] Efficiency from the Perspective of the States 263 [B] Fundamental International Tax Reform 265 [C] Current Country Experience 268 [1] Issue [2] Issue [3] Issue [4] Issue [a] Foreign Subsidiary 271 [b] Foreign PE 274 [c] Other Considerations 275 CHAPTER 4 Policy Guidelines General Guidelines Specific Guidelines on Tax Integration 282 Appendix 289 Glossary 305 Bibliography 307 Table of Statutes 325 Index 331 xiv