Separate entity and group taxation systems
196. Countries currently apply corporate tax systems which include different types of group taxation and separate entity taxation. The best practice approach described in this report should be compatible with any system, although in some cases specific provisions within the best practice approach may require adjustment.
Countries applying separate entity taxation systems
- 197. Where a country taxes each entity within a group separately, the fixed ratio rule and group ratio rule may be applied in any of the following three ways at the discretion of the country:
- • The fixed ratio rule and group ratio rule may be applied separately to each entity based on its EBITDA.
- • The country may treat entities within a tax group as a single entity for the purposes of applying the fixed ratio rule and group ratio rule. For example, the benchmark fixed ratio would be applied to the tax group’s total tax-EBITDA. Interest capacity would then be allocated within the tax group in accordance with rules developed by the country, which may include allowing a group to determine the allocation of interest capacity between entities. To prevent abuse, transactions within the tax group which do not net off may be stripped out of the tax group’s "entity EBITDA". Under this option, entities which are in the same financial reporting group, but which are not part of the same tax group, would continue to be treated as separate entities and would apply the fixed ratio rule and group ratio rule independently.
- • The country may treat all entities in the country which are part of the same financial reporting group as a single entity for the purposes of applying the fixed ratio rule and group ratio rule. Transactions within the financial reporting group which do not net off may be excluded from "entity EBITDA" to prevent abuse. This option may be particularly relevant for a country with a group ratio rule, which applies to entities in a financial reporting group. However, as this could in effect allow the transfer of interest capacity between entities which are not in a tax group, the country may need to consider whether this raises any policy concerns (such as inconsistency with existing loss surrender, profit contribution or similar rules). The operation of other provisions such as carry forwards and carry backs would need to be considered, for example whether an entity should be able to benefit from attributes carried forward from a period before it joined the financial reporting group.