A tax sharing agreement is created between the members of a consolidated company where every member of the consolidation takes responsibility of sharing a preset tax liability not paid by the chief of the consolidated group. Such an agreement helps in tax savings when the head of the consolidation is in a country that has a high corporate income tax rate and the subsidiaries are in countries with lower rates. The subsidiaries can be protected from being charged a higher rate of interest.
All the companies in a tax sharing agreement must calculate and show their taxes as a separate entity. Such an agreement helps in case of an AMT or Alternative Minimum Tax. A subsidiary member of the consolidation group may have to pay higher taxes because of AMT and in such a case, a tax sharing agreement will help the subsidiary as the difference between the AMT liability and the usual consolidation tax liability will be shared between all the members.
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