Tax Agreements

What are Tax Agreements?

Tax agreements are the arrangements between your company and group companies to directly or indirectly share tax liabilities.

Tax agreements cover your company’s obligations to pay the tax liabilities of your group entities and vice versa, based on a predefined arrangement. In cases where your company fails to pay its tax liabilities, the other group entities can become jointly and severally liable to pay outstanding tax based on these agreements.

It covers:

• Tax Sharing Agreement: Under this agreement, your company’s tax liabilities are shared between your group entities in a ratio pre-determined by your company and vice versa
• Tax Funding Agreement: Under this agreement, your company’s outstanding tax liabilities are funded collectively by your group entities and vice versa

Why are Tax Agreements important for business today?

Tax agreements enable your company to:

• Share your company’s tax liabilities and risks with your group entities
• Calculate the tax sharing ratios applicable for your group entities under the tax sharing agreement
• Assess and evaluate the circumstances under which your group companies have to pay your tax liabilities and vice versa
• Allocate funds for payment of the tax liabilities of your group entities
• Evaluate your group entities’ outstanding tax liabilities and the impact of paying them on your financial performance

Why are Tax Agreements important for an event tomorrow?

Tax agreements are important for an event tomorrow, as they help:

• Evaluate the tax liabilities of your company and other group entities in consolidation
• Understand the agreements in place to share or fund tax liabilities within your group entity and assess terms and conditions
• Evaluate the distribution of tax among your group entities and their compliance with obligations
• Understand the internal policies and procedures to meet the tax obligations of your company and assess the reserves created to meet them
• Track the number of times your group entities were required to pay your company’s tax liabilities and vice versa and assess the reasons behind them

Pros of addressing Tax Agreements

• Recognition of, and compensation to your group entities for undertaking your tax liabilities
• Reduction in conflicts among group entities, as terms and conditions are agreed and pre-defined
• Facilitation of accurate reporting and accounting of inter-company payables and receivables in your group’s consolidated financial statements
• An exit clause your company can rely on, which limits your liability for future tax debts
• Better financial planning and reduction in tax burden on your company, as tax liabilities and risks are shared

Cons of not addressing this topic

• Limited ability to help a financially distressed group entities
• Increase in conflicts within your group entities since terms and conditions and tax sharing ratios are not pre-defined and agreed
• Difficulty in tracking the outstanding tax liabilities among your group entities.