Intercompany Profits

Transactions between the legal entities included in the consolidated financial statements are eliminated such that the consolidated results solely reflect the effects of 3rd party transactions. However, intercompany transactions may be taxable prior to the ultimate 3rd party transaction occurring.   


Most tax regimes impose an income tax when the entity or entities included in a particular return enter into a transaction with any entity not included in that same return, regardless of whether those entities are related parties or not. This creates a situation where there is an economic cost that must be accounted in the income taxes currently payable despite the fact that the transaction that gives rise to the tax is eliminated from the financial statements.


The elimination of the income tax expense on intercompany profits is recorded as a credit to current income tax expense offset by a deferred charge/prepaid tax rather than a DTA. ASC 740-10-25-3(e) prohibits the recognition of a DTA relating to intercompany profits.


There is diversity in practice regarding the types of transactions that should be eliminated and when to account for secondary effects such as Subpart F and FTC implications that arise due to the intercompany transactions.


The FASB is currently deliberating changes to these rules.







© 2019 Tax Prodigy, LLC The training provided by Tax Prodigy Provision Academy is general information only and is not, by means of this publication or recording, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication/recording does not substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified advisor. TAX PRODIGY, LLC shall not be responsible for any loss sustained by any person who relies on this publication.

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