WHO PARTICIPATES IN CORPORATE INCOME TAX CONSOLIDATION? EVIDENCE FROM JAPAN

When a group of affiliated corporations have the option to file a single tax return based
on a combined income, what types of groups would take up the option? This study
empirically analyses decisions to participate in a single-jurisdiction consolidated tax
filing. The data consists of 2,782 Japanese corporate groups headed by publicly-traded
corporations observed over 2002-2007. Results indicate higher likelihood of
participation among groups characterised by low correlation in returns among group
members, high variance in returns, large number of subsidiaries, and losses
accumulated in parents. The significant influence of variance and covariance of returns
suggests that a consolidation scheme improves the efficiency of corporate income tax
through reducing profit shifting.