Who participates in corporate income tax consolidation?: Evidence from Japan

When a group of affiliated corporations can file a single tax return based on a combined income, what types of groups would take up the option? This study empirically analyzes 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 from 2002 to 2007. Results indicate a higher likelihood of participation among groups characterized by low correlation in returns among group members, high variance in returns, many subsidiaries, and losses accumulated in parents. The significant influence of variance and covariance of returns suggests that a consolidation scheme improves the efficiency of a corporate income tax by reducing profit shifting.