The undistributed earnings of unconsolidated subsidiaries and joint ventures are the most common example of this problem. the U.S. tax code requires 80% ownership to consolidate for tax purposes, excluding joint ventures and many subsidiaries that are consolidated for accounting purposes. in addition, foreign subsidiaries are not consolidated in the U.S. tax return.
as a result, the income of these affiliates is taxable on the parent’s (U.S.)tax return only when dividends are received or the affiliate is sold, not when earnings are recognized. there is a difference between (tax return) taxable in come and (financial reporting) pretax income. if the affiliate earnings are permanently reinvested, then affiliate earnings may never be taxable on the parent company’s tax return.