Acquiring a business is always a complex and multiple-step process. Buyers need to evaluate all risks connected to the deal as precisely as possible to ensure the profitable results. Among many other aspects to analyze, tax due diligence is often disregarded when evaluating a target company.
Especially in the case of share purchases overlooking tax due diligence can place the buyer in high risk. With a share purchase agreement, the buyer gains responsibilities and liabilities of the acquired company even if they were discovered after the purchase.
Why is it so important?
Depending on the scope and reach of the activities, all companies work as a part of their local tax regulatory regimes. In addition, international businesses must also comply with tax regulations in all regions where they are present.
This is a part of the difficulty for the buyers: each jurisdiction has an uncountable number of taxes for different company types. That is why buyers struggle to efficiently assess whether a potential target company truly complies with al needed tax laws to the full extent.
Once there are any tax issues discovered after the purchase, it significantly and quickly degrades the deal.
To illustrate, these issues can be non-filing exposures, overstated non-capital losses, underreported tax liabilities, or others. The goal of tax due diligence is to find out about these problems before the purchase takes place.
Basically, it helps the buyer to:
- Define the structure of the deal
- Determine agreement terms
- Make informed purchasing decisions
- Obtain support for negotiation.
Processing tax due diligence
Traditionally, tax due diligence is processed by accountants or lawyers who have experience with corporate tax. Their job is to evaluate different types of tax exposures imposed upon a target company.
Crucially, the experts do not only review corporate tax returns but also focus on high-risk areas such as:
- Foreign affiliates
- International business activities
- Transfer pricing.
Typically, tax diligence also involves a review of tax and legal documents including foreign reporting forms, objections, past audits, any pre-closing tax structuring steps.
Does tax due diligence seem like a difficult process to you? We will be happy to do this work for you. Experts from COREDO are true specialists in this field and have been performing such tasks for multiple years now.