Tax due diligence is a critical component of any mergers and acquisitions (M&A) transaction. It involves a comprehensive review of the tax liabilities, obligations, and risks associated with a target company, and is designed to identify any potential tax issues that could impact the transaction or the value of the company.
The primary objective of tax due diligence is to help the buyer assess the tax risks associated with the target company and determine the potential tax consequences of the transaction. The buyer can use this information to negotiate the purchase price, structure the transaction, and develop a post-transaction tax strategy.
The scope of tax due diligence can vary depending on the nature and size of the transaction. However, some of the most common areas of focus include:
- Corporate structure: Tax due diligence involves a review of the target company’s corporate structure to ensure that it is tax-efficient and complies with all applicable laws and regulations. This includes a review of the company’s legal entity structure, ownership structure, and any tax elections that have been made.
- Tax filings and compliance: The buyer will want to review the target company’s tax filings for the past several years to identify any compliance issues or potential tax liabilities. This includes a review of federal, state, and local tax returns, as well as any tax audits or disputes.
- Tax positions and reserves: Tax due diligence involves a review of the target company’s tax positions and reserves to identify any potential tax risks or contingencies. This includes a review of the company’s tax accruals, reserves, and any other tax-related liabilities.
- Transfer pricing: If the target company has operations in multiple jurisdictions, the buyer will want to review the company’s transfer pricing policies to ensure that they are in compliance with local laws and regulations. This includes a review of the company’s transfer pricing documentation and any related-party transactions.
- Tax incentives and credits: The buyer will want to review any tax incentives or credits that the target company has received or may be eligible for in the future. This includes a review of any tax treaties, tax holidays, or other tax incentives that the company may be entitled to.
The tax due diligence process is typically conducted by a team of tax professionals, including attorneys, accountants, and tax advisors. The team will work closely with the buyer’s legal and financial advisors to identify any potential tax issues and develop a plan to mitigate any risks.
In addition to identifying potential tax risks and liabilities, tax due diligence can also help the buyer develop a post-transaction tax strategy. This may include strategies to minimize tax liabilities, optimize the tax structure of the combined company, and take advantage of any available tax incentives or credits.
