When it comes to making preparations for a business sale, tax due diligence may be viewed as an afterthought. However, the results of tax due diligence could be crucial to the success of a deal.
A thorough examination of tax regulations and rules can identify potentially deal-breaking issues before they become a problem. They can range from the basic complexity of a company’s tax position to the specifics of international compliance.
Tax due diligence also looks at whether a company can create an overseas tax-paying presence. A foreign office, for instance can trigger local excise and income tax. While treaties can mitigate the consequences, it’s crucial to be proactive and know the potential risks and opportunities.
We review the proposed transaction, the company’s acquisition and disposal practices in the past, and look into any international compliance issues. (Including FBAR filings) As part of our tax due diligence workstream we also analyze the documentation on transfer pricing along with the company’s documents relating to the transfer price. This includes assessing the assets and liabilities’ tax basis and identifying tax attributes that could be utilized to maximize the value.
For example, a company’s tax deductions could exceed its income taxable, leading to net operating losses (NOLs). Due diligence can help to determine whether these NOLs are realizable and whether they could be transferred to the new owner as carryforwards or used to reduce tax liabilities following the sale. Other tax due diligence issues include unclaimed property compliance that, though not a specific tax issue, is becoming an area of increasing scrutiny by tax authorities in the state.