When it comes to the preparation for a sale of a business, tax due diligence may seem like an afterthought. Tax due diligence results can be critical to the success or failure of a business deal.
A thorough examination of tax rules and regulations can uncover potential deal-breaking issues before they become problems. They can range from the basic complexity of a business’s tax situation to the nuances of international compliance.
The tax due diligence process also considers whether a company is likely to create tax-paying presence in other countries. For instance, a place of business in a different country can cause local country income and excise taxes and, even though there’s a treaty between US and the foreign jurisdiction could reduce the effects, it’s vital to recognize the tax risk and opportunities proactively.
We analyze the proposed transaction, as well as the company’s acquisition and disposal activities in the past, and review any international compliance issues. (Including FBAR filings) As part of our tax due diligence process we also review the transfer pricing documentation and the company’s transfer price documentation. This includes assessing assets and liabilities’ underlying tax basis and identifying tax attributes that can be used to increase the value.
For instance, a company’s taxes deductions could exceed its income taxable, leading to net operating losses (NOLs). Due diligence can be used to determine whether these NOLs are able to be realized and if they can either be transferred to the new owner in the form of tax-free carryforwards or used to reduce the tax burden after a sale. Other tax due diligence items include unclaimed property compliance which, while not a tax issue is becoming a subject of increasing scrutiny by state tax authorities.
