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What is Tax Due Diligence

Tax Due Diligence services are a part of the Due Diligence process under which we examine the company's unrecognized tax expenses and other tax issues.

This process is done before the pre-acquisition of a company. When you enter into an M&A agreement it’s really important to know about the tax obligation which is attached to the transaction. 

It helps you make wise decisions in the potential deal. Any merger and acquisition transaction has to be carefully executed. Before taking any decisions a due diligence process is a must.

Table of Content:

  • Tax Due Diligence meaning
  • Tax Due Diligence benefits
  • Tax Due Diligence Checklist
  • Why tax due diligence is important
  • Areas of investigation under tax due diligence
  • M&A Tax Due Diligence
  • Tax preparer of due diligence
  • Significance of Tax Due Diligence
  • FAQs

Tax due diligence meaning

Tax due Diligence is the detailed investigation of the target company’s unrecognized taxes and tax expenses, if any, and reviews the historical tax compliances of the target company. 

Tax Due Diligence benefits

  1. It helps in gaining the existing tax structure of the target company.
  2. Assesses the unutilized tax opportunities and presents any tax risk available. the target company adheres to all the tax compliances of the government. 
  3. Identifies the tax exposures of the target company. 
  4. It also investigates the tax incentives, tax credits carried forward which are used to take the M&A decision. Clients use the information to decide on post-M&A tax planning.

Tax Due Diligence Checklist

  • Financial statements: Tax information is provided in the balance sheet. It discloses the aggregate tax provision made and tax paid by the target company.
  • Methods of accounting: Check whether the target company follows different accounting methods and it’s not as per the company’s law. Check the difference in tax due to a change in accounting method.
  • Income tax returns: Ensures all the tax payments are made, current and previous as well.
  • Review Company’s tax audit: A tax audit refers to a check, verification, and inspection of records and transactions.

Why tax due diligence services are important

It's important to detect any tax evasion if any and penalties attracted to the target company. 

It understands the structure of expected transactions in M&A.

Making any mistake in tax due diligence can lead to heavy penalties for the government.

Areas of investigation under Tax Due Diligence Services

  • Tax liabilities and assets: It is to analyze the tax liability of the target company. The buyer company must know about the tax liability attached to it if any.
  • Tax compliance: Tax due diligence is to ensure that the target company adheres to all the tax compliance of governments.
  • Employee tax: Investigation includes employee contracts and compensation structure.
  • Tax credit: tax due diligence analysis if any tax liability is miscalculated or wrongly claimed.

M&A Tax Due Diligence

In M&A it's essential to understand the tax obligation, if any arises, of the target company. 

It helps to understand the target company’s existing tax structure. 

If there is any tax evasion, avoidance, or penalty attracted to the target company. So, M&A transactions can take place smoothly.

Tax preparer of due diligence

The tax preparer determines the information of tax, whether it is correct or not? Given by the taxpayer. 

Any tax liability arises, which is not paid off and is to be cleared. Tax preparers must keep the document for at least 3 years. 

The preparer must inquire about the information, they appear to be correct and complete.

Significance of Tax Due Diligence

Financial due diligence & Tax due diligence plays a significant role in M&A transaction decision-making. 

It is carried out to understand the tax profile of the target company. Tax is an unavoidable cost for the company. 

So, If there is any tax evasion by the target company it is to be identified because it may lead to heavy penalties. 

Although, tax is not primarily considered in M&A transactions. It helps in validating the representations made by the seller company.

Especia makes the due diligence process very easy and quick. It has an experienced team and works in an efficient and effective manner.

Frequently Asked Questions(FAQs)

If the target company is located in other states, do I have to tax due diligence in that state only?

No, even if the target company is located in another state, tax due diligence can be done from any place. Today, it is the time of e-commerce, electronic communication, and electronic delivery which has changed the state tax landscape. Tax due diligence can be done from anywhere, this service is outsourced.

The Due Diligence procedure, which we use to investigate the company's unrecognised tax costs and other tax problems, includes Tax Due Diligence services.

Before a firm is pre-acquired, this procedure is carried out. Understanding the tax liability associated with the transaction is crucial before entering into an M&A agreement.

Any merger and acquisition transaction must be properly planned and carried out; as a result, the buyer often follows specific agreed-upon protocols to evaluate the purchase from commercial, financial, tax, and legal aspects before concluding a deal and making more informed judgments.

You must include these items in your own checklist:

  • Accounting records, tax returns, assets, and budgetary statements
  • Contracts, litigation, licences, patents, and other legal documents
  • Corporate structure, board composition, and minutes of board meetings
  • Market share, competitive landscape, goods, and services
  • Organisational structure, compensation and perks for employees

Identifying tax evasion, if any, and penalties applied to the target entity are essential.

It knows and understands the format of anticipated M&A deals.

Any government tax due diligence error might result in severe fines.

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