When you are the preparation for a sale of a business tax due diligence could appear to be an afterthought. However, the results of tax due diligence can be vital to the success of a transaction.
A thorough examination of tax laws and regulations can help identify potential deal-breaking issues well before they become a serious issue. They could range from the fundamental complexity of a company’s tax situation to the nuances of international compliance.
The tax due diligence process is also an opportunity to determine whether a company has the potential to create tax-exempt presence in other nations. A foreign office, for example, can trigger local taxes on income and excise. Even though an agreement could mitigate the impact, it’s crucial to be proactive and understand the potential risks and opportunities.
As part of the tax due diligence workstream we review the proposed transaction and the company’s past transactions in the areas of acquisition and disposal and also review the company’s transfer pricing documentation and any international compliance issues (including FBAR filings). This includes analyzing the underlying tax basis of liabilities and assets and identifying tax attributes that could be used to increase the value.
For instance, a company’s taxes deductions could exceed its taxable income, resulting in net operating losses (NOLs). Due diligence can help determine whether these NOLs are realizable and the possibility of transferring them to the new owner as carryforwards or used to lower tax liability following the sale. Other tax due diligence items include unclaimed property compliance which, although not specifically a tax subject is becoming a subject that is being scrutinized by tax authorities of the state.