Aims of tax due diligence :
Understand the materiality of the deal value.
Seek to understand whether there are any tax exposures in
the company that will result in a profit and loss account charge,
reduction in balance sheet or additional cash taxes payable.
Seek to quantify the potential exposure in respect of issues.
Seek to understand the risk of the exposure crytallising.
Consider whether the exposure will result in a fall in
purchase price, seek contractual protection and consider how it can be used in
the negotiating position.
Examples of need for tax due diligence
Understands contingent claims and rights of tax authorities to
Understand tax debtor balances and how they will be recovered.
VAT and sales tax issues associated with specific industries –
These taxes are based taxes and therefore often material.
Payroll taxes issues – individuals are self employed in
certain industries but may be treated as employees for tax purposes resulting
in significant liabilities for both parties.
Thin capitalization/interest deductibility issues and those in
respect of prior transactions e.g mergers within group companies.