When you are preparing for a business sale tax due diligence could be viewed as an afterthought. Tax due diligence results can be critical to the success or failure of a business transaction.
A thorough review of tax laws and regulations can help identify potential issues that could cause a deal to fail before they become a major issue. They can range from the basic complexity of a company’s tax position to the nuances of international compliance.
Tax due diligence also looks at the possibility of a business creating a an overseas tax-paying presence. For instance, a business in a foreign country could trigger local country taxation of excise and income taxes, and even though a treaty between the US and the foreign country could mitigate this impact, it’s important to recognize the tax risk 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 program, we also examine the transfer pricing documentation as well as the company’s documents relating to the transfer price. This includes assessing assets and liabilities’ underlying tax basis and identifying tax attributes that could be used to maximize value.
Net operating losses (NOLs) are a result of when the deductions of a business exceed its taxable income. Due diligence can be used to determine if the NOLs are able to be realized and if they are transferable to the new owner in the form of tax carryforwards or utilized to lower the tax liability following a sale. Unclaimed property compliance is yet another tax due diligence issue. Although not a strictly subject of taxation, state tax authorities are increasingly scrutinized in this field.