When it comes to making preparations for a business sale, tax due diligence may seem like a last-minute thought. 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 reveal potential issues that could cause a breach before they become problematic. This could be anything from the fundamental complexity of a company’s tax situation to the nuances of international compliance.
Tax due diligence also considers the possibility that a company could create a an international tax-paying entity. For instance, a place of business in a foreign jurisdiction can create local taxation of excise and income taxes even though there’s a treaty between US and the foreign country could mitigate the impact, it’s crucial to understand the tax risks and opportunities proactively.
As part of the tax due diligence workstream we review the proposed transaction and the company’s past disposal and acquisition activities as well as look over the documentation on transfer pricing for the company and any international compliance issues (including FBAR filings). This includes assessing the tax basis of assets and liabilities and identifying tax-related attributes that could be used to maximize valuation.
For example, a company’s tax deductions could be higher than its income tax deductible, which results in net operating losses (NOLs). Due diligence can be used to determine if these losses can be realized and whether they are transferable to a new owner as tax-free carryforwards or used to reduce the tax burden following a sale. Unclaimed property compliance is yet another tax due diligence item. While it isn’t a tax issue however, state tax authorities are being scrutinized more in this regard.
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