Tax due diligence is a vital part of corporate mergers and acquisitions, requiring an in-depth review of tax documents by professionals. It satisfies the fiduciary duty of executives and directors to maximize value for shareholders and can take months to complete. Tax consequences can make or break a sale, and multinational companies require a professional assessment of various accounting principles.
Tax due diligence is the investigation of a company’s current and future tax liabilities. It is an aspect of the general due diligence conducted in corporate mergers and acquisitions (mergers and acquisitions) when one company plans to acquire another or more companies intending to merge. The process requires a review of certain tax documents by professionals with in-depth knowledge of the tax code of the applicable jurisdictions.
Due diligence is a legal standard of counsel that requires parties to a sale to make every effort to determine the legitimacy of the transaction. The standard places the responsibility on the buyer to conduct a thorough investigation to ensure that he is receiving the benefit of the deal. In a corporate context, due diligence satisfies the fiduciary duty of executives and directors to ensure that any decision made maximizes value for existing shareholders. Inadequate due diligence will limit a company’s legal options if something is later found to be wrong with the transaction, because there will be a contributory negligence aspect.
A complex M&A transaction will require separate financial, legal, operational, strategic, and tax due diligence investigations of the acquiree or both companies in the event of a merger. Each of these areas of investigation will be handled by a team of accountants or lawyers, as well as the management of the acquiring company. Tax due diligence is a particularly exhaustive process and can take months to complete, depending on the number of jurisdictions involved in the sale.
The tax team reviews all documents relating to any type of tax liability or assessment, including income, sales, employment, capital, and asset taxes. They will ask for access to tax returns, balance sheets, audits, assessment notices, tax decisions and tax-related memos produced by staff and consultants over the years. Following a review of the documents in the context of applicable tax legislation, the team will produce to management a written tax due diligence report which contains a professional opinion regarding all relevant tax liabilities and possible future impacts.
Tax consequences can make or break a sale. Even the simplest sale requires a substantial investigation that takes into account different levels of tax liability, such as national, regional and local. The scope of the investigation becomes exponentially more complex if the companies involved are located in different countries or when the acquired company has multiple subsidiaries. Tax due diligence for multinational companies includes a professional assessment and reconciliation of various accounting principles, treatment of domestic versus foreign sources of income and tax return filing locations, as well as pricing issues related to the transfer Property.
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