Are business deals closed without any prior analysis? Do business owners jump on any profitable deal they come across without a second thought? No, business owners never jump to conclusions immediately after discovering a business deal. Instead, they thoroughly examine the pros and cons of the corporate deal before closing it. If a business opportunity can offer long-term growth, business owners will take it.
How do business owners determine whether a deal is beneficial for their company or not? By choosing the right due diligence services, business owners can learn vividly about the target company before establishing a partnership. Among all types of investigative services, tax due diligence services are the most crucial ones for companies. Read on to learn about the ultimate tax due diligence checklist for business owners in India.
What exactly is tax due diligence?
Let’s say a company wants to merge with another firm or acquire it completely. What will be the key points for discussion among business owners and stakeholders before closing the M&A deal? Business owners and stakeholders will want to know the target company’s financial position, tax obligation, administrative power, and market reputation. All this information can be uncovered only by conducting various due diligence activities. Different due diligence processes are performed before closing a corporate deal like, tax due diligence, financial due diligence, reputational due diligence, etc.
Tax due diligence focuses on uncovering the tax obligations of the target company. The taxation structure of the target company is studied in light of due diligence practices. Is there a need to change the existing tax structure of the target company? It’s a critical question to ask before acquiring a firm. Since the company is looking to acquire the target company, it is essential to know the tax structure. If there are pending taxes on behalf of the target company, they will be transferred to the acquirer. The acquirer does not want any tax implications to bog down the company’s growth. To learn everything related to taxes of the target company, tax due diligence services are essential.
While tax due diligence is usually conducted before M&A deals, it is not limited only to mergers and acquisitions. Sometimes, business owners and other stakeholders might want to know the existing tax burdens and obligations. They can conduct tax due diligence and learn about the same. However, tax due diligence activities are not carried out to evade taxes. Instead, it is performed to understand the existing tax structure and obligations.
Checklist for an effective tax due diligence
A business wants to uncover everything about the target firm with tax due diligence services. Here is a checklist to ensure everything is covered in the tax due diligence:
- Start by reviewing the state and federal tax returns of the target company. Also, assess the negative tax elements against the cost of the acquisition. Due diligence experts must cross-check the target company’s tax depreciation and negative gains. If all the taxes of the target company are remitted, you are good to go.
- Every company conducts tax audits at frequent intervals to be aware of the tax liabilities. Therefore, it’s crucial to access the findings of previous tax audits in the company. The acquirer will clearly understand the existing tax liabilities and policies by finding the results of prior tax audits.
- Accounting methods often decide the tax policies for a company. Changes in accounting techniques can give rise to tax hangovers. For the same reason, it is vital to analyse the accounting practices of the target company with tax due diligence.
- Ensure that the target company performs business activities under federal/state tax rules. For example, a company does not want to acquire a firm already blacklisted by authorities for tax evasion.
- Before acquiring a global company, try to understand its foreign tax structure. Before acquiring a global company or merging with an international business, international tax planning is essential.
- The final step in the due diligence checklist is ensuring the target company has dedicated employees for the taxation process. If the target company outsources the tax process, collect information related to the third-party service provider.
Once the checklist is complete, you will have valuable insights into the tax structure of the target company. Partner with a CA firm for tax due diligence services today!