Tax due diligence

Feb, 01 2020

Contents:

First, we should define the term itself. An audit is a procedure when a specialist scrutinizes company documents and tries to identify any hidden problems, debts, and other potential problems. Who needs that? When you buy a ready-made company, you have to understand all risks and correctly assess the situation; otherwise, you run the risk of facing huge problems. For evaluating the transaction, you need to provide a tax audit.

Purposes of a tax due diligence 

The primary purpose of the tax audit is to assess a company’s attractiveness for buyer or owner. Is it a beneficial decision to invest money in this business? There are hidden problems that can make a business unprofitable and risky, and the tax audit allows you to evaluate the company properly. The audit is carried out in the following cases:

  1. Changing of legal form/type of company.
  2. Carrying out financial recovery.
  3. Monitoring the company condition.
  4. Buying or selling a business.

Therefore, the main goal is to identify all possible errors and the associated risks, as well as the potential costs of troubleshooting. Simultaneously, the tax audit is quite complex and usually includes several consecutive steps that will be discussed below.

Tax due diligence main steps

There is an approximate sequence of steps for a tax audit:

  1. Assessment of a current corporate structure. This step is necessary to determine a company structure including unknown subsidiaries, branches, representative offices, etc. It also establishes the list of dependent and authorized persons. At this stage, the total transaction price and the rules of controlled foreign companies must be determined.
  2. Assessment of transactions and contracts. After a detailed analysis of the company structure and the associated risks, it is necessary to check the contracts and counterparties carefully. Indeed, it makes no sense to check all contracts. The tax audit of a large company should include only contracts with high price. The limit may be set at the price of USD 10,000. For small and medium-sized companies, it is possible check all the contracts.
  3. Assessment of internal documents. At this step, it is required to assess whether there are individual entrepreneurs in the company’s structure with valid agreements. This will help to assess the risk associated with tax liabilities. In an ideal case, additional contracts should not be found, but if it is happened, the level of risk associated with tax liabilities is increased. 
  4. Assessment of a current tax policy. Throughout the assessment advisors check the company’s bank account and provide compliance with applicable tax laws. 
  5. Assessment of open court proceedings and audits by tax authorities. The Russian Federation’s tax authorities may carry out no more than two inspections of a company per year; therefore, if tax authorities provide more inspections, it indicates problems. 

What do we offer?

We offer you a full company tax audit service. This allows you to be confident that you have a complete picture of all the risks and challenges. We provide some services in tax analysis and accounting, general assessment of the financial condition of a company and its documentation.

Author of the article

Tax due diligence
Ignat Shevchenko
Lawyer

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