Tax due diligence

Feb, 01 2020


Tax due diligence is a procedure used by companies while closing deals with counterparts in order to determine and reduce risks. This procedure implies a thorough analysis of internal documentation, as well as financial and tax reporting, taking into account the requirements of legislation. The audit increases the attractiveness of the transaction object for investors, potential buyers and other interested parties.

Nature and objectives of tax due diligence

Preliminary audit of reporting is of great importance for any business, since the tax burden affects the assessment of the condition and attractiveness of the transaction object. It can make a business unprofitable and unpromising in terms of investment. As a rule, companies need to conduct a comprehensive tax audit in the following cases:

  • reorganization of a legal entity;
  • company’s financial recovery;
  • monitoring the current asset’s status and determining the future one;
  • purchase and sale of assets

The objectives of tax due diligence are detecting of past errors, identification of risks of tax audit and additional charges, as well as ways to reduce these risks. Structuring of transaction is also related to the objectives. At the same time, the process of due diligence is quite complex and consists of several stages.

Main stages of tax due diligence

The audit sequence may vary, supplemented by new stages and procedures depending on the company’s activities. But most commonly it takes place in the following order:

Within this stage the evidence of foreign elements in the ownership structure, the presence of a branch and representatives offices is determining. Also, the list of interdependent and authorized persons is drafted. In addition, the rules of deal’s price determining, and the rules of controlled foreign companies are analyzed.

2) Analysis of contracts and deals conducting

After detecting of risks at the first stage, the experts should attentively check the contracts with affiliated and interdependent companies. It is important to determine the transactions’ trigger value. It is recommended to draft a registry of all contracts exceeded 5 million rubles for enterprises which are not related to small and middle-business category.

3) Analysis of regulations

The presence of tax compliance regulations may indicate the conscientious fulfillment of taxpayer duties. The analysis of legal entities’ and sole entrepreneurs’ with which formal contracts exist presence in the ownership structure, is conducted for risks indicating. In fact, business is not interested in the services of legal entities and entrepreneurs mentioned.

4) Analysis of accounting tax policy and audit reports

At this stage, it is checking whether the account meets the requirements of tax legislation. If it was carried out according to laws that have already expired, operations are considered risky.

5) Checking the status of tax audits and litigation

Tax authorities are not able to conduct two or more on-site inspections of the same taxes for the same period, except for repeated control. Therefore, passing the audit and the availability of litigation in tax disputes is a positive factor for the buyer. This reduces the likelihood of new additional charges.

VALEN will check the tax purity of the company, make sure that there are no arrears in settlements. We specialize in the analysis of tax and accounting, assessing the debt burden of a business, and the correctness of documents.

You can contact our lawyers using any available method of communication and visit VALEN office by appointing a meeting via phone +7 (495) 7-888-096

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