Tax Due Diligence
Tax liabilities attach to the entity, not the owner. Buyers inherit them. Sellers get charged for them. Tax due diligence decides which.
What Tax Due Diligence Tests
4 questions, in order. Find the failure. Size it. Then argue about who funds it.
Has it filed everything, everywhere?
Direct tax, payroll, indirect tax, local filings. No return filed means no closed year, so every period stays open.
Matters most to: the deal team sizing the exposure and the lender funding it
What is the exposure worth?
Unregistered indirect tax is often the largest unrecorded liability in a deal. It is a gross tax. Loss carryforwards cannot absorb it.
Matters most to: whoever signs off the escrow
Do the attributes survive?
Losses and credits get priced in. Ownership-change rules restrict them. Structure decides whether they transfer at all.
Matters most to: the head of tax and the buyer paying for them
What does the structure trigger?
Share and asset deals tax differently, for both sides. Transfer taxes, withholding on consideration, basis step-up and the seller’s own tax bill all follow that choice.
Matters most to: the selling shareholder and the adviser modeling net proceeds
The liability never moves. It sits with the entity that incurred it. Everything after that is a negotiation about who funds it.
Tax Due Diligence Document Checklist
Lookback is 3 to 5 years on filed returns, and unlimited wherever nothing was filed.
Heads of tax and finance directors: assemble this before a banker takes you to market. Buy-side deal teams: this is the request list.
Direct tax returns
3 to 5 years, every entity
- ✓ Corporate income tax returns as filed
- ✓ Computations and supporting schedules
- ✓ Group relief, consolidation or fiscal unity elections
- ✓ Estimated payment history
- ✓ Confirmation of filings up to date in every jurisdiction
Provisions and deferred tax
Balance sheet dates under review
- ✓ Current and deferred tax provisions
- ✓ Uncertain tax position analysis
- ✓ Book to taxable income reconciliation
- ✓ Deferred tax asset recoverability support
- ✓ Prior period adjustments and restatements
Assessments, audits and disputes
All open and 5-year closed
- ✓ Correspondence with every tax authority
- ✓ Open audits, information requests and assessments
- ✓ Appeals, litigation and settlement agreements
- ✓ Penalty and interest history
- ✓ Statute of limitations status by year and jurisdiction
Indirect tax
3 to 5 years, all jurisdictions
- ✓ Indirect tax registrations and returns
- ✓ Registration threshold analysis by jurisdiction
- ✓ Taxability analysis by product and service
- ✓ Exemption certificates and supporting evidence
- ✓ Unregistered jurisdiction exposure quantification
Payroll and employment taxes
3 to 5 years
- ✓ Payroll tax returns and remittance evidence
- ✓ Worker classification analysis for contractors
- ✓ Equity compensation reporting and withholding
- ✓ Benefit in kind and expense reporting
- ✓ Cross-border and remote worker filings
Tax attributes
All carried forward
- ✓ Loss carryforward schedule by entity and year
- ✓ Credit and incentive carryforwards
- ✓ Prior ownership changes and any existing limitation
- ✓ Expiry profile of each attribute
- ✓ Support for attributes priced into the deal
Structure and entity chart
Current and 5 years of changes
- ✓ Group structure with tax residence of each entity
- ✓ Prior reorganizations, migrations and liquidations
- ✓ Permanent establishment analysis
- ✓ Dormant and struck-off entities
- ✓ Tax residence and management substance evidence
Transfer pricing
Current documentation plus 3 years
- ✓ Transfer pricing policy and master file
- ✓ Local files and benchmarking studies
- ✓ Intercompany agreements and pricing schedules
- ✓ Country-by-country reporting where applicable
- ✓ Advance pricing agreements and rulings
Cross-border and withholding
All flows under review
- ✓ Withholding tax on dividends, interest and royalties
- ✓ Treaty relief claims and supporting certificates
- ✓ Customs and duty compliance
- ✓ Indirect tax treatment of cross-border supplies
- ✓ Global minimum tax and top-up tax analysis
Rulings, incentives and agreements
All in force
- ✓ Advance rulings and clearances obtained
- ✓ Tax holidays, grants and incentive agreements
- ✓ Conditions attached and compliance status
- ✓ Whether each survives a change in ownership
Transaction tax
Applies to the deal itself
- ✓ Transfer taxes and stamp duty on the contemplated structure
- ✓ Withholding obligations on the consideration
- ✓ Indirect tax treatment of the transaction
- ✓ Seller tax position on the proposed structure
- ✓ Clearance certificates available from the authority
Governance and controls
Current state
- ✓ Tax function headcount and outsourced scope
- ✓ Tax control framework and sign-off process
- ✓ Calendar of filing obligations by jurisdiction
- ✓ History of late filings and missed deadlines
Provisions and the tax reconciliation also appear in the financial workstream. Tax warranties sit with legal review. Neither duplicates this list.
Tax Due Diligence Opens 5 Years of Filings
Returns, computations, and correspondence. Indexed by jurisdiction and year.
Successor Liability and Deal Structure
Buyers pursue an asset deal to avoid inherited tax. It is a good answer. It is not a complete one, and it usually costs the seller more.
Deal counsel reads the left column. The selling shareholder reads the right.
4 ways an asset deal fails to shed the liability
Structure reduces the risk. Only quantification removes it.
The buyer assumed it.
Expressly in the agreement, or implied by conduct and the assets taken.
It was a merger in substance.
The deal looks like a combination rather than an asset purchase.
The business simply continued.
Same management, same customers, same operations, new owner.
Statutory successor rules apply.
Many jurisdictions attach unpaid indirect tax and payroll tax to the acquirer regardless of the agreement.
No return filed means no closed year to hide behind. The exposure is every year of activity, plus interest and penalties. Size it before choosing a structure.
Red Flags in Tax Due Diligence
8 findings that move a price. Sellers can fix most of these. Buyers will charge for all of them.
Heads of tax: clear the top 3 before launch. Deal teams: price the rest.
Trading where you never registered
No return means no closed year. Every period is open.
Indirect tax never charged on a taxable supply
A gross exposure. Losses cannot absorb it.
Loss carryforwards priced into the deal
Ownership-change rules may already have restricted them.
Contractors who function as employees
Payroll tax, interest, and penalties across every open year.
Transfer pricing with no documentation
Intercompany margins nobody can defend on audit.
Incentives with survival conditions
Benefits that lapse on a change of ownership, after the price assumed them.
A deferred tax asset nobody can support
Recoverability assumed, not evidenced.
Registrations opened, filings never followed
You told the authority. Then you stopped.
From Tax Due Diligence to Deal Protections
Tax gets its own instrument. Buyers do not rely on general warranties here.
Disclosure behaves differently for tax. Disclosing a matter rarely releases the seller from a tax indemnity. It does release the insurer from covering it.
Disclosure Cuts Both Ways
What was disclosed, when, against which document. The record decides who pays.
Tax Due Diligence by Deal Type
Jurisdiction count drives the clock. Clean filings in 1 country are a fraction of the work of a group with unregistered activity.
On an M&A process
Runs after the letter of intent, usually attached to the financial diligence engagement with a tax specialist alongside. 2 to 6 weeks in 1 jurisdiction, considerably longer for a group.
On a sell-side process
The deliverable is a vendor tax report or a tax factbook, prepared for bidders. It is also the last point where voluntary disclosure is open, because that route closes once an authority makes contact.
On a carve-out or IPO
The question becomes the standalone tax position rather than the historic one. Underwriters need it to support the prospectus, and a de-grouping charge on exit is easy to miss.
This is specialist work, not a job for the general accounting team. A private equity sponsor repeats it at every bolt-on, and on an insolvency sale it runs against a statutory clock.
Frequently Asked Questions
The questions heads of tax and deal teams actually ask, in the order the process forces them.
A review of a target’s filing history, tax positions, and open exposures in every jurisdiction it touches. It quantifies what the buyer may end up funding.
Partly. Successor liability rules in many jurisdictions still attach unpaid indirect tax and payroll tax to whoever acquires the business. Structure lowers the risk. Quantification manages it.
Often, yes. An asset sale can trigger tax at the company and again on distribution, so net proceeds fall even where the headline price is identical; model both before agreeing structure.
Yes, through voluntary disclosure, but only if the authority has not made contact. A gap settled on a shortened lookback becomes a known cost instead of an escrow.
Because it is a gross tax, loss carryforwards can absorb an income tax assessment. They cannot touch indirect tax, so the full amount plus interest lands on the balance sheet.
Yes, where a seller will not stand behind a position or the sum is too large to escrow. Note the asymmetry: disclosure rarely releases a seller from a tax indemnity, but it does exclude insurance coverage.
In a share purchase, they stay with the entity and are then restricted by ownership-change rules. In an asset purchase, they stay with the seller. Validate before pricing them in.
Whatever the conduct of claims provision says. The party funding the liability usually wants control of the defense, and whether the buyer can settle without consent is negotiated, not assumed.
Yes. The exposure sits in the target entity, not the group, and a bolt-on with unregistered activity brings it into the platform. For that reason, sponsors repeat the review at every add-on.
Tax Due Diligence Starts Before the Buyer Calls
Every return, registration, and letter in 1 indexed place. The gaps become yours to fix, not theirs to price.