Analysis of Historical Tax Compliance: This involves reviewing the target company’s past tax returns and payments to ensure they have been compliant with all tax obligations. This review covers various taxes such as income tax, payroll tax, sales tax, and any other relevant taxes.

Identifying Potential Tax Liabilities: Tax due diligence seeks to uncover any existing or potential tax liabilities. This could include unpaid taxes, underreported income, overclaimed deductions, or disputes with tax authorities. Identifying these issues early on can influence the transaction’s terms, pricing, or even its viability.

Evaluating Tax Strategies and Risks: The process involves assessing the target company’s tax strategies to determine their effectiveness and sustainability. This includes reviewing tax planning methods, understanding the use of tax incentives, and evaluating the risks associated with the company’s tax positions.

Understanding Tax Implications of the Transaction: Tax due diligence also includes analyzing how the structure of the transaction (e.g., asset purchase vs. stock purchase) will affect the tax outcomes for both the buyer and the seller. This helps in structuring the deal in a tax-efficient manner.

Future Tax Projections: It involves forecasting the target company’s future tax liabilities based on current operations and planned business activities. This projection helps in understanding the long-term financial implications of the deal

Review of Tax Contingencies and Reserves: The process involves reviewing any tax contingencies or reserves that have been set aside for potential tax liabilities. This includes an examination of the company’s approach to tax provisions and its history of tax audits.

International Tax Considerations: For companies with international operations, tax due diligence also involves understanding the tax implications in different jurisdictions, including transfer pricing, withholding taxes, and compliance with international tax laws and treaties.

Effective tax due diligence helps in identifying and mitigating risks, ensuring compliance, and planning for future tax strategies. It’s an essential part of financial due diligence, contributing significantly to the overall assessment of a business’s value and the potential risks of a transaction.