Tax due diligence : a proposed framework

• Published date: 01 December 2020
• Pages: 7-15
• DOI: 10.10520/ejc-btclq-v11-n4-a3
• Author: Michael Rudnicki Rudnicki
• Date: 01 December 2020

7

© Siber ink

Tax Due Diligence:

A PROPOSED FRAMEWORK

MICHAEL RUDNICKI*

ABSTRACT

A tax due diligence is a complex investigation into the tax affairs of a legal

entity or entities within an organisation and is undertaken for particular needs

of interested parties, such as buyers, sellers, f‌inanciers and public offerings.

A due diligence is an assessment of risk within an organisation, but often in

the context of a buy-side due diligence, an assessment of possible opportuni-

ties, such as an allowance for ‘learnerships’ not taken. An important feature

of a tax due diligence is to position the engagement with the objectives of

the user. A potential bidder requires an assessment of risk, quantif‌ication of

the risk and a recommendation in relation to the risk identif‌ied. This forms an

important consideration as to price determination which is often determined

as a factor of future earnings. A seller of an organisation will undertake a due

diligence in order to highlight risk for potential suitors and address remedia-

tion procedures that have been undertaken to limit the risk or procedures

which will be undertaken.

Scoping is an important feature in the due-diligence process and often

insuff‌icient attention is given to the magnitude of group companies, the juris-

diction of each entity, whether specialist tax expertise is required in relation

to mining, for example, and enquiries from management and shareholders as

to material issues within the organisation.

Tax risk management and governance are important to address in a due-

diligence investigation. Addressing tax risk and bringing tax to the boardroom

will give due-diligence advisors more comfort in assessing the degree and

quantif‌ication of tax risk. Reviewing tax policy memoranda, tax committee

minutes, as examples, will often highlight key issues within an organisation

which require attention from a due-diligence perspective.

The completeness and accuracy of information and responses to questions

in tax returns are important features in terms of addressing permeating tax

risk. Material misstatement or non-disclosure of information will usually be

highlighted in a tax due-diligence report as issues to be warranted or indem-

nif‌ied by sellers. Delaying prescription from a tax perspective could have a

negative impact on transaction pricing.

Accounting standards and information within annual f‌inancial statements

are important sources for identifying tax risk. The introduction of fairly recent

International Financial Reporting Standards (IFRS) may have a material impact

on tax risk, in particular, the creation of timing differences. The need for

involving accounting standards specialists in conducting a tax due diligence

is becoming more of a reality.

* Tax executive, Bowman’s Attorneys.