A tax due diligence is an investigative analysis into the operations of a business in order to identify tax risks and ensure that the taxpayers are compliant with the South African tax legislation. A tax due diligence is most commonly recommended with the proposal of a merger or acquisition, and the target taxpayer needs to be vetted. It can, however, also be beneficial for a company to identify any conceivable tax exposures.
By conducting an in-depth analysis, all risks and opportunities can be identified. This helps to recognise any historical tax exposures and prevent the reoccurrence of such exposures.
The analysis will be on all tax types and not limited to just income tax in order to ensure that all tax exposure risks can be acknowledged and prevented. For example, addressing the tax implications of employees being misclassified as independent contractors, or not including taxable fringe benefits in the relevant employees’ salaries.
The due diligence not only identifies and mitigates risk, but it also recognises opportunities that may be explored. By analysing the trends in the market, the business will be able to ensure that they act on all types of developments and changes in the tax sphere. This will enable the opportunity for unrealized growth the be identified and plans of action can be put in place to take advantage of unrealised tax savings. For example, opportunities can be identified in areas such as tax credits including research and development, state employment and energy efficiency which can ultimately save the targeting company money.
A tax due diligence identifies the existing tax structure which in turn categorizes the transaction structure. By identifying this it enables the taxpayer to recognize the needed post-sales structures that may need to be put in place. The current tax reserves of the target taxpayer can be analysed, and any deal breakers can be identified pre-transaction process. By reviewing any debt, capital structures and transfer pricing, the tax implications on the sales structure and sales price can be identified and addressed accordingly and plans can be put into place to address any post sales operations.