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Diligence The Deal To Avoid Surprises
Taxand USA discusses some of the more important factors that the buyer and the seller should consider when performing due diligence.
From the perspective of the buyer
- Ensure proper understanding of the business activities of the target
- Determine how many audits are in progress and what is the stage of each audit review
- Determine the status of any recently closed audits and evaluate whether unresolved contentions may warrant future protests
- Determine where the company is located and where it is conducting sales activities. What is the target's sales process?
- Ensure the proper documentation of exempt sales
- Discuss the taxability of sales or purchases
From the perspective of the seller
- Refunds of taxes paid on past transactions: the seller should immediately take appropriate steps prior to the deal close to identify and recover potential overpayments, especially while they have access to the historical data
- Assistance provided to buyer: Occasionally, the buyer must negotiate assistance from the seller during a period of transition to provide compliance assistance or other tax services
- Professional services provided during transition: Depending on the type of services provided and the jurisdiction where the services are provided, any transition services may be subject to sales tax.
- Negotiation of the purchase price or seeking a "holdback" for future sales tax exposure: Countering claims of potential exposure from the buyer is very important.
Although the approach to due diligence differs from the perspective of the buyer and the seller of the company or asset(s), each side must take the time to perform due diligence during the acquisition process to avoid or minimise sales and use tax headaches down the road and, more importantly, unanticipated tax payments. With enough time, consideration of each of these factors should at least result in an awareness of potential sales tax issues beyond what is normally anticipated.