The Benefits and Process of Tax Due Diligence in Mergers & Acquisitions (“M&A”)

In a competitive and dynamic business environment, it is important for companies to conduct a thorough review of a company’s business and financial affairs before entering a merger, acquisition, or significant investment. A key aspect of ascertaining the financial health of a company is Tax Due Diligence. This would encompass a detailed review of a company’s historical tax records, its current tax liabilities, and status of compliance with the Singapore tax filing and tax regulatory requirements.

Benefits of Tax Due Diligence

There are various benefits to undergoing Tax Due Diligence prior to any M&A decision.

1. Identification and Assessment of Tax Risks and Tax Implications 

Through the process of Tax Due Diligence, companies can identify potential tax risks and where applicable, quantify potential taxliabilities. Tax issues identified may be relevant in negotiation discussions and could very well be used as basis for indemnification clauses in the sale and purchase agreement to protect the interests of stakeholders. In addition, businesses would also be able to address potential adverse tax implications before they crystallise and thereby avoid any future penalties or recovery actions that may be taken by the Inland Revenue Authority of Singapore (“IRAS”).

2. Tax Health Check Assessment and Proper Valuation

Tax Due Diligence would also help to provide an assessment of a company’s tax health and provide confidence to potential investors on the standard of compliance with Singapore’s tax laws and regulations, thereby ascertaining the level of compliance risk.

An accurate depiction of the potential tax liabilities through Tax Due Diligence would also help provide a more accurate valuation price of the company and would be useful in a sale and purchase negotiation.

3. Strategic Planning and Decision-Making

A detailed understanding of the potential tax implications arising from the Tax Due Diligence would also provide additional financial information to investors and sellers which may be relevant for future strategic planning and decision making.

General Process of Tax Due Diligence

As part of the Tax Due Diligence process, we would help to assess the accuracy of tax filings made in the last few Years of Assessment (“YA”), assess the adequacy of the current tax provision, and document the potential risks associated with tax liabilities.

The tax due diligence process would generally involve the following:

Conclusion

Tax Due Diligence is a valuable tool for businesses and investors in providing a good snapshot of the overall compliance with Singapore’s tax regulations, potential tax risks and opportunities, and would help to assist in long-term strategic decisions. Ensuring that Tax Due Diligence is conducted prior to entering a transaction would help to ensure your business puts the best foot forward and is in an optimal position to take advantage of any M&A deal.

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CONTACT US

Tax Advisory Specialists

Edwin Leow Co-Advisory Leader Director, Head of Tax edwinleow@sg.cla-ts.com

John Chua Associate Director, Mergers & Acquisition Tax Lead johnchua@sg.cla-ts.com