• Anne Marie Anselmi, Director |

The main objective of a tax due diligence exercise during a merger or acquisition is to identify potential (cash) tax risks and to appropriately reflect these in the negotiations. However, where the target group and/or the buyer prepare accounts under IFRS/US GAAP, tax accounting considerations also become important.

Objectives of a tax due diligence

Identifying tax risks and making sure these are appropriately reflected in the negotiations are the most important objectives of a tax due diligence. This could mean that identified tax risks are deducted from the purchase price or appropriate indemnities are included in the sales and purchase agreement (SPA) for such risks. Further, it also allows the acquirer to obtain first important insights into the tax function and attributes of the target group relevant for structuring and integration considerations.

Where do tax accounting considerations become relevant?

The target group’s tax positions, deferred taxes and tax disclosures in the IFRS/US GAAP accounts should already be considered in the due diligence to ensure a complete view of the target. This is not only important from a complete risk identification perspective but also forms the basis to understand the main drivers of the target group’s effective tax rate (ETR). This information is very important for structuring and integration considerations. Understanding the current and deferred tax impacts included in the financial statements already at the due diligence phase will also make for better negotiations of the SPA, for instance when discussing the purchase price adjustment mechanism and reflecting specific (current and/or deferred) tax positions in the closing accounts.

Potential risks if deferred taxes are not appropriately considered

In the heat of M&A and due diligence projects, where information and time available for analysis are often limited, the potential impact and interaction of deferred taxes are often not adequately analyzed. Moreover, it does not help that deferred taxes have an interdisciplinary nature in terms of being based both in tax and accounting, and as a result, responsibilities in tax and finance functions are often unclear.

This can potentially lead to situations such as:

  • A tax risk identified is already reflected in the IFRS/US GAAP financials as a deferred tax liability (DTL) e.g. in the case of provisions or impairments. Depending on the mechanism how the purchase price is defined and without close involvement of the tax, financial and legal teams, an intended purchase price adjustment might in effect be included twice (“double counting”) or not at all;
  • Deferred tax assets (DTAs) might be recognized with respect to tax losses in the IFRS/US GAAP financials. Depending on the nature of such losses and the mechanism in the SPA, this can result in an increase of the purchase price, which may or may not be appropriate. Care also needs to be taken when tax risks are identified that would reduce such tax losses, hence also reducing the value of the DTA;
  • The definition of taxes in the SPA usually does not cover deferred taxes. Whether this is appropriate needs to be analyzed carefully to make sure that all tax risks (with or without corresponding DTL) are covered by tax indemnities and warranties as intended.

Potential opportunities to leverage tax accounting information

On the contrary, information in the target company’s/group’s (consolidated) IFRS/US GAAP financial statements on tax positions can also be leveraged in tax due diligence projects, especially at an early stage when detailed information may not yet be available. Ears should prick up if something seems remiss in certain tax positions as this could be an indication that something larger looms underneath.

Examples of such useful information include:

  • Disclosures of uncertain tax positions that provide information on potential tax risks in the target group
  • Insight into potential tax attributes of the target group, such as tax losses from the DTA disclosures
  • Indication of potential trapped cash issues from the disclosures on (potential) DTLs on unremitted earnings


It is clear that tax accounting considerations are important in tax due diligence exercises and the close involvement of the tax, financial and legal teams of an M&A project is a good idea in order to make sure that tax risks are appropriately reflected in the negotiations and the SPA. Further, tax accounting information can be used at an early stage of the project to get important first insights into the target group’s tax affairs and positions. By including tax accounting considerations early in an M&A project, ETR drivers are better understood and can form the basis for further analysis in the structuring and integration phases of such projects.

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