TLDR:
Tax due diligence (Tax DD) is the systematic review of a target company’s historical tax positions, ongoing tax compliance, and structural tax issues during a transaction. Tax DD identifies historical tax exposure (potential audit risk), validates deferred tax positions, assesses transfer pricing, and informs transaction structuring for tax efficiency.
Scope of Tax DD
Comprehensive tax DD covers: historical tax returns review (typically 3-5 years for open statute periods), pending audits and tax disputes, tax positions and policies (revenue recognition, expense classification, transfer pricing), indirect taxes (VAT, sales tax, withholding tax), employment taxes (payroll, social security), international tax positions (permanent establishment, treaty applications, foreign income), deferred tax assets and liabilities, tax credits and incentives utilization, and tax compliance with specific industry requirements. Each area has specific risk patterns and remediation approaches.
Common Tax Risks
Frequently identified tax risks include: undisputed tax positions taken aggressively (creating uncertain tax positions under accounting standards), transfer pricing not supported by documentation (related-party transactions priced at non-arm’s-length), permanent establishment risk in foreign jurisdictions, withholding tax obligations not properly handled, employment tax misclassification (independent contractors actually employees), VAT/sales tax compliance gaps, accumulated NOL carryforwards subject to limitation upon ownership change, and unrecorded contingent liabilities for prior-period adjustments.
Turkish Tax DD Considerations
Turkish tax DD has specific focus areas: Kurumlar Vergisi compliance (CIT), KDV (VAT) reconciliation (Turkish VAT is complex with multiple rates, reverse-charge mechanisms, and refund procedures), Damga Vergisi (stamp duty) on contracts, SGK obligations and employee classifications, transfer pricing documentation (Türkiye has detailed TP rules requiring annual reports), KVK Article 5/1-(e) participation exemption requirements, R&D and innovation incentive utilization (5746 sayılı kanun), Free Zone benefits if applicable, and inflation adjustment requirements. Cross-border deals involving Turkish entities require careful analysis of withholding tax positions and treaty applicability.