Tax Review: Essential Process in Merger and Acquisition Operations

Marluci Azevedo

The Brazilian market has been showing signs of recovery, influencing the formation of new businesses. According to the TTR-Transactional Track Record, mergers and acquisitions in Brazil involved BRL 16.7 billion in August of this year, totaling 87 transactions. In the first eight months, the total amount transacted compared to the same period of 2018 increased 21.5%.

In M&A - mergers and acquisitions operations, proper planning and the quality and tax and accounting data are decisive. Yes, tax and accounting management play a key role for all companies, but when it comes to M&A, the transparency and reliability of this information is even more important.

The elements raised through the tax review will affect the process called valuation of the company Always holding the figures would be a favorable aspect and a step towards the achievement of new ventures.

The tax review enables a thorough understanding the business health, integrating the set of items that must be evaluated when mergers and acquisitions are in the plans.

Tax Review: What are the Benefits for Businesses?

The tax review may be applied for preventive, strategic or corrective purposes. This work is designed to ensure the full compliance with the law, but seeking to optimize tax obligations so that payments are limited to what is required. It is not uncommon for companies to pay more than they should for unawareness of the complex tax processes.

Attention to laws and regulations prevents from financial losses and penalties and fine for failure to pay.

The identification of any unused tax credits and tax benefits hitherto unused is also the result of a tax review. The evaluation of the business in accordance with the legislation can confirm the existence of these opportunities.

A tax planning even contributes to the price revaluation of products and services, which are affected by the calculation of taxes involved in their commercialization.

The tax regime is subject to a testing. The evaluation may show that the classification (Simples Nacional, Real and Presumed Profit) is wrong or that the exchange, within the possibilities provided by legal provisions, may be advantageous.

M&A Tax Review

Typically, large business groups resort to the M&A process to acquire smaller business. Small and midsize companies are increasingly using this type of operation to leverage business and expand markets. In all cases, a tax review is essential.

The Brazilian tax legislation undergoes frequent changes, imposing on the entrepreneur the importance to monitoring and adapting to changes in order to comply with obligations.

This, for sure, influences mergers and acquisitions. After all, the appraised company's accounting and tax specificities should be mapped to identify the threats and opportunities of a transaction.

Therefore, M&A operations should be preceded by investigations that raise and quantify risks, such as tax review, which may be part of a due diligence process.

The contingencies identified by the review will be indicated and will certainly influence the negotiation of the values and terms of the commitment.

The companies that are eager to prepare for sale can also use this feature as an early action to eliminate occurrences that may commit their reputation and judgment with the stakeholder.

Due diligence to classify the business health

In addition to tax assessment, the due diligence analyses the company's economic and financial transactions, based on data from its trial balance, statement of income for the year (DRE) and statement of financial position, among other sources deemed relevant.

In addition, documents made available by public agencies at the municipal, state and federal levels are checked.

There is a large amount of information to be provided to the tax authorities, exposing the entrepreneur to the risk of failure. It is quite common when taxpayers pay taxes, but to wrongly state with inaccurate information.

Therefore, all the matching between accounting entries, payments, compliance with accessory obligations and the list of statements filed at e-CAC is essential. This is why it is also important to compare such information throughout this survey.

After this phase, the information is used to generate valuation, as well as to establish the strategy of the operation and the accounting report.

This follow-up prepares the company for the proper accounting treatment of the transaction. A number of issues in the accounting report may influence the timing of investment return, such as parameters for amortization or deadlines for registration with the RFB. In the last one, losing the term will not enable the taxpayer to benefit from important discounts on the income tax basis on the transaction.

Due diligence: accurate diagnosis for buying or selling transactions

Investors may use due diligence to identify the risks and impacts involved in the operation of their interest. This process shows concrete data from the evaluated company, enabling a clearer view of the business moment and the associated risks.

In addition to having a specialized multidisciplinary team in operational due diligence, which extends to the tax, accounting, labor and social security areas, Domingues e Pinho Contadores acts with the confidentiality and impartiality that this activity requires.

DPC also monitors the valuation stage in the provision of advice after the transaction consolidation, a strategic support with the accounting records for the success of M&A operations.

In turn, the entrepreneur who wants to attract investors to sell part or all of the business should preventively act and seek an expert advice to make a full tax diagnosis.

DPC has experts in identifying problems and failures that may compromise attracting investments. Services include permanent or punctual accounting and tax advice, compliance with current regulations, review of procedures, among other activities.