China tax due diligence review

For all the China Mergers and Acquisitions deals, it is always possible that tax exposures of the target company will be carried over to the purchaser. In order to manage the tax risks and identify the major hidden tax exposures which will significantly affect the investors' assessment on the investment opportunities, it is advisable for the foreign investors to arrange a proper due diligence review of the target business to assess the tax risks and make adjustments to the purchase price and add sufficient warranties and indemnities.

What do you expect from a China tax due diligence review?

To identify significant tax issues that could impact the proposed acquisition in order to protect the purchaser's interest, including:
Aggressive and unjustifiable tax schemes;
Special deals with local authorities and unofficial tax concessions;
Land use right has not been converted from "allocated" status to "granted" status;
Corporate and individual taxes compliance weaknesses;
Unsupportable transfer pricing policy; and
Heavy penalty exposure and late payment surcharges.
To assess whether the current operations and the tax positions of the target company complies with the relevant China tax laws and regulations and alert on the related consequences as a result of any non-compliance practice; and
To identify and quantify the potential major hidden PRC tax liabilities / exposures, especially those recurrent tax events which may affect the deal price and future earnings of the target.

A full-scope tax due diligence review or a specific procedure review will provide you with a better understanding of the tax consequences on the potential acquisition of the target company, which is important to your assessment of the investment opportunities in China.