Tax Due Deligence in Merger Acquisiton
Wednesday,21st August, 2019. 3:01:22am

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Chief. Yahaya. O. Olajide (fca,fcti)
Managing Partner

(Charters Accountants, Tax Practitioner)


The current spate of mergers and acquisition in the banking sector has lead to a myriad of choices concession and strategies. The consolidation exercise, IPO being put in place by the entire bank. When the dust is settled the board and management “boys” would have been separated from “men” in equal terms. One wonders, however, whether the operators in the industries have put into account the needs to stream line their tax policies and procedures in line with the consolidation exercise, in order not to be fund wanting at the end of the exercise and hence, be forced to begin all over again. This is so because the challenges of the consolidation exercise encompasses tax management without which assets and liabilities, profit and losses could blowing in the wind. The best way not to be caught napping therefore, is to advise that the following be done. It is suggested that in order to carry out Tax Due Diligences, each or a group of operator should identify and assess the risk in each of the group's assets. They must not only do this, such identifiable risk must be qualified. In examine the risks, it is inevitable that the opportunities in the mergers and acquisition process will also be identified, assessed and qualified.

The objectives of the said assessment are among others meant to develop ways and means to actualize the purpose of mergers and acquisition. It will also lead to a review of the tax processes of the banks that are involve in the merge, while each bank's current tax position in conjunction with the appropriate state and Federal tax merger talks will do well to identify opportunities that are capable of adding value to the group as a whole. The bottom line in this approach is transparency because where necessary unfettered access should be granted the parties to fish out possible undisclosed tax exposures. In fact, other lawful tax such VAT, WHT, CGT and Income Tax should be reviewed in case they contain porous exit that should negate the chance of the income of parties concerned.

There are however, variables that impact the Due Tax Diligence process. These variables include detail transaction revealing any tax implication, legal and organization structure of the banks and the operation and location of branches of such. In tackling the Deal Negotiations parties should be aware of the impact of Tax Due Diligence findings on the merger and acquisition as well as the contract indium. At the level of transaction proper, the need for full disclosure to form an opinion becomes vital. Nothing should be hiding at his stage. In fact copies of all annual Tax returns made to both State and Federal Revenue Authorities as well as related documents that are maintained at the corporate head quarters as well as tax matters that should create discomfiture for the parties concerned should be brought into view.

It is also pertinent that individual banks should recognize taxable income or loss on the transaction. The parties in merger/acquisition must also be sure that all unrealized overprovision are recognized and same for the realized under provision. As regard the operations and locations of the branches, there ought to be compliance with State and Local Government provisions. The provision can be as varied as the State and Local are. Far from being done, the next level of the Due Diligence process will be to conduct investigation into the exposures of the banks concerned. In doing this, certain enquiries will have to be made.

These include the possibilities of improper Tax Accounting Applications, Accounting miscalculations, clarifications of certain expense items and the computation of Detail Tax. All these are investigation for Federal Taxes. When it comes to conducting the exposures to the state and local Taxes, tax policies such as PAYE, property tax Revaluation that may result to Capital Gain Tax or Transfer Tax are inclusive.

The outcome of the investigations exposures will form the basis for the analysis for the Tax Due Diligence process as well as the review Tax Due Diligence. What is of concern at this juncture are the following findings. The parties in the merger talks may want to know who prepared the tax for the Income Tax provision of the banks and what forms the basis of the figure used and how time was spent. Each party may also want to find out what were the purposed or suggested adjustment related to the provision by the external auditor or tax consultant and whether or not the provision include any other taxes than Company Income Tax expense (or benefit) such as VAT, WHT, PAYE etc.

The analysis can further be pursued to include what impact any provision adjustment for the previous year have on the current year's provision and has all the known tax rates law charges being incorporated into the provision for the period? Parties to the negotiations will also be advised to ask whether there are any transaction or positions on return for which disclosure is required under the Federal Tax law. It will also be necessary to know whether the Income Tax provision was made in accordance with the relevant sections of the Company Income Tax Act.

Other areas for review and analysis include VAT and in that instance it become necessary to determine whether all vat able items have been subjected to Value Added Tax and whether filling or monthly returns with the relevant tax unit have been complied with and on what platform is the conclusion of VAT payable based. Apart from VAT, other Federal Taxes include Withholding Tax and the appropriate suggestion in this regard is to review all contracts, review the base of calculating the Withholding tax due and determine whether it is the Federal or State departments that the payment is due. The dead line of filling the period of such tax should also come under review.


OLAJIDE AND ASSOCIATES is a member of BNI and a registered member of The Institute of Chartered Accountants of Nigeria and Chartered Institute Of Taxation Of Nigeria


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