Part II: Financial & Tax

Financial and tax is pretty much what is sounds like: financial statements, tax returns and various bits and pieces on which the financial statements and tax returns are based.

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Audited consolidated annual financial statements (since establishment) and the most recent interim financial statements, including all notes and auditor’s opinions. Depending on where you are located and the local statutory reporting requirements, reporting schedules agreed with your investors (generally listed in the Articles of Association) and your own internal practices, you may be preparing audited financial statements every year.

However, even if you aren’t preparing audited financials, you should have sets of financial statements drawn up for purposes of your tax return—you can hardly calculate tax due without knowing your net income.  If that is all you have, provide that.

Your accountants should have copies of financial statements (audited or no), if you don’t have them on hand.

For interim statements, if you are providing your accountant with your bookkeeping materials on a regular basis as you should, and they are doing the books on a regular basis as they should, it shouldn’t be a big deal for them to pull together a set of interim statements, for instance, as of the end of the last quarter.

See here for more on audited financial statements and audit opinions.

See here for more on consolidated financial statements, interim financial statements and notes to the financial statements.

All correspondence with and reports from the independent certified accountants of the Company, including auditors’ inquiry letters and replies and attorney’s letters to auditors. Here you are being asked for your correspondence with your auditor and your legal counsel’s correspondence with your auditor.

First, you. Your auditors may provide you with additional reports or send you additional correspondence, either as part of the audit or at your request. For example, in the US, it is common for auditors to provide audit clients with a “management letter”, which is a letter which spells out internal control and operational items needing improvement that they noted as part of their audit.  Alternatively, you might ask the auditors to perform a review of a transaction or a process and issue a report (e.g. confirming that XYZ is what you say it is). This could be for a government agency, a shareholder, a customer or someone else.

Second, the lawyers. As part of your annual audit, your auditor will ask your legal counsel to send them a letter either saying that there are no current or threatened lawsuits or other open and bleeding legal wounds OR saying that there are, and giving a description. Hopefully your letters will be of the first, more vanilla, variety.

Your legal counsel should send a copy of this letter to you. Just save it in the audit file with the financial statements.

All material correspondence with tax authorities from date of incorporation, including all tax assessments, audits, appraisals and property tax appraisal notices relating to the assets of the Company. In addition to having copies of your submitted tax returns available (more on that below), you should have any correspondence, documentation and results relating to other audits or assessments performed by tax authorities.  In Israel, that might include audits of VAT, “odfot” (excess expenditures) or Bituach Leumi.  And of course, tax authorities in all jurisdictions might decide to audit your tax return!
All income, sales, use, value-added, personal property, real property, franchise or other tax returns or other required filings with any country, state or local taxing authority, together with all reports, estimates, elections and information statements relating thereto.


Tax returns. Of all types.  Of all jurisdictions. Complete with all the addendums.  In Israel, for example, this would include: annual tax return, VAT submissions, Form 856 (payments to suppliers and withholdings from those payments); Form 126 (payments to employees) and anything else that comes up along the way.  In the UK, this would include your annual tax return, quarterly VAT submissions, annual P11D submissions (payroll) and again, anything else that comes up.  In the US, in additional to your federal, state and city tax returns…wow…the opportunities are just endless.  Each jurisdiction has its own collection of return-y delights.
List of all pending tax liabilities. Hopefully, this will include only amounts outstanding for the prior year, and those will not be past due!   Where the year has ended but you haven’t completed your tax return yet and do not have a final amount but you know that you are going to owe money, provide an estimate. This may be calculated as part of your annual financial statements, or your accountant may be able to provide you with a rough estimate of what they think the total is going to come out to. Where you are providing an estimate, make sure to say that “this is an estimate”.
Tax sharing agreements or arrangements. If you file a single tax return for multiple companies (a “consolidated” tax return) you may also have set up an agreement which spells out how the actual tax bill or tax refund is to be split up between the companies.  Who pays what and who gets what.

I actually had no idea what this was, so I researched it here.  Not exactly non-accountant friendly, but interesting nonetheless.

Other documents that may be relevant to a financial due diligence review of the Company.


We have eight more sections to go.  You will be providing a lot of data and documents.  If, by the time we hit the last item on the last page, there is still a significant contract, government program report, piece of government correspondence, any other reports, legal matter, general development, anything else important, etc. etc. etc. … which wasn’t covered anywhere else, stick it here.  🙂
Any transfer price arrangements between the Company and its subsidiaries.  Any transfer pricing analyses or studies performed regarding transactions between the Company and its subsidiaries If you have more than one company, one issue you should be watching out for is “transfer pricing”. Transfer pricing is the setting of prices for goods and services sold between related companies.

A transfer pricing study is performed by accountants or other qualified consultant. The goal is to try to ensure that the prices set, as much as possible, to “arm’s length”, that is, the prices that you would have charged a completely unrelated company.   And the goal of that is to ensure that you allocate your revenues, and therefore your profits, in a reasonable and fair manner between the different companies.  That is, you don’t try to shove as much of your profits as possible into the country with the best tax rates or the company with the largest amount of accumulated losses or so on.

The study will provide you with guidelines you can use to set the transfer prices. While having the study doesn’t necessarily protect you from any tax review or even from a tax authority challenge, it does demonstrate that you took the issue seriously enough to have your transfer pricing reviewed and adopt the findings.

For a nice and clear, if somewhat skeptical, explanation and discussion of transfer pricing, see here.