KNAV was appointed by a major technology, engineering, construction, manufacturing and financial services conglomerate with global operations, to conduct a tax due diligence on its US based target corporation.
ISSUE:
Two key issues identified during the tax due diligence process:
(a) The profit-sharing payments made to shareholders-employees were actually paid to S-corporations formed by these individuals; &
(b) Specific valuation aspects of stock compensation could potentially have adverse payroll tax implications.
OUR APPROACH:
- KNAV conducted detailed discussions with the management of the target corporation.
- During these discussions, we were informed that for point (a), these payments were primarily in the nature of dividend but considered as service charge to reduce the tax liability on the corporation and shareholders and for (b) valuation of these stock options as on date of grant was approximately $ X but the same had been undervalued to make the exercise lucrative for employees.
VALUE PROVIDED:
- The detailed analysis arising on account of these uncertain tax positions was presented to the management of our client. A joint meeting was held with the management of the target corporations and these tax issues presented by KNAV to them.
- Based on our recommendation, the target corporation agreed to a tax indemnity of approximately $ 3 million.
