A golden tax opportunity for entities undergoing sell-side due diligence

Sell-side due diligence is the evaluation of the value of a company to determine its strengths and weaknesses prior to selling it to an interested buyer.

Sell-side due diligence describes a process in which a potential seller assesses how best they can negotiate for a good deal from an impending sale. This process allows a seller to address the potential risk areas in their business and prepare for queries that a buyer might have.

Sell-side due diligence investigates many aspects of a company including financial, human resource, legal and information technology aspects among others. One important aspect of a business that ought to be critically scanned during sell-side due diligence is the tax aspect.

A tax sell-side due diligence is vital as it enables a company to self-evaluate or engage an experienced tax consultant to evaluate their profile. The seller also gets to have an idea of post-tax proceeds.

In the recent past, Kenya has experienced substantial activity in mergers and acquisitions. Consequently, the Deal Drivers Africa Report recognised Kenya as one of the countries at the nerve centre of mergers and acquisitions in Africa.

Acquisitions in Kenya occurred in various sectors including the financial services sector and petroleum sector.

Examples include Rubis Energie SAS that acquired Kenol Kobil, Kenya Commercial Bank Group (KCB Group) that acquired the National Bank of Kenya (NBK) and HID Corporation Limited that acquired De La Rue Kenya Limited.

Mergers and acquisitions have been impacted by Covid-19. The pandemic dealt a blow to global economies reducing the economic momentum and by extension, potential opportunities for mergers and acquisitions.

Additionally, mergers were paralysed as governments imposed restrictions on their citizens which subsequently made businesses to suffer. Moreover, restructuring of businesses during such a time of economic hardship was a big gamble as firms shifted their focus from other goals to survive.

The good news for entities undergoing sell side due diligence is that the Kenya Revenue Authority (KRA) came up with the Voluntary Tax Disclosure Programme (VTDP) that became effective on 1st January 2021 and will run until 31st December 2023.

VTDP enables taxpayers to confidentially disclose tax liabilities that were previously undisclosed to KRA. The programme targets undeclared taxes that accrued between 1st July 2015 and 30th June 2020.

VTDP allows taxpayers to be granted 100 percent waiver on all penalties and interests if they declared this tax information in the first year that ended on 31st December 2021.

Subsequently, the taxpayers will get a 50 percent and a 25 percent waiver if they disclose this tax information in the second and the third years respectively. Taxpayers eligible for this programme can lodge their application on iTax for KRA to consider after which they will either get an approval or a rejection based on the facts presented.

This is a golden opportunity for entities undergoing sell side due diligence since they gain credibility of both the KRA and the buyer, the value for the selling company appreciates if their business is tax compliant and there will be reduced scrutiny from the KRA since the company self-disclosed their tax liability making the process of selling their business seamless.

It is important to note that, whenever such a transaction occurs, KRA is always on the lookout to arrest any uncompliant taxpayers through their rigorous tax audits.

By undergoing the VTDP, entities that are in the process of a sell side due diligence save time and resources since they are already in the clear.