What are the Different Types of Due Diligence?

At the conclusion of major transactions, many domestic companies still prefer to be guided by intuition rather than resorting to accurate calculations. Thus, they put themselves at risk. Reasonable businessmen prefer to exercise “due diligence” and resort to the Due Diligence procedure, which makes the transaction completely transparent.

Due diligence When Choosing a Counterparty

In the current pre-crisis conditions for the functioning of a business, risk management issues come to the fore: first of all, forecasting the most significant risks and building a system to minimize potential damage in the event of adverse consequences. This applies to all areas of the company’s life, but the correct organization of risk management acquires particular relevance in working with counterparties.

The law does not impose a duty on organizations to exercise due diligence. However, this does not mean that organizations should ignore the exercise of such discretion. This follows from numerous judicial practices, court clarifications, as well as letters from the tax department. Information on planned and complex inspections is entered into the integrated automated system of state supervision (control) to automatically identify business entities that are subject to complex planned measures of state supervision (control).

While performing the due diligence, it is important to check the following:

  1. the business reputation of the counterparty;
  2. solvency, the amount of income and expenses according to accounting data;
  3. how many years it has been on the market;
  4. the presence of debts;
  5. how many employees are in the state (average headcount per year);
  6. information on taxes and fees paid, violations of tax legislation.

The practice of commercial turnover often requires requesting documentation from potential counterparties in order to check the partner for reliability. This is due not only to the desire to avoid losses on the transaction but also to the need to exercise the so-called “due diligence.” The fact is that the tax authority may recognize the tax benefit as unreasonable if it proves that the taxpayer acted without due diligence and caution and he should have known about the violations committed by the counterparty.

Due Diligence and Its Main Types

Motivations for buying a ready-made business can be very different. Starting from the desire to try something new to the desire to profitably invest the available funds. But all these motives have one thing in common – a person wants to understand what he is investing in and what return it can bring. Sometimes it is difficult for buyers to understand anything other than marketing literature. It is these questions that the due diligence procedure provides answers to.

The main types of due diligence are:

  • Commercial due diligence.
  • IT due diligence.
  • Regulatory due diligence.
  • Environmental due diligence.
  • Financial due diligence.

The general scheme of due diligence work is as follows: the system compares the tax deductions declared by the taxpayer on their purchases with information from the corresponding invoices from the counterparty-seller. And if the counterparty did not file a declaration/did not reflect the transactions in the sales book, or there are other significant shortcomings, and the payer at the same time filed for a deduction for relations with this counterparty, the tax authorities will file a claim against the final buyer. Because he, choosing a counterparty, acted at his own risk.

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