A company’s due diligence in tax and fiscal matters must carefully consider legal contingencies and review the criteria for provisions.
A proper analysis of the provisioning goes beyond the due diligence moment, as it is also very important for the company’s day-to-day management of its tax liability in general. The main points of attention are:
(i) accurate risk rating: it is necessary to check, case-by-case, based on concrete aspects (discussed matter and evidence collected), as well as the current position of case law, whether the risk classifications are being correctly classified as remote, possible or probable.
(ii) double contingency: some specifics of tax law in Brazil demand attention to avoid double provisioning, especially because it is common for the same tax debt to be discussed in more than one lawsuit. For instance, it is wrong to provision twice if the tax debt is being discussed in a lawsuit against a tax assessment and at the same time being charged in an execution proceeding.
(iii) undervalue risk provisioning:the particularities of the type of lawsuit will influence possible expenses. For example, while there is no attorney fees if you request a writ of mandamus in a Federal Court jurisdiction, other type of procedures have them, which can reach 20% of the case`s amount. In addition, it is necessary to consider the costs, which vary greatly from the federal to the state level.
(iv) provision timing: risk rating can change significantly by a simple factor: time. Contingency for risks needs consider the legal nature of the dispute (administrative or judicial) and the moment in which it is being made. This is extremely important: the change of risk rating must be real – neither too soon nor too late. Especially for publicly traded companies, any change can impact the share price and/or the company’s valuation.
Thus, when a tax due diligence is carried out and the Brazilian company to be invested has lawsuits, the accurate risk of contingency is essential for a real valuation, precisely as possible. Mapping and monitoring the risks once is not enough, it is crucial to keep reviewing them on a periodic and case-by-case basis.