Why private equity investors should treat international tax as an operational diligence issue

Historical tax risks remain a key consideration in private equity transactions, but not the only issue.  Investors today also need to understand whether a target’s operations and processes can support increasingly data-intensive tax compliance obligations. The value at risk may not come from an aggressive tax position; it may come from an inability to comply efficiently with new reporting requirements. 

Operational readiness and an ability not just to get the answer right but to prove it through data is becoming paramount in the tax world. Initiatives such as Making Tax Digital (MTD), Pillar Two reporting and the forthcoming International Controlled Transactions Schedule are examples of this shift. International tax is becoming a test of whether finance, legal and tax functions can produce consistent, reliable data across multiple jurisdictions. 

Tax controversy has historically revolved around documentation and explanation, allowing businesses to respond to information requests, explain arrangements and provide support for key decisions. 

But a drip-feed of rules and initiatives (CbCR, Pillar Two, ICTS and even real-time information for PAYE) requires taxpayers to maintain and submit information in a more structured, digital format, providing tax authorities with increasingly rich datasets from which to assess risk. 

The result is that tax authorities often know far more about a multinational group’s cross-border activities before an enquiry begins than they did a decade ago. 

Many mid-market businesses have grown internationally through a combination of acquisition, expansion and entrepreneurial decision-making. Whether the systems and processes supporting the resulting international tax structures have evolved at the same pace is the key question. 

Common issues include: 

• Multiple ERP systems 
• Limited visibility over intercompany flows 
• Inconsistent legal entity governance 
• Limited or outdated transfer pricing processes 
• Impacts on the management incentive plan 
• Issues reconciling tax and financial reporting data 

These weaknesses may once have represented administrative inefficiencies, but now increasingly represent tax risk. Whether a group can produce the required data without significant remediation will directly impact future compliance costs, management time and transaction readiness.

The most successful portfolio companies are increasingly those with scalable operating models, and this same principle applies to tax. 

Those groups that invest early in governance, data consistency and reporting processes are likely to be better equipped for international expansion, increased reporting obligations, tax authority enquiries, refinancing events and exit due diligence. 

A practical starting point is to assess: 

• Whether tax data can be extracted consistently across jurisdictions 
• Whether intercompany arrangements are being implemented as intended 
• Whether existing processes support new reporting requirements 
• Where key tax risks sit within finance, legal and operational teams 
• Whether governance frameworks have kept pace with international growth 

In our experience, these reviews often uncover opportunities not only to reduce tax risk but also improve reporting efficiency and transaction readiness. 

For both investors and portfolio companies, understanding those issues today may be significantly less costly than addressing them under the pressure of an enquiry, acquisition or exit process. 

Approval code: NTEH7072633