- a lower valuation,
- escrow/holdbacks,
- special indemnities,
- or a structure change that shifts risk back onto the seller.
What cross-border tax diligence is really testing
Buyers and their advisors are trying to answer four blunt questions:- Did you file what you were required to file (everywhere)?
- Did you pay what you were required to pay (or are there hidden liabilities)?
- Is your profit allocation defensible (transfer pricing + substance)?
- Will the buyer inherit risks that can’t be priced cleanly?
The biggest red flags buyers care about (and why they matter)
Red Flag #1: Missing US international information reporting
If you have foreign entities and your US reporting is incomplete or late, that’s immediate friction. Why buyers care:- penalty exposure can be material,
- amended filings are time-consuming,
- and it signals weak controls.
Red Flag #2: “We didn’t think we had a taxable presence” (PE/nexus surprises)
Permanent establishment (PE) issues abroad and state nexus issues in the US show up constantly. Triggers buyers look for:- employees or contractors abroad negotiating/closing deals
- offices, warehouses, or “temporary” workspaces
- inventory stored in-country (including third-party logistics)
- recurring in-country services (installations, support, implementation)
- agents/distributors acting like dependent agents
- unfiled returns can trigger back taxes + penalties + interest
- PE positions can be contested years later
- remediation can be expensive and slow
Red Flag #3: Withholding tax exposure on cross-border payments
Withholding is a classic inherited liability because the payer (often the target) is on the hook. Buyers look for:- royalties, service fees, interest, dividends paid cross-border
- treaty claims without documentation
- inconsistent treatment year-to-year
- no centralized withholding process
Red Flag #4: Transfer pricing that doesn’t match reality
Buyers don’t need your transfer pricing to be perfect. They need it to be defensible. What breaks defensibility:- agreements signed retroactively
- “management fees” with no evidence of services
- profit sitting in an entity with no substance
- local entities losing money every year without a story
- intercompany transactions booked inconsistently
- no documentation for pricing method or allocations
- transfer pricing audits can be high-dollar and multi-jurisdictional
- post-close, the buyer owns the risk (and the headache)
Red Flag #5: VAT/GST/sales tax surprises (especially in Europe and digital sales)
Buyers increasingly flag indirect tax because it’s often:- under-managed,
- multi-country,
- and discovered late.
- VAT/GST registrations where required
- correct invoicing and rates
- marketplace/fulfillment implications
- historical exposure and whether you can quantify it
Red Flag #6: Intercompany debt and “profit stripping”
If the target has heavy intercompany interest expense or fees, buyers scrutinize:- whether it’s arm’s length,
- whether deductibility limits apply,
- and whether it creates post-close tax inefficiency.
Red Flag #7: Weak documentation discipline (the silent deal killer)
This is the one that turns a manageable issue into a deal issue. If your team says:- “We think…”
- “We usually…”
- “It’s probably…”
How these red flags show up in deal terms (what it costs you)
If diligence finds these issues, buyers typically respond with:- purchase price reduction (you pay for the risk immediately),
- escrow/holdback (you don’t get full cash at close),
- special indemnities (you remain exposed post-close),
- restructuring requirements (slows closing and increases fees),
- R&W insurance exclusions (harder/expensive insurance).
The pre-close cleanup plan (what smart sellers do)
If you’re planning a sale in the next 12–24 months, do this now:Step 1: Build a filings inventory (US + foreign)
- What entities exist?
- Where do you have employees/contractors?
- Where do you have inventory?
- What returns were required?
- Which returns were filed (and when)?
Step 2: Run a focused risk assessment (don’t boil the ocean)
Prioritize:- missing filings (highest urgency),
- withholding exposures,
- PE/nexus exposure,
- transfer pricing documentation gaps,
- VAT/GST high-risk countries.
Step 3: Fix documentation and controls going forward
Buyers don’t just care about history. They care whether you’ve stopped the bleeding.Step 4: Align structure before the buyer forces you to
If the target has a messy cross-border structure, do planning proactively so you:- preserve value,
- reduce friction,
- and control the timeline.
What buyers love to see (and what makes deals move faster)
If you want a smoother close, build a diligence-ready package:- entity chart with ownership % and countries
- intercompany agreements (current, executed, consistent)
- transfer pricing policy and supporting documentation
- withholding process and filings summary
- VAT/GST registration list and filing evidence
- PE/nexus assessment memo (even if high-level)
- a calendar showing ongoing compliance owners and deadlines