You Bought a Philippine Company and Found Old Unpaid Taxes: What the Buyer Should Do

The short answer: the tax stays with the company; recovery depends on your contract

In a share purchase the company itself does not change. It is the same legal person, and the tax obligations it incurred in earlier years stay with it. The tax authority pursues the company, not the former shareholders, simply because ownership changed. As the new owner, you face those historical issues through the company.

An asset purchase works differently. The buyer usually takes only selected assets and business, while the seller company generally keeps its own historical tax obligations. The difference between the two structures is explained in share sale versus asset sale.

So the buyer runs two tracks at the same time. The first is the company and the tax authority: the company must answer on time and handle the matter lawfully, even if the problem was created before you arrived. The second is the buyer and the seller: you rely on the representations and warranties, indemnity clauses, and any retention or escrow arrangements in the purchase agreement to make the seller bear the cost.

The two tracks move at different speeds. The tax track has hard deadlines and is usually more urgent. The recovery track depends on notice periods and procedures in the contract, which also cannot be left too long.

Keep the two tracks documented separately but cross-referenced, so the evidence you gather for the tax authority can be reused when you prove your loss to the seller. Individual cases should be reviewed by a licensed lawyer and a certified public accountant.

Above all, do not let the new management team assume the problem belongs to someone else and ignore the notice for a few weeks.

The first week after the notice: confirm, collect, bring in the right people

First, confirm what the notice is and how urgent it is. Is it a letter of authority, a request for information, an assessment notice or a collection letter? Which tax type and which years are involved? What is the deadline to respond? The meaning of each BIR document and how to respond is covered in the BIR audit process.

Second, gather everything the company received at handover: books of account, returns, payment receipts, correspondence and the previous accountant working papers. Handover files are often incomplete. List what is missing and ask the seller or the former accountant for it in writing.

Third, bring in the right people. Your current accountant should review whether the periods and amounts in the notice are supported. Your lawyer should help answer the tax authority and start preparing the claim against the seller.

One thing is easy to miss in that first week: read the purchase agreement and locate the tax representations, the indemnity clause and any deadline for notifying the seller of a claim. Many agreements require written notice within a set period after discovery, and late notice can weaken the claim. That period is whatever the contract says.

Put all of this into a short internal memo for management so decisions in the coming weeks are made on the same facts.

If the company changed its accountant at handover, contact the previous accountant politely and in writing as early as possible. They may hold working papers, filing confirmations and payment records that never reached the new team, and they are usually more cooperative at the start than after a dispute has become formal. Record what they provide and when, so the chain of documents is clear.

Notify the seller in writing: early, factual and unemotional

Once you have checked the contract, notify the seller in writing as soon as possible: what notice the company received, which periods and taxes are involved, which clause you rely on to hold the seller responsible, what information you need from them, and how you intend to proceed. Have your lawyer review the letter before it is sent and keep proof of delivery.

Keep the tone businesslike. There is no need to accuse the seller of concealment in the first letter. Often the seller did not know what the previous accountant had done. Asking for cooperation and a joint response to the tax authority frequently reduces the final cost to the company more than an immediate confrontation.

If the deal included a price retention, an escrow account or deferred payments, follow the contract on freezing or suspending the relevant release, and tell the seller in writing why. Do not withhold money unilaterally without a contractual basis, or you may create a new breach dispute of your own.

If the agreement contains no tax warranties or indemnity at all, recovery becomes much harder and may rely only on general legal principles. Your lawyer needs to assess that. It is also a lesson for future buyers: tax clauses in transaction documents are not boilerplate.

Keep a log of every exchange with the seller after the notice, including calls, so the history of their response can be shown later if needed.

If the seller replies and disputes responsibility, do not argue the point by message. Ask for their position in writing, pass it to your lawyer, and continue with the tax response regardless. Their reply, even if negative, is useful: it shows when they were informed and what they said, which matters if the claim later goes to formal dispute resolution under the contract.

The tax track: answer on time, contest what you can, negotiate what you owe

The company must answer the tax authority within the deadline regardless of how the claim against the seller is progressing. Your accountant and lawyer will review each item: whether the income, expenses and input tax in the findings are supported by documents, whether payments already made were missed, and where lawful objections can be raised.

For amounts that are properly due, look at whether a compromise settlement or instalment arrangement is possible; see BIR compromise and instalments. Whether these apply and how to apply follow current BIR rules.

If the tax authority asks the company to sign a document extending the period to assess or collect, discuss it with your accountant and lawyer first. Do not sign simply because you want the matter closed quickly.

Keep a complete record of correspondence and payment receipts throughout. These records prove compliance to the tax authority and also prove your loss when you claim against the seller: what the company finally paid and what it spent on professional fees both need receipts.

Assign a single person inside the company to track every deadline on this track, because a missed date here creates penalties that the seller may argue are your responsibility, not theirs.

Where the findings are partly right and partly wrong, consider paying the clearly correct portion promptly while contesting the rest. This can limit further penalties and interest on the undisputed amount and shows good faith to the tax authority. Your accountant should prepare a clear reconciliation that separates the accepted items from the contested ones, with documents attached for each contested item, so the response is easy to follow and harder to dismiss.

While you are at it: check staff, permits and contracts for other surprises

Hidden tax usually means handover due diligence was not deep enough. It is worth re-checking the other places where problems hide: whether business permits and registrations are current, whether social security, health insurance and housing fund contributions are unpaid, and whether foreign employees have valid work visas and work permits.

Foreign staff deserve particular attention because two agencies, immigration and labor, are involved. The checklist for what to review and how to handle findings is in checking foreign staff permits in an acquisition; if the deal has already closed, use the same list as a catch-up review.

Also review the contracts the company signed: undisclosed guarantees, loans, long-term supply commitments or pending lawsuits. Like tax, these often surface only after the new owner takes over.

Put the findings into one list, sorted into items that need immediate action, items that can be claimed from the seller, and items that require changes to internal procedures, and take that list to management for decisions.

This catch-up review is also useful evidence: it shows the scale of what was not disclosed, which can support the overall claim against the seller.

Where you find gaps in foreign staff permits, fix the status of the people affected before anything else, because an employee working without valid authority creates ongoing exposure every day it continues. Do not wait for the seller to respond before correcting compliance; correct first, record the cost, and claim it later if the contract allows. The same applies to unpaid contributions: settle what the company owes, keep the receipts, and add the amount to the claim file with a short note on how it was discovered.

Realistic recovery options, and how Yixing can help

In practice there are a few routes to recover from the seller: the seller cooperates and agrees to bear or share the cost; the amount is deducted from retained purchase price or escrow; or, if talks fail, the claim proceeds under the dispute resolution clause in the contract. For how sellers see their post-sale exposure, see liability after selling a company.

On every route, early notice, complete evidence and clear contract terms usually produce a better outcome. Be realistic as well: if the seller has left the Philippines and holds no reachable assets, recovery may cost more than it returns, and you should weigh that with your lawyer.

Yixing handles the company setup and compliance side: reviewing the company registration and permit status, coordinating document preparation with your accountant for the tax response, and catch-up checks and filings for foreign staff visas and work permits. The tax dispute and the claim against the seller must be handled by a licensed lawyer and a certified public accountant. Reach us through our company setup services.

Yixing is SEC-registered (CS202009551) and holds Bureau of Immigration Accreditation No. CA-202624381-1 (valid until 30 June 2027) and DOLE accreditation. Individual cases should be reviewed by a licensed lawyer and a certified public accountant; this article is not legal or tax advice.

Finally, update the company internal records once the matter settles: note what was paid, what was recovered, which professional advised on each step, and what changes were made to procedures. A clean record helps at the next audit, at the next financing, and at any future sale of the company, when your own buyer will ask exactly the questions you wish you had asked.