Old Tax Problems Found in Due Diligence Are Blocking the Sale of Your Philippine Company: What the Seller Can Do

When the due diligence list arrives: sort before you concede or walk

Sort the buyer's findings into real problems, misunderstandings and documents not yet provided. Due diligence reports tend to list every query together, and a good share of them disappear once the missing papers are supplied.

A practical way to sort them:

• Missing documents. The return was filed and the tax paid, but the buyer has not seen the proof. Supply filing receipts, payment confirmations and any acknowledgement from the tax bureau; these items can often be closed within days.
• Known and quantifiable. Certain months were genuinely not filed and the structure of the catch-up, tax plus surcharges and interest, is clear enough for your accountant to estimate a range.
• Known but uncertain. An audit in progress, or an assessment under protest, where the final figure depends on how the process ends.
• The buyer's speculation. Risks the buyer assumes exist because of industry practice, such as related-party pricing or deductibility positions, without specific evidence.

Each category needs a different response: supply documents for the first, clean up or quantify the second, negotiate risk allocation for the third, and cover the fourth with representations and warranties rather than a large price cut. Once sorted, give the buyer a written response setting out your plan and timetable item by item; that steadies a nervous buyer far better than verbal reassurance.

Number every item exactly as the buyer's report numbers it and keep that numbering in all later correspondence. When both sides refer to the same item by the same number, nothing gets lost between rounds of questions, and you can show at any moment how many items are closed, how many are in progress and how many are disputed. That simple discipline does a great deal to keep a nervous buyer at the table.

Establish the facts from the tax bureau and your accountant

The only numbers worth using at the table are ones you have verified yourself, not the buyer's estimates.

1. Tax bureau records. Through the company's online account and its revenue district, find which open cases exist, which periods are flagged as unfiled, and whether any Letter of Authority or assessment notice is outstanding. The general course of an audit is described in the BIR audit process.
2. Where each audit stands. Still at verification, at a preliminary assessment, or at a final assessment: each stage has its own response deadlines and options. If a protest deadline has been missed, see a missed protest deadline and a final assessment.
3. Do the books match the returns? Have your accountant reconcile audited statements against income tax, VAT and withholding returns year by year, identify differences and whether they can be explained; see when audited statements and returns do not match.
4. Exposure ranges. Put a low-to-high range on each issue with its basis and its uncertainties, broken down into tax, surcharges and interest or possible penalties, using the bureau's current rules and your accountant's calculations.

Take the time to get this right. A figure that turns out to be wrong will make the buyer discount everything you say afterwards.

Keep a single working file per issue: the bureau's documents, your accountant's workings, the range, and the open questions. When the buyer's advisers ask, you can send the file rather than reconstructing the reasoning each time, and your own lawyer can see at a glance which numbers are firm and which are still estimates. Agree internally who is allowed to quote figures to the buyer, so that nobody gives out a number that has not been checked.

Clean up what you can, in the right order

Deal first with what is certain, cheap and likely to block completion; then with what is uncertain and slow.

• Unfiled periods. File what can be filed as soon as possible, with amended returns where needed; see filing an amended return. Delay only adds surcharges, and buyers usually make these items conditions to completion.
• Open cases. Where returns were filed but not recognised, submit the proof and ask for closure; where a tax type was registered in error, apply to remove it. Obtain the bureau's written outcome as evidence for the buyer.
• Amnesty or compromise. If an amnesty or compromise programme currently applies, assess whether it is cheaper than seeing the process through; background in penalties and tax amnesty and compromise and instalment payment. Eligibility follows the bureau's current rules.
• Audits in progress. Do not accept an assessment in a hurry to close the deal. Prepare your protest properly and allocate the disputed amount through the deal terms; that is usually more sensible than overpaying to get the deal done.

Keep every exchange with the bureau in writing and share progress with the buyer. A buyer who sees items being closed one by one gains far more confidence than one who hears that everything will be taken care of.

Assign one person on your side to own the clean-up list, with dates and status for every item, so that progress reports to the buyer are consistent and nothing quietly slips while everyone is focused on the commercial negotiation.

Where a fix cannot be completed before signing, agree a realistic deadline with the buyer rather than an optimistic one.

Allocate what remains through the deal terms

Tax history that cannot be fully cleaned up does not have to mean a large discount; the transaction structure can allocate the risk. The usual tools are often combined:

• Price adjustment. Deduct items that are quantified and certain to arise. Suited to the second category.
• Escrow or holdback. Place part of the price with a third party or let the buyer retain it, releasing it when an audit closes, a period expires or defined events occur. Suited to uncertain items.
• Specific indemnities. The seller indemnifies against a defined issue, with scope, cap, duration and triggers spelled out, rather than for all historical tax matters in general.
• Deferred or conditional payments. Part of the price is paid after completion, with agreed items set off against later instalments if they arise.
• Conduct of audits. If the bureau later audits pre-completion periods, settle in advance who runs the defence and whether the seller is informed and involved, so that the buyer cannot simply accept an assessment and pass the bill to you.

The wording decides what you will eventually pay, so it must be drafted and reviewed by a lawyer, with amounts, caps and periods modelled by your accountant. Do not accept a general indemnity with no cap and no time limit.

For your specific case consult a licensed lawyer and a certified public accountant; this article is not legal or tax advice.

Think about how each mechanism will actually work in two or three years' time: who holds the escrow, what document proves an audit has closed, how disputes about release are resolved. Terms that read well on signing day but cannot be operated later are a common source of post-completion fights between buyer and seller.

When it is too messy: change the structure, carve out or wait

If the history cannot be quantified, forcing a share deal through serves neither side; consider a different structure.

• Switch to an asset sale. The buyer takes the business and assets, and the tax history stays in the old company for you to clean up and dissolve. The trade-off is that permits and contracts must be re-arranged and the asset transfer has its own tax treatment; compare the two routes in share sale or asset sale.
• Restructure, then sell. Move the clean business and assets into a new company and sell the new company's shares. This needs design by lawyers and accountants and attention to the tax and employment effects of the transfer itself.
• Postpone. Spend time putting the books in order and letting audits run their course, then relaunch the sale. A buyer who genuinely values the business will often wait or sign a conditional agreement.

One more caution: where a company ultimately cannot pay its taxes, responsible officers can in some circumstances be pursued; see when a company cannot pay deficiency taxes. That is one reason not to assume that selling ends your involvement; see being pursued after selling a company.

Whichever path you take, explain the reasons to the buyer candidly. A change of structure proposed openly, with the evidence behind it, is usually received as a constructive step rather than as a retreat.

Before committing to a restructure, ask your accountant to estimate its own tax and registration costs and timing, because a carve-out that costs more and takes longer than simply cleaning up the existing company is no solution at all.

How YIXING can help

When a sale stalls on old tax problems, what matters most is establishing the facts quickly and accurately and turning the clean-up into material the buyer can follow.

YIXING holds SEC registration (CS202009551), Bureau of Immigration accreditation (BI Accreditation No. CA-202624381-1, valid until 2027-06-30) and DOLE and PRA accreditation. We can:

• help identify the company's open cases, unfiled periods and audit status with the tax bureau;
• coordinate accountants to reconcile returns and audited statements year by year and arrange catch-up and amended filings;
• prepare written responses to the buyer and a clean-up progress tracker;
• deal with outstanding SEC annual report and GIS issues in parallel;
• keep the company's filings uninterrupted before and after the deal through our tax and incentive services and compliance retainer.

Deal terms, indemnity mechanisms and tax protests should be handled by licensed lawyers and certified public accountants, and we can coordinate with them. We cannot promise any decision of the tax bureau or that the deal will close.

The earlier you involve us, ideally before marketing the company at all, the more of this can be done quietly and without a buyer watching every step and adjusting the price as each issue surfaces.

For your specific case consult a licensed lawyer and a certified public accountant; this article is not legal or tax advice.

A useful first step is a short desk review of the buyer's findings with your accountant and us in the same meeting, which quickly separates the items that are easy to close from those that need a lawyer and a negotiated mechanism.