Article category: KCM Guide

What is Financial Due Diligence?

Financial due diligence is a detailed analysis of the target’s historical performance with core focus on key financial drivers including the quality of operating revenue and earnings (generally EBITDA), capital expenditures, operating working capital, and net debt/debt-like items. Trends in these metrics are analysed to obtain perspective on business performance, financial position, capex requirements, and working capital dynamics.

KCM’s Due Diligence Methodology

KCM’s methodology focuses on the key deal rationale, including application of accounting principles, management reporting systems and internal controls, quality of sustainable earnings, normalised working capital, adjusted net debt, commercial terms with key customers and suppliers, nature of capital expenditure, analysis of historical and projected cash flows, and identifying and validating tax efficiencies and exposures.

Key Benefits

A thorough due diligence exercise provides early identification of potential deal issues, focus on sustainability of earnings through extensive management discussions, key inputs on net debt and normalised working capital that directly impact valuation, factual confirmation to avoid unpleasant surprises, constructive feedback on accounting policies and internal controls, and key inputs for effective transaction closure.

What is BEPS 2.0?

Base Erosion and Profit Shifting (BEPS) relates to avoidance of tax by multinational enterprises through use of harmful tax strategies or exploitation of loopholes to artificially shift profits to low or no-tax jurisdictions. Over 135 Inclusive Framework members, representing more than 95% of global GDP, agreed on a two-pillar solution to reform international taxation rules.

Pillar One — Where Companies Pay Tax

Amount A

Amount A applies to MNEs with global revenue over EUR 20 billion and total profits greater than 10% of global revenue. It seeks to reallocate taxing rights over a portion of excess profit from residence countries to market jurisdictions, even without physical presence. This is particularly relevant as countries with large customer bases have already begun levying digital services taxes unilaterally.

Amount B

Amount B simplifies existing transfer pricing rules for baseline marketing and distribution activities, applying to qualifying wholesale distributors of tangible goods. The arm’s length margin range (1.5%–5%) depends on industry grouping, operating asset intensity, and operating expense intensity. India has flagged multiple reservations on the computation mechanisms.

Pillar Two — Global Minimum Tax of 15%

GloBE Rules

Global Anti-Base Erosion rules seek to impose a minimum 15% effective tax rate on a jurisdictional basis. They apply to MNE groups with consolidated revenue of EUR 750 million or more. Where ETR in a jurisdiction falls below 15%, a Top-up Tax is levied to bring total tax up to the minimum rate. A Substance-Based Income Exclusion (SBIE) provides relief for entities with genuine economic activities, based on tangible assets and employee costs.

Subject to Tax Rule (STTR)

STTR is a treaty-based rule allowing countries to retain taxing rights on certain intra-group payments (interest, royalties, service fees) that are subject to nominal rates below 9% in the recipient’s jurisdiction. It may apply even where MNEs are not subject to GloBE rules.

India’s Position

India has flagged reservations on Amount B computation mechanisms. For Pillar Two, India’s approach to QDMTT (Qualified Domestic Minimum Top-up Tax) and SBIE carve-outs will significantly affect how Indian operations of multinationals are impacted. The publication provides detailed analysis of India’s positioning and implications for MNEs with Indian operations.