What is an arms-length transaction and how to make a deal using Virtual Data Rooms

Large arrays of confidential information are processed during the arms-length transaction in business. So, how can the Virtual Data Room optimize this process and what are the benefits for involved parties?

What is an arms-length transaction?

Digital transformation is a revolutionary change in business models based on the use of digital platforms that lead to a radical growth in market size and the competitiveness of companies. So, how can this digitalization improve deal-making?

The arm’s length principle is an international transfer pricing standard that has been agreed upon by OECD member countries for use for tax purposes by groups of multinational companies and use by tax authorities. Indeed, when independent enterprises cooperate, the terms of their commercial and financial relations (such as price, terms of transfer) are usually determined by market indicators. And when associated enterprises interact with each other, external economic factors may not directly affect their trade and financial relationships.

The policy is to establish a completely equal financial and commercial environment that would arise between two completely independent entities in comparable transactions and circumstances.

As practice shows, the “arm’s length” principle is effective in most cases of buying and selling or lending, when you can easily find the usual market price of a comparable transaction between comparable enterprises under comparable conditions.

The role of the Data Room software in arms-length deals

In the same way, tax authorities alike often find it tough to receive the necessary information to introduce the arm’s length principle. Its application requires an assessment of uncontrolled transactions and business activities of independent enterprises, comparison of the information obtained with the transactions and activities of associates. This is a very time-consuming and voluminous process, sometimes accompanied by difficulties due to the complexity of obtaining, the geographical location of countries, and confidentiality. Thus, Virtual Data Rooms https://virtual-data-rooms.org/ play an important role in such operations.

The information, processed in the Data Room, includes not only data about the legal entity, its counterparty, and the operation performed, but also a general description of the activities of the group of companies, the organizational structure of the group, a description of the economic activities, the transfer pricing policy, information about persons, to which the taxpayer provides local management reports (the name of the state in which such persons hold their head offices), a description of the activities and business strategy carried out by the taxpayer, in particular, the economic conditions of activity, in which the taxpayer carries out its activities, and even the main competitors and much more different information, including that which is sometimes confidential at the enterprise.

Data Room software can simplify arms-length deals in the following ways:

  • Document access. All information is available to project participants in any location, both online and offline. Besides security is ensured by a special security architecture with reduced interfaces and several interlinked technical protective measures.
  • Meeting management. Do you want to host a meeting and use everyone involved? Data Room platform offers customers professional distribution of materials for meetings, as well as regular progress updates.
  • Minimization of administrative tasks. The software supports your deals and is maximally for the acceleration of the technical processes. This allows participants to concentrate more on the content.
  • Interactive methodology for document exchange. With the help of the Q-A section function, communication in the Data Room can be significantly simplified. It also speeds up the administration of audit results, risk management reports, incentive plans, and investment presentations.