Due diligence is when a company or individual verifies its counterparties before entering into a deal with them. Check the power of the virtual data room during the due diligence process.
What Is Due Diligence and Why to Exercise It?
A company that goes public is required by law to make the necessary business documents publicly available. This is due to the fact that shareholders and investors need to analyze the company’s previous performance, current state, and forecasts for the future. Providing sensitive data to a large number of individuals is risky; competitors may misuse publicly available data.
The essence of due diligence lies in the fact that an economic entity is obliged to take certain measures or actions to verify information about the reliability (or unreliability) of a potential counterparty. Due diligence is mandatory both before the direct conclusion of a cooperation agreement and in the process of further interaction with a partner.
The notion of due diligence has emerged from the fact that some companies are trying to illegally save on taxes and involve their partners in this. A company that does business honestly can suffer if it contacts an unscrupulous partner.
When considering the issue of unjustified tax benefits, the following points are distinguished:
- the transaction was not actually carried out;
- the company and its partner are interdependent;
- the counterparty was aware that its actions could lead to unreasonable tax benefits.
The purpose of “due diligence when checking a counterparty” is to ensure the legitimacy of one’s own legal position in relation to the tax authority on the legality of calculating and paying taxes (deduction of paid to a counterparty, reduction of taxable profit due to expenses in the form of payments to a counterparty, etc.), since the legitimacy of the calculation can very easily be called into question due to the unreliability and dishonesty of the counterparty.
Use the Data Room During the Due Diligence Process
When all the company’s important documents are located in one centralized space, it is much easier to set up the functions of an electronic data room and get rid of organizational clutter once and for all. The tools presented in this repository are also important for external investors. Show them data in a personalized, easy-to-understand way.
The best perspectives of a virtual data room for due diligence are:
- User activity monitoring: Administrators will see which users have accessed which file, so project security and activity are never in doubt.
- Reporting and analytics: Administrators can find more information about user interaction, data room usage, document sharing, and other topics.
M&A due diligence is a popular VDR application. Mergers or acquisitions of other businesses require careful consideration, especially the provision and analysis of voluminous records. Due diligence when choosing a counterparty, which should be exercised by the taxpayer, is becoming increasingly important in tax legal relations. The growth of this importance requires expanding the ways in which such discretion is exercised using the virtual data room provider.
You also don’t have to spend time preparing documents before uploading. Data Room for due diligence supports over 25+ different formats. Downloaded files are automatically converted to PDF for online viewing. These documents are also automatically indexed and numbered in an organized manner. Overall, this tool makes it easy to upload, organize, and share documents online for multiple parties in a data room.