Cash pooling

Cash pooling can be used to manage the multinational group’s cash position on a consolidated basis and concentrate the group’s cash in one place. A cash pool is normally administered by a group company which is to be referred as the cash pool leader. The reasons for concluding a cash pooling arrangement can be threefold:

• minimizing the cost of funding (external borrowing) as well as transaction costs;
• monitoring the group’s cash position and managing foreign exchange exposures; and
• maximizing the group’s return on their cash (better terms could be negotiated with any third party bank) during the “economies of scale”.

Cash pooling arrangements

There are two main types of cash pooling arrangements: notional cash pooling and physical cash pooling.

Notional Cash Pool

A notional cash pool allows the multinational group to net off the balances of various bank accounts across jurisdictions. The cash is not physically transferred to a cash pool leader’s bank account.

Physical Cash Pool

In a physical cash pool the cash is periodically (daily, weekly or monthly) transferred from the individual group company’s bank account to a cash pool leader’s bank account. The cash pool leader becomes the owner of the cash and any deposit with a third party bank will turn into a loan to the cash pool leader in the group.

The nature of the cash pool is set out in the cash pooling arrangement with a third party bank and may include elements of notional and physical cash pooling. Due to the terms and conditions as stated in the cash pooling arrangement, the allocation of interest debit or credit between depositors and borrowers in the cash pool must be “at arm’s length”. 

Transfer Pricing

From a transfer pricing perspective, the key question is how the benefits from the cash pooling arrangement should be allocated between the participating group companies. Notwithstanding the cash pooling arrangement is concluded with a third party bank, the responsibility to use at arm’s length interest rates remains within the multinational group. These internal interest rates will most likely differ from the external bank rate. After all, since the creditability of a debtor (having its own individual credit rating) serves an important role in determining the height of a used interest rate. In the situation of a physical cash pool, the debtor will not be the external bank, but in fact the participant of the cash pool having a debt position. Internal debit and credit interest rates will therefore generally differ from the bank’s interest rate and depend on the individual credit rating of each participating company.

Besides the credit and debit tax rates also an at arm’s length remuneration for the provided guarantees of the participating companies to the external bank should be taken in consideration as well as a possible remuneration for the handling of the cash pool leader in the situation of a notional cash pool.

Determining an arm’s length price is a complex task and highly depends on the specific facts and circumstances written in the cash pooling arrangement. To apply the arm’s length principle to the cash pool transactions, the functions, assets and risk of each of the parties of the arrangement should be considered and subsequently the most appropriate transfer pricing method can be chosen. How any cash pool benefit should be allocated between the different participants. Since the facts and circumstances (like the solvency of a participating company) can change during the year, the preparation of a cash pooling policy could be recommended. In this document the working of the used transfer pricing methodology within the group and how the group can make sure how regularly the individual credit ratings can be tested.

Find out more

Would you like to know more about this subject? Or do you need help with complex cross-border tax issues? Our specialists can advise you on how to craft and set up an effective transfer pricing policy and documentation system. Call Jeroen Geers, tax advisor, on +31 (0)134 647 288 or send Jeroen an e-mail.