A cash pool from a transfer pricing perspective

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.

Determining an arm’s length price is a complex task and highly depends on the specific facts and circumstances. 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. Since the facts and circumstances (like the solvency of a participating company) can change during the year, the preparation of a cash pooling policy is highly recommended.  A description of the relevant facts and circumstances in a cash pooling agreement will strongly support the at arm’s length nature of your intercompany interest rates.