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A cash pool from a transfer pricing perspective

What is 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.

What kind of cash pooling arrangements are there?

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

Cash pooling 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.

Cash pooling template

Our cash pooling agreement describes a ‘zero balancing’ cash pool arrangement, whereby funds are transferred on a daily basis to/from the cash pool leader, the group entity that manages the pool (usually a treasury operation or the parent company). The cash pooling arrangement includes multiple countries and currencies. The currencies used in this template cash pooling agreement are Euro and US Dollar. 

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