Cash pool: a mechanism of efficient cash management
Cash pool is a mechanism of efficient cash management realised by pooling of cash balances as part of a short-term liquidity management arrangement.
There are two types of cash pools:
- physical pooling: the bank account balances of all the pool members are transferred to a single central bank account owned by the cash pool leader.
- notional cash pool: bank account balances of pool members are pooled administratively but no physical transfer of balances take place.
All entities in the cash pool should benefit from the cash pool. Such benefit may include:
- reduced need to attract external loans
- favorable interest rates
- access to liquidity that may not be available otherwise
- more efficient management of the liquidity position
- less administration
When analysing the cash pool arrangement from a transfer pricing perspective the following aspects should be taken into consideration:
- It should be verified whether cash pool balances are indeed short-term positions, or they should be treated as rather a longer-term deposit or a term loan.
- The functions, risks and assets of a cash pool leader: does a cash pool leader perform no more than a co-ordination or agency function or does the cash pool leader perform a more complex treasury function? Depending on the answer the cash pool leader might need to report a minimum remuneration (on a cost-plus basis) or be entitled to a significant interest rate spread between deposits and borrowings.
- Cash pool advantage should be determined and allocated to the cash pool leader and participants depending on the functional profile.
Four steps to take to make sure the cash pool arrangement is compliant from a transfer pricing perspective:
- Review the functional analysis of a cash pool leader and cash pool participants. This review should focus on functionality (in terms of people substance), contractual risk allocation and equity at risk
- Establish the borrowing and lending margin
- Quantify and allocate the cash pool advantage
- Prepare the cash pool TP policy and include the pricing in the Transfer pricing documentation
If the above has triggered your interest and you want to make sure that your cash pool arrangement fully complies with transfer pricing principles, RED can help you every step of the way. Please feel free to contact marina.zubtsova@red.tax for expert advice.
