An update of a story – one of NeuGroup`s most read articles – about pooling physical and fictitious cash. By Susan A. Hillman, Partner, Treasury Alliance Group LLC Cash Pooling can be used to manage the multinational group`s cash position on a consolidated basis and to concentrate the group`s cash in one place. A cash pool is usually managed by a group company called the treasury pool leader. The reasons for entering into a cash pooling agreement can be threefold: Physical cash pool In a physical cash pool, money is transferred periodically (daily, weekly or monthly) from the bank account of the individual group company to the bank account of a cash manager. The cash pool manager becomes the owner of the money and each deposit with a third-party bank becomes a loan to the group`s cash pool leader. More and more multinationals are using a cash pool for their cash management and intra-group financing. Cash pooling agreements are mainly commercial agreements with a third-party bank that cannot be concluded for tax reasons. However, there are guidelines on transfer pricing and corporate tax aspects of cash pooling agreements. Takeaway.
The advantage of pooling cash comes from the fact that separate subsidiaries can use internal company funds instead of bank loans for daily working capital. A few caveats have always been important, but require closer compliance with tax and regulatory updates. Eight months into the global pandemic, liquidity and liquidity remain paramount for many multinationals facing uncertainty about the shape and timing of the economic recovery. This does this at an opportune time to review a critical liquidity management tool that has been around for decades, but has always required careful evaluation before implementation: cash pooling. Tax reform. The 2017 U.S. tax reform meant that multinational corporations received fewer tax incentives to record profits outside the U.S. in a lower tax jurisdiction – a significant barrier to tax reversal from an offshore site with a regional headquarters.
Initially, treasurers wondered whether the tax reform would affect current or planned cash pooling structures. Notional cash pool A notional cash pool allows the multinational group to balance the balances of different bank accounts in different jurisdictions. The money is not physically transferred to the bank account of a cash pool manager. In addition to the credit and debit tax rates, account should also be taken of an arm`s length remuneration for the guarantees provided to the external bank by the participating companies as well as a possible remuneration for dealing with the cash pool leader in the situation of a fictitious cash pool. From a transfer pricing perspective, the central question is how the benefits of the cash pooling agreement should be shared among the Participating Group companies. Notwithstanding the conclusion of the cash pooling agreement with a third-party bank, the responsibility for use at market interest rates remains within the multinational group. These internal interest rates will most likely be different from the external bank interest rate. Because the solvency of a debtor (with its own individual solvency) plays an important role in determining the amount of an interest rate used. In the situation of a physical cash pool, the debtor is not the external bank, but in fact the participant in the cash pool with a debt position. The internal debit and credit interest rates will therefore generally be different from the bank`s interest rate and will depend on the individual solvency of each participating company. Determining an arm`s length price is a complex task that depends to a large extent on the specific facts and circumstances set out in the cash pooling agreement.
In order to apply arm`s length to pooled cash operations, the functions, assets and risks of each of the parties to the agreement should be taken into account and the most appropriate transfer pricing method should be chosen. How the cash flow benefit should be distributed among the different participants. Since facts and circumstances (such as the creditworthiness of a participating company) may change during the year, the creation of a cash pooling policy may be recommended. This document describes how the transfer pricing methodology used works within the group and how the group can ensure how often each rating can be tested. There are two main types of cash pooling agreements: fictitious cash pooling and physical cash pooling. Definition of cash pooling. Cash pooling is a short-term cash management tool whose objective is to eliminate unused cash and reduce overdrafts in subsidiaries with different daily cash positions. There are two approaches: physical and fictitious. Regulatory control.
The initiatives of the OECD (Organisation for Economic Co-operation and Development) and the BCBS (Basel Committee on Banking Supervision) in recent years could have an impact on cash pooling. However, the actual adoption of such declarations shall be made separately by the participating countries and their central banks or supervisory authorities. Physical pooling automatically directs funds into segregated sub-accounts – in the same bank – to and from a header account. The bank accounts of participating companies are in a surplus or deficit position at the end of the day. The physical concentration on the specified header account effectively balances the zero subcounts. Physical pooling can be used between multiple legal entities located in the same country or in different countries, but on a monetary basis. The type of cash pool is specified in the cash pooling agreement with a third-party bank and may include fictitious and physical cash pooling items. Due to the conditions set out in the cash pooling agreement, the allocation of interest or credit costs between depositors and borrowers in the cash pool must be made «on market terms».
Fictitious pooling achieves a similar result, but is achieved by creating a phantom or nominal position resulting from an aggregate of all accounts that can be held in multiple currencies. Interest is paid or calculated on the consolidated position. There is no actual movement or mixing of funds. .
