Cash pooling is a method often used by multinational companies for cash management and intra-group financing. Cash pooling is a treasury technique to manage the short-term liquidity position of a multinational group. Important benefits of intercompany cash pooling are a reduction of external financing costs, securing short-term liquidity for participants and more control and insight for the headquarter in liquidity of the group.
How to deal with the transfer pricing aspects of cash pooling?
We distinguish two types of cash pools, namely physical- and notional one. In a physical pooling arrangement, the bank account balances of all the cash pool participants are transferred daily to a central bank account owned by the cash pool leader. However most of the time notional cash pools are used within a multinational. In notional cash pooling we do not physically transfer the funds to the bank account of the leader. Please click the link notional pooling for more information.
The cash pool leader
Important tasks of the cash pool leader are control and monitoring of the relevant positions and financials of participants. Furthermore, the cash pool leader is responsible for coordination and communications with the bank and the participants. The cash pool leader must be compensated at arm’s length. The leader’s compensation depends amongst others on his or her function; does the leader act as a “coordination or agency function” or on a “more than coordination or agency function”.The cash pool leader is remunerated based on its functions performed and risks assumed, which usually results in a limited remuneration for merely a “coordination or agency function”. However, sometimes a cash pool leader may have “more than coordination or agency function” and this should also be reflected in its arm’s length compensation.
Challenges you might experience
Cash pooling is always intended for short-term financing. It is important that the current accounts do not become a structural position. When short-term becomes long-term, it is necessary to reevaluate and potentially reclassify the transactions. Other important items to consider are how to deal with compensating the leader and the participants, (cross) guarantees and different currencies and credit ratings.
What we offer your company as transfer pricing experts
We set up proper transfer pricing documentation in combination with a robust transfer pricing policy for your cash pool activities:
- We make an transfer pricing analysis
- We determine the remuneration for the cash pool leader and participants
- We advise on how to deal with potential cross guarantees
- We determine a policy on how to deal with structural positions
- We prepare transfer pricing documentation
- We provide implementation support
- We provide monitoring support
How Quantera Global may be of service
With the support of Quantera Global, you will have a well-documented cash pool arrangement and will experience multiple benefits:
legally required transfer pricing documentation and in compliance with transfer pricing legislation and OECD guidance
for the organisation on how to deal with the cash pool
into best practises for a cash pool set-up and which set-up suits your situation best
administrative simplification where possible
a solution to monitor the cash pool in the future and related policies