The OECD notes that before any attempt is made to determine the remuneration of the cash pool manager and participants, it is essential for transfer pricing analysis to identify and study the economically significant risks associated with the cash pooling agreement. This could include liquidity risk and credit risk. Liquidity risk in a cash pool agreement arises from the difference between the maturity of the credit and debit balances of the members of the cash pool. Credit risk refers to the risk of loss arising from the inability of treasury pool members with debit positions to repay their cash withdrawals. Cash pooling structures. The use of a cash pool is popular among multinational companies to achieve more efficient cash management by merging balances into a number of separate bank accounts, physically or fictitiously. According to the OECD, according to regulations, a cash pool can contribute to more efficient liquidity management, where dependence on external credit can be reduced or, if there is excess liquidity, a higher return on each aggregate cash balance can be achieved. Cash pooling agreements are complex contracts that can involve both controlled and uncontrolled transactions. For example, a common structure consists of participating members of the multinational group entering into a contract with an independent bank providing liquidity pooling services and each participating member opens a bank account with that bank. 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. 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: fictitious pooling achieves a similar result, but is achieved by creating a phantom or nominal position resulting from a totality 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 mix of funds. 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. 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. There are two main types of cash pooling agreements: fictitious cash pooling and physical cash pooling. 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. Provision of a complete cash pool and documentation for intercompany financial transactions Uniform liquidity position. It allows each subsidiary to take advantage of a unique, centralized liquidity position while maintaining day-to-day cash management privileges. 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. 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. Fictitious pooling. In a fictitious cash pool, some of the benefits of combining the credit and receivable balances of multiple accounts without physical transfer of funds between the accounts of participating members are achieved. .