White paper | November 15, 2021

Understanding the TP compliance burden for cash pools

Cash pooling

Many corporates are impacted by the recent OECD chapter 10 document which is the first consensus between tax authorities on how to determine interest rates within cash pooling and in-house banking arrangements. The process is cumbersome and requires taxpayers to calculate and allocate the pooling benefit across all participating entities. This article discusses common pricing approaches and their level of compliance.

Why each corporate should charge interest on intercompany balances

In principle, the provision of credit is an intercompany financial service which should be remunerated in line with external markets. How to determine the arm’s length interest rate depends on the transaction type. However, all short-term intercompany balances from cash pools and in-house banking follow the same high-level process, as per the OECD.

Should a corporate not charge any interest rate internally, it would leave a substantial risk for a transfer pricing adjustment later on. This method implies that subsidiaries would not receive any benefit from depositing with the group. Additionally, participating entities would also be able to borrow funds internally without any cost. Not charging any interest would also mean that the cash pool leader or in-house bank entity assumes all the risk without a specified remuneration for it.

The below image illustrates that concept for two  cash pools that do not charge any interest internally. The external interest rates are 1% for deposits and 2% for overdraft positions, i.e. assuming a non-negative interest rate environment.

Image 01: no internal interest charged

Whether the cash pool header makes a profit or a loss solely depends on the aggregate position of all entities. This clearly indicates why there is a need to charge interest rates within a cash pool or in-house bank when complying with the transfer pricing principles.

Why corporates should not apply the external interest rates within the cash pool

Often corporates would be inclined to charge the external interest rates also within the cash pool. At first sight, it may seem that it is simply passing through the charges for overdraft positions and rewarding deposits in a similar fashion. However, this does not hold for cash pooling situations.

If you would charge the external interest rates internally as well, all pooling benefits will reside with the cash pool leader. This pooling benefit is generated through the offsetting of debit and credit positions and arises regardless of the overall position of the cash pool, i.e. a positive or negative aggregated balance. The below image depicts both scenarios.

Image 02: external interest rates charged internally

The profit for the cash pool leader is in both scenarios identical. However, the OECD argues that only a portion of this profit should reside with the leader entity as a remuneration for administering the pool and assuming certain financial risks.

The participating entities play a crucial role in generating the cash pool benefit. Their balances are an essential contribution to the cash pool benefit, which also requires remuneration. In addition, this remuneration will also give subsidiaries a financial incentive to participate in the cash pool or in-house bank. This ensures that internal cash pool interest rates are thus always better than the external interest rates.[1] A pricing methodology that does not award subsidiaries is therefore not preferred from a transfer pricing point of view.

Cash pool benefit allocation

The cash pool benefit allocation method is done in two steps. First, a functional analysis of the cash pool leader should be made. This analysis should investigate beyond the contractual type of cash pool, i.e. identifying which functions are performed by the cash pool leader as well as which financial risks it assumes through the pooling.

The cash pooling profit should first be split between the cash pool leader and the participants based on the functional analysis. The remuneration for the cash pool leader should be in line with the outcome of the function analysis.

The remainder of the cash pool benefit should be distributed to the cash pool participants. As per the OECD, this profit allocation should be priced into the interest rates. This implies a synergy margin to be added to the preliminary deposits rates as well as a synergy margin to be deducted from preliminary overdraft rates. There is no consensus on the exact allocation key to be used between the various participants. Nonetheless, it is advised to document why the applied allocation key is suitable for the respective cash pool based on the economic circumstances. Following these principles, each multinational creates an incentive for all its subsidiaries to participate in the pooling structure.

The below example outlines a synergy margin on 0,2%. This results in a benefit for the cash pool leader as well as higher profit for each subsidiary compared to the previous scenario. Therefore, this pricing approach is preferred by tax authorities.

Image 03: pooling benefit allocation


Corporate treasurers use cash pooling techniques for short-term cash management. Apart from the operational benefits, it also entails a profit for the corporate. This profit mainly results from the offsetting of debit and credit positions. Treasury and tax professionals should be aware that this profit may be taxed across the different entities that participate in the cash pool. Therefore, careful consideration should be given to the allocation of the cash pool benefit towards the various subsidiaries.