Transfer pricing of cash pooling arrangements

This guidance will be updated.

A common approach to cash management among MNE groups is to carry out a pooling of cash balances. The goal is to ensure effectiveness in cash management within the group. Cash pooling arrangements are complex contracts that may involve controlled and uncontrolled transactions. From the perspective of how transfer pricing between group companies should be evaluated, these arrangements can be viewed as a set of intra-group liabilities and receivables.

A common pooling structure is that the participating group companies of the MNE group conclude a contract with an unrelated bank that renders cash-pooling services. After that, every participant opens a bank account with that bank. Remuneration to the bank is normally provided in the form of service fees or in the form of interest payments.

In addition, one of the group companies normally operatesas a intra-group cash pool leader for the arrangement. Typically, this role is taken by the parent company or by a company in charge of treasury function.

An accurate description of the cash pooling arrangements within transfer pricing documentation helps the Tax Administration in verifying whether the arm’s length principle is being adhered to.

Particular facts and circumstances create the framework for arm’s length pricing

Because cash pooling arrangements are only prevalent inside MNE groups, the proper way to evaluate whether pricing is arm’s length requires that all the specific facts and circumstances are looked into on a case-by-case basis. Accordingly, it is essential to find out which group companies participate the arrangement, the obligations that they must take care of due to their participation, the functions carried out by each participant, and evaluate the question whether the participants could pursue alternative cash management arrangements instead of being part of the group’s cash pool. On prevailing facts and circumstances, conclusions of how the benefits and drawbacks are allocated between pool participants and the cash pool leader can be drawn.

In general, no participant of the cash pool is likely to be participating in the arrangement if it made them worse off than their other options of cash management.

Arm’s length remuneration to the participating companies

An analysis of the remuneration paid to the cash pool leader must take account not only the facts and circumstances, but also the functions it performs, the assets it employs, and the financial risks it assumes.

In the majority of MNE groups, the cash pool leader engages in a co-ordination function. In that case an arm’s length remuneration can be determined according to the OECD guidelines on arm's length pricing of intra-group services. However, where the accurate delineation of the actual transactions determines that a cash pool leader is carrying on activities other than co-ordination or agency functions, the pricing of such transactions would follow the approaches included in other parts of the OECD guidelines.

The acceptable arm’s length level of the remuneration that the other group companies can receive also depends on the facts and circumstances and those companies’ functions performed, assets employed and risks assumed. It may be a challenging exercise to determine the arm’s length interest rates inside the cash pool arrangement because there are no comparable arrangements between unrelated parties. However, it is expected that the participating companies will be better off than in the absence of the cash pool, i.e. none of them should experience drawbacks due to participating. When arm’s length remuneration is determined, it is important to look into the other ancillary benefits that the cash pool can create for a participant, including improved access to short-term borrowing, and the ability to take a more independent stance towards banks and financial institutions outside the MNE group.

Transfer pricing if the positions of debt or receivable become long-term

Special attention should be given to circumstances where cash is deposited, or borrowed, and this intra-group transaction becomes a long-term position. In this case, the question from the perspective of transfer pricing would be whether the transaction is actually something other than effective short-term liquidity management. If the conclusion is that, in fact, there has been a long-term loan (or receivable) further evaluation of the arm’s-length pricing must be based on that conclusion.

For more information on transfer pricing of cash pools, see the OECD’s Transfer Pricing Guidance on Financial Transactions.