Tax considerations in light of Transfer Pricing when setting up Zero-Balance Cash Pool arrangements
International companies are taking advantage of group synergy by entering into cash pool arrangements to support a group strategy. This strategy usually includes improved cash management and interest yields on cash. Cash pool arrangements are rarely (or not at all) found between independent parties. Such arrangements may attract the attention of local tax authorities. This will therefore be subject to scrutiny. When local Tax Authorities challenge Cash Pool arrangements, the result may be: ALSO READ Some countries (such as the United Kingdom, Germany, and Australia) have transfer pricing guidance or tax rules on the treatment of cash pooling arrangements. Other countries may lack such guidance or tax rules. Also, a cash pooling arrangement could be treated as something other than a short-term cash pool balance. If, e.g., balances have been outstanding for a long time. Or if the funds are used for a different purpose than that intended. Therefore, there is a risk of re-characterization of the cash pool transactions by local tax authorities. They can consider cash pooling arrangements as a loan or guarantee or a mixed contract with a different result. Transfer Pricing Rules and Tax Guidance in Selected Nations Below is a summary of legal cases in Poland, Switzerland, Denmark, and Norway. It illustrates how various tax authorities may scrutinize and challenge zero-balance cash pooling arrangements. Having consequences from a tax and transfer pricing perspective for companies that enter into cash pool arrangements. These cases, together with the “OECD Transfer Pricing Guidance on Financial Transactions—Inclusive Framework on BEPS,” may support companies in establishing a proper framework. From a transfer pricing perspective, to manage interest remuneration in cash pool arrangements. Having a well-documented and professional rational embedded in cash management agreements between individual group members and the cash pool leader (usually the central Treasury) may abate the drive from tax authorities to challenge the company’s cash pool arrangement; at least it will limit possible challenges and/or discussions. Please note: Cases are presented as case dates, references, and summarized court decisions. 1. Danish Revenue Authorities 2. Norwegian Revenue Authorities 3. Swiss Revenue Authorities 4. Polish Revenue Authorities Importance of Proper Cash Pooling Agreements With growing demand from governments to limit tax evasion or tax avoidance structures, revenue authorities across the globe are more and more discussing and challenging the transfer pricing elements of cash pooling arrangements (both from the perspective of te cash pool leader as well as the participants). Based on the sample cases presented above, together with the “OECD Transfer Pricing Guidance on Financial Transactions—Inclusive Framework on BEPS,” I strongly advise companies that have entered into cash pooling arrangements or are about to enter such arrangements, to ensure proper cash pool or cash management agreements are set up between the participating group members and the cash pool leader (usually central Treasury). Such agreements will require the following elements to be included: Paul Buck is a Treasury Associate with one of our partners, Percunia Treasury and Finance and is available for any project. Fill out the contact form below to get in touch for more information about Paul and his capabilities. Thanks! Notice: JavaScript is required for this content.
A Guide to the Emergence of Instant Payments Globally & How to Navigate Them
This article is written by Treasury Intelligence Solutions In the ever-evolving world of financial transactions, the adoption of instant bank payments has become a catalyst for transformational change in both the corporate and consumer sectors. Today, this transition from traditional payment methods to real-time, 24/7 transactions is reshaping how businesses and individuals navigate the financial landscape on a global scale. This article will explore the evolution of instant payments within the corporate sector and more specifically, how their adoption is impacting the world of treasury and finance. We will begin with exploring the primary benefits associated with their usage before delving into the main use cases that exist in 2024. Next, we will evaluate current challenges that are obstructing the adoption of real-time payments and explore several of the leading institutions and payment systems tasked with real-time deployment across the world. Finally, we will demonstrate how the TIS cloud platform enables corporate treasury and finance teams to adopt real-time payments gradually without abandoning their traditional payments and reporting channels. Instant Payments Revolution: The Benefits Instant payment schemes have been making waves worldwide, offering unparalleled advantages for businesses and individuals alike. When we examine the underlying benefits in the corporate realm, there are several key factors driving their adoption: Speed & Accessibility: The main characteristic of instant payments is their speed. Regardless of the geographical location or the time zone, users can execute transactions swiftly, eliminating the delays and processing uncertainty associated with traditional banking hours. This immediate access to funds offers unprecedented financial flexibility. A service that is available 24 hours a day, 7 days a week. Transparency & Control: Because transactions are usually completed in instantly with very little time between a payment being sent and delivered, both the payor and payee have greater insight to the status of payments compared to methods where it might take a full day, or even multiple days, for funds to be delivered. This has historically been a major issue with the correspondent banking model, with various legacy cross-border payment systems, and even with various domestic payment options, such as checks (cheques) in the USA. Streamlined Operations: The streamlined nature of instant payments simplifies financial operations for both businesses and individuals. Whether it’s receiving salaries, making bill payments, or managing day-to-day transactions, the efficiency of instant payments improves the overall financial management for companies or consumers that leverage them. Cash Flow Management: For enterprise organisations, managing cash flows is crucial. Services like FedNow in the USA, Faster Payments in the UK, and SEPA Instant Credit Transfers (SCT Inst) in Europe all empower large corporations with the ability to transfer funds instantly between accounts. This not only enhances cash flow management but also contributes to overall financial resilience and strategic planning. Use Cases Accelerating the Adoption of Instant Payments In the dynamic landscape of instant payments, various use cases are reshaping how businesses and individuals engage and interact in financial transactions. The swiftness and accessibility of instant payments are paving the way for various applications, enhancing efficiency and responsiveness across different domains. Here are some concrete examples: Business-to-Person (B2P) Use Cases: Business-to-Business (B2B) Use Cases: In general, we can conclude that the adoption of instant payments is revolutionizing financial interactions, offering 24/7 unprecedented speed and efficiency, across diverse scenarios. Whether settling urgent compensation, streamlining business transactions, or facilitating seamless online purchases, instant payments are at the forefront of transforming the way we transact in the modern world. A Global Perspective: Instant Payment Schemes Worldwide As the benefits of instant payments and strategies regarding how best to implement them gain momentum, many countries have embraced real-time transaction systems, contributing to the global shift towards faster, more efficient financial transactions. Beyond the SEPA Instant Credit Transfer (SCT Inst) scheme in Europe, notable instant payment schemes have emerged worldwide. Here are just a few examples successfully incorporated by TIS: FedNow Service in the United States: While the United States entered the instant payments arena later with the introduction of the FedNow Service in July 2023, it represents a significant leap forward. The service, developed by the Federal Reserve, empowers financial institutions across the U.S. to provide real-time payment services, aligning with the global move towards instant transactions. Faster Payments in the UK: The United Kingdom has been a trailblazer with its Faster Payments system, revolutionizing the way individuals and businesses transfer money. Introduced in 2008, Faster Payments enables near-instantaneous fund transfers, providing a model for other nations exploring real-time payment solutions. SEPA Instant Credit Transfer Scheme in Europe: The SEPA Instant Credit Transfer scheme, operational since November 2017, has significantly influenced the European payments landscape. Covering 23 countries initially, with plans for expansion towards all 36 members, “SCT Inst” allows instantaneous cross-border transactions within the Eurozone, setting a precedent for regional collaboration. Faster Payment System (FPS) in Hong Kong: Hong Kong’s Faster Payment System (FPS) is another noteworthy initiative, introduced in 2018. FPS facilitates swift, round-the-clock fund transfers, enhancing financial accessibility and promoting a cashless society. The system has garnered widespread adoption, reflecting the global trend towards real-time payments. FAST Payments in Singapore: Singapore’s FAST (Fast and Secure Transfers) payment system has positioned the country at the forefront of the global instant payments movement. Launched in 2014, FAST enables individuals and businesses to transfer funds seamlessly, reinforcing Singapore’s reputation as a financial hub with cutting-edge payment solutions. PromptPay Thailand: PromptPay was launched in 2016 as a payment system enables customers in Thailand to send or receive Thai Baht funds via digital channels in real time. New Payments Platform (NPP) Australia: The NPP (New Payment Platform) is a new platform launched in 2018 that gives Australian consumers and institutions a new way to make everyday payments. Today, the NPP allows Australians to make low-value payments 24 hours a day in less than 30 seconds. The system operates seven days a week, 365 days a year, with no holiday breaks. The below graphic also offers more insight to various instant and real-time payment schemes in development globally. NOTE: This is not a complete list. Many other instant payment schemes are in development or have been recently…
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