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:
- Arrangements may not be considered arm’s-length transactions. If there is a better option realistically available for the cash pool participants.
- Potential double taxation or penalties
- Non-deductibility of interest expense
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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
- Case Administrative Tax Court No. SKM2014.53.LSR from October 21, 2013 (Revenue Authorities vs Bombardier)
- Requirement for a Cash Pool or Cash Management Agreements between participating group members and the cash pool leader (usually central treasury)
- Clearly stipulating the arm’s length interest remuneration and explaining how the transfer pricing rates are determined or calculated.
- Cash pool leaders (usually central treasury) who act like an In-House Bank are in fact not real commercial banks with commercial risks; hence, interest rates of independent banks are not suitable to serve as appropriate comparable for determining arm’s length interest rates for cash pools
2. Norwegian Revenue Authorities
- Case Supreme Court HR-2016-988-A, No. 2015/1044 from October 5, 2016 (Revenue Authorities vs ConocoPhilips)
- Arm’s Length interest is required to differentiate between debit & credit interest on sweeps and between debit & credit interest on Intercompany loans (credit interest related to cash deposits from the local entity with the cash pool leader, usually central treasury)
- Requirement to differentiate interest spread based on individual legal entity balance sheet risk and (external) bargaining power
- Arm’s length interest spreads should apply a documented ratio, including a logical rationale between various spreads.
3. Swiss Revenue Authorities
- Case Administrative Court No. SB.2017.00100 from September 12, 2018 (Revenue Authorities vs A GmbH)
- Case Administrative Court No. SB.2016.00008 from December 7, 2016 (Revenue Authorities vs A GmbH)
- Cash Pool agreements required to apply a split between remuneration for short-term lending (e.g. daily sweeps) and long term lending (e.g. dedicated Intercompany lending to serve a purpose)
4. Polish Revenue Authorities
- Case Tribunal No. 55/2012-T from November 13, 2019 (Revenue Authorities vs M. Sp. Z.o.o.)
- Cash Pool arrangements are to be considered as Intercompany lending
- Requirement for establishing Cash Pool or Cash Management Agreements between participating group members and the cash pool leader (usually central treasury), characterizing cash pool transactions as intercompany loans
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:
- A Cash Pool or Cash Management agreement is required to be in place with every individual participating group member
- A difference is required to be made between interest associated with (daily) debit and credit sweeps (as this is considered current account cash)
- A difference is required to be made between interest associated with dedicated intercompany loans and cash deposits (a cash deposit from a group member is a reversed intercompany loan to the cash pool leader).
- Current account interest spreads should differ from spreads on long-term lending or deposits.
- Interest spread setting is always taken from the point of view of the cash pool leader (usually central treasury), who acts like an In-House Bank
- Interest spreads taken from an external commercial bank are not suitable to serve as interest spreads for Cash Pooling arrangements
- Though cash pool transactions are to be characterized as intercompany loans, the ratio between current account spreads and long-term lending spreads that banks apply is still to be observed.
- Individual participating group members must be able to assess Cash Pool arrangements as competitive with independent banks and, as such, must consider participating in Cash Pool arrangements as beneficial.
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