Physical pooling. In a typical physical pooling agreement, the bank account balances of all pool members are transferred daily to a single central bank account owned by the cash pool manager. Depending on whether there is a surplus or deficit in the main account, the cash pool manager can borrow from the central bank to meet the net funding needs of the pool, or deposit a surplus if necessary. Physical cash pool In a physical cash pool, money is transferred periodically (daily, weekly or monthly) from the bank account of the individual group company to the bank account of a cash pool manager. The cash pool manager becomes the owner of the money and each deposit with a third-party bank becomes a loan to the group`s cash pool leader. 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. Only the liquidity position.
It allows each subsidiary to take advantage of a unique, centralized liquidity position while maintaining day-to-day cash management privileges. More and more multinationals are using a cash pool for their cash management and intra-group financing. Cash pooling agreements are mainly commercial agreements with a third-party bank that cannot be concluded for tax reasons. However, there are guidelines on transfer pricing and corporate tax aspects of cash pooling agreements. 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 obtained. The Bank fictitiously aggregates the different balances of the individual accounts of the participating members and pays or calculates interest based on the net balance, either on a specific main account or on all participating accounts according to a formula. According to the OECD, in a fictitious pool with minimal functions performed by the pool guide, there may be little added value from the pool leader, which could be reflected in intra-group pricing. Local self-government.
If a parent company wishes to maintain the operational independence of its subsidiaries, fictitious pooling allows it to keep cash balances in its local bank accounts. It also facilitates bank reconciliations at the local level, as there are no cash transfer operations to a central account, as would be the case with a cash scan agreement. 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 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 concluding a cash pooling agreement can be threefold: precise delimitation of cash pooling. Since the pooling of cash is not carried out regularly, if at all, by independent companies, the application of transfer pricing principles requires careful consideration. According to the OECD, a cash pool is likely to differ from a simple demand deposit in a bank or similar financial institution in that a member of the treasury pool with a credit position does not deposit money as a transaction in terms of the depositor`s mere return. On the contrary, the member of the treasury pool is likely to participate in the provision of liquidity as part of a broader group strategy in which the member may have a credit or debit position. No member of the pooling agreement would expect to participate in the transaction if it were worse off than the next best option. An advantage of a cash pooling agreement may be the reduction in interest paid or the increase in interest received as a result of the offsetting of accounts payable and receivable balances. The OECD points out that the amount of this group synergy effect, calculated on the basis of the results obtained by the members of the cash pool if they had dealt exclusively with independent companies, would generally be shared by the members of the cash pool, provided that the cash pool manager is awarded appropriate remuneration for the functions he performs. Notional pooling is a mechanism for calculating interest on the combined credit and debit balances of accounts that a parent company wishes to consolidate without transferring funds between accounts. It is ideal for companies with decentralized organizations that want to grant their subsidiaries some autonomy, including their control over bank accounts.
The main disadvantage of fictitious pooling is that it is not allowed in some countries. It is difficult to find anything other than a large multinational bank that offers a nominal cross-currency pooling. Instead, it is more common to have a separate fictitious cash pool for each currency area. Regulatory control. The initiatives of the OECD (Organisation for Economic Co-operation and Development) and the BCBS (Basel Committee on Banking Supervision) in recent years could have an impact on cash pooling. However, the actual adoption of such declarations shall be made separately by the participating countries and their central banks or supervisory authorities. In addition to the credit and debit tax rates, account should also be taken of an arm`s length remuneration for the guarantees provided to the external bank by the participating companies as well as a possible remuneration for dealing with the cash pool leader in the situation of a fictitious cash pool. No money transfer fees. There are no bank fees associated with money transfers as there are no transfers between accounts that would normally trigger fees. 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 over the course of the year, the creation of a cash pooling policy may be recommended. .