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International Tax Library

BNA International Tax Library
TM Transfer Pricing Report (BNA)
2010
February 11, 2010, Vol. 18, No. 18
Analysis
Intercompany Loans
Cash Pooling in Today's World: a Transfer Pricing Perspective (February 11, 2010)

Volume 18 Number 18
February 11, 2010
ISSN 1521-7760
Analysis
Intercompany Loans
Cash Pooling in Today's World: a Transfer Pricing Perspective
Aamer Rafiq, Michel van der Breggen, Ana Carolina Albero, and Wout Moelands
Michel van der Breggen is a partner and Wout Moelands is an assistant manager in the
Amsterdam office of PricewaterhouseCoopers. Aamer Rafiq is a partner and Ana Carolina Albero
is a manager in the London office of PricewaterhouseCoopers. All are members of
PricewaterhouseCoopers' global financial services transfer pricing practice.
This is part of a series written by PwC financial services tax and transfer pricing practitioners for
BNA's Transfer Pricing Report.
1) Introduction
Financial transactions are the lifeblood of most organisations. From the genesis of the Theory of the
Firm to today's commercial organisations, small and large, debt is an integral part of how most
organisations manage their daily operations and simply exist. In this context, the concept of debt and
how best to manage debt, for debt comes with a cost, is increasingly (if it wasn't already) becoming a
key aspect of most treasury groups' lifeblood. As such, to optimize their intragroup working capital
management and to obtain certain group benefits, almost all companies that operate on a cross-border
basis make use of cash pools. In simple terms, a cash pool seeks to ensure that cash and other liquid
assets that are available within a group are utilised first within the group before external financing is
sought. It appears to be a simple concept and one which makes perfect sense. In more technical
terms, a cash pool is a specific financial tool that first pools all available cash and other liquid assets
within the various entities of a group before external financing is obtained (if required), generally from
the bank that is facilitating the cash pool. As such, a cash pool reduces the external financing costs of
the multinational.
As a result of the recent financial and economic turmoil, the utilisation and incidence of cash pools has
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become increasingly relevant. It is more difficult for companies to obtain external financing and the
current market credit spreads have made external financing increasingly more expensive. Not only has
funding become more expensive, it has also become scarcer. This has coincided with a growing need
for liquidity as a result of lower than expected operational results, or even operational losses.
Companies have also found that (historic) relatively cheap credit facilities are reaching their maturity,
and need to be replaced by alternative financing. Therefore, using all available liquid assets within the
company is now of eminent importance for many companies.
Although a cash pool is generally set up for operational rather than fiscal purposes, there are important
fiscal aspects with respect to establishing and running a cash pool. To date, there has been only limited
literature discussing this subject from a transfer pricing perspective. Therefore, this article sets out the
most important transfer pricing aspects of cash pooling, considering the OECD Model Tax Convention
and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995)
as our starting point.
2) Cash Pool: Background and Characteristics
2.1 Why cash pooling?
Essentially, the reasons why companies use cash pools can be broken down into four main categories.
Firstly, companies use cash pools to reduce costs. By using a cash pool, the banking costs (such as
transaction costs) of the participating entities in the cash pool can be reduced compared to the
situation in which the participants maintain separate bank accounts locally.
Secondly, the participants can often agree on more favourable interest rates with a bank as a result of
the cash pool than would be the case if the subsidiaries would act on a stand-alone basis with the bank
(economies of scale).
Thirdly, cash pooling offers a tool for central financial management by the company and as such, the
ability to have greater control over group operations, since cash pooling often leads to rationalization of
the number of bank accounts maintained and the number of intragroup financial transactions. In
addition, cash pooling provides central management with greater overview, and control, of all cash
transactions within the company and provides one central point of access to the capital markets. As
such, a cash pool provides central management with more information on the supply and demand of
cash within the company which improves decision-making on financing matters.
Fourthly and finally, the most well-know advantage of cash pooling (and from a transfer pricing point of
view, perhaps the most important to be considered) is the so-called cash pool benefit. The cash pool
benefit is based on the principle that the interest that a debtor pays to the bank (debit interest) is
higher than the interest a creditor receives from the bank (credit interest). The cash pool benefit, which
is obtained at group level, results from the fact that the debit and credit positions of all participants are
first settled among each other before surplus cash is deposited with the bank or cash is borrowed from
the bank. The cash pool benefit, therefore, consists of interest savings on debit positions to the extent
there are equally high credit positions within the group. The example below describes how a cash pool
operates and why it can provide a cash pool benefit:
Example
Assume three participants in a cash pool within a group. The participants have the following balances
with the bank in their local jurisdictions:
Balance bank account participant 1: 250
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Balance bank account participant 2: -/-400
Balance bank account participant 3: 150
Now assume that the bank, which provides banking services to this group, pays and charges the
following interest for debit and credit balances:
Debit interest charged by the bank: 4%
Credit interest paid by the bank: 2%
We can see what the implication is for the group if it decides to pool or not to pool. In the example,
where there is no pooling and accounts are held with the local branches of the bank, then the group
will have the following result with regard to the net interest expense paid by the group:
Total net interest expense without the cash pool:
1
-/- 8

In the situation where the cash pool is utilised and debit and credit balances can be netted off, the
position is as follows:
Total net interest expense with the cash pool:
2
0

As such, the differential between the use of the cash pool and the absence of the cash pool implies the
following benefit:
Cash pool benefit: 8
In the example above, with the cash pool, the bank does not receive any interest, whereas without the
cash pool, the bank would receive interest. At first sight, a cash pool does therefore not seem to be an
interesting product from the bank's point of view. However, in the underlying cash pool agreement, it is
typically agreed that the bank has a recourse right on all the participants, and/or other entities of the
group, including the parent, if and to the extent a participant defaults on its obligations. Furthermore,
the cash pool balance cannot be lower than zero (unless the cash pool also involves a credit facility
with the bank). As such, the debtor's risk is incurred by the participants that have excess cash rather
than the bank itself.
Furthermore, although the bank does not charge interest, it does charge fees with respect to
implementing and running the cash pool, including transaction fees. In addition, the bank can earn
money on arbitrage in interest payment days and the cash pool binds the group to the bank, which
often leads to further financial transactions and services. Increasingly, over the last decade, most
banks have therefore increased the breadth and nature of their cash pool offerings to their corporate
clients.
2.2 Different types of cash pooling
There are many different ways in which a cash pool can be structured.
3
Therefore, from a transfer
pricing perspective it is important to always review the underlying cash pool agreements to determine
the factual setup of the cash pool. In principle, there are two main types of cash pools that form the
basis for all other cash pools: the target-balancing (also known as zero-balancing) and the notional
cash pool. In the section below, a brief summary of the mechanics of these two main types of cash
pooling is provided.
2.2.1 Target-balancing (zero-balancing) cash pool
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The bank accounts of the participants in a target-balancing cash pool are levelled regularly (often daily)
to a certain pre-determined amount (often zero), i.e., if and to the extent the balance on the
participant bank account exceeds this amount, the excess amount is transferred to a central bank
account (i.e., the bank account of the cash pool leader or CPL). If and to the extent the balance on
the participant bank account falls short of this amount, the required funds are transferred from the
bank account of the CPL to the participant bank account to achieve the targeted amount. A zero-
balancing cash pool (i.e., the targeted balance on the bank accounts of the participants is set at zero)
is the most commonly applied form of a target-balancing cash pool.
If and to the extent the target-balancing cash pool is linked to a credit facility (between the bank and
the CPL), the CPL can offset a total debit position of the cash pool with funds withdrawn from that
credit facility. In this event, the CPL must pay interest to the bank. However, if and to the extent the
cash pool is in a total credit position, the bank pays interest on this position to the CPL. Alternatively,
excess cash in the cash pool can be invested in, typically, short-term limited risk securities. To what
extent the participants in the target-balancing cash pool need to provide a guarantee to the bank
depends, among other things, on the financial position of the CPL and of the participants. It is normally
the case that a guarantee is required.
In summary, a target-balancing cash pool is an important cash management tool that concentrates
cash at the level of the CPL. The CPL is responsible for managing the company's overall working capital
as efficiently as possible.
2.2.2 Notional cash pool
A notional cash pool does not involve an actual transfer of cash from one bank account to another.
Instead, the bank calculates the credit and debit interest on each participant's individual bank account
and subsequently calculates (notionally) the total combined balance of all individual bank accounts. On
the basis of this notional balance, the cash pool benefit is calculated. Depending on the underlying
agreements, the cash pool benefit is: (i) paid by the bank to the CPL; or (ii) paid by the bank to the
participants by means of adjusting the debit- and credit interest accordingly.
In practice, this type of cash pool is therefore also called an interest compensation cash pool.
Similar to the target-balancing cash pool, in principle, the combined total balance of the notional cash
pool cannot be less than zero. Furthermore, the cash pool participants may typically have to provide
cross-guarantees to the bank in order to prevent the bank from incurring debtor's risk on the notional
cash pool. If and to the extent the participants want to have the option to be in a debit position with
the bank, the participants must enter into a credit facility with a bank, which may also need to be
cross-guaranteed by the participants and/or by the parent company.
The CPL's role with respect to notional cash pools consists mainly of contacting the bank on matters
such as interest payments and cash pool benefit payments. A notional cash pool thus, arguably serves
fewer purposes than a target-balancing cash pool; its main purpose is to obtain an interest benefit for
the group.
2.3 What type of cash pool to implement: notional vs. target-balancing
An important difference (also for fiscal purposes) between target-balancing cash pools and notional
cash pools is that, inter-company payables and receivables are created in the former type, whereas this
is, in principle, not the case in the latter type.
4
Since the participants in a notional pool maintain their
bank accounts with the bank individually, the debit and credit positions are maintained with the bank
and not intragroup, i.e., there are no transactions between the participants and the CPL. As a notional
cash pool limits the number of transactions to be performed by the bank (and as such the transaction
costs) and limits the number of inter-company payables and receivables, many companies prefer to
implement a notional cash pool over a target-balancing cash pool. Banks also often prefer notional cash
pools as no credit positions are created with the cash pool participants (unless a credit facility is agreed
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upon) and, as such, the banks do not need to include the cash pool in their balance sheets. Therefore,
banks do not need to maintain additional capital on their balance sheets with respect to a notional cash
pool.
5


Another important element in determining which type of cash pool suits the group best, is whether or
not the group has a centralised management structure (target-balancing cash pooling centralises cash
in one entity, often the company's headquarters, resulting in more centralised control and management
of cash) or a decentralised management structure (local subsidiaries may not be willing to give up their
autonomy in making financing decisions and therefore would prefer a notional cash pool).
Furthermore, a target-balancing cash pool requires more management and administration compared to
a notional cash pool, and is, therefore, more costly to maintain. In addition, legal and financial
monitoring considerations
6
as well as operational considerations (such as ITinfrastructure) influence
the decision whether to implement a notional cash pool or a target-balancing cash pool. Finally, the
extent to which the CPL also provides other treasury services to the participants, such as a payment
factory (i.e., central payment of third-party invoices) or netting (i.e., to allow inter-company credit
and debit positions to setoff and partially or entirely cancel each other out), further influences which
type of cash pool a group should implement.
2.4 Cash pooling in practice
Irrespective of the type of cash pooling, all participants need to maintain a current account with,
preferably, one bank (or local offices of that bank). Furthermore, one entity must be appointed as the
CPL which, in this role will: (i) manage the cash pool; (ii) centralise all cash positions of the participants
and the bank (for target-balancing cash pools); and (iii) manage interest payments.
The bank will generally provide the IT-platform upon which the cash pool operates (i.e., periodical
payments, transfers, etc.). Given the often international nature of cash pools, the bank needs to have
an extensive network of local offices and an adequate IT-infrastructure to facilitate cash pools.
Therefore, not all banks are able to provide cash pool services.
7


A cash pool is typically not covered by just one legal agreement but by a number of legal agreements
between all participating parties. A cash pool always relates to short-term financing of working capital.
As such, a cash pool is not intended to fund long-term financing requirements. However, in practice, it
is not uncommon that some participants have long-term debit positions with the CPL, whereas other
participants have long-term credit positions with the CPL. This may have consequences for the long-
term legal relationships between the various participants and also, for their transfer pricing position, as
will be further discussed in the next section.
3) Transfer Pricing Aspects of Cash Pooling
3.1 Introduction
Most jurisdictions follow the arm's-length principle as defined in Article 9 of the OECD Model Tax
Convention and the OECD Guidelines in determining the appropriateness of the remuneration for
financial activities. The arm's-length principle states that where:
conditions are made or imposed between the two enterprises in their commercial or financial
relations which differ from those which would be made between independent enterprises, then
any profits which would, but for those conditions, have accrued to one of the enterprises, but, by
reason of those conditions, have not so accrued, may be included in the profits of that enterprise
and taxed accordingly.
As such, the arm's-length remuneration for financial activities should be analysed based on the
functions performed, the risks assumed and the assets used by the relevant parties. For cash pools,
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this means that the credit and debit interest rates, in addition to the remuneration that the CPL
receives for its activities, should be at arm's length. There are also further issues that should be
considered, such as the impact of any guarantees (be they cross-guarantees, parental guarantees or
guarantees provided by the CPL) on the overall pricing and the capital structure of the cash pool and
how the CPL may be characterised either as an entrepreneur or as a service provider. In fact there are
many dynamic parts which need to be considered, on a case by case basis, in order to arrive at a
cogent arm's length transfer pricing policy.
In the section below, some of these considerations and possible approaches on dealing with them are
touched upon. Since it is virtually impossible to identify and explain all possible scenarios, we therefore
provide a flavour of the main types of issues that clearly need to be considered from a transfer pricing
perspective when implementing a cash pool and setting the policy.
3.2 How to determine the arm's-length credit and debit interest rates?
Clearly, one of the key and most tangible benefits for the cash pool participants include savings on
bank costs and more favourable credit and debit interest rates. On the other hand, in most cases, the
participants also incur a higher debtor's risk in the cash pool compared to having direct deposits with a
bank.
Assume a case of notional cash pooling, in which cross-guarantees are provided by the pool
participants.
8
In this situation, the participants incur a higher debtor's risk as a result of the cross-
guarantees; these effectively shift the debtor's risk from the bank to the participants (and arguably
away from the CPL). With a target-balancing cash pooling scheme, cash is lent to the CPL, which it
subsequently on-lends to the participants. Depending on the solvency of the CPL, this basically means
that cash is lent to pool participants that are in a cash deficit position. As such, in both examples, the
debtor's risk for the participants in a cash rich position is more comparable to lending funds to a related
party rather than to making a deposit with a bank.
9


To determine the arm's-length credit and debit interest rates, it is theoretically not correct to apply the
credit and debit interest rates applied by the bank within the cash pool. After all, the creditworthiness
of a debtor is a determining factor in establishing an arm's-length interest rate. With respect to a cash
pool, in most cases, the ultimate debtor is neither the bank nor the CPL, but really the pool participants
with a cash deficit, and the creditworthiness of participants is often much lower than the
creditworthiness of a bank. Therefore, the creditworthiness of the pool participants should be taken as
the basis upon which the arm's-length credit and debit interest rates applied within a cash pool should
be determined.
In the alternative case of a target-balancing cash pool, where there are no cross-guarantees provided
by the participants, the creditworthiness of the CPL also needs to be considered since, in principle, it is
the principal to the transactions with the participants.
10
It is unlikely, however, that the participants
and the CPL have their own credit rating. Therefore, in principle, for each participant and the CPL (for
target-balancing cash pools) a stand-alone credit rating needs to be established.
Subsequently, based on the stand-alone credit ratings and the terms and conditions of the cash pool,
comparable uncontrolled price analyses should be performed based on relevant market information.
These CUP analyses result in (interquartile) ranges of credit spreads
11
which, together with the
underlying base interest rate
12
(i.e., the interest rate for risk free funding), can be used as the arm's-
length credit and debit interest rates within the cash pool. It goes without saying that these interest
rates need to be verified regularly, and adjusted when appropriate, based on actual market interest
rates. A practical approach in doing so is described in section 3.6.
Depending on the underlying guarantee structure, it may be required to remunerate those entities that
provided a guarantee for the benefit of the cash pool but that do not belong to the cash pool
themselves with a guarantee fee. Whether or not a guarantee fee is appropriate depends, among other
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factors, on the type of cash pool, the creditworthiness of the participants and that of the guarantors,
and whether or not credit facilities are attached to the cash pool. To determine the level of the
guarantee fees, reference can be made to the interest benefit realised by the participants with a cash
deficit as a result of the guarantees provided. In practice, guarantee fees are an additional complexity
in setting up and maintaining a cash pool.
3.3 Remuneration for the CPL
The CPL's remuneration for the functions performed, risks incurred and assets used also has to be at
arm's length. Taking into account the different position of the CPL with respect to a notional cash pool
compared to a target-balancing cash pool, the approach to determine the appropriate remuneration for
the CPL may differ as well.
Within a target-balancing cash pool, transactions take place between the participants and the CPL upon
which arm's-length interest rates need to be applied since the CPL may effectively operate as an
internal bank. If its role is not to act as simply a service provider (i.e., to take no principal risk on any
of the transactions but simply to administer the scheme) but more as an entrepreneur (as the effective
bank being the counterparty to the transactions) then its remuneration should consist of the difference
between the debit interest rates and the credit interest rates (and potential guarantee fees). In this
respect, it is important to note that the higher the amount of equity (capital) of the CPL, the larger the
interest rate spread will be. That is because with a high level of equity (capital) the creditworthiness of
the CPL will be stronger, which results in a lower credit interest rate. The CPL will not receive a
separate remuneration for its functions performed, therefore, the CPL needs to recover its expenses,
and make a profit, from the interest rate spread it realises.
Alternatively, within a notional cash pool, there are no transactions between the participants and the
CPL (although interest payments may be routed via a so-called master account in the name of the
CPL). The CPL's functional and risk profile mainly depends on the way in which the notional cash pool is
set-up. In the simplest of forms, as an illustrative example, the CPL instructs the banks on the credit
and debit interest rates to be applied to the balances of the various participants. The CPL does not
provide any guarantees and, as such, does not incur any debtor's risk. In this situation, the CPL
operates as a service provider. The cost plus method or a (limited) basis point spread may therefore be
appropriate methods to remunerate the CPL (the remuneration can be settled by means of a separate
fee or by means of credit and debit interest rate adjustments).
As mentioned above, all interest payments may be routed via a master-account in the name of the
CPL. In this situation, the CPL is typically obliged to provide a guarantee to the bank. In such a
scenario, the CPL does incur debtor's risk. As such, the arm's-length remuneration for the CPL should
consist of remuneration not only for the activities performed, but also for the debtor's risk incurred.
Depending on the guarantee structure underlying the cash pool, the remuneration in such a case will
typically be related to a basis point spread.
In all scenarios, it is necessary to analyse the exact role and position of the CPL before further
analysing its arm's-length remuneration and reward system.
3.4 Allocation of the cash pool benefit
As a consequence of the method to determine the arm's-length credit and debit interest rates as
described in section 3.2, the cash pool benefit does not automatically end up with the CPL. Instead, the
cash pool benefit may be distributed to those participants (and potentially the CPL) that (economically)
incur the debtor's risk with respect to the cash pool on the basis that, to a large extent, interest is
compensation for incurring debtor's risk.
There is, however, a complicating factor to the method described in section 3.2. The more favourable
interest rate conditions, which are a result of economies of scale, should benefit all participants, not
only those participants that incur the debtor's risk with respect to the cash pool. This is because the
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more favourable interest rate conditions are a result of the total volume of the cash pool and the
number of transactions, to which all participants contribute. This matter may be addressed by
positioning the credit and debit interest rates (and guarantee fees) in the high-end and low-end of the
established ranges of interest rates respectively, so that all participants benefit from the economies of
scale.
3.5 Practical experience
In practice, cash pools are often still implemented in a rather practical way without paying attention
to the above-mentioned transfer pricing aspects (or other fiscal aspects). Furthermore, cash pools are
regularly considered as a planning tool to obtain fiscal benefits, i.e., by establishing the CPL in a
country with a favourable tax regime and allocating the entire cash pool benefit to the CPL. As
described in the previous sections, the cash pool benefit can only be allocated to the CPL if and to the
extent it both legally and economically (the CPL should have sufficient equity (capital) at risk with
respect to the cash pool) incurs the debtor's risk with respect to the cash pool. Furthermore, as
mentioned previously, all participants should, in principle, benefit from the economies of scale.
Furthermore, in practice, a participant may have a long-term credit position in the cash pool. However,
the credit and debit interest rates are determined on a short-term basis since, as mentioned in section
2, the purpose of a cash pool is to facilitate short-term financing of working capital. Many discussions
with local tax authorities have been taking place on this issue since, with the benefit of hindsight, tax
authorities can establish if and when cash has been deposited in the cash pool for a long period. These
discussions in particular relate to the interest rate the participant depositing the cash has received; the
argument of the tax authorities being that the participant has been paid an interest rate that is too
lownamely a short-term interest rate.
This argument, however, requires some nuance since the participant may have arguments to maintain
a credit position in a cash pool for a long period. For example, the participant may want to have a
financial buffer in case of unexpected operational expenses, the company may want to have cash
available for envisaged acquisitions or there may not be sufficient local expertise with respect to long-
term financing (and management thereof). Furthermore, it may be the case that the participant did not
foresee that the credit position in the cash pool would be for a long period.
In practice, these arguments are not always accepted by local tax authorities. The counterargument
used is that the participant could have, just as easily, placed its excess cash on a fixed-term deposit
with a bank and earned a higher interest rate than it did under the cash pool. However, this
counterargument does not consider that:
(i) there is a higher debtor's risk associated to depositing cash for a longer period; and
(ii) there is also a higher market risk in case of long term deposits (the market interest rate can
increase to a level higher than the deposit interest rate).
13
An interesting discussion in this respect is
to what extent the tax authorities can challenge business decisions taken by the company. All the
same, it is prudent for the participant to document why excess cash is deposited into the cash pool for
a long period and not used for other means.
The situation in which a participant is in a long-term debit position in the cash pool could also result in
a not at arm's-length situation, especially when it has been foreseen that the debit position would be
long-term. In this situation, the participant is effectively financed with long-term debt and should have
paid a matching interest rate.
3.6 Preparing a cash pool policy paper
In most European countries, but also, for example, in the United States and most Asian countries, the
arm's-length nature of the terms and conditions of a cash pool, the remuneration for the CPL and the
applied credit and debit interest rates need to be substantiated and documented. Taking into account
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that a cash pool is often implemented on a regional or even worldwide scale, it is important to comply
with these transfer pricing requirements.
However, with often dozens of pool participants and capital markets that are constantly fluctuating, it is
almost impossible for groups to apply real time credit ratings and market interest rates when setting
arm's-length credit and debit interest rates.
14
The OECD Guidelines do seem to recognize that there
may be a difference between theory and practice in applying the arm's-length principle. The OECD
Guidelines therefore seem to accept that a somewhat practical approach can be taken, although
theoretically it may not be fully correct.
15
Although, in our view, this does not mean that transfer
pricing rules can be applied randomly and arbitrarily, it does lead to the impression that taxpayers have
some leeway in applying a practical, yet consistent transfer pricing approach to cash pooling
arrangements.
In their effort to meet transfer pricing requirements, as a best practice, companies may want to
consider the preparation of a so-called cash pool policy paper, describing how the cash pool operates
from a legal and economic perspective. The policy can also be used to describe the process of how (and
how often) the participants' credit ratings are determined. At the same time, it can be used to set out
how and when the credit and debit interest rates are determined (including reference to the market
information used) and on what basis the remuneration for the CPL is established. In addition, the policy
can substantiate and document any guarantee fees applied. The policy can also describe which
departments within the group are involved in running and managing the cash pool as well as where,
and how, appropriate documentation is prepared. If and to the extent pool participants are also
involved in other intercompany financial transactions (such as loans, guarantees, factoring, etc.) it can
be considered to establish a so-called financial transactions policy paper, combining all intercompany
financial transactions.
4) Conclusion
This article provides an overview of cash pooling and its transfer pricing aspects, highlighting some of
the complex issues that need to be addressed. Cash pooling is a very specific financial tool and each
cash pool should be analysed based on its own merits and operations. Furthermore, the current
environment for cash pooling is very dynamic: the financial markets are fluctuating as never before and
the economic turmoil has put more pressure on companies to effectively manage their cash. Although
all of these factors are variables that influence the transfer pricing of cash pools, there are also
constant factors to be recognized and addressed in transfer pricing documentation.

1
5+3-16=-8.

2
The cash pool balance is 250-400+150=0.

3
A cash pool can be structured as a relatively simple notional cash pool that involves a limited number
of bank accounts but it can also be setup as a multi-currency cash pool consisting out of a number of
target-balancing cash pools and notional cash pools in different currencies, involving non-resident
accounts, etc.
4
Although under local fiscal rules, positions in a notional cash pool may be considered as (indirect)
inter-company loans.
5
In principle a bank does not incur debtor's risk on a notional cash pool because of the cross-
guarantees provided and the fact that the overall position in the cash pool cannot drop below zero. As
such, on the basis of the solvability requirements for banks such as those captured in the Basel II-
accord (International Convergence of Capital Measurement and Capital Standards, A Revised
Framework, June 2004) no additional capital needs to be maintained. However, if and to the extent a
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credit facility is provided to the cash pool participants, the bank does incur debtor's risk and additional
capital must be maintained.
6
In some countries notional cash pooling is prohibited. In other countries, such as Switzerland, a cash
pool can only have a limited number of participating entities. If and to the extent this number is
exceeded, the cash pool is subject to financial monitoring by the national bank. Furthermore, cash
pools may interfere with covenants agreed by the company on financial transactions with third-party
banks.
7
As a result of the recent financial turmoil, a number of big banks have been dismantled. As such,
some of these banks are no longer capable of providing their cash pool products to clients and their
existing clients needed to switch to other banks.
8
In this instance, further assume that the CPL is acting as a service provider and not as an
entrepreneur with respect to the lending transactions.
9
Often the parent company provides a guarantee for the benefit of the cash pool participants. In these
situations, the debtor's risk is equal to lending cash to the parent company, which typically has a better
credit rating than the stand alone credit rating of the cash pool participants with a cash deficit. This
guarantee may also provide for a potential advantage on the interest rate on drawings that may be
made from a credit line established with the bank. This would also need to be transfer priced as part of
the overall analysis.
10
If and to the extent guarantees are provided for the benefit of the cash pool, the credit rating of the
guarantors should be considered in determining the arm's-length credit and debit interest rates. If and
to the extent guarantees are provided by subsidiaries that do not participate in the cash pool, it may be
necessary to charge separate guarantee fees on the provided guarantees.
11
A credit spread is that part of an interest rate to remunerate the creditor for, among others, incurred
debtor's risk. Within the established range of credit spreads, the appropriate credit spread needs to be
determined based on factors such as interest rate reset dates, interest payment dates, guarantee
structures, and other relevant information.
12
An example of a base interest rate is the inter-banking rate (e.g., Eonia or Euribor), which factors in
items such as maturity and currency.
13
Recent events have shown that there is also debtor's risk associated with depositing cash with a
bank.
14
In practice banks also do not constantly perform credit rating analyses of their debtors or reset
interest rates every time the market changes.
15
Paragraph 5.6 and 7.4. OECD Guidelines.

2010 Tax Management Inc., a BNA Company
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