International Vikram Chand*

Transfer Pricing Aspects of Cash Pooling

Arrangements in Light of the BEPS Action Plan
The author discusses the concept, underlying pooling can be done on either a physical or notional basis
commercial rationale and types of cash pooling (see below).
arrangements, and then analyses and comments
on the transfer pricing aspects thereof. The 1.2. Types of cash pooling
analysis also takes into consideration the 1.2.1. Physical cash pooling
Actions under the OECD/G20 BEPS Project
related to transfer pricing. The author discusses Physical cash pooling4 can be on either a zero balancing
the impact of other BEPS-related actions method5 or a target balancing method. Under the zero
(domestic and treaty law changes) on cash balancing approach, cash pool participants transfer their
pooling arrangements, and ultimately suggests entire cash to a cash pool leader. Similarly, under a target
a way forward. balancing approach the cash pool participants transfer
their entire cash that exceeds a certain balance to the cash
1. Introduction: Cash Pooling pool leader. However, if the cash pool participants have a
negative balance, the cash pool leader transfers funds to
1.1. The concept and commercial rationale
them.6 In essence, the arrangement ensures that the credit
Multinational groups have been utilizing cash pools for balances are moved (swept) into, and debit balances are
several decades.1 Under such arrangements, multina- covered (swept) out of a single master account.
tionals efficiently manage liquidity (working capital)
The following example illustrates the mechanics of a physi-
requirements of the group by using surplus cash avail-
cal cash pooling arrangement. A Co (Parent Co), a tax resi-
able with some cash pool participants (also referred to as
dent of State A, enters into a zero balancing cash pooling
“members of the group”) – typically subsidiaries, to fund
arrangement with its subsidiaries B Co, C Co and D Co
the requirements of other cash pool participants. This
resident in State B, State C and State D, respectively (all
enables members of a group to support each other finan-
states are within the European Union). Under the arrange-
cially before having to obtain external financing, which
ment, A Co – the cash pool leader – sets up a bank account
itself has become an expensive source of funding in light
(master, header or concentration account) with BUS bank
of the recent credit turmoil. In effect, multinationals lever-
in State A. Similarly, B Co, C Co and D Co set up current
age internal finance sources within the group in order to
bank accounts (sub-accounts that are linked to the master
reduce external financing costs.2
account) with BUS bank. The arrangement (zero balanc-
Broadly, multinationals enter into cash pools to (i) cen- ing) provides that the bank balances of the cash pool par-
tralize cash management and decision making power for ticipants are transferred to or from the master account on
financial arrangements, (ii) obtain favourable deposit and a regular basis (for instance on a daily, weekly or monthly
borrowing interest rates in light of their increased cash basis).
position, (iii) achieve cost savings on banking transac-
The bank balances of B Co and C Co show a positive
tions and (iv) acquire cash pool benefits available on the
balance of EUR 100 and EUR 150, respectively, whereas
difference between debit and credit interest rates.3 Cash
that of D Co shows a negative balance of EUR 200. Further,
the debit (on negative balances)7 and credit (on positive
* Executive Director – Executive Program in Transfer Pricing & Masters balances) interest rates offered by BUS bank are 15%
of Advanced Studies in International Taxation, University of Lausanne, and 10%, respectively. On a stand-alone basis, B Co and
Switzerland. The author can be contacted at [email protected]. C Co would earn EUR 10 and EUR 15 (combined inter-
He would like to express his gratitude to Mr Markus Wyss (Partner,
KPMG Zurich) and Mr Stefaan DeBaets (Transfer Pricing Advisor, est income of EUR 25), while D Co would have an inter-
OECD) who offered valuable comments on this article. est expense of EUR 30, thereby leading to a net interest
1. A.J. Bakker, Transfer Pricing and Intra-Group Financing: Low-Hanging expense of EUR 5 for the entire group.
Fruit?, 15 Derivs. & Fin. Instrums. 2 (2013), at 30, Journals IBFD; A.
Storck, The Financing of Multinational Companies and Taxes: An Over-
view of the Issues and Suggestions for Solutions and Improvements, 65 Bull. 4. Such arrangements are attractive in jurisdictions that do not apply domes-
Intl. Taxn. 1 (2011), at 33, Journals IBFD; I. Diakonova, S. Huibregste & tic withholding taxes on outbound interest payments. Even if withholding
G. Körner, Where Do Financial Services Meet Transfer Pricing?, 2 Derivs. & taxes are applied domestically, such arrangements are popular in jurisdic-
Fin. Instrums. 2 (2000), at 61, Journals IBFD; PWC, Clarifying the Rules: tions that levy nil withholding tax under an applicable tax treaty or the
Sustainable Transfer Pricing in the Financial Services Sector (PWC Apr. Interest and Royalties Directive (within the European Union).
2012), at 138; A. Russo & O. Moerer, Introduction, in Transfer Pricing and 5. Also known as the cash concentration or sweeping method.
Intra-Group Financing (IBFD 2012), at 40-41, Online Books IBFD. 6. S. Tredicine, Tax Treatment of International Cash Pooling Arrangements, 4
2. PWC, supra n. 1, at 137. Derivs. & Fin. Instrums. 4 (2002), at 151, Journals IBFD; S. Damji, I. Dia-
3. PWC, supra n. 1, at 137; D. Ledure et al., Financial Transactions in Today’ s konova & U. Brügger, Transfer Pricing DNA as a Tool to Achieve the Optimal
World. Observations from a Transfer Pricing Perspective, 43 Intertax 2 Balance of Risks and Efficiency, Der Schweizer Treuhänder 3 (2006), at 189.
(2014), at 196-197. 7. Also known as overdraft interest rates.

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 Transfer Pricing Aspects of Cash Pooling Arrangements in Light of the BEPS Action Plan

However, by entering into a cash pooling arrangement arrangement and interest rates, (ii) drafting intercompany
and concentrating the funds in the master account owned loan agreements, (iii) coordinating the cash pool and (iv)
(legally) by A Co, the entire group is in a surplus of EUR managing internal offsets of debit and credit positions.
50 (EUR 250 – EUR 200) on which A Co can earn interest In terms of risks, in addition to bearing the credit risk,
income8 of EUR 5 from BUS bank (even though A Co is the cash pool leader also bears the interest rate risk (risk
entitled to receive the income from a legal perspective, the associated with changes in the market interest rates) and
considerations outlined in section 2. need to be taken into foreign exchange risk (risk that exists when the financial
account to determine whether A Co is entitled to receive transactions between the cash pool members are denomi-
the interest income from a transfer pricing perspective). nated in a currency other than that of the base currency of
To attain this advantage, B Co and C Co have deposited the cash pool leader).14
cash in the master account (provided a loan), while D Co
The difference between an external bank structure and an
has withdrawn cash from the master account (received a
in-house bank structure is that under the former, the cash
loan).9 The pooling benefit is depicted in Table 1.
pool participants have intercompany accounts with an
Table 1 external bank, whereas under the latter, the cash pool par-
Stand-alone transaction Cash Pooling ticipants have intercompany accounts with the in-house
(without pooling) pooling benefit bank (treasury entity). This would imply that under an
B Co C Co D Co Total in-house bank structure, as the depositor cash pool par-
Balance 100 150 (200) 50 50 ticipants have made deposits with the treasury entity (not
Interest 10 10 15 – 10 with an external bank), they assume a significantly higher
rate (%) credit risk with respect to these deposits.15 From a trans-
Interest 10 15 (30) (5) 5 10 fer pricing perspective, it is crucial that the transactions
be appropriately delineated and a proper comparability
Typically, at one end of the spectrum, in physical cash analysis including a functional analysis be undertaken to
pools, the cash pool leader (or the treasury entity of the determine the actual roles and responsibilities of the par-
group) may act as a financial services entity with an exter- ticipants, as such arrangements may fit into one of these
nal bank structure.10 Under such structures, the cash pool categories or maybe somewhere between the two spec-
leader would enter into a cash management services agree- trums.
ment (for administrative convenience) with a bank pursu-
ant to which the bank accounts of the cash pool partici- 1.2.2. Notional cash pooling
pants are netted out for the purposes of determining the
balance on which the deposit or overdraft interest rate is Under a notional16 cash pooling arrangement,17 cash is
applied. Based on these balances, the external bank will not physically transferred to any bank account. This type
have to pay or receive from the cash pool.11 Broadly, the of arrangement does not lead to any intra-group loans.18
cash pool leader engages in borrowing and lending of Under the arrangement, the cash pool participants operate
funds, but operates with a limited amount of equity at risk accounts directly with the bank. The bank calculates the
in relation to the functions performed and risks assumed. debit and credit interest rates on each participant’ s indivi-
For instance the cash pool leader may not have the nec- dual bank account and then subsequently calculates the
essary funds to bear the credit risk (risk associated with combined notional balance of all bank accounts (for
a cash pool member defaulting on its borrowing) in the instance on a daily, weekly or monthly basis).19 Thereafter,
event of its realization. the cash pool benefit is determined based on the notional
balance. The cash pool benefit is paid directly to the cash
At the other end of the spectrum, the cash pool leader may pool leader (master account in the name of the cash pool
act as an entrepreneurial entity (in-house bank structure)12 leader).20 Typically, in notional cash pools, the cash pool
wherein it carries out functions, assumes risks and employs leader does not act as counterparty to the transactions
assets as an external bank. In essence, the cash pool leader and does not bear risks.21 In such situations, the cash pool
acts as counterparty to the transactions and bears risks.13 leader only coordinates the cash pool and manages inter-
In such situations, in terms of functions, the cash pool
leader plans the financial needs of the multinational group,
develops the cash pooling concept, and implements the 14. In these situations, the cash pool leader could be entitled to a spread on
the interest rates. See section 2.5.
cash pooling concept by (i) negotiating the cash pooling 15. Hollas & Hands, supra n. 11.
16. Also known as interest compensation cash pool.
17. Such arrangements are attractive in (i) jurisdictions that apply withhold-
8. The excess cash may also be invested in short-term limited risk securities. ing taxes that cannot be completely eliminated by tax treaties and (ii) juris-
PWC, supra n. 1, at 138. dictions that have legal restrictions (typically developing countries such as
9. These loans are mostly regarded as short-term loans. PWC, supra n. 1, at Brazil, China or India) which restrict the physical transfer of funds. Storck,
138. supra n. 1, at 33-34. However, several countries (e.g. the United States
10. A financial services entity is an entity that is responsible for the receipt and Germany) do not allow notional cash pooling. S. Hillman, Notional
and payment of interest within a group of companies. Russo & Moerer, vs. Physical Cash Pooling Revisited, International Treasurer (2011), at 1
supra n. 1, at 15. available at http://www.treasuryalliance.com/assets/publications/cash/
11. J. Hollas & G. Hands, Transfer Pricing and Intra-group Cash Pooling (17 Treasury_Alliance_Notional_Physical_Pooling_Revisited.pdf.
Sept. 2013), available at http://www.tpa-global.com/news/2013/09/17/ 18. Bakker, supra n. 1, at 30; Diakonova, supra n. 1, at 61.
transfer-pricing-and-intra-group-cash-pooling. See also the ConocoPhil- 19. PWC, supra n. 1, at 138.
lips case in section 2.3.3.1. 20. As an alternative, the bank could pay the benefit directly to the partici-
12. Hollas & Hands, supra n. 11. pants by amending the interest rates. Tredicine, supra n. 6, at 152.
13. Bakker, supra n. 1, at 30. 21. Bakker, supra n. 1, at 31.

© IBFD INTERNATIONAL TRANSFER PRICING JOURNAL JANUARY/FEBRUARY 2016 39

Vikram Chand

nal offsets of debit and credit positions. Essentially, it acts 1330 of the BEPS Action Plan. This will lead to the pub-
as a service provider. Moreover, in such cash pools, the lication of revised OECD Guidelines in the near future.
cash pool participants may have to provide cross-guaran- The following analysis takes into consideration both the
tees to the bank to prevent the bank from bearing the risk current and revised OECD guidance.
associated with a cash pool participant’ s defaulting.
2.2. Recognition of arrangements
2. Transfer Pricing Aspects of Cash Pooling
Only members of a multinational group enter into cash
Arrangements
pooling arrangements in order to benefit from group syn-
2.1. Intra-group transactions ergies.31 Such arrangements are rarely found between inde-
pendent parties. As a starting point, the question arises as
Article 9(1) of both the OECD22 and UN23 Model Conven-
to whether the arm’ s length principle should be applied to
tions provides that transactions between associated en-
such arrangements even though independent enterprises
terprises must be at arm’ s length. This means that, from a
typically do not enter into such arrangements. The OECD
transfer pricing perspective, intercompany loans provided
Guidelines highlight that practical difficulties arise when
in physical cash pooling arrangements must be at arm’ s
applying the arm’ s length principle to such situations. This
length (the funding itself and interest rates). This issue is
is because “little or no direct evidence of what conditions
not relevant for notional cash pooling arrangements, as
would have been established by independent enterprises”
there is no real movement of funds. Further, if one assumes
exists.32 Nevertheless, the OECD Guidelines provide that
that the cash pool is in an overall negative balance, the bank
the fact that independent enterprises do not enter into
would grant a loan to the cash pool leader (under physi-
such transactions does not necessarily imply that the con-
cal arrangements) or to the cash pool participant directly
trolled transactions are not at arm’ s length. Thus, the arm’ s
(under notional arrangements) pursuant to a credit facility
length nature of cash pooling arrangements must be ascer-
on which interest must be paid.24 More often than not, a
tained (see sections 2.3.-2.6.).
member of the cash pool must provide a bank with a guar-
antee on behalf of another participant to cover the default A related question arises as to the circumstances under
risk associated with this loan. Such guarantees also must which such arrangements may be disregarded. In principle,
be at arm’ s length.25 Furthermore, under both types of if the controlled transactions are accurately delineated,33
arrangements, the remuneration that the cash pool leader with the effect that the economic substance of the cash
obtains must be at arm’ s length. Moreover, a determina- pooling arrangement (such as functions, assets and risks
tion of an arm’ s length allocation of the cash pool benefit assumed by the members to the arrangement, taking
among the cash pool participants needs to be undertaken into account the economic circumstances and business
in either type of cash pool. strategies)34 is aligned with the legal arrangements35 (con-
tractual terms), tax authorities should not disregard the
In 2013, the OECD initiated its work on BEPS (the BEPS
transaction.36 However, even if the form and economic
Project).26 It was contended that the current transfer pricing
substance coincide, the OECD Guidelines provide that the
system had led to serious BEPS-related concerns. Never-
transactions may be recharacterized if the arrangement,
theless, replacing the arm’ s length principle was not viable,
viewed holistically, differs “from those which would have
and a better solution is to ensure that transfer pricing out-
been adopted by independent enterprises behaving in a
comes are in line with “value creation”.27 In this regard, the
current OECD Transfer Pricing Guidelines (2010),28 which
propagate the use of the arm’ s length principle, have signif- 30. This Action has led to changes in Chapter V (transfer pricing documen-
icantly been revised in light of Actions 8-1029 and Action tation). OECD, Transfer Pricing Documentation and Country-by-Coun-
try Reporting – Action 13: 2015 Final Report, OECD/G20 Base Erosion
and Profit Shifting Project (OECD Publishing 5 Oct. 2015), International
Organizations’ Documentation IBFD.
31. H.M. Andresen, ConocoPhillips Case: Implications in Norway and Beyond,
17 Intl. Transfer Pricing J. 6 (2010), at 464, Journals IBFD. See also S. Assef
22. OECD Model Tax Convention on Income and on Capital art. 9(1) (26 July & D. Boer, Safe Dive into a Cash Pool, Treasury & Risk (1 Oct. 2013),
2014), Models IBFD. available at http://www.treasuryandrisk.com/2013/10/01/safe-dive-into-
23. United Nations Model Double Taxation Convention between Developed and a-cash-pool?t=treasury-management&page=3.
Developing Countries art. 9(1) (2011), Models IBFD. 32. OECD Guidelines, para. 1.11.
24. PWC, supra n. 1, at 138. 33. The application of the arm’ s length principle requires a comparison of
25. Id. the related-party transactions with comparable uncontrolled transac-
26. OECD, Action Plan on Base Erosion and Profit Shifting (OECD Publishing tions. Two aspects of this analysis are to (i) identify the contractual terms
2013), International Organizations’ Documentation IBFD. between related parties and the economically relevant aspects attached to
27. V. Chand & S. Wagh, The Profit Split Method: Status Quo and Outlook in such terms in order to properly delineate the related-party transactions
Light of the BEPS Action Plan, 21 Intl. Transfer Pricing J. 6 (2014), at 405, and (ii) undertake a comparability analysis to compare the controlled
Journals IBFD. transactions with uncontrolled transactions. OECD, Actions 8-10 Final
28. OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Reports, supra n. 29, para. 1.33. However, if the form does not correspond
Administrations (OECD 2010), International Organizations’ Documen- to the economic substance, the economic substance should be used to
tation IBFD. delineate the transactions. OECD, Actions 8-10 Final Reports, supra n.
29. These Actions have led to changes in Chapter I (guidance for applying the 29, paras. 1.42-1.50.
arm’ s length principle), Chapter II (transfer pricing methods), Chapter VI 34. The economically relevant characteristics must be documented in the
(intangibles), Chapter VII (intra-group services) and Chapter VIII (cost local file. OECD, Action 13 Final Report, supra n. 30, para. 22.
contribution agreements). OECD, Aligning Transfer Pricing Outcomes with 35. However, if the form does not correspond to the economic substance, the
Value Creation – Actions 8-10 Final Reports, OECD/G20 Base Erosion economic substance should be used to delineate the transactions. OECD,
and Profit Shifting Project (OECD Publishing 5 Oct. 2015), International Actions 8-10 Final Reports, supra n. 29, paras. 1.42-1.50.
Organizations’ Documentation IBFD. 36. OECD Guidelines, para. 1.65.

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 Transfer Pricing Aspects of Cash Pooling Arrangements in Light of the BEPS Action Plan

commercially rational manner”.37 In the author’ s opinion, independent banks to determine the creditworthiness of
if the commercial rationale of entering into a cash pooling the borrower needs to be undertaken. The credit rating47
arrangements is demonstrated (such as savings on banking obtained pursuant to the multi-pronged creditworthi-
costs, the possibility to obtain favourable credit and debit ness analysis48 lays the foundation to determine under
interest rates and centralization of treasury functions), tax what conditions a loan can be issued in related-party set-
authorities should not disregard such arrangements. tings. Furthermore, the factors influencing the interest
rate determination49 (terms and conditions of the loan),
2.3. Intra-group loans such as the currency, tenure of the loan, seniority or sub-
2.3.1. The arm’ s length analysis ordination, type (fixed or floating), loan repayment sched-
ule, pre-payment options, convertibility (into equity)
The movement of funds among the cash pool leader and and security, need to be analysed to determine the arm’ s
cash pool participants in physical cash pooling arrange- length interest rate.50 The most common transfer pricing
ments creates intercompany loans (mostly short-term method applied to benchmark interest rates is the compar-
loans although long-term positions are also feasible).38 able uncontrolled price (CUP) method,51 using internal52
Two questions39 need to be answered, namely (i) whether or external CUPs53 as may be available.54
the intercompany loans40 (deposits and drawdowns) are
at arm’ s length and (ii) whether the interest rates on such 2.3.2. Application to cash pooling arrangements
loans are arm’ s length.
With respect to cash pooling arrangements, in determin-
Generally, a transfer pricing analysis of intercompany ing the arm’ s length credit or debit interest rates on the
loans involves a two-step process. First, the characteristics intercompany deposits and loans, respectively, it is essen-
of the borrowing entity must be established. This analysis tial that the creditworthiness of the borrower participants
should address the following questions:41 (i) could the bor- (cash pool leader or cash pool participants depending
rowing entity obtain a similar level of debt from a third- on the structure), on a stand-alone basis, be ascertained
party lender42 and (ii) would the borrowing entity actu- (adjusted for implicit support).55 The analysis lays down
ally borrow a similar amount at arm’ s length, given the the basis for determining the arm’ s length spread56 that can
performance of its business.43 Essentially, this step entails be added to the base interest rate (e.g. LIBID,57 LIBOR58
a credit rating evaluation44 of the borrower on a stand- or other bank rates). Thereafter – based on the credit
alone basis (adjustment to the credit rating of the borrower ratings, the contractual terms (the loan terms and con-
will be required to be made, taking into consideration the ditions) and actual conduct of the parties – CUPs (inter-
implicit support that it receives from being associated with nal or external)59 need to be found to benchmark the con-
the entire group; see section 2.4.).
Second, an arm’ s length interest rate45 needs to be estab- 47. References can be made to Moody’ s, Fitch and Standard and Poor’ s rating
lished in light of a credit rating evaluation.46 In practi- agencies. Russo & Moerer, supra n. 1, at 19-29.
cal terms, the screening process applied by commercially 48. The analysis includes an analysis of the business/industry in which the
borrower operates, an operational risk assessment of the borrower, finan-
cial statement analysis, cash flow analysis, forecast and probability mea-
surement analysis, credit scoring analysis and comparable analysis. For a
37. OECD Guidelines, para. 1.65; OECD, Actions 8-10 Final Reports, supra n. detailed description of these parameters, see Russo & Moerer, supra n. 1,
29, paras. 1.122-1.125. at 16-30.
38. Bakker, supra n. 1, at 32. However, such long-term positions could pos- 49. The US transfer pricing regulations also provide that the credit rating of
sibly be recharacterized as long-term loans. the borrower should be ascertained with respect to determining interest
39. Damji, Diakonova & Brügger, supra n. 6, at 189. rates. US: Treas. Reg. sec. 1.482-1(d)(4)(ii)(D) (1994).
40. It is assumed that the loans qualify as debt under the relevant domestic 50. Damji, Diakonova & Brügger, supra n. 6, at 188; Bakker, supra n. 1, at
tax rules. PWC, supra n. 1, at 131. 28-29.
41. Russo & Moerer, supra n. 1, at 15; Damji, Diakonova & Brügger, supra n. 51. Russo & Moerer, supra n. 1, at 29. In some cases, tax authorities have also
6, at 189. accepted the build-up approach. Essentially, this approach estimates a
42. The could analysis focuses on what a lender would be prepared to lend to risk-free rate to which a credit risk and term risk premium is added, based
the borrower, taking into consideration, for example, the latter’ s capacity on spreads available at corporate bonds. In other cases, tax authorities
to borrow, risk of default, assets that can be provided as security, liabilities have also accepted bank quotes to determine if the interest rate received
that can have a negative effect on the intercompany loans and the indus- (paid by the borrower) is at arm’ s length.
try in which the borrower operates. Her Majesty’ s Revenue & Customs 52. Internal CUPs may exist. More often than not, adjustments will be
(HMRC), Transfer Pricing: Thin Capitalisation Legislation and Principles: required to improve comparability. Bakker, supra n. 1, at 29.
The “Would” and “Could” Arguments, INTM 413030. 53. External CUPs may exist where it is possible to find comparable loans
43. The would analysis focuses on how much, and under what conditions, a between unrelated parties in the public domain. Bakker, supra n. 1, at 29.
borrower would have borrowed at arm’ s length, taking into consideration 54. In situations where comparables do not exist, the result obtained through
(i) whether the borrower would have taken a loan at arm’ s length given the application of the fair market yield curves (e.g. the Bloomberg yield
its financial situation, (ii) the amount of debt and whether taking that curves) have been accepted. Bakker, supra n. 1, at 29.
amount leaves room to absorb cyclical or seasonal variations, unforeseen 55. PWC, supra n. 1, at 140-141.
events or a fluctuation in interest rates or profits, (iii) its the costs of bor- 56. The OECD Guidelines provide that “in respect of financial services such
rowing and (iv) its debt servicing ability and the possibility to have suf- as loans … remuneration would generally be built into the spread and it
ficient cash to operate as a profitable organisation. HMRC, supra n. 42. would not be appropriate to expect a further service fee to be charged”.
44. This evaluation estimates the ability of the borrowing entity to repay its OECD Guidelines, para. 7.15.
debt. 57. The London Interbank Bid Rate. See http://www.investopedia.com/
45. Interest (fixed or floating) consists of a base rate (risk-free rate) that is terms/l/libid.asp.
determined on the basis of currency and maturity and a credit spread 58. The London Interbank Offer Rate. See http://www.investopedia.com/
that is determined on the basis of the risks undertaken by the lender with terms/l/libor.asp.
respect to the lending transaction. 59. The external CUP analysis, which is based on information obtained in the
46. Damji, Diakonova & Brügger, supra n. 6, at 189; Russo & Moerer, supra public domain (databases such as Loan Connector), results in interquartile
n. 1, at 15. ranges of base interest rates and credit spreads that can be used as arm’ s

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Vikram Chand

trolled interest rate. If CUPs are unavailable, the taxpayer taxpayers was to deposit the funds with an independent
could explore options realistically available to it to justify bank.62 Nevertheless, as the interest rates that the taxpay-
the arm’ s length nature of its dealing,60 taking into con- ers received from the arrangement was higher than the rate
sideration the contributions of all cash pool members. that they could have achieved by depositing the funds with
For instance, net depositors could demonstrate the arm’ s an independent bank, it was contended that the transac-
length nature of interest rates by benchmarking them with tions were at arm’ s length. It was also contended that the
the option of depositing the funds with an external bank, cash pooling benefit should not be divided among the cash
although such an alternate option was rejected in the court pool members. As the cash pool benefit was created by the
cases discussed below. Those cases dealt with the arm’ s treasury entity, it should reside with that entity.63
length determination of interest rates in cash pooling
The tax authorities argued that the cash pooling arrange-
arrangements.
ment should be seen in a holistic manner, and that the
cash pooling benefit should be split among the partici-
2.3.3. Court decisions on interest payments
pants in light of their respective contributions (bargain-
2.3.3.1. The ConocoPhillips case 61 ing power). The alternate option available to the taxpayers
ConocoPhillips Inc, a US-headquartered company, owned (i.e. depositing the funds with a bank) ignored the actual
subsidiaries worldwide. It also owned two subsidiaries in cash pooling arrangement and the bargaining power posi-
Norway, namely COPSAS and NCOPAS. ConocoPhil- tion of the parties. It was also contended that deposits and
lips Inc, along with its subsidiaries (as cash pool par- withdrawals by the cash pool participants to/from the cash
ticipants), entered into a multi-currency physical cash pool respectively attracted the same interest rates of LIBID
pooling arrangement with Bank of America (bank). The minus 25 basis points. Accordingly, net depositors were in
group’ s treasury centre, ConocoPhillips UK, managed the a similar situation to net debtors, even though the former’ s
arrangement. Pursuant to the arrangement, the cash pool bargaining power (on account of their cash balances) was
participants were required to place their surplus cash with higher than that of the latter. Thus, net debtors were enjoy-
the bank (sub-accounts). Interest was debited or credited ing the cash pool benefit (as opposed to the net depositors)
based on the group’ s top account balance (sub-accounts due to similar interest rates.
aggregated into the master account). A positive balance The Bogarting Court of Appeal decided in favour of the
on the top account entitled the arrangement to earn an tax authorities. The Court held that the pooling benefit
interest rate of LIBID minus 25 basis points (interest from should be split among all the participants in light of their
the bank), whereas a negative balance attracted an inter- respective contributions. Net depositors to the arrange-
est rate of LIBOR plus 25 basis points (payment to the ment were, indeed, in a better bargaining position, as they
bank). Generally, a spread of 62.5 basis points was avail- were the ones that were creating profit opportunities for
able, as the LIBOR rate was 12.5 basis points higher than the group. Accordingly, if they had entered into similar
the LIBID rate. However, deposits and withdrawals by the arrangements with independent parties, they would have
cash pool participants to/from the cash pool respectively obtained a higher interest rate in light of their bargain-
attracted the same interest rates of LIBID minus 25 basis ing position. Therefore, the taxpayers did not receive an
points (interest rate on net deposits). appropriate compensation that reflected their contribu-
In this case, the top account always reflected a positive tions. Accordingly, the taxable income of the taxpayers
balance. Furthermore, ConocoPhillips Inc guaranteed the was increased.
accounts even though all the entities in the group were An interesting question arises within the context of the
jointly and severally liable for the arrangement. COPSAS case, namely whether the deposit and lending rates offered
and NCOPAS were net depositors to the arrangement and by the bank can be used as CUPs for the rates charged by
were entitled to a deposit interest rate of LIBID minus 25 the cash pool leader to the cash pool participants (depos-
basis points. The key question that arose in this case, from itors and lenders). In the author’ s opinion, a mechanical
a Norwegian tax and transfer pricing perspective, was transposition of the rates charged by the bank to the rates
whether the deposit interest rate received by the taxpay- charged by the cash pool leader to its members does not
ers, namely COPSAS and NCOPAS, was at arm’ s length. reflect an arm’ s length rate. If the bank charges the cash
The taxpayers argued that independent parties do not pool leader a debit interest rate of LIBOR plus 25 basis
enter into cash pooling arrangements. Therefore, it was not points on negative balances in the master account, that
possible to compare controlled transactions with uncon- rate should not be mechanically applied by the cash pool
trolled transactions. Consequently, it was necessary to leader to funds provided to a participant. Similarly, if the
compare the closest option that exists between indepen- bank provides the cash pool leader with a credit interest
dent parties. The closest option that was available to the rate of LIBID minus 25 basis points on positive balances in

length credit and debit interest rates within the cash pool arrangement. 62. The author understands that the taxpayers presented external CUP evi-
PWC, supra n. 1, at 141. See also the Bombardier case discussed in section dence on deposit interest rates that could have been achieved from inde-
2.3.3.2. pendent banks.
60. OECD Guidelines, paras. 1.34 & 9.59-9.64. See also S. Parekh, The Concept 63. The author could not manage to obtain a detailed functional analysis
of “Options Realistically Available” under the OECD Transfer Pricing Guide- of the cash pooling arrangement. Accordingly, it is difficult to ascertain
lines, 22 Intl. Transfer Pricing J. 5 (2015), at 297-307, Journals IBFD. whether the treasury entity should have been compensated as an entre-
61. Andresen, supra n. 31, at 461-463. See also Bakker, supra n. 1, at 31-32. preneur or a service provider. See section 2.5.

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 Transfer Pricing Aspects of Cash Pooling Arrangements in Light of the BEPS Action Plan

the master account, that rate should not be mechanically The tax authorities did not agree with the spread earned
applied by the cash pool leader to funds deposited by a by the Swiss entity and equalized the deposit interest rates
participant. This is because a direct application of the rates and withdrawal interest rates. Further, they calculated the
does not take into account the functional and risk analysis interest on the net balance of the deposits. Moreover, due
of the parties to the arrangement. A credit rating analy- to the lack of documentation, the tax authorities deter-
sis of all the pool members is essential to justify the arm’ s mined the interest rate based on an external CUP analy-
length lending and borrowing rates. Accordingly, differ- sis, taking into consideration the credit rating of the Bom-
ent deposit and lending rates could apply to the pool par- bardier Group. The fact that the interest rate received/paid
ticipants.64 by the taxpayer was equivalent to the interest rate avail-
able from independent parties was not considered rele-
2.3.3.2. The Bombardier case 65 vant, as the latter rates did not take into consideration the
The Canadian Bombardier Group owned subsidiaries credit risk assumed by the taxpayer (a similar argument
worldwide. It also owned a subsidiary in Denmark (the was made by the tax authorities and upheld by the Court
taxpayer). The taxpayer entered into a zero-balancing of Appeals in the ConocoPhillips case). Nevertheless, the
cash pooling arrangement with a related Swiss entity that tax authorities agreed that the Swiss subsidiary should be
was appointed as the cash pool administrator. Pursuant paid a service fee of 0.25% for its treasury-related activities.
to the arrangement, the taxpayer was required to deposit The taxpayer appealed the decision of the tax authorities
its surplus funds in the cash pool. Furthermore, the tax- before the Danish Administrative Tax Court. The Court
payer could also borrow the deposited funds and with- upheld most of the findings of the tax authorities. In par-
draw additional funds, if required. The Swiss entity was ticular, the Court held that the Swiss entity was not entitled
responsible for establishing cash pool accounts, coordi- to a spread (– 0.5 to + 1.15). This was because that entity
nating the cash pool, providing documentation and deter- did not bear the credit risk with respect to the arrange-
mining interest rates. Furthermore, the Swiss entity also ments. The author agrees with the findings of the Court. If
took care of other treasury-related activities.66 Under the the cash pool administrator does not bear any credit risks,
arrangement, deposits into the pool attracted interest rates it should not be entitled to a spread. On the other hand, it
of daily overnight bank rates minus 50 basis points, while should be entitled to a service fee for the administrative
withdrawals attracted interest rates of daily overnight bank activities it undertakes (see section 2.5.).
rates plus 115 basis points. According to the taxpayer, the
spread on deposits was equal to deposit rates offered by 2.4. Intra-group guarantees67
independent banks, and such deposits enabled the Swiss
2.4.1. The arm’ s length analysis
entity to negotiate external party funding at cheaper rates
for the Bombardier Group. The question arises as to how do to determine the arm’ s
length charge with respect to guarantees. The OECD
During the years under audit, the taxpayer had surplus
Guidelines,68 in the context of intra-group services,
cash and deposited these amounts under several short-
provide that two questions that must be answered with
term agreements (and received interest). However, due to
respect to the provision of a guarantee, namely (i) whether
insufficient liquidity management, the taxpayer had a neg-
an intra-group service is provided and, if so, (ii) whether
ative balance for a few months and was therefore required
the intra-group charge with respect to such service is at
to withdraw funds (and pay interest). The key question
arm’ s length.69
that arose in this case, from a Danish transfer pricing per-
spective, was whether the interest rate received/paid by the The response to the first question depends on whether
taxpayers was at arm’ s length. the guarantee provides the recipient with economic and
commercial value to enhance its commercial position.70
The Swiss entity did not have its own independent credit
The commercial position of the guarantee recipient is
rating. However, the Bombardier Group had a credit rating
enhanced when the provision of a guarantee improves
of Ba2/BB. Moreover, the taxpayer failed to provide any
the credit rating of the recipient in such a manner that the
documentation explaining how the rates were calculated.
recipient can obtain a loan at lower interest rates (or inter-
Furthermore, from a risk appetite perspective, the tax-
est rates applicable to the guarantor). In this regard, a dis-
payer bore the debtors risks with respect to the depos-
tinction must be drawn between passive association and
its. However, the Swiss entity did not bear any risks with
active promotion of a multinational group’ s attributes71
respect to the withdrawals by the taxpayer, as the former
(or deliberate concerted action).
already had its deposits.

67. The author focuses on the provision of explicit guarantees within a mul-
64. M. Breggen, Netherlands, in Transfer Pricing and Intra-Group Financing, tinational group, as such instruments create a legally enforceable com-
supra n. 1, at 436-437. mitment for the guarantor.
65. E. Vistisen, Bombardier Case: First Published Cash Pool Decision, 21 Intl. 68. OECD Guidelines, para. 7.5.
Transfer Pricing J. 3 (2014), at 464, Journals IBFD. See also E. Vistisen, 69. For a detailed analysis, see V. Averyanova & J. Sampat, Transfer Pricing
Bombardier Cash Pool Decision (21 Jan. 2014), available at http://www. Aspects of Intra-Group Financial Guarantees in Light of the BEPS Action
vistisenlaw.com/bombardier-cash-pool-decision. Plan, 22 Intl. Transfer Pricing J. 6 (2015), Journals IBFD.
66. Such as liquidity, interest and risk management, insurance, letters of credit 70. OECD Guidelines, para. 7.6.
and accounting for European operations. 71. OECD Guidelines, para. 7.13.

© IBFD INTERNATIONAL TRANSFER PRICING JOURNAL JANUARY/FEBRUARY 2016 43

Vikram Chand

The following example can be used to illustrate this dif- est rate that the subsidiary can obtain as a result of the
ference. The credit rating of a parent company in the XYZ guarantee (2%). This would mean that the guarantee fee
group is AAA. Its subsidiary’ s stand-alone credit rating should be calculated within the ranges of 0% to 2%. If the
is Baa. On an individual basis, the subsidiary can obtain borrower were to be required to pay the entire saving (2%)
a loan from a bank at 6%. However, due to its affiliation as the fee, it would not make sense for it to enter into the
to the group, the subsidiary’ s credit rating is pushed up guarantee arrangement. At the same time, if the guarantee
to A.72 This enables the subsidiary to obtain a loan at provider did not receive a share of the saving (2%), it would
4% from independent banks. Nevertheless, the parent not make sense for it to enter into the guarantee arrange-
company decides to provide a guarantee to its subsidiary ment. Therefore, the synergistic benefit must be split. In
which then pushes up the credit rating of the subsidiary these situations, the revised OECD Guidelines provide
to AAA. This deliberate concerted group action enables that it is necessary to split the benefits of the synergies
the subsidiary to obtain a loan at 2% from independent among the participants in proportion to their respective
banks. The revised OECD Guidelines73 (clearly inspired by contributions.79
the GE Capital case)74 provide that if the subsidiary has a
higher credit rating, due to its group membership (taking 2.4.2. Application to cash pooling arrangements: The
the loan at 4%), than the credit rating it could achieve on an Portuguese Arbitration Tax Court decision80
individual basis (taking the loan at 6%), no service is pro- Cross guarantees81 (or upstream82 or downstream83 guar-
vided by the parent to the subsidiary, as the latter company antees) could be provided in cash pooling arrangements.
receives only an incidental benefit by being associated with Accordingly, it becomes imperative to analyse whether a
the group. However, the revised OECD Guidelines75 also guarantee fee is necessary. Ideally, if a guarantee issued by
provide that an intra-group service is provided when the one entity within the group pushes up the credit rating of
provision of the guarantee enhances the credit rating of another entity over and above implicit support, a guaran-
the subsidiary from A to AAA – which thereby enables tee fee may be payable. The following court case arrives
it to obtain a loan at 2%.76 The author agrees with this at a similar conclusion, although the author understands
approach77 although it may be disputable.78 that there was no discussion regarding implicit support.
Continuing with the previous illustration, with respect A parent company and its Portuguese subsidiary (the tax-
to the second question, the arm’ s length guarantee fees payer) entered into a notional cash pooling arrangement
should be determined as the difference between the inter- with a Dutch bank with which they held bank accounts.
est rate that the subsidiary can obtain on a stand-alone Pursuant to the arrangement, the parent and the subsid-
basis, as adjusted for implicit support (4%) and the inter- iary provided cross-guarantees to each other for their
respective account balances. In effect, this meant that each
72. The example assumes that the multinationals group rating is higher than
cash pool participant in the notional pool agreed to guar-
the stand-alone rating of the subsidiary. However, there could be situ- antee the liabilities (debit balances) of the other cash pool
ations where the stand-alone rating of entities is higher than that of the participants to the bank. In this case, the taxpayer had a
group.
73. OECD, Actions 8-10 Final Reports, supra n. 29, paras. 1.164-1.166 & paras.
good financial standing and had higher credit balances in
7.12-7.13. comparison to its parent (which was in a deficit position).
74. CA: TCC, 4 Dec. 2009, General Electric Capital Canada, Inc. v. Her Majesty Further, even though the cash pool participants cross-
The Queen, 2009 TCC 563, aff ’d 2010 FCA 344 (1 Nov. 2010). See also
Ledure et al., supra n. 3, at 352-353.
guaranteed each other, the risk of compensating the bank
75. OECD, Actions 8-10 Final Reports, supra n. 29, para. 1.167. for debit balances of other cash pool participants never
76. In contrast to the above illustration, assume that an independent bank, materialized during the year under audit. Moreover, in
after analysing the financial position of the subsidiary, refuses to provide
a loan. This is because the bank considers the subsidiary to be financially
addition to virtually merging balances, certain clauses of
weak on a stand-alone basis. In such circumstances, if the parent company the agreement restricted the subsidiary from obtaining
provides a guarantee subsequent to which the bank provides a loan to loans from the Dutch bank, whereas no such restriction
the subsidiary, it could be argued that an intra-group service is not pro-
vided even though the guarantee enhances the commercial position of
was placed on the parent entity. In other words, the parent
the subsidiary. The OECD Guidelines provide that, in order to determine had access only to the master account.
the arm’ s length price for intra-group services, the matter should be seen
from the perspective of both the service provider and service recipient.
In all likelihood, an independent enterprise would not provide a guaran- 79. OECD, Actions 8-10 Final Reports, supra n. 29, para. 1.162. In practice, the
tee, as it will not be willing to accept the risks associated with the trans- CUP method (credit default swaps, letter of credit fees, commitment fees),
action (as the subsidiary is financially weak). Thus, if the parent provides the cost benefit analysis approach, the contingent put option approach
a guarantee, it would do so in its capacity as a shareholder. Accordingly, and the cost of capital method are used to price a guarantee fee payment.
no remuneration should be charged, as the service amounts to a share- Bakker, supra n. 1, at 33; Russo & Moerer, supra n. 1, at 34.
holder activity. Russo & Moerer, supra n. 1, at 33. 80. F. Sousa & B. Santiago, Portuguese Arbitration Tax Court Rules on Notional
77. See e.g. the position of the Dutch tax authorities in Decree of 14 November Cash Pooling Arrangements, Tax Notes Intl. (3 June 2013), at 999-1003. See
2013, IFZ 2013/184M, International Tax Law. Transfer prices, application also C. Scholz et al., Comparison of the Tax Treatment of Inter Company
of the arm’ s length principle and the Transfer Pricing Guidelines for Multi- Cash Pools in Europe, Transfer Pricing Intl. J. (BNA) (Apr. 2015). A proper
national Enterprises and Tax Administrations (OECD Guidelines). For an analysis of this case could not be made due to non-availability of detailed
unofficial translation by KPMG Meijburg & Co/KPMG Global Transfer facts.
Pricing Services, see 21 Intl. Transfer Pricing J. 2 (2014), Journals IBFD 81. Typically, issued by group companies whereby all the group members are
(Decree of 14 November 2013, IFZ 2013/184M). jointly and severally liable to the creditors (banks). PWC, supra n. 1, at
78. See e.g. C. Schultz, National Foreign Trade Council, Comments on OECD 146.
Revised Discussion Draft on Transfer Pricing Aspects of Intangibles and White 82. Typically, issued by subsidiaries to creditors (banks) for the benefit of the
Paper on Transfer Pricing Documentation (30 Sept. 2013), at 4-5, avail- parent company. PWC, supra n. 1, at 146.
able at http://www.nftc.org/default/Publications/Tax/Comments%20 83. Typically, issued by parent companies to creditors (banks) for the benefit
OECD%20on%20the%20Intangibles.pdf. of the subsidiary. PWC, supra n. 1, at 146.

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 Transfer Pricing Aspects of Cash Pooling Arrangements in Light of the BEPS Action Plan

The tax authorities argued that the taxpayer had provided leader’ s remuneration should ideally consist of the dif-
a guarantee to the Dutch bank on behalf of the parent ference between the debit and credit interest rates.86 The
company in light of its strong financial position. This interest rate spread is directly proportional to the amount
guarantee led the parent to obtain a higher credit rating, of equity that the cash pool leader owns. The larger the
which in turn helped the parent to obtain better interest amount of equity, the higher is the interest rate spread (and
rates from the Dutch bank (on future loans). Further, as vice versa). This is because a higher amount of equity leads
certain clauses of the agreement restricted the taxpayer to a higher credit rating for the cash pool leader. In these
from obtaining loans, in essence, the taxpayer had pro- situations, the cash pool leader makes a profit on the inter-
vided a guarantee to the parent. Accordingly, the parent est spread and does not receive any separate/additional
should pay a guarantee fee to the subsidiary. remuneration from the other cash pool participants.87 In
all likelihood, in the in-house bank structure, the cash pool
After reviewing the terms and conditions of the agreement
leader’ s credit rating will not be similar to that of a bank.
in detail, the Portuguese Arbitration Tax Court held that,
Accordingly, if the cash pool leader were receiving depos-
even though the arrangement was called a cash pooling
its from and lending to the same entity, a spread that an
arrangement, a proper analysis of the facts and circum-
independent bank could enjoy would not be available to
stances (also the agreement clauses) of the taxpayer led
the cash pool leader.
the Court to believe that the arrangement was a contract
of mixed nature which resulted in the subsidiary’ s pro- On the other hand, if the cash pool leader were to act as
viding a guarantee to the parent. The key takeaway from a service provider (see section 2.3.3.2., Bombardier case),
this case is that if the terms and conditions of the cash it should be entitled to a service fee.88 This is because it
pooling arrangement differ from normal circumstances, does not bear any risks with such arrangements. In these
courts could recharacterize such arrangements in light of situations, a method based upon costs (the cost-plus
their economic substance. This recharacterization mech- method or the transactional net margin method) or a
anism is also supported by the OECD Guidelines (see limited basis point spread could be applied to determine
section 2.2.). Accordingly, the contractual terms must be the arm’ s length fee that the cash pool leader is entitled
carefully reviewed prior to being executed. to.89 Such could be the case in physical or notional cash
pooling arrangements where the cash pool leader has a
Further, in notional arrangements which provide for
limited functional and risk profile.
cross-guarantees, it could be argued that an intra-group
service is not provided, as independent enterprises do
2.6. Sharing the cash pool benefit
not enter into joint liability arrangements. In fact, the
Dutch tax authorities consider that an explicit charge is Cash pooling benefits (or losses) arise in light of multina-
not required, as cross-guarantees are put in place due to tional group synergies. They result from deliberate con-
shareholder relations. Moreover, it is asserted that an intra- certed action of group members. As discussed, the revised
group service is not rendered, as the joint liability of the OECD Guidelines provide that benefits of such synergies
cash pool participants – coupled with fluctuating cash should be shared among the participants in proportion
pool balances – should offset benefits that could trigger a to their respective contributions.90 Thus, if the cash pool
guarantee claim.84 leader acts as an in-house bank, it could be argued that a
major part of the cash pool benefit should be allocated to
In the author’ s opinion, a credit rating analysis of all the the cash pool leader. This is because the cash pool leader
participants in a notional cash pool must be undertaken. performs substantial functions and undertakes major risks
Based on this analysis, the impact of cross-guarantees associated with the arrangement.91 On the other hand, if
needs to be analysed. If it is established that the avail- the cash pool leader does not perform substantial func-
ability of the cross-guarantee pushes up the credit rating tions or undertake substantial risks associated with the
of the loan recipient (over and above implicit support), arrangement, but merely acts as a service provider (in
a fee should be payable. However, such fees should not physical or notional arrangements), the cash pool leader
be payable when the “fees are already priced in interest should not be entitled to the a major part of the cash pool
rates, for instance, if the external bank offers implicit guar- benefit. In these situations, a major part of the cash pool
antee providers with more favourable interest rates and benefit should be allocated to the cash pool participants
implicit guarantee receivers less favourable interest rates in light of their respective contributions.
in the context of the cash pool” 85

2.5. Arm’ s length remuneration for the cash pool

leader
86. The cash pool leader may provide guarantees to the cash pool participants,
The arm’ s length remuneration for the cash pool leader and could also be entitled to a guarantee fees.
depends on the functions it performs, risks it assumes and 87. PWC, supra n. 1, at 141; Bakker, supra n. 1, at 31; Russo & Moerer, supra
assets it employs. In physical cash pooling arrangements, n. 1, at 44.
88. OECD Guidelines, para. 7.14.
the cash pool leader may act as an internal bank. In such 89. PWC, supra n. 1, at 141; Bakker, supra n. 1, at 31; Russo & Moerer, supra
cases, due to its entrepreneurial activities, the cash pool n. 1, at 44.
90. OECD, Actions 8-10 Final Reports, supra n. 29, para. 1.162.
91. This would be the case if the cash pool leader, legally and economically,
84. Scholz et al., supra n. 80, section IV B. bears all the risks associated with the arrangement. Russo & Moerer, supra
85. Scholz et al., supra n. 80, section V B. n. 1, at 44; PWC, supra n. 1, at 142.

© IBFD INTERNATIONAL TRANSFER PRICING JOURNAL JANUARY/FEBRUARY 2016 45

Vikram Chand

Depending on the factual circumstances, the residual bility for countries to choose a percentage between 10%
profit split method92 could be applied, in principle, to split and 30% based on certain parameters.98 Furthermore, the
the cash pooling benefit. Imagine, in an external bank/ Report recommends countries to incorporate a group
notional cash pooling structure, that the bank pays the ratio rule alongside the fixed ratio rule. This approach
entire pool benefit (interest on positive balances) to the would enable entities with net interest expense above a
cash pool leader. In situations where the cash pool leader country’ s fixed ratio rule to deduct interest up to the level
acts as a service provider, the cash pool leader could retain of the net interest/EBITDA ratio of its worldwide group.
a service fee for the activities it carries out. Thereafter, the The Report acknowledges that Actions 8 through 10 also
remaining cash pool benefit could be allocated to cash affect Action 4,99 and also highlights that further work will
pool participants on the basis of certain allocation keys be undertaken with respect to transfer pricing aspects of
that showcase their contributions (such as the size of the financial transactions (by the end of 2017). Accordingly,
account balances of different entities).93 Action 4 could restrict the deduction of interest paid by
entities in a cash pooling arrangement, even if they are
2.7. Cash pooling documentation at arm’ s length. Consequently, cash pooling (depending
As a best practice, it is recommended that multination- on the structure) may result in effective double taxation
als clearly document their cash pooling policy in their because interest income will be taxable in the country of
transfer pricing documentation. Essentially, the following the depositors and the corresponding interest expense
information should be reflected: (i) a description of the may be non-deductible in the country of the debtor. Thus,
cash pool, (ii) the terms and conditions between the cash it is suggested that the OECD100 provide guidance on this
pool leader, cash pool participants and external parties topic, as it is essential.101
(banks), (iii) the intra-group transactions, (iv) a functional Action 3 of the BEPS Action Plan102 deals with controlled
analysis of the arrangement which clearly outlines the roles foreign company (CFC) rules. The Final Report provides
and responsibilities of the cash pool members94 and (v) the recommendations in the form of building blocks for
selection of the most appropriate transfer pricing method designing CFC rules. Essentially, building blocks are pro-
for the various intra-group transactions, in particular the vided with respect to (i) the definition of a CFC, (ii) CFC
arm’ s length interest rates and guarantee fees, the remu- exemption and threshold requirements, (iii) the definition
neration for the cash pool leader and the allocation of the of CFC income, (iv) the computation of CFC income, (v)
cash pool benefit.95 This documentation serves to justify the attribution of a CFC’ s income to its shareholder and
the nature of the taxpayer’ s dealings in the event of a trans- (vi) rules regarding the prevention of double taxation.103
fer pricing audit (a circumstance that is currently on the The Report provides countries the flexibility to design their
rise). CFC rules, taking into consideration their overall policy
objectives. It could well be possible that income (interest or
3. Impact of Other BEPS Actions on Cash Pooling services income)104 derived by a cash pool leader’ s (when
3.1. Domestic law changes it operate as an in-house bank or a service entity), even
though the transaction is at arm’ s length, could be subject
Action 4 of the BEPS initiative96 deals with the perceived to CFC rules in the parent’ s country. This would be the
need to limit interest deductions. The Final Report pro- case if the cash pooling arrangement were operated from
vides recommendations for designing domestic law pro- a low-tax country.105 Accordingly, taxpayers should take
visions to prevent base erosion through the use of (excess) into consideration the applicability of the CFC rules of
interest expense deductions. Essentially, a fixed ratio rule the parent’ s country vis-à-vis cash pooling arrangements.
is recommended to restrict interest deductions.97 In par-
ticular, the rule restricts the deduction of a group entity’ s
interest payment to a percentage of that entity’ s earn-
ings before interest, taxes, depreciation and amortization
(EBITDA). The recommendation leaves open the possi-

92. The profit split method can be applied to such arrangements, as they 98. Id.
are “highly integrated”. OECD Guidelines, para. 2.109. This is because 99. OECD, Action 4 Final Report, supra n. 96, at 12.
pooling the balance of all cash pool participants generates profits under 100. Although the OECD has already indicated that the application of a group-
such arrangements. See also J. Hülshorst, The Profit Split Method in Cash wide rule should not impact the ability of a group to manage its third-
Pooling Transactions, Transfer Pricing Rep. (BNA) (Nov. 2005). party balances through cash pooling. OECD, Discussion Draft, BEPS
93. Assef & Boer, supra n. 31. The OECD has indicated that it will provide Action 4: Interest Deductions and Other Financial Payments, OECD/G20
detailed guidance on splitting synergistic benefits in the follow-up work Base Erosion and Profit Shifting Project (OECD 18 Dec. 2014), para. 138.
on transfer pricing methods. OECD, Actions 8-10 Final Reports, supra n. 101. Duff & Phelps, Comments Pertaining to the Public Discussion Draft on
29, at 58-61. Deductibility of Interest and Other Financial Payments, in OECD, Com-
94. Regarding the steps in a functional analysis, see OECD, Actions 8-10 Final ments Received on Public Discussion Draft, BEPS Action 4: Interest
Reports, supra n. 29, paras. 1.51-1.106. Deductions and Other Financial Payments – Part 1 (OECD 11 Feb. 2015),
95. A. Roeder & S. Kuzmina, Germany, in Transfer Pricing and Intra-Group at 363-372.
Financing, supra n. 1, at 260-261. 102. OECD, Designing Effective Controlled Foreign Company Rules – Action 3:
96. OECD, Limiting Base Erosion Involving Interest Deductions and Other Final Report, OECD/G20 Base Erosion and Profit Shifting Project (OECD
Financial Payments – Action 4: 2015 Final Report, OECD/G20 Base 5 Oct. 2014), International Organizations’ Documentation IBFD.
Erosion and Profit Shifting Project (OECD Publishing 5 Oct. 2015), In- 103. OECD, Action 3 Final Report, supra n. 102, at 9.
ternational Organizations’ Documentation IBFD. 104. OECD, Action 3 Final Report, supra n. 102, at 43-55.
97. OECD, Action 4 Final Report, supra n. 96, at 11. 105. OECD, Action 3 Final Report, supra n. 102, at 14.

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 Transfer Pricing Aspects of Cash Pooling Arrangements in Light of the BEPS Action Plan

3.2. Treaty law changes and transfer pricing disputes.111 Accordingly, given the fact
that tax administrations could take aggressive positions
Action 6 of the BEPS Action Plan106 deals with prevent-
regarding cash pooling arrangements, it becomes imper-
ing treaty abuse. The Final Report suggests that countries
ative for taxpayers to maintain robust documentation by
incorporate a minimum standard by changing the title and
carefully considering and documenting all functions per-
preamble of their treaties to reflect the objective of pre-
formed, assets used and risks assumed, as well as the bar-
venting tax evasion and tax avoidance (including treaty
gaining power of all related parties.
shopping), coupled with either (i) a principal purpose test
and limitation on benefits clause, (ii) a limitation on bene- This would provide a solid foundation for avoiding
fits clause with a narrow principal purpose test for conduit common pitfalls in cash pooling arrangements, such as
financing situations or (iii) only a principal purpose test.107 (i) applying debit and credit interest rates without under-
Furthermore, the Report suggests other treaty-related taking a credit rating analysis of the cash pool leader/cash
changes to combat other tax avoidance structures (typi- pool participant or applying such rates in light of external
cally, rule shopping).108 It could well be possible that a bank quotes, (ii) allocating the entire cash pool benefit to
treasury entity of a group (or cash pool leader) does not the cash pool leader even though it does not bear any sub-
satisfy the stringent requirements under the limitation on stantial risks and (iii) maintaining long-term positions in
benefits clause in order to qualify as a resident of a con- the cash pool even though the arrangement, essentially, is
tracting state due to its scant economic substance109 and to fund short-term working capital requirements.112 For
the fact that it derives or pays interest from/to foreign arrangements that are already in cross-border litigation,
jurisdictions. Accordingly, interest paid by the net debtors taxpayers should evaluate the possibility of entering into
in a cash pooling arrangement could be exposed to high a mutual agreement procedure under an applicable treaty
withholding taxes in the source state if treaty benefits are that contains an equivalent to article 25 of the OECD
denied to the cash pool leader. Thus, taxpayers should take Model113 (or arbitration). Needless to say, if the taxpayer
into consideration the impact of these treaty law changes would like to prevent double taxation and obtain upfront
on cash pooling arrangements. certainty prior to actually implementing such arrange-
ments, it might consider entering into a unilateral or (pref-
4. The Way Forward: Dispute Resolution and erably) bilateral APA (or even – when possible – a multi-
Prevention lateral APA) with the relevant jurisdiction(s).114
Multinational groups consider transfer pricing issues with
respect to intra-group finance as a leading area of contro-
versy.110 The ConocoPhillips, Bombardier and Portuguese 111. Chand & Wagh, supra n. 27, at 408. See also C.H. Lowell & M. Herrington,
BEPS: Current Reality and Planning in Anticipation, 21 Intl. Transfer
Arbitration Tax Court cases clearly show that the tax Pricing J. 2 (2014), Journals IBFD; M. Herrington & C.H. Lowell, The
authorities have started to question the arm’ s length nature BEPS Project: Planning in Anticipation, 21 Intl. Transfer Pricing J. 3 (2014),
of cash pooling arrangements. Moreover, it has been pre- Journals IBFD.
112. Bakker, supra n. 1, at 32.
dicted that the BEPS project will result in increased tax 113. Article 25 of the OECD Model provides for a dispute resolution mecha-
nism that is also applicable for transfer pricing disputes. Currently, the
MAP process, which also provides for an optional arbitration mecha-
106. OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circum- nism, is considered to be ineffective. The OECD, in light of Action 14
stances – Action 6: 2015 Final Report, OECD/G20 Base Erosion and Profit of the BEPS Action Plan, seeks to make dispute resolution mechanisms
Shifting Project (OECD 5 Oct. 2015), International Organizations’ Docu- more effective. Essentially, the Final Report provides for implementation
mentation IBFD. of minimum standards through a robust peer-based monitoring mecha-
107. OECD, Action 6 Final Report, supra n. 106, at 10. nism. In addition to committing to the minimum standard, several coun-
108. Id. tries have also expressed their interest in implementing the mandatory
109. Reports indicate that cash pooling arrangements are operated from arbitration clauses in their tax treaties. OECD, Making Dispute Resolution
Ireland with one to four employees. See J. Duffy, Ireland, in Transfer Pricing Mechanisms More Effective – Action 14: 2015 Final Report (OECD 5 Oct.
and Intra-Group Financing, supra n. 1, at 320-321. 2015), at 9-10, International Organizations’ Documentation IBFD.
110. T. Borstell et al., Navigating the Choppy Waters of International Tax: EY’ s 114. P. Jain & V. Chand, Location Savings: International and Indian Perspective,
2013 Global Transfer Pricing Survey (2013), at 25. 43 Intertax 2 (2014), at 196-197.

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