The TMI Tax Doctor: Cash Pooling

Welcome to the second column of Tax Doctor. In this issue I look at a question around the differences in tax treatment between notional and target balancing cash pooling arrangements and also the value added tax (’VAT’) implications of incorporating a payments on behalf of (’POBO’) service within an existing cash pooling arrangement.

Q1: We are considering implementing a cash pooling arrangement for our group across multiple jurisdictions; what are the key implications to consider when comparing notional as opposed to target balance pooling?

Generally, under target balancing pooling, intercompany balances are created between the pool participants and the pool header (on which interest should be charged) as opposed to a notional pooling structure where the bank will generally pay interest to each pool participant (although this may be paid to the pool header initially as collecting agent for the pool participants).

As a consequence, the characterisation of the interest paid between pool participants in respect of target balancing will usually be related party interest for tax purposes (as it will be interest on an inter-company loan), which will impact areas such as transfer pricing (is the rate charged between participants an appropriate arm’s length rate?) and withholding tax (there could be different requirements to consider in respect of payments between group members as opposed to payments between the pool header and the cash pooling bank). Other anti-avoidance provisions may need further consideration in the context of target balancing e.g., some jurisdictions, such as the UK, have specific tax rules for inter-company loans.

Under notional pooling, although the specific tax considerations for inter-company loans should not be relevant, additional issues would need to be considered such as the necessary transfer pricing documentation to support the notional allocation of interest between participants (properly reflecting the allocation of additional returns generated to each pool participant), the impact of any cross-guarantee arrangements and whether the allocation of notional interest between pool participants by the pool header could be viewed as a payment representative of interest and therefore subject to different withholding tax requirements as between the cash pooling bank and the pool participants.

Download our Free Treasury App for mobile and tablet to read articles – no log in required.

Download Version Download Version