Transfer Pricing Aspects of Cash Pooling arrangements

Frederik Brøndum Christensen & Frederik Kaarup

Student thesis: Master thesis


The purpose of this thesis is to analyze the challenges taxpayers and tax authorities encounter in cash pool arrangements from a transfer pricing perspective.
According to OECD, the use of cash pool arrangements is popular way among the multinational enterprises to achieve more efficient cross-border cash management by bringing together, either physically or notionally, the balances on a number of separate bank accounts. As a result of this cash pool arrangements have for many years brought to view many tax issues relating to compliance with the arm's length principle, including allocations of cash pooling benefits, the determination of lending/borrowing rates, the remuneration of the administrator of the cash pool arrangement and pricing of cross guarantees.
The reason for the many tax issues that arise in connection with cash pools can be explained by the fact that OECD has not prepared specific guidelines for financial transactions in their Transfer Pricing Guidelines for Multinational Enterprises and Tax Authorities ("OECD TPG"). This means that financial transactions are treated according to the current OECD Transfer Pricing Guidelines 2017, in line with the guidance on other intra-group services. Another reason for this is might be that there is not much legal practice in Danish and international law that determines the arm length assessment of the different financial transactions in these cash pool arrangements
As part of the BEPS initiative, the OECD has included in their Actions 8-10 a draft guidelines for the pricing of intra-group financial transactions in order to avoid the uncertainty that has existed so far. The draft may be a warning that multinational group companies' cash pooling policies will come under the attention of the tax authorities in a near future.
As a result of the lack of guidance on the pricing of financial transactions in cash pool-arrangements, this thesis analyzed which components that influences the pricing of loan transactions on the free market. The findings of this analysis was successively used to determine the central factors of the comparability analysis for intercompany transactions. These factors include loan currency, yield to maturity and most important credit ratings. Subsequently, an analysis of the allocation of the benefits that arise in cash pool arrangements on arm's length terms and the pricing of guarantees in cash cool arrangements was performed. This analysis concluded that the cash pool-administrator and the participants should receive a compensation according to the risk they take on, asset they use and functions they perform. The guarantees will
Finally, this thesis recommended a safe harbour solution which included the use of a simplified credit model for the challenges relating to the pricing of loans transactions in cash pool arrangements. The safe harbor solution seeks to create legal certainty for multinational group companies while ensuring that the tax authorities will receive the required tax revenue on the cross-border transactions in cash pool arrangements in the future.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2019
Number of pages118
SupervisorsLouise Blichfeldt Fjord