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Cash & Working Capital

Does It Still Pay to Fill a Cash Pool?

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March 10, 2015

With negative rates, LCR, ring fencing, tax and transfer pricing considerations, it’s a question worth asking.

Fri Currency in Gears SmallCash pooling has become almost automatic to the point where MNCs are executing it as soon as they have multiple entities in places that allowed it. Now, however, there are a number of trends coming together that may make the cash-pooling decision less automatic and at least should prompt treasurers to question some long-held assumptions.

In answering anew the question of why you are pooling – whether physical, notional, intercompany netting/loan programs, in-house bank deposit taking or lending – you may scale back on setting up and filling another cash pool or become much more nuanced in what kind of pool you do set up and how you go about filling it.

Here are three trends to consider in questioning the concept of cash pooling:

  1. Interest optimization is not what it once was. For starters, with the normalization of a negative interest rate environment, every treasury operations manager should be going through the company’s cash-pool set up with its transaction banking coverage officer. With so many different pooling structures, banks are likely to have different means of calculating the net interest charge and determine whether there will be a net payment to the bank (and the likelihood of pool charges increases with negative rates). If negative interest rates continue in key pooling places – as the outlook suggests – companies need to consider the impact not only on cash pooling but the way liquidity should be structured going forward. Even where cash is pooled in a positive rate environment, it is worth asking: How high must rates go in order to reap enough benefit to offset adverse pooling trends such as those below? And what are the other benefits to pooling that justify filling them?
  2. Bank regulation complications. Starting with rules on the Liquidity Coverage Ratio (LCR), banks are fighting an ongoing battle with the types of deposits they want and those they don’t. While cash pooling structures offered by banks (and their underlying operational deposit accounts) have so far survived the LCR rules, they are still going to be tested by the Net Stable Funding Ratio (NSFR) rule and other on-going bank reg interpretations in jurisdictions around the world. Additionally, they’ll encounter various forms of ring fencing to prevent too much liquidity from escaping across borders. These will make cash pooling structures, and especially the cross-border variety, more costly for banks to provide with time. Also, many treasurers have by now experienced banks turning away their cash when it is too sizable for their banks to manage under new liquidity requirements, or paying more for cash in jurisdictions where they need liquidity (often in higher-yielding currencies where it is more difficult to pool). The question is: Will cash pooling structures be able to adapt to support these sorts of push-me, pull-you regulatory dynamics effectively?
  3. Tax and transfer pricing exposure. Previously, we noted how the OECD BEPS Action Plan could be something of a game changer for many types of treasury structures. This week we were reminded just how painful the discussion with tax already can be when thinking about setting up cross-border pooling arrangements. This was in the context of looking at the tax and transfer pricing ramifications of cross-border pooling in and out of China, but it is not just China. Around the globe, tax authorities--including in places where it has been going on for some time, like Switzerland, and not brand new like in China--are taking a closer look at cash pooling and challenging MNCs on some of the niggling details. It could be that cash pools are already something of a ticking time bomb and it will only get worse with OECD BEPS. Meanwhile, MNCs with the least well-documented pooling structures (arm’s-length rate justification, intercompany loan-, deposit taking-, services agreement documentation, etc.) may find themselves in tax court, as Bombardier did in Denmark:

    "The National Tax Tribunal found that the Danish tax authorities were allowed to disregard the transfer pricing applied by the company due to inadequate transfer pricing documentation. 

    --As a result of transfer pricing documentation being deemed inadequate, according to a PwC brief on the tax court decision last year, “an arbitrary assessment was made” where the credit rating of the group as a whole was used to find loans to comparable companies instead of the rates set by the company to be slightly less advantageous than the deposit/lending rates of external banks. The risk of these sorts of events means more, and longer, "painful" dialogue with tax.

    --US MNCs also need to consider the larger tax picture and whether they want to take such risk for small amounts of interest-optimization on off-shore cash that already has a big target on it.

When all the cost/benefit (and risk) analysis is done, cash pooling (at least in some of its forms) will probably still make sense to pursue. However, this is something that MNCs should do rather than blindly filling up a pool.



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