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Switzerland: Analyzing a cash pool from a transfer pricing perspective

Switzerland: Analyzing a cash pool

The Organisation for Economic Cooperation and Development (OECD) in February 2020 issued a report, “Transfer Pricing Guidance on Financial Transactions” that among other things, provides clear guidance on what elements to consider when analyzing a cash pool from a transfer pricing perspective.

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Hence, the OECD report is particularly relevant for multinational groups that have put in place a cash-pool structure.

What does the OECD report say about cash pools?

  • Is the cash pool beneficial for the participating parties? It is not to be taken for granted that participating in a cash pool is always beneficial. It is important to substantiate that the cash-pool participants actually benefit from the cash pool. Hence, an analysis would also consider the options realistically available for the cash-pool participants (such as opening a bank account at a local bank).
  • What does the cash-pool leader do? The remuneration of the cash-pool leader would depend on functions performed and risks assumed. The role of the cash-pool leader can vary between two extremes:
    • A mere service provider, with limited co-ordination functions
    • An in-house bank and profit center, which also means much more complex functions and risks

In the first instance, when the cash-pool leader’s role is limited to co-ordination functions, it would need to earn a reward commensurate with the service functions it provides to the pool.

In the second situation, the cash-pool leader is entitled to a fee that rewards the cash-pool leader for its activities and assumed risks that go beyond mere co-ordination. This may include earning part or all of the spread between the borrowing and lending positions.

  • Is there a guarantee in place? The particular facts and circumstances of the guarantee arrangement would always need to be considered, placing a special focus on the control and management of the risks assumed by the guarantor(s) and the benefit derived from the arrangement.

In the case of cross-guarantees, it is likely that individual participants have no control over the amount of the debt, or information about the other participants of the cash pool guaranteed. This uncertainty could become an issue from both an arm’s length and from a Swiss Commercial Law perspective.

  • Have the cash-pool transactions been delineated from other inter-company funding arrangements? Taxpayers need to consider having a treasury policy in place that governs long and short-term inter-company funding.
    • Short-term inter-company funding can be resolved with revolving loans or cash-pool structures.
    • Long-term funding needs would be met with term loans. 

In this context, taxpayers would want to determine that their cash pool is not used for long-term funding, in order to avoid potential interest rate adjustments and tax assessments.

What’s next?

Tax authorities scrutinize cash-pool arrangements more frequently. An adequate transfer pricing documentation is required in order to fulfill the OECD requirements. Taxpayers, therefore, would want to provide context and detailed information on the structure and the pricing policies of the whole cash pool, making sure that the cash-pool pricing policies are well substantiated and aligned with the functional profiles of the cash-pool leader and cash-pool participants. This will help guard the hard-earned benefits of the cash pool by limiting the tax exposure in the respective countries.


Read a September 2020 report prepared by the KPMG member firm in Switzerland

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