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.
Hence, the OECD report is particularly relevant for multinational groups that have put in place a cash-pool structure.
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.
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.
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.
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
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.