Stefanie Perrella and Beau Sheil Published in AFP Exchange – Managing the Tax Risks of Cash Pools

Stefanie Perrella, Managing Director, and Beau Sheil, Director, in Duff & Phelps’ Transfer Pricing practice, authored an article in the Summer 2019 issue of Association for Financial Professionals (AFP) Exchange titled, “Uncharted Waters: Managing the Tax Risks of Cash Pools”. Cash pooling is a solution many treasury professionals use as a means for optimizing cash management. It is often the responsibility of a treasury department rather than tax specialists to coordinate with a third-party bank to set up a cash pool, and as a result, certain embedded tax risks and planning opportunities can be overlooked.

By their nature, cash pools (both notional and physical) result in intercompany account balances. While the interest rates paid or received by cash pool participants on these intercompany balances may not impact what is paid to the third-party bank or directly impact the multinational’s overall pre-tax cost of funds, there are tax consequences from these rates. Tax authorities will be concerned that non-arm’s-length interest rates could potentially reduce the taxes owed in their jurisdiction. Given this, companies need to determine arm’s-length rates that conform with the tax rules in the jurisdictions of all parties involved to minimize tax risk (i.e., potential income adjustments, penalties, double taxation).

While the relevant tax regulations vary by country, the Organization for Economic Cooperation and Development (OECD) publishes global standards for all types of intercompany transactions. Many jurisdictions follow the spirit of this guidance, and some simply adopt it as law. Recently, the OECD published a discussion draft, which included proposed frameworks for how companies and tax authorities should analyze cash pools. The United Nations also recently released a new proposed chapter on intra-group financial transactions. The attention of these bodies on this topic is indicative of the growing tax scrutiny on intercompany financing structures.

Read the full article here.

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