Tax Implications of Notional Pooling
Notional pooling means that credit and debit balances of various companies are notionally aggregated and netted by the group’s bank, without actual transfer of ownership of the funds taking place. The following issues are associated with notional pooling:
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Notional pooling is usually considered to be a form of bank lending and treated as if interest is paid to the bank, although in fact the interest may actually be paid through intercompany transactions.
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Transfer pricing regulations require that any interest paid as an intercompany transaction is reallocated to the subsidiaries on an arm’s-length basis.
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Transfer pricing will also look into the issues of pricing for the value of cross-guarantees that would normally be paid to a third party.
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There may be withholding tax (WHT) on the interest paid through intercompany transactions.
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A debit balance in a notional pool may also be used to calculate thin capitalization ratios.
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Notional pooling requires cross-guarantees and a legal right of offset to secure the position of creditors. Strictly, both these should be charged for.
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Legal constraints, such as not allowing cross-border legal right of offset, prohibiting the co-mingling of resident and nonresident accounts or requiring central bank reporting and reserves to be maintained on a gross basis, render pooling unviable or difficult in some countries.
Tax Implications of Cash Concentration
With cash concentration, the funds move physically into the concentration account, with a resulting change of ownership. These are the major issues that arise from cash concentration:
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It creates intercompany loans and is taxed accordingly.
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No cross-guarantees or legal right of offset are required.
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Transfer pricing regulations require that any interest paid as an intercompany transaction is reallocated to the subsidiaries on an arm’s-length basis.
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There may be WHT on the interest paid through intercompany transactions.
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Thin capitalization is likely to be an issue.
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It may attract deemed dividends.
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In some countries there may be additional stamp duties on cross-border intercompany loans (for example Austria, Italy, Portugal).
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Regulations prohibiting cross-border transfers will restrict participation in an overseas concentration scheme.
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Reference accounts are a way to pool cash without transfer of ownership.
Making It Happen
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Taxation considerations should be built in at an early stage in the planning of liquidity management structures and processes.
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The best location for a cash management center will often be within a country with an extensive network of tax treaties and with no WHT on interest or dividends.
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Intra-group financial transactions should be priced at market prices (including margin where appropriate), and there should be contemporaneous independent documentation in place to support the prices used (for example, Reuters, Bloomberg, or the Wall Street Journal ). Justification of margin can be more subjective. Possible comparators might be alternative facilities offered by banks locally or perhaps bond spreads, or credit default spreads (from Markit for instance).
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Where there is a central treasury operation or an in-house bank, borrowing rates and other terms and conditions should be formalized in the same manner as they would be with an external commercial bank.
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The same applies where a parent company is obliged to guarantee a subsidiary as a means of securing the subsidiary a lower borrowing rate. The parent should charge a guarantee fee.
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Structures such as “shared service centers,” where a centralized group resource provides services to affiliates, also attract particular attention from tax authorities. Pricing and service levels should be similar to those that might be offered by a third-party provider.
- Page 4 of 4
- Previous section Withholding Taxes
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