Cash pooling: risk assessment/compliance checks
In order to understand the cash pooling arrangement of a particular customer, the CCM or caseworker should identify whether there is a cash pool, what the role of the UK entities are within the cash pool (depositor, borrower, cash pool header, etc.), and how rates are set.
The existence of a cash pool is sometimes disclosed in the statutory accounts of the UK companies.
When reviewing the statutory accounts of a depositor, particular attention should be paid to the following:
- The Director’s Report, regarding the activities of the company and its risks;
- The note on “Interest Receivable and Similar Income”;
- The “Amounts owed by fellow group undertakings” under the “Debtors” note;
- If the company is the cash pool header, consideration of the margin made on its activities.
If the figure for “Amounts owed by fellow group undertakings” is high for both the current year and the previous year, and the interest receivable is relatively low, there could potentially be a TP risk on long term deposits. However, that alone is not enough to conclude that there is a TP issue on a cash pool arrangement; further information is required. The OECD Transfer Pricing Guidelines at Paragraph 3.82 sets out what supporting documentation and contemporaneous analysis should have been prepared, depending on the size of the transaction, complexity, etc.
Key information and documents required where the UK is a depositor include:
- A reconciliation of the intercompany debtor balances which make up the “Amounts owed by fellow group undertakings”. For each of the balances:
- The nature of the deposit (purpose and term);
- Which legal entity the arrangement is with (overseas or UK), and location of the cash pool header if applicable;
- The interest rate received on any balance (if any); and
- The extent to which the balance fluctuates during the year.
- Transfer pricing documentation prepared to support the intercompany transactions relating to the cash pool.
- The legal agreements both with the third party bank, and between the cash pool header and the cash pool participant.
- Even if the cash pool header is not in the UK, consideration of UK members of the pool will still necessitate an understanding of the function of the header.