Pooling, the practice in which treasuries consolidatefunds from subaccounts into a central account, provides companieswith better visibility into their cash. But pooling can bechallenging to implement across national borders, in large partbecause of tax regulations.

Susan Hillman, a founding partner at Treasury Alliance Group, aChicago area-based treasury consulting firm, cautioned thatthe tax issues involved in cross-border pooling are “verycomplex and need to be vetted by each company's tax counsel.

“You're not just dealing with U.S. tax law, you're dealing withcountry-by-country tax considerations,” said.

Pooling can be either physical or notional. In physical pooling,bank accounts maintained by various units of a company are linkedto a master, or header, account. Cash is automatically swept fromaccounts with a positive balance and moved from the master accountinto accounts with a negative balance. In notional pooling, nofunds actually move between accounts. Instead, the bankadministering the pool makes accounting entries on a set of virtualaccounts.

Treasury Alliance Group estimates that physical poolingconstitutes about 80% of the pooling structures set up bycompanies. “Physical pooling has to be a single currency,” Hillmansaid. “In Asia Pacific, cross-border physical pooling is commonlyU.S. dollars, which are used for trade in many countries in theregion.”

“The one definitive thing that you can say is cross-borderpooling is a short-term cash management technique,” she added. “Itshould not be used to manage any long-term cash deficit or surpluscash positions between entities,” he said.

While there has been a greater use of cash pooling over the lastsix years, according to Jeffrey Olin, a managing director withAlvarez & MarsalTaxand, until recently, companies' tax departments were often“a little bit in the back seat” when pooling was implemented. “Thetrend we are seeing now is tax and treasury teams working moreclosely together to address the cross-border issues on the frontend,” Olin said.

That's a positive development since “we're in a world where taxauthorities are going after multinational businesses. Putting inthe correct documentation around any type of a cash poolingarrangement or any type of cash management system continues to beimportant,” he said.

Visibility isn't the only thing companies gain from pooling.Since banks charge more to lend than they pay in interest,offsetting the negative balances in some of the company's accountswith the cash swept from its other accounts saves the companymoney.

“Pooling benefits include reduction of idle cash balances andoffset of short-term borrowing costs,” Hillman said, adding thatpooling also “allows treasury to reduce the number of bank accountsand banks they're dealing with,” which can cut costs.

Layne Albert, a managing director with Alvarez & MarsalTaxand, cites the advantages that pooling can provide to companiesthat hedge their foreign exchange exposure or use other types ofderivatives.

“You're able to offset sometimes a lot of counterparty riskwithin your own cash pool before you have to go outside and hedgefurther,” he said, and noted that pooling can also play a role inthe posting of collateral. “We've seen a lot of situations wherethese cash pools can be relied upon for multiple collateralpurposes just because of the sheer size.”

Still, tax considerations are a problem.

Joseph Calianno, a partner at Grant Thornton, noted U.S. federaltax issues that could come into play.

“Some of the issues that may need to be considered includecertain anti-deferral rules, such as the subpart F rules of theInternal Revenue Code,” Calianno said. “These anti-deferral rulesmay require the U.S. parent of the foreign subsidiaries to includein income the interest income earned by the foreign subsidiarieseven if such income is not repatriated in the form of an actualdividend.”

Transferpricing is one of the top issues, said Olin of Alvarez &Marsal Taxand, pictured at left. “Transfer pricing has an impact ona cash pooling arrangement because it asks: what are the properinterest rates set between pool members? The transfer pricing rulesapply to the setting of the interest rates within a cash poolingstructure.”

“The other open question in transfer pricing is how do youallocate the benefits of a pooling arrangement,” he said. “That hasto be at an arm's-length standard.”

Another possible area of concern in transfer pricing is howcompanies' business units charge for the treasury department'sservices. “A U.S. multinational might have a fairly sophisticatedtreasury management team based in the United States,” Olin said.“If you're doing regional cash pooling that just addresses Europe,how do you charge out the treasury management services beingperformed in the U.S., such as foreign currency hedging?”

The deductibility of interest and withholding taxes is anotherconsideration in cross-border pooling, Olin said. “There are issuesabout the location of your pool leaders and how you structure thepool arrangement,” he said. “These could come under the umbrella ofwhat we in the tax world call permanent establishment. And indirecttaxes—there may be other stamp taxes, business taxes thatapply.”

Tax considerations come into play when a company decides whereto set up the pooling arrangement's header bank accounts. “It ispreferable to be in a location that has no withholding tax oninterest and has minimal or no reserve bank charges,” Hillman said.“The common locations for cross-border pool headers are London,Amsterdam and Singapore, but New York is sometimes used for USDpooling.”

One criterion for the location for a header account is theextent of the country's treaty network, Olin said, since suchtreaties generally cut the amount of withholding tax that'sdue.

“If the statutory withholding rate on interest payments is 30%,a treaty will normally reduce that to zero, or potentially 5%,” hesaid. “You get less withholding-tax drag on any of your poolingpayments that are going across borders.

“The UK is an excellent location because it has so many treatiesamong the various countries. Netherlands is another example, with avast treaty network, and Singapore, too,” Olin said.