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In the current economic environment, liquidity management is a key function for multinational corporations. Many multinationals operate some form of group treasury structure, such as centralized or regional treasury centers; in-house banks; foreign exchange (FX) centers; and payment factories, which are central units that execute payments on behalf of one or more subsidiaries. Through these various treasury structures, multinationals undertake activities like centralized lending, payment management, risk management, and FX hedging.

For short-term cash management, cash pooling is often the most effective way to optimize both excess and deficit cash positions within a group of companies. By allocating internal funds, rather than depending entirely on external sources, a large business can minimize its interest costs overall. Moreover, cash pooling can lead to significant savings when the group marshals its combined market power in dealing with external banks and through centralization of cash management, which may lead to economies of scale.

But when a cash pooling system straddles multiple countries and currencies, it gives rise to a range of tax issues. One of the more complicated issues is transfer pricing, which evaluates the intercompany payments and allocation of benefits that are inherent in a cash pooling structure. Tax authorities around the world are keenly interested in transfer pricing, as many are focusing increasing attention on protecting their tax base. Although cross-border cash pools have proliferated since the introduction of the euro, we are far from reaching consensus on the proper transfer pricing treatment of these arrangements. In some cases, different countries have taken inconsistent approaches to transfer pricing, increasing the challenges for multinational corporations’ treasury functions.

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