Transfer Pricing and Financial Transactions

S. 1321. Theoretical Background

Cash pools are widely used by multinational enterprises (MNEs) to optimize working capital. This is achieved by aggregating cash balances of a number of bank accounts held within an MNE. It creates intercompany account balances and incites discussions on how to apply the arm’s length principle since cash pooling activities are not undertaken by unrelated parties. In this theoretical context, the aspects of applying the arm’s length principle to cash pooling arrangements are explained. This section considers the guidance in the OECD Transfer Pricing Guidelines (“OECD TPG”), including the OECD’s latest guidance on financial transactions released in February 2020 (OECD FT Guidance).

1.1. General considerations

With the COVID-19 pandemic, as with other global economic crises, liquidity becomes a major area of concern for companies. Cash pooling arrangements, which have traditionally been used as short-term liquidity management arrangements, are thus especially vulnerable to these extreme circumstances. These increase the difficulties when applying the arm’s length principle on cash pooling arrangements.

Since the introduction of the arm’s length principle in the e...