Treasury management and cash pooling: how is the COVID-19 crisis affecting transfer prices? Treasury management and cash pooling: how is the COVID-19 crisis affecting transfer prices? Treasury management and cash pooling: how is the COVID-19 crisis affecting transfer prices?

The economic downturn triggered by the COVID-19 pandemic is affecting wide swathes of sectors and companies. In particular, the treasury departments of multinationals have needed to boost their liquidity levels to cope with this unstable economic environment and meet their short- and medium-term financial obligations.

Treasurers have a range of strategies at their disposal to address liquidity issues. These include, for instance, reducing overhead costs, eliminating unproductive assets and refinancing debt, as well as adjusting working capital, modifying debt terms, or using a cash pool. However, many of these strategies trigger transfer pricing consequences that shouldn’t be ignored.

Let’s take a closer look at cash pooling from a transfer pricing perspective. This commonly used strategy allows for a more efficient use of cash and a reduction of external funding through concentrating the affiliated entities’ cash in one place. Intragroup cash pool positions are normally short-term and should be priced at arm’s length.

Several transfer pricing considerations arise with cash pooling, such as: can certain advances/deposits be considered long-term rather than short-term and be priced accordingly? And, is the contribution of the cash pool participants rewarded accordingly?1

The COVID-19 pandemic also highlights the uncertainty of interest rates used in the context of cash pooling, as their volatility has significantly increased over the last few months. Both short- and medium-term interest rates have not yet returned to their pre-COVID-19 levels. This trend can be seen across multiple sectors and credit ratings, as shown in Table 1 (industrial companies) and Table 2 (real estate companies).

The most significant rate increase was registered when most European countries first locked down, i.e. from mid to end March 2020. Once lockdown was over, interest rates started to decrease, demonstrating the market’s positive reaction to the measures taken to fight COVID-19. However, interest rates remain higher compared with the same time last year. Therefore, the market’s effect on cash pool activities is immediate and must be reflected in cash pool participants’ current advances/deposits.

These tables demonstrate that, from the beginning of September 2020, the yields for both industries and Standard & Poor’s BBB, BB and B credit ratings remain at least 170% higher compared with November 2019 levels. For example, if we analyze  the yield for BB for industrial companies, the yield is 1.12% as of 1 September 2020 compared with 0.26% as of 1 November 2019. This can also be seen in the yield for BB for real estate companies, which is 1.54% as of 1 September 2020 compared with 0.53% as of 1 November 2019.

International groups often have a transfer pricing policy in place for their intragroup transactions. However, this pricing policy is not necessarily changed every year, nor the interest rates applied to the cash pool advances/deposits. Over the last few years, this wasn’t necessarily an issue as interest rates remained relatively stable. Now, however, when considering the current pricing of their cash pool position, treasurers should not only consider the drastic increase in short-term rates but also the pricing of any other intragroup financing.

Given the high volatility in the market due to the COVID-19 pandemic, special consideration should be given to pricing intercompany financing transactions. Any treasury management measures involving intercompany pricing that were implemented before the pandemic should be updated to reflect these new market conditions.

Also, organizations should launch a broader review of intercompany transactions to explore new opportunities for refinancing long-term loans and to ensure companies can assume additional debt or a change in their terms and conditions. By harnessing our deep knowledge and experience in the market, KPMG can help you ensure the arm’s length nature of these transactions.

If you have any questions or would like additional advice, please get in touch.

1The new chapter X of the OECD Transfer Pricing Guidelines was issued in February 2020, providing specific guidance regarding financial transactions, including cash pool structures. One of the issues raised is whether certain debit or credit positions of cash pool members, despite being booked as short-term, should be considered as having a long-term nature and be repriced accordingly