Cash pooling during and in the aftermath of the Covid-19 pandemic

As businesses across the world struggle to deal with the economic impact of the Covid-19 pandemic, liquidity and freeing up much needed cash resources has become the main concern for many businesses.

17 Nov. '20 Neha Mohan

MNEs have had to amend their existing financing arrangements and deploy alternative strategies to preserve liquidity. Centralized MNE management is more involved with managing cash pools as cash pool participants making withdrawals at the same time can (quickly) exhaust the credit limit of the cash pool. Along with this the probability to incur losses derived from the default of cash pool members with debit positions (to bear the credit risk) has increased. Cash pool participants might have to rely on additional short-term group financing and cross guarantees (in relation to third party lending) for emergency liquidity. This may affect the taxation of the existing cash pooling arrangements, in terms of benefit and risk allocation. In this regard, MNEs with cash pool arrangements during the Covid-19 pandemic should take note of the following considerations:

  • Remuneration of the cash pool leader (as centralized management involvement increases)
  • Long-term debt and credit positions (probability of default increases)
  • Alternative benefit allocation (focus on long term deposits)
  • Are guarantees during the Covid-19 pandemic still implicit support?
  • Increased necessity for cash pooling arrangements (to facilitate the cross-border liquidity management)
  • Short-term liquidity needs may drive transfer pricing

Neha Mohan

Neha Mohan is a Tax Adviser at NovioTax.

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