One of Treasury's central tasks is managing liquidity. One tool to help do so is to regularly conduct in-house liquidity equalization as part of cash pooling and thereby enable efficient use of available funds. We will not examine the necessity of physical pooling for the time being as, not only due to the current interest rates, the question always remains as to what the drivers of cash pooling are and whether costs and benefits are in a reasonable proportion.
We have noticed that many companies have national cash pools in their local currency. However, often the accounts of international subsidiaries or accounts in foreign currencies are ignored so that depending on the company's business purpose, organizational form and level of internationalization, considerable cash potential goes untapped.
Accordingly, the key question is with which structure, design and type of cash pool can a company achieve cross-border centralization of its liquidity.
The starting point for answering this question is to determine whether the physical consolidation of liquidity (through zero or target balancing) or alternatively the optimization of net interest income (through notional pooling) should be the focus of cash pooling.
Difficulties in setting up cross-border pooling generally include regulatory and/or tax constraints. For instance, stamp duties and rules on minimum capitalization may need to be observed, which could restrict cross-border money transfers in certain countries. These restrictions need to be overcome by setting up alternative forms of pooling:
If automated pooling is not possible, then, for example, manual pooling can be conducted in the form of individually initiated transfers (but minimum amounts should be defined). However, if there are many manual pooling transactions, besides the costs, the need for same-day entry of the account statements is a major drawback. This, however, must be done in order to be able to monitor these minimum amounts.
One alternative is to use so-called "overlay" structures as a roof over the existing account structures. An overlay structure has the advantage that existing bank accounts or national cash pooling do not have to be changed, but excess liquidity can nevertheless be physically transferred from the accounts. Simply stated, a bank account is opened in the relevant countries by the pooling bank and this is then used for liquidity equalization in a national cash pool. Now the pooling bank can dispose over the excess liquidity and, for instance, transfer the amounts in major currencies and/or invest these funds.
Aside from questions regarding possible methods, you need to examine where the cash pool leader should be ideally located. Besides the perceived "closeness" to liquidity, tax considerations are especially important. This generally has less to do with the income tax on cash pool earnings; the focus is rather on the withholding tax on interest payments and the ability to offset it against income tax in the home country under double taxation agreements.
All these methodological, regulatory and process-related questions show that an upfront detailed and interdisciplinary analysis is necessary to identify which methods in the individual local companies of a group are ideal. This generally means that ultimately several pooling methods will need to be used at the level of the individual company, which results in a heterogeneous structure.
Author: Dr. Andreas Liedtke, Senior Manager, email@example.com
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