Cash Management And Transfer Pricing

Now that you know all about cash management, you are ready to pool the cash from the divisions of your company, even if they operate in different countries. One thing you must consider first is transfer pricing. Transfer pricing is the cost charged by one division of a company to another division of the company for goods or services. The transfer price is the price that would be charged by an outside, or arms length, entity. If the transfer is between divisions in the same country, the tax implications (other than state and/or local taxes) are minimal. However, if the divisions are in different countries, transfer pricing becomes important with regards to taxes. A recent article in Treasury & Risk  highlights some potential pitfalls in cash pooling for divisions in different countries. Cash management transfer pricing presents problems because cash pooling generally results in a higher interest rate earned on the combined deposits than the rate that would be received on on individual deposits. Similarly, any borrowing is generally less expensive. Additionally, there is the fact that the parent company should receive compensation for the time, effort, and expenses put into pooling the cash. As you will read, a number of factors affect transfer pricing when pooling cash from divisions in different tax jurisdictions.