Bombardier cash pool decision

The Danish Administrative Tax Tribunal has issued a decision regarding the transfer price of a cash pool arrangement.

The Tribunal rules mostly in favor of the Danish Tax Authorities and bases the transfer price interest rate on a net cash balance instead of determining different rates for simultaneous loans and deposit. Furthermore, the transfer pricing rate is fixed as the same rate, whether it is a net deposit or a net loan.

The case involved a Danish subsidiary of the Canadian Bombardier group. The Danish subsidiary had entered into a zero balancing cash pool arrangement with a Swiss subsidiary as cash pool administrator.

A zero balancing cash pool arrangement is an arrangement, where all surplus liquidity is physically transferred each day to the account of the cash pool administrator, i.e. the Swiss subsidiary.

The cash pooling arrangement was based on a daily overnight bank rate plus a spread. The spread was -0.5% on the subsidiary’s deposits and +1.15% on loans from the cash pool administrator.

All deposits and loans where unsecured and the Swiss cash pool administrator did not have an independent credit rating, but the Bombardier Group had a rating of Ba2/BB.

Under the cash pool arrangement it was possible to place deposits for shorter or longer term at more favorable rates.

The Danish subsidiary had mostly a surplus of cash and deposited amounts on short term agreements. In some periods the Danish subsidiary had deposited too many funds under such short term agreements and hence needed to borrow funds from the cash pool administrator at the +1.15% rate. This was due to insufficient liquidity management.

Besides from these problems with liquidity management the Danish subsidiary had a surplus of liquidity in the whole period in question under the tax audit, except from two months.

There was no Transfer pricing documentation explaining how the transfer pricing rates where determined.

The Danish Tax Authorities disregarded the difference in spreads on the short term deposits and the simultaneous corresponding loans (borrowed due to insufficient liquidity management), thus equalizing the rates.

Furthermore the Danish Tax Authorities calculated a transfer pricing rate on the net balance of the deposits. The Danish subsidiary had in the period in question a positive net balance in all months, except two months.

The transfer pricing rate was based on a search on Loan Connector based on the credit rating of the Bombardier Group, 364 days revolving credits and 1-12 months maturity.

This search resulted in an average spread of 1.18% which the Danish Tax Authorities set as the transfer pricing rate on the net balance. The Danish Tax Authorities upheld the rate of +1.15% on the net negative balance for the remaining two months.

The Tax Authorities furthermore determined a service fee payable to the Swiss subsidiary for administrating the cash pool agreement calculated as 0.25% on the gross balance of all deposits and loans.

The case was appealed to the Danish Administrative Tax Tribunal which upheld most of the Danish Tax Authorities decision.

Firstly, the Danish Administrative Tax Tribunal found, that the Danish Tax Authorities were allowed to disregard the original transfer pricing rate due to the lack of transfer pricing documentation.

Secondly, the financial service fee of 0.25% was upheld.

Thirdly, the Administrative Tax Tribunal upheld that the rate on the short term deposits and the corresponding loans (borrowed due to insufficient liquidity management) should be the same.

The spread on the net balance of the deposits was, however, lowered from +1.18% to + 1.15% equal to the borrowing spread. The Administrative Tax Tribunal did not, however, criticize that the search made by the Danish Tax Authorities where based on a group credit rating rather than an individual credit rating of the Swiss cash pool administrating subsidiary.

This is the first publicised Danish decision regarding a cash pool arrangement.

It is also the first publicised decision where it is affirmed that the creditworthiness should be based on a group creditworthiness.

The decision by the Administrative Tax Tribunal is furthermore interesting because the cash pool arrangement is viewed as a revolving credit with a net balance approach rather than looking at the separate short term deposits and loans.

Furthermore, all rates are fixed at exactly the same level, no matter if it is a loan or a deposit.

This is not the same approach as the Norwegian ConocoPhilips cash pool judgment and it will be interesting to see which route other countries will follow.


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