Banks and cash-pooling
Banking on Tax, Issue 7
Cash-pooling arrangements raise a number of tax and regulatory issues to be considered by a bank when it facilitates a cash-pooling arrangement for a corporate client. For example:
- What is the impact of cash-pooling on the bank’s regulatory capital position?
- What is the relevance of the general anti-avoidance provisions to cash-pooling?
- What is the bank’s exposure to the promoter penalty regime?
- What is the impact of withholding taxes?
We consider each of these issues below.
Regulatory capital impact
The regulatory capital impacts of cash-pooling within a single jurisdiction tend to create fewer issues than cross-border cash-pooling (although issues of netting still need to be considered for inter-country cash-pooling arrangements). However, an emerging issue for cross-border cash-pooling arrangements is where the prudential regulator in the jurisdiction of the “header company” of a cash pool, requires a bank to maintain independent systems and regulatory capital for transactions that might, absent cash-pooling, have been undertaken in a bank’s home country. For example, the prudential regulators in certain Asian jurisdictions require a bank’s systems and capital obligations to be met as if that jurisdiction was self contained. Cross-border cash-pooling has the capacity to increase the capital obligations of a bank, where Australia and the foreign jurisdiction both require the maintenance of capital in their respective jurisdictions.
General anti-avoidance provisions
If a bank participates in a cash-pooling arrangement, it is difficult to see how the general anti-avoidance regime (GAAR) could apply to it (absent some unusual factual matter peculiar to a particular corporate client). Whether or not the GAAR could apply to the corporate participants of a cash-pooling arrangement is less obvious. However, if a corporate participant enters into and conducts cash-pooling for commercial reasons unrelated to tax, then the GAAR should not apply to participants in a cash-pooling arrangement.
Promoter penalty regime
Notwithstanding that the GAAR may not apply to a bank that participates in a cash-pooling arrangement, a bank would still need to be aware that it may still have an exposure to promoter penalties (i.e. where a cash-pooling arrangement is entered into and conducted by a corporate client with a tax avoidance purpose, including withholding tax). Promoter penalties were introduced to deter the promotion of tax-avoidance arrangements. A bank can, inter alia, be subject to a civil penalty if it promotes a tax-exploitation scheme. For a scheme to be a tax-exploitation scheme, two conditions must be satisfied. The first condition is that it must be reasonable to conclude the bank entered into a cash-pooling arrangement with the dominant purpose of obtaining a scheme benefit. The second condition is that it must not be reasonably arguable that the scheme benefit was available under the tax laws. Accordingly, cash-pooling arrangements facilitated by a bank for commercial benefits (unrelated to tax) for their corporate clients should not expose a bank to promoter penalties.
The form and structure of cash-pooling arrangements can result in significantly different interest withholding tax outcomes, both for the bank and for the corporate participants. For example, cross-border notional pooling into an Australian bank can result in the elimination of withholding taxes; compared to, say, an on-shore header company, where withholding tax could arise on arrangements between the on-shore header company and other foreign pool participants. A bank facilitating such arrangements should ensure that it is facilitating the arrangement for reasons unrelated to minimising withholding tax.
Other issues to consider
Other taxation and regulatory issues that a bank involved in cash-pooling arrangements should consider include:
- Transfer pricing (with minimal guidance from the Australian Taxation Office and the Organisation for Economic Cooperation and Development – which has the potential for authorities to take differing positions, potentially resulting in double taxation)
- Dealing with information requests from taxation authorities, particularly where there are cross-border confidentiality obligations
- Whether the bank is appropriately indemnified for unexpected adverse taxation and regulatory outcomes.
Cash-pooling arrangements are becoming increasingly sophisticated, and more widespread. Accordingly, the taxation issues arising out of facilitating cash-pooling arrangements, particularly cross-border cash-pooling arrangements, will require tax input from the early stages of development.