Notional pooling allows companies to combine their bank accounts for interest, benefiting those with decentralized structures and subsidiaries. It can reduce tax burdens and avoid transfer fees, while subsidiaries retain autonomy and credit ratings improve. However, not all countries allow it.
Notional pooling is a way for a company to pool its various bank accounts together to earn combined interest. It benefits companies with decentralized structures and those with several subsidiaries. The option to group accounts is not available or legal in all countries. The cash pool is based on large multinational banks that can facilitate cross-currency accounts.
Large national and multinational companies are often made up of a complicated arrangement of parent companies and subsidiaries. Subsidiaries may be companies formed to do a different job, or they may have been purchased and then integrated into the parent. Without bundling these companies together, their accounts would have to be managed separately.
A bank creates a notional pooling account when a business decides to pool the surpluses and deficits in each of its accounts. The accounts maintain their independence from each other, but the bank creates a notional position as if they were combined. If the set of all accounts results in a surplus, the company earns interest. If the total is past due, the bank charges interest.
Each account within the notional pool position will receive interest based on its contribution to the total pool. If Subsidiary A, for example, earns 40 percent of the group’s interest, then it receives the same amount of money. The same applies to deficit charges.
As subsidiaries are often based in different countries with different tax regimes, they will face different taxes against what they earn. These taxes are charged against earnings and usually come in the form of a capital gains tax. Notional pooling allows the parent company to charge fees to each subsidiary to effectively move money from a high-tax area to a low-tax area. This method allows companies to reduce their tax burden and may explain why some governments do not allow notional pooling.
Withdrawing from a notional pool agreement is relatively easy. It gives companies the flexibility to use cash pooling to maximize interest generation or to offset losses at one of their subsidiaries with surpluses at others. By bundling instead of transferring cash, businesses can avoid bank transfer fees. Partially owned subsidiaries also find notional bundling nice because it means they don’t have to transfer money to a company they don’t control.
Other advantages of the notional pool include the ability of subsidiaries to retain their local autonomy. It also helps reduce the need for businesses to set up overdraft lines with local banks, as shortfalls in other accounts can negate shortfalls. The combined cash total of all accounts provides a single liquidity position. This means that the subsidiary’s credit rating improves with the full amount of cash accumulated, but the company still retains full control over the cash in its separate account.
Smart Asset.
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