702Vo.14.No.17) IN PRACTICE Figure 1 shows that arms length credit and debit in asymmetrical situation when total balances diverge, the terest rates differ significantly in situations in which lower of the credit or debit balance(that is, the scarcer matching balances are low(for example, Month 3)or, factor in the generation of the joint efficiencies) should in other words, the mismatch of balances is high. In receive the higher interest spread advantage from the those situations, spreads are distributed very asym-pool Limitations of the Analysis balance, the interest advantage of a debtor is almost The allocation mechanism for the profit split focuses zero(0. 12 percent annualized) whereas the interest ad on the pools residual profits that are not directly attrib vantage of a creditor is comparatively high (0.48 per- utable to individual members. In deriving joint interest cent annualized) show almost identical balances, which indicates that matching benefits are high and arms-length spreads in a situation in which some members are in a perma between pool and market interest are almost identical nent borrowing position to the pool, credit risk may be for debtors (0.84 percent annualized) and creditors come an issue, which should be reflected in higher debit (0.96 percent annualized) interest rates for those members(see Fn. 4) Conclusion quantified on an individual basis by using capital mar ket instruments (for instance, by looking at money mar This article developed arms-length pricing rules for ket or bond market spreads over risk-free assets). As cash pool transactions by using profit split methodol- credit risk is directly attributable to debtors, risk- ogy. It argued that profit split is a reasonable method to appropriate spreads should be added to the cash pool debit interest rate to arrive at individual arms-length a cash pool generates joint efficiencies. As contributions can be observed and measured easily a general alloca Economies of scale and risk diversification, which tion scheme was established are sometimes mentioned as economic reasons for As a central rule, spreads between pool and market building up a cash pool, have not been investigated ex- nterest rates should equal the inverse proportion of licitly The rationale behind those arguments is that a creditors'to debtors'total balances Given market inter pool would negotiate more favorable interest terms for est rates and pool administrative costs, arm's-length its members than members would do individually. If ad- pool interest rates should reflect the magnitude of ditional sources of joint efficiencies exist in a cash pool, credit and debit balances. Arms-length credit(debit) the associated portion of the residual profit would need interest generally should be high (ow)in a symmetrical to be allocated based on an allocation scheme similar to situation when credit and debit balances equalize. In an I the one derived here 1221-05 Copyright o 2005 TAX MANAGEMENT INC, a subsidiary of The Bureau of National Affa TMTR ISSN 1063-20