IN PRACTICE (Vol.14,No.17 699 OECD Guidance the pool. K only covers indirect items that are not di ectly attributable to individual pool members. Direct The Organization for Economic Cooperation and costs such as transaction costs in connection with the velopment transfer pricing guidelines acknowledge members bank accounts(for instance, fees for money that interrelated transactions may not be evaluated on a transfers, foreign exchange)will be charged directly to separate basis. Under those circumstances, indepen the members and will not be included in the pool inter dent enterprises might agree to a form of profit split est ra Profits should be split on an economically valid basis Based on above definitions, the cash pool profit, Il, at Contributions should be evaluated in respect of the in.a given point in time can be expressed as tangible property employed. A division of profits also may be derived from economies of scale or other joint (1)Ⅱ= Min(C,d)×(r-r)-K. efficiencies. Based on the principles set forth in the In Equation (1) Min(C, D) denotes the minimum of OECD guidelines, the profit split method can be reason- the total credit or debit balance; in other words, it rep- ably applied to cash pooling transactions because esents the pool's matching balance On th e matchin a cash pooling transactions are highly interrelated in balance a spread between market debit and credit inter he sense that interest advantages can be realized only est(r-r*)is earned. This term represents the joint in when there are both debtors and creditors to the pool; terest savings of the pool compared to a situation with a efficiency gains are generated jointly by all pool separate bank accounts. The pool profit actually is a re sidual profit after reducing the pool administrators a the allocation of efficiency gains can usually not be arm's-length remuneration for performing routine type determined by reference to independent transactions of administrative functions. The arms-length compen and sation for such routine activities will be included in K a pool members' contributions are purely monetary Now let ri be the transfer price of the pool in re- and can be easily observed and measured as they are spect to the balance of creditor i,(that is, the pool's linked to pool accounts' cash balances credit interest granted to creditor i) and let ri: denote Cash pooling systems are rather homogeneous in the debit interest of the pool charged to debtor j. Then, hat they are all subject to the same value creation prin he benefit of a typical creditor i is ciple(that is, the generation of interest advantages (2)x=c1×(r-r+), through matching of balances). Therefore, a common model framework for applying the profit split method wherer indicates the interest advantage a member receives when participating in the pool can be established Analogously, the benefit of a typical debtor i can be calculated as follows Basic Model framework A cash pool consists of a given number of members The interest advantages of creditors and debtors in which are either debtors or creditors to the poow ao gf can achieve when lending money to the pool, ci, or bor- Equations(2)and (3) are derived from the spreads they be the number of creditors to the pool at a given poi in time and let m stand for the number of debtors. with rowing from the pool, d, instead of keeping their sepa- out loss of generality, it will be assumed that n and m rate bank accounts or going to the money market.Be may vary from time to time. Further, let C denote the credit balance of creditor ii=l.,, n, and let spreads are solely determined by choice of pool interest rates. Hence, r and r; are the relevant transfer prices through which the allocation of pool profits among in- dividual members is established Due to the pools overall budget restriction, the ben- e the sum of pool creditors'balances. Analogously, efits received by creditors and debtors must equal the d, represents the debit balance of debtor j, j pool profit (4) 129+12=∏ D=∑d Application of Profit Split is the sum of pool debtors balances. Assume that r and r are the market (bank) interest rates on the pools Having set up the basic model framework, the next master account for positive and negative pool balances, steps will be to Hbpectively. The costs of the cash pool is denoted as K, a calculate individual contributions to the pool ch represents all administrative expenses (including a for each individual pool member, set contributions an appropriate mark up to the pool administrator equal to benefits; and based on the cost-plus method) that are not directly at a derive arm' s-length interest rates such that pool ial guarantee costs to cover credit risk associated with their individual contributions. ool members according to OECD, Transfer Pricing guideline In the following, assume that all pool members are similar terprises and To istrations, July 1995(4 Transfer Pric- in terms of credit risk. If credit risk were distributed uneven! ingi Para 3.5 of the OECD guideli Report207,8295) among the members, individualized spreads reflecting default risk would have to be added to the debit interest rates. Al Para 3.7 of the OECD guidelines other implications of the analysis remain unchanged TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 12-21-05