|Ulf Andresen||Yu Tao|
German multinationals, some with huge accumulated CNY cash surpluses in China have had difficulty with cash repatriation. They now have the opportunity to use their surplus cash by connecting their Chinese and global cash pools. Successful pilot cases have been launched both within and outside the Shanghai Pilot Free Trade Zone (entities in this zone enjoy simplified procedures) and now banks are offering cash pool linkage as a product.
Transfer pricing challenges arise from the determination of arm's-length cash-pooling interest rates for CNY, mainly because of the co-existence of onshore and offshore interest and currency exchange systems. The two markets deliver different third-party benchmarks and mixed opportunity costs for the fund providers. On the other hand, fund users are able to borrow alternative free-trade currencies at lower interest rates. Here the rate difference is primarily driven by the evolving outlook of CNY exchange rates. This situation is further complicated by the mismatched expectations of the German and Chinese tax authorities on intercompany financing interest rates, built up from their historical experience. German multinationals that are interested in exploring this cash-pooling mechanism need to consider a number of transfer pricing factors, including the selection of benchmarked markets, identification of opportunity costs, hedging policy and costs, appropriate documentation, as well as the implication of the Chinese thin-capitalisation and German interest limitation rules.