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Notional pooling is a way for a company to bring its distinct bank accounts together in order to gain combined interest. It benefits companies with decentralized structures and those with a number of subsidiaries. The option to pool accounts together is not available or legal in all countries. Cash pooling relies upon large multinational banks that are able to facilitate cross-currency accounts.
Large national and multinational companies are often made up of a complicated arrangement of parent and subsidiary companies. Subsidiaries may be companies formed to do a distinct job, or they may have been purchased and then integrated into the parent. Without pooling these companies, their accounts would have to be administered separately.
A notional pooling account is created by a bank when a company decides to pool together the surpluses and deficits in each of its accounts. The accounts maintain their independence from one another, but the bank creates a notional position as though they were combined. If the aggregate of all accounts results in a surplus, the company earns interest. If the total is in arrears, the bank charges interest.
Each account within the notional pooling position will receive interest based on its contribution to the total pool. If Subsidiary A, for example, earns 40 percent of the pool’s interest, then it receives the same amount of money. The same applies to charges for deficits.
As the subsidiaries are often based in different countries with different tax regimes, they will face different levies against what they earn. These levies are charged against profit and usually come in the form of a capital gains tax. Notional pooling allows the parent company to charge fees against each subsidiary to effectively move the 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.
Backing out of a notional pooling agreement is relatively easy. It gives companies the flexibility to use the cash pooling to maximize interest generation, or to offset losses in one of its subsidiaries with surpluses in others. By pooling instead of transferring cash, businesses are able to avoid bank transfer fees. Partially-owned subsidiaries also find notional pooling agreeable because it means they do not have to transfer money to a company they do not control.
Other advantages of notional pooling include the ability for subsidiaries to retain their local autonomy. It also helps to reduce the need for businesses to set up overdraft lines with local banks as deficits can be negated by surpluses in other accounts. The combined cash total of all the accounts provides a single liquidity position. This means the subsidiary’s credit rating is improved by the overall amount of cash pooled, but the company still retains full control over the cash in its separate account.