INTM507070 – Intra-group funding: group finance companies and the treasury function

Functional analysis

Having decided to commence an enquiry into a UK-based group finance company, the Inspector will need to analyse in fair detail the various functions performed by that company.

The starting point for any such analysis should be the formal agreements relating to the operations of the UK company and the services provided to fellow group companies. The Inspector should of course be prepared to test whether the services which the UK company has legally contracted to provide are equivalent to those which it has in fact provided, and in particular whether the service agreements cover all the services provided.

For CTSA years it may be that the UK group finance company has prepared or commissioned a transfer-pricing report which should contain a functional analysis of the business of the company. In some cases such an analysis will contain sufficient detail to enable the Inspector to be satisfied as to what functions the company performs, but in other cases it may be that further detail is required. For example, a transfer-pricing report may simply list a number of functions and may not indicate the relative weight of those functions, either in terms of costs to the service provider or value to the recipient.

For CTSA years for which no transfer-pricing report has been prepared the company should have given some consideration to the functions performed and how these would be rewarded at arm’s length and should be willing to share its conclusions with the Inspector.

In a case of any size and/or complexity it is advisable to request access to staff involved in providing the relevant services to fellow group companies and to ascertain their respective roles and responsibilities. An analysis of staff salaries and of their job histories may also be revealing as it should provide some indication as to the level of skill and the amount of decision-making power residing in the company (see the comments at INTM507020).

The amount of detail required to perform a functional analysis will vary from case to case but will include among other things:

• the nature of the cash management function
• the amounts of cash under management
• the terms on which the company borrows, whether from third parties or affiliates, and the terms on which it lends funds to affiliates
• the risks borne by the UK company on its borrowing and lending activities (including forex and interest rate risks and also credit risk) and how the UK company manages these risks (processes and costs)
• what risks are managed on behalf of group companies (as a separate matter from risks borne by the finance company itself). For example, the finance company may advise fellow group companies on managing forex etc. risks where they themselves are lending, and/or may assist them in setting up hedging arrangements or arrange loans for them on favourable terms
• whether the UK finance company is able to invest any structural surpluses arising from cash pooling or borrowing/lending activities, and, if so, the forms of such investment.