INTM503070 - Intra-group funding: group finance companies and the treasury function: Functional analysis

A full functional and factual analysis should concentrate on identifying the exact functions performed and risks borne in relation to any finance transactions.

The factual and functional analysis should start with the formal agreements relating to the operations of the treasury or group finance company. Then the caseworker should examine any other relevant documents, including less formal items such as emails which shed light on the arrangements, and look at the behaviour of both parties to the transactions to test whether the services which the treasury of group finance company has legally contracted to provide and the risks allocated are the same as those which it has in fact provided and borne. Particular care should be taken to consider whether the service agreements cover all the services provided.

The aim of the functional analysis is to establish

• the nature and level of complexity of the cash management function
• the terms on which the company borrows, whether from third parties or affiliates, and the terms on which it lends to affiliates
• the risks borne by the treasury or group finance company on its borrowing and lending activities (including forex, interest rate risks and credit risk)
• how and by whom the risks are managed (processes and costs)
• what risks the treasury or group finance company manages on behalf of other group companies (as a service, not as risks taken on). For example, the finance company may advise fellow group companies on managing financial risks. The treasury or group finance company may also provide services to other companies in the group such as setting up hedging arrangements or arranging loans with third parties.
• whether the 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

The treasury or group finance company may have prepared 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 caseworker to be satisfied as to what functions the company performs, but in other cases the functional analysis will need to be tested. 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.

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 INTM503020).