February 24, 2021
OECD Forum on Tax Administration releases new handbook for International Compliance Assurance Programme (ICAP)
On 18 February 2021, the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration (FTA) released a new handbook for the International Compliance Assurance Programme (ICAP) (the handbook). According to an OECD media release, following two initial pilot programs, ICAP will now be run as a full program, open to all 53 FTA member tax administrations. This transition to a program with open membership follows the plenary session held by the FTA on 7 and 8 December 2020.
ICAP is a voluntary risk assessment and assurance program designed to facilitate open and cooperative multilateral engagement between large multinational enterprise (MNE) groups that are willing to engage actively and transparently and tax administrations in jurisdictions where the MNE groups have business activities.
Developed under the framework of the FTA Large Business and International Programme, the first ICAP pilot was launched in January 2018, with the participation of eight FTA member jurisdictions: Australia, Canada, Italy, Japan, the Netherlands, Spain, the United Kingdom, and the United States. In ICAP 2.0, the second ICAP pilot program which commenced in March 2019, there were an additional 11 participating tax administrations: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Luxembourg, Norway, Poland, and Russia. The handbook released on 18 February 2021 was assembled based on the experience from these two pilots and from feedback provided by tax administrations and MNE groups.
In broad terms, the handbook released is very similar to ICAP 2.0, with no significant changes in scope nor in the six key drivers that underpinned both ICAP 1.0 and ICAP 2.0. The core focus areas remain, as reflected in ICAP 2.0, the assessment and assurance of transfer pricing (TP) risk, permanent establishment (PE) risk, and other categories of international tax risk (e.g., hybrid mismatch arrangements, withholding taxes, or treaty benefits) as agreed by the MNE group, the lead tax administration, and other covered tax administrations. However, the revised handbook contains some modifications to the procedural and administrative elements of the ICAP program.
Utilizing a group's Country-by-Country (CbC) reports, TP master file and local files, and other information provided by the MNE group, the aim of ICAP is to provide an efficient, effective, clear, and coordinated approach to achieving early tax certainty and assurance for MNEs. To aid in its implementation, the OECD released the new handbook for tax administrations and taxpayers potentially interested in participating to obtain further information on the program.
As was the case with both ICAP pilots, the handbook reaffirms that an ICAP risk assessment does not provide an MNE group with legal certainty, as may be achieved, for example, through an advance pricing agreement (APA). Rather, the ICAP program is intended to give comfort and assurance where tax administrations participating in an MNE group's risk assessment consider a covered risk to be low such that it is unlikely to be subject to high intensity local tax audits. Furthermore, the handbook notes that where an area is identified as needing further attention, work conducted in ICAP can improve the efficiency of actions taken outside the program, including through unilateral, joint or simultaneous tax audits, APAs or mutual agreement procedures (MAPs).
Comparison between the handbook and ICAP 2.0
As with ICAP 2.0, the handbook is comprised of seven chapters that outline the intended purpose and framework of the ICAP risk assessment process:
Covered tax administrations
Unlike the two ICAP pilots which involved respectively only 8 and 19 of the 53 FTA members, all FTA members will be able to participate in the full program, with at least one country that did not participate in the initial pilots, Singapore, already announcing its intention to participate from 2021 onwards.1 A full list of participating countries will be made available on the OECD's website by 12 March 2021 and updated as and when additional countries elect to participate.
As with ICAP 2.0, the handbook states that there is no limit on the number of tax authorities that may participate in a single MNE ICAP risk assessment — potentially allowing MNEs to achieve assurance across the majority of their operations. The number of tax authorities participating in a particular MNE ICAP risk assessment is to be determined by the lead tax administration and MNE group on a case-by-case basis. As with ICAP 2.0, the handbook recommends that a multilateral risk assessment including between four and eight covered tax administrations is likely to be the most effective.
Qualification for participation in ICAP
As with ICAP 2.0, MNEs are advised in the handbook to approach the tax administration in the jurisdiction of their ultimate parent entity (UPE) or, in the event of either non-acceptance or non-participation by their UPE tax administration, a surrogate lead tax authority in a jurisdiction where they have significant activities to discuss their potential inclusion in ICAP. However, unlike in ICAP 2.0, the new handbook does not contemplate MNEs being proactively approached by tax authorities, but rather foresees that all potentially participating MNE groups will submit their own applications to participate. This change suggests that MNEs interested in participating in ICAP are best served by starting initial discussions with the relevant lead tax authority (either UPE or surrogate jurisdiction) to determine what is involved in the process, what outcomes can be expected, and whether they would be a suitable candidate.
The handbook indicates that participating MNE groups will be able to indicate their preferences as to which tax administrations would be considered covered tax administrations under ICAP, although there is no obligation on any tax administration to agree to participate in any individual MNE ICAP risk assessment.
As an additional change from ICAP 2.0, all MNE groups will now be required to make available a "selection documentation package" to their potential lead tax administration. This package will include information such as details on the proposed covered tax administrations, covered periods and covered risks, as well as copies of the MNE's latest CbC report, TP master file, current global group structure (if not included in the TP master file) and a list of all APAs and tax rulings relevant to the proposed covered risks.
As regards qualification for participation generally, the new handbook introduces two additional criteria previously not present in the ICAP 2.0 handbook that an MNE should take into account when considering whether it is suitable for an ICAP risk assessment, namely whether:
Timing of ICAP
For MNE groups interested in applying, UPEs must discuss their possible ICAP participation with the relevant potential lead tax administration in advance of the first deadline for submission, 30 September 2021. Future deadlines currently indicated for participating include 31 March 2022 and 30 September 2022, with additional deadlines to be released on a rolling basis. On that basis, ICAP effectively moves from an annual intake to a biannual intake process.
For MNEs that intend to participate in ICAP, it is expected that a risk assessment will be completed by the covered tax administrations, and outcome letters will typically be issued by participating covered tax administrations within 24 to 28 weeks following delivery of the main documentation package by the MNE at the start of the risk assessment and issue resolution stage. This can be compared favorably with the timeframes of alternative dispute resolution mechanisms such as domestic audits and litigation, APAs, or MAPs.
The handbook notes that the periods eligible for review in an ICAP risk assessment are an MNE group's tax filing periods for which they have been required to file a CbC report or have voluntarily filed a CbC report under parent surrogate filing rules. In line with ICAP 2.0, the specified period or periods to be included in a particular MNE group's ICAP risk assessment (the covered periods) will be agreed between the MNE group, the lead tax administration and other covered tax administrations and may therefore vary. However, while the handbook that accompanied ICAP 2.0 stated that it was anticipated that, in most cases, an ICAP risk assessment would focus on a single covered period, the handbook now states that it is anticipated that most ICAP risk assessments are likely to cover either a single or two consecutive covered periods (usually the two most recent periods for which the necessary documentation is available).
As with both ICAP 1.0 and 2.0, the handbook states that the program is also forward-looking, meaning that it is intended such that covered tax administrations will typically aim to provide tax assurance to an MNE group with respect to relevant covered risks not just for the covered periods but also for the two immediately subsequent tax filing periods (the roll-forward periods), assuming there are no material changes in circumstances. This assurance is indicative of a risk assessment-focused approach by covered tax authorities during the roll-forward periods rather than the complete absence of domestic tax reviews or audits. Covered tax administrations can also specify the applicable roll-forward periods in the outcome letter they issue at the end of the risk assessment.
Covered risks and covered transactions
Covered risks and covered transactions under the handbook are largely identical to those in ICAP 2.0, covering risks associated with TP, PEs, and other international tax issues as agreed between the MNE, the lead tax administration, and the covered tax administrations. The only noteworthy difference is that the handbook further stresses the fact that the ICAP risk assessment received by an MNE only applies to the covered risks from the perspective of the covered tax administrators. To the extent that the covered risks affect MNE entities or activities in jurisdictions that did not participate in the ICAP risk assessment, no assurance can be given for those entities or activities in those non-participating jurisdictions. Given certain covered tax risks, such as TP risks, necessarily involve the existence of intragroup counterparties, there is no guarantee that an MNE will be able to secure assurance on the treatment of all covered transactions in all the jurisdictions that may seek to risk assess the MNE.
Further information, including more frequently asked questions and a list of participating tax administrations, will be made available by the OECD on a dedicated ICAP webpage during March 2021.
ICAP awareness sessions
The OECD will hold virtual OECD ICAP Awareness Events on 30 March 2021 at 09:00 (CEST) and on 1 April 2021 at 17:00 (CEST) for MNE groups to learn more about the program and ask any questions they may have.
ICAP application dates
For MNE groups interested in joining the program, the parent company should contact its local tax administration where it is tax resident to discuss possible ICAP participation in advance of the first deadline for submission. The upcoming dates to submit an application to participate are 30 September 2021, 31 March 2022, and 30 September 2022. Future deadlines will be released in due course.
With the release of this handbook, the OECD has now concretely positioned ICAP as providing "comfort" as opposed to "certainty," in comparison to existing cross-border dispute resolution processes such as APAs, joint and simultaneous tax audits, MAPs, and arbitration, all of which are intended to eliminate rather than simply lessen risk.
As noted above, however, the ability for MNEs to receive outcome letters within 24 to 28 weeks following delivery of their main documentation package, which is itself typically less information than required during an APA, tax audit, or MAP, and after a single round of risk assessment and issue resolution by the covered tax authorities, may be viewed by some MNEs as being a significant benefit of the ICAP process. By way of comparison, the OECD's MAP statistics for 2019 indicate that the average TP MAP case took approximately 30.5 months to resolve.2 Moreover, the fact that an ICAP risk assessment can involve an effectively unlimited number of tax authorities from within the FTA network means it is one of the most multilateral tool available to MNEs — allowing for comfort to be obtained in numerous jurisdictions in a concurrent and collaborative way. Finally, participants in the earlier pilots have indicated that the comfort they received had a wider impact on their controversy risk than just the participating jurisdictions.
There is also the opportunity for ICAP to complement other existing methods of dispute resolution. For example, during subsequent domestic tax audits, both by covered tax authorities and other jurisdictions, MNEs may be able to leverage existing risk assessments and document collation completed through ICAP processes to strengthen their position and shorten timeframes. Further, MNEs may use ICAP to identify suitable covered transactions for bilateral and multilateral APAs or MAP applications or to supplement existing or future APA or MAP negotiations.3
Interested groups should review the ICAP handbook to identify potential challenges and opportunities, specifics of eligibility and applications requirements.
For additional information with respect to this Tax Alert, please contact the following:
Ernst & Young Solutions LLP, Singapore
Ernst & Young LLP (United States), Washington, DC
Ernst & Young LLP (United States), Greenville, SC
Ernst & Young LLP (United Kingdom), Global Tax Desk Network, London
Ernst & Young Belastingadviseurs LLP, Rotterdam
1 See Inland Revenue Authority of Singapore ICAP information page, About the International Compliance Assurance Programme.
2 See OECD Mutual Agreement Procedure Statistics for 2019.
3 See EY Global Tax Alerts, OECD releases 10th batch of peer review reports on BEPS Action 14 related to improving dispute resolution, dated 17 February 2021, and OECD holds public consultation on review of minimum standard on dispute resolution under BEPS Action 14, dated 3 February 2021.