In February 2021, the Organisation for Economic Co-operation and Development (“OECD”) issued a handbook linked with the official roll-out of its International Compliance Assurance Programme (“ICAP”). ICAP was first introduced as a pilot in January 2018 (“ICAP 1.0”) as a voluntary program where MNE groups may receive “comfort and assurance” from multiple tax administrations as to the veracity of the MNE group’s transfer pricing allocations and numerous types of international transactions. While some notable countries did not participate in ICAP 1.0 (for example, Germany), the pilot program received positive reviews by a number of MNE groups. In March 2020, the OECD enhanced the pilot program (“ICAP 2.0”) to encourage more countries to join. On March 22, 2021, the OECD announced an initial list of twenty countries that are participating in the official program.
While ICAP does not provide the legal certainty of an advance pricing arrangement (“APA”) or Mutual Agreement Procedure (“MAP”), ICAP does provide MNE groups the opportunity to receive a risk assessment and potential assurances from tax administrations that they intend to exclude the covered transactions from future audit. Thus, ICAP offers a MNE group an opportunity for its international transactions to be anointed by multiple tax administrations in a single forum, and potentially avoid future costly audits.
Eligibility and Benefits
To be eligible for ICAP, a MNE group’s ultimate parent entity (“UPE”) generally must be located in one of the twenty participating countries and be subject to a Country-by-Country reporting filing requirement. Based on these requirements, MNE groups with US UPE’s are eligible. According to a recently published FAQ, taxpayers in the United States can begin the process by contacting the IRS at email@example.com for an initial consultation before submitting any application materials. But selection occurs on a case-by-case basis, and participation is also voluntary on the part of the various tax administrations involved. At least three tax administrations must agree to participate in the process. As a result, there is no guarantee that an MNE applying to join the program will be accepted or that a sufficient number of tax administrations will agree to participate.
Although ICAP provides neither guaranteed access nor legal certainty, it still offers some distinct advantages over the programs it is intended to supplement—APAs and MAPs. Similar to APAs, a taxpayer can proactively pursue ICAP pre-audit, rather than wait for the formal proposed adjustment normally needed to access MAP. In addition, while APAs are limited to transfer pricing issues, ICAP allows numerous types of international tax issues to be addressed. These include issues such as permanent establishment risk, hybrid mismatch arrangements, withholding taxes, and treaty benefits, in addition to transfer pricing risks. Further, the OECD intends ICAP to be used to complement APAs and MAPs with the view that introducing issues at a risk assessment stage allows ICAP to facilitate further action. This may include helping a MNE group identify covered transactions suitable for a bilateral or multilateral APA or to improve consistency between tax administrations and reduce the need for MAP relief. Thus, ICAP could become a particularly useful and efficient new tool for many taxpayers.
Finally, the OECD has highlighted ICAP in its Pillar One blueprint materials as an important program to achieve its “dispute prevention and resolution” goals with respect to issues beyond “Amount A.” And with respect to Amount A (i.e., the new taxing right that Pillar One seeks to create), it is worth noting that while the OECD has not yet finalized a proposal for preventing and resolving disputes, thus far it has proposed a voluntary review system remarkably similar to ICAP. Thus, if nothing else, ICAP may be an important learning experience for taxpayers prior to the adoption and implementation of Pillar One, which could begin taking shape soon after the OECD finalizes its blueprint as expected this summer.
The ICAP programs lays out three distinct stages: 1) selection, 2) risk assessment and issue resolution, and 3) outcomes. The selection stage begins when the MNE group submits an initial documentation package that includes a CbC report, master file, and a completed standard ICAP template information request. The OECD expects the selection stage to take four to eight weeks. As noted above, at least three tax administrations must agree to participate in the process.
Risk assessment and issue resolution is the second stage and the heart of the ICAP program. Participants submit a full documentation package at the start of this stage, including schedules providing details of the covered transactions, a CbC report self-assessment, local files, and audited financial statements—among others. The OECD instructs that the comfort level ICAP may provide depends on the level of detail a MNE group is willing to provide and how much time the MNE group is prepared to spend. During this stage, the taxpayer and tax administrations will conduct a series of multilateral calls or meetings where the tax administrations are expected to work together to agree on the correct treatment of a covered transaction. If the tax administrations determine that they will not come to an agreed conclusion, they are still permitted to provide their separate conclusions. Further, a tax administration is permitted to stop its risk assessment at any time if it determines it cannot comfortably reach a conclusion. The targeted timeframe for risk assessment is twenty weeks.
In the third stage, the lead tax administration issues a completion report that includes an outcome letter from each covered tax administration. Each tax administration’s outcome letter typically addresses: 1) a risk rating, 2) any agreement reached as part of the resolution process, 3) a description of covered transactions determined to be low-risk, 4) a statement, as appropriate, that the tax administration anticipates excluding the covered transactions from future audit, and 5) any caveats or limitations. The outcomes stage is expected to take four weeks. So all in, an appropriately prepared ICAP participant could complete the program in twenty-eight weeks.
Although ICAP lacks the legal certainty of APAs and MAPs, it may become a useful tool for taxpayers seeking reduced risk for financial restatements and exposure to lengthy and costly audits. The submission period for the first ICAP cycle has already begun and MNE groups wishing to participate must submit their materials by September 30, 2021. When ICAP 2.0 was announced in March, 2020, some MNE groups were not selected in part to limit the number of MNE’s in the pilot. Now that ICAP is past its pilot stage and twenty countries are participating, MNE groups may want to consider or reconsider participating in ICAP soon.
 Currently, the countries participating in ICAP are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Russia, Singapore, Spain, United Kingdom, and the United States.