The voluntary programme is in its second pilot phase. Participants are multinational enterprises within the scope of CbCR in Austria, Belgium, Denmark, Finland, Germany, Ireland, Luxembourg, Norway and Poland, as well as to companies headquartered in the eight countries it opened to from January 2018. The programme is likely to expand in the future, too.
"We really feel that this is a great initiative," says Danny Houben, who coordinated Shell's participation in ICAP. "This is something that is the future."
"Engaging in a collaborative way with the tax authorities early on and getting certainty is really something that can prevent controversy in the future, especially in the current era regarding very rapidly changing rules in the tax space, and also tax challenges in digitalisation that we see coming," he adds.
Companies that successfully completed the ICAP pilot are given the status of 'low-risk' taxpayer following intensive discussions and information sharing with tax authorities from countries including Australia, Canada, Italy, Japan, the Netherlands, Spain, the United Kingdom and the United States.
"ICAP is a high-level risk assessment," says Rocío Bermúdez, tax global practices and transfer pricing senior manager at Repsol. "It's a multilateral control, but it cannot be seen as a proper tax audit because it takes place in advance. The participant tax authorities check if you are compliant with standards. So no matter what the standards are, ICAP can help the company to be in line with them; this would allow groups to avoid double taxation and to prevent/reduce further litigation, etc."
"In this rapidly changing environment that we are facing in the tax world, it's a very useful tool to get tax certainty, which at the end of the day is the late-motive of this process, by enabling an efficient way of solving tax disputes," she adds.
The OECD envisaged the programme as the positive side to the multitude of information sharing requirements such as country-by-country reporting (CbCR) it has encouraged governments to implement in the past few years.
The fact that it is a multinational programme is its great appeal. While being in a room with tax authorities from multiple countries may sound daunting, participating companies told ITR this helped them to explain their tax structure and get different authorities thinking in the same way.
This effectively eliminates the chance of double taxation between participating countries, by allowing companies to explain transfer pricing (TP) structures to tax authorities that might previously have wrangled over the same portion of income is very beneficial.
"The main benefits we saw in this pilot is the goodwill built between MNEs and tax authorities and the goodwill and knowledge built among tax authorities," says Matteo Crispi, group international tax and transfer pricing director at Italian food company Barilla. "[Another benefit was] having the chance to work in advance, collaborating transparently simultaneously with more tax authorities on the same table, to discuss our transfer pricing model where MNE and tax authorities can better understand each other's challenges and ways of working.
Further benefits of ICAP
The main benefit of participating in ICAP is not just reducing the risk of double taxation, but the certainty it provides for the future – and the speed at which participation can achieve this compared to traditional routes, such as advance pricing arrangements (APAs).
"We had a fast track to open a bilateral APA between the US and Italy," says Gianluca Tagliavini, group VP tax at Barilla. "Normally it can take longer than a year to have the first discussion. [Through ICAP], we had the opportunity in few months to have the first preliminary understanding between the US tax authority and the Italian tax authority. The spirit of a successful ICAP is that of trust, transparency and collaboration. This is a very important aspect to speed up the processes in order to reach tax certainty"
All of the companies ITR spoke to for this article note an improvement in their relationship with the tax authorities. Houben also comments that he found the experience of cooperating with other MNEs useful.
"The outcome has been very positive, not only because of the fact that you can be qualified as a low-risk taxpayer in those jurisdictions which review your company, but also because of the intangibles that are built during the process," says Bermúdez.
"For example, you can get a much more transparent and trustful relationship with the tax authorities," she continues. "This programme gives the opportunity to explain your country-by-country report, show your tax policies, tax control framework, are. [To show] that we are a company that is looking forward to collaborating with the tax authorities, that just want to be compliant and make things easier."
There are also benefits for companies in dispute with countries not even involved in ICAP or the Forum on Tax Administration, says Achim Pross, head of the international co-operation and tax administration division at the OECD.
"There are some indirect benefits that flow and if you take them all together, I think it's quite important," he tells ITR.
"There is also an upside for [companies] beyond the [ICAP] jurisdictions, of being able to say that what we've gone through this process, we run one structure around the world. We have some of the most sophisticated tax administrations looking at this all together. Why is it that you in country X feel what was good enough for the [ICAP countries] is not good enough for you?"
How does the ICAP process work?
Any multinational company within the scope of CbCR can theoretically participate in ICAP if it is headquartered in the countries mentioned above.
Companies enter the 'pre-entry' stage after expressing an interest in the programme to the tax authority in the country of their headquarters, which becomes their 'lead' tax administration. The tax authority will then assess information it already has on that company – such as a CbC report, financial statements, APAs and information on group structure – and may make additional requests.
Following this, the authority and company will have discussions about the scope of the ICAP risk assessment, such as what periods of time will be covered and potential risks – in addition to TP and permanent establishment PE risks, which are all covered – the company is willing to identify. There is very little cost associated with the pre-entry phase.
"For companies of a decent size and with a certain level of maturity in terms of tax data, tax strategy, tax control framework and tax management can consider it as a very interesting option in order to get tax certainty and get a better relationship with the tax authorities," says Bermúdez.
The lead tax administration begins the process of sharing relevant information with other ICAP-participating tax authorities and checking the viability of including the company in the programme. As long as two tax authorities, plus the lead tax administration, are happy to cover the company's risks in ICAP, then the company can move on the next stage: 'scoping.'
"The scoping stage provides an opportunity for the lead tax administration and other covered tax administrations to review a summary of all of the MNE's transactions relevant to the covered risks, and determine whether any should be excluded from the scope of their ICAP risk assessment," says the ICAP pilot handbook 2.0. "This requires the MNE to provide a scoping documentation package."
This part of the process takes four to eight weeks and helps set limits on what information the company can be asked for.
After this, all parties move on to risk assessment and issue resolution, which the OECD says typically takes no more than 20 weeks – though taxpayers ITR spoke to did see this stage elongated for various reasons.
This is article is part of a five-part series on ICAP. ITR spoke to multinational companies about their experiences of the programme, chronicling the positives and negatives of ICAP. This led to two case studies of companies’ involvement and an exploration of the future of the programme.