Just three years after its first pilot, the ICAP has become an established programme, being run for the first year in 2021 through the Forum on Tax Administration (FTA). This opens up the initiative from the original eight tax authorities to the FTA’s 53 members. The ICAP handbook will be indispensable for taxpayers and tax administrations using the programme from this point on.
Multinational companies with complex TP structures often rely on advance pricing agreements (APAs) to gain legal certainty, but the ICAP offers an alternative route. The programme may not guarantee the same level of legal certainty but is a quick way to get reassurance.
“Under ICAP, an MNE group may obtain comfort that multiple covered tax administrations do not anticipate dedicating compliance resources to a further review of the covered risks,” the handbook states.
The OECD designed ICAP to increase tax certainty because of the instability of global tax policy over the past decade. However, the programme is one of many tools MNEs can use to increase certainty.
Other options include bilateral and multilateral APAs, joint audits, MAP and arbitration. Although ICAP cannot provide the same level of legal certainty, it does provide what the OECD calls “comfort”. Yet the advantage is more about time and resources.
“ICAP includes a clear timeframe and typically an MNE group’s ICAP risk assessment will be completed and outcome letters issued within 24-28 weeks following delivery of the main documentation package,” the handbook states.
This is far shorter than any APA. The programme can also help reduce the need for a MAP to resolve problems between taxpayers and tax authorities. Nevertheless, the handbook makes it clear that ICAP should be used with other tools.
Meanwhile, tax administrations can use ICAP to make the audit process more efficient with less documentation being required and reducing the amount of time taxpayers spend explaining their tax affairs. At the same time, the OECD hopes ICAP will complement the digital transformation tax authorities are facing.
“Tax Administration 3.0 on tax administrations going digital has huge potential,” said Achim Pross, head of international tax at the OECD, in a recent interview with ITR.
“There are some real transformational things in the pipeline which could fundamentally change tax administration as we know it,” said Pross. “That will benefit tax administrations and taxpayers alike.”
The next deadline for companies wanting to take part in ICAP is September 30 2021.
Tools for tax certainty
ICAP has come a long way since it was piloted in January 2018. The 2018 pilot involved just eight tax administrations, but the second pilot following in March 2019 included 17 tax authorities. The FTA endorsed the programme soon after the second pilot.
Shell started participating in ICAP when the company was notified about the pilot scheme by the Dutch tax authority. Danny Houben, who served as project lead for Shell’s ICAP team, explained to ITR in 2019 how the company proceeded.
“We formed a project team within Shell, where we had several people from the countries involved, as well as other global tax professionals,” said Houben. “I was the project lead, so I was basically coordinating the different working groups within Shell and communicating with our ICAP tax authority in the Netherlands.”
ICAP does have its limitations, though. The success of the programme often hinges on how well the tax authority operates on its own terms.
“The outcome is positive, [but] the way we got to the outcome still needs to be worked on,” said Matteo Crispi, group international tax and transfer pricing director at Barilla, who also participated in the ICAP pilot.
Furthermore, ICAP does not prevent all ‘surprises’ for taxpayers.
“We were quite surprised to be audited on transfer pricing which is what had been discussed during ICAP,” Crispi told ITR. “It is an example of a lack of tax administration internal coordination.”
“It happened after ICAP, when we were already close to receive the outcome letters, that we got an audit on FY16 – the year of ICAP risk assessment – in one of the jurisdictions, with a request for transfer pricing documentation and other details regarding inter-company transactions,” Crispi explained.
Some tax administrations are better at internal coordination and communication than others. A lack of coordination within a tax authority can undermine ICAP and the “comfort” it offers for taxpayers.
Even still, this is a problem that can be overcome, although it is up to tax administrations to fix. Many taxpayers would still prefer ICAP for the sake of short-term gains in certainty provided there are few audit surprises.
“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,” said Houben.
“It is a really good initiative going forward,” he continued. “But just like with any new initiative… there is always room for improvement in the spirit of joint collaboration.”
Taxpayers have options for reducing TP risks and improving compliance, but every option comes with limitations. The same is true of ICAP. This is why the OECD is already working on other ways to increase tax certainty.
“We are mapping ways in which different countries currently risk assess and detect certain TP risks,” Pross told ITR. “This will help in the identification of good practices and drive greater consistency in risk assessments, and, where differences remain, the basis for these will be better understood.”
ICAP may become one option in a growing collection of tax certainty tools. There is still a lot of work to do before taxpayers gain the certainty they need, but the push towards better risk assessments and alternative forms of dispute prevention will help reduce uncertainty.
