What the OECD Statistics Tell Us About ICAP

Background

On 29 January 2024 the OECD released its first aggregated results and statistics for the International Compliance Assurance Programme ("ICAP") (the "Statistics").  The Statistics show that ICAP is developing into an effective tool that multinational enterprises ("MNE") should be aware of and consider as part of a multi-faceted approach to prevent and resolve international tax disputes. 

It is clear from the Statistics that taxpayers should be attuned to the types of transactions ICAP is appropriate for (typically less complex transactions that are standardised across a number of jurisdictions) and within that remit should consider using ICAP as a tool to achieve a degree of tax certainty.

What is ICAP?

ICAP is a voluntary risk assessment and assurance process whereby MNEs and participating tax administrations work in a co-operative manner with a view to providing a participating MNE with assurance with respect to the risks associated with covered transactions. 

There are currently 23 tax administrations participating in the ICAP programme and these include Ireland, France, Germany, the United Kingdom and the United States.[1] In order to participate in the programme, a MNE group's ultimate parent must be located in one of these jurisdictions and be subject to a country-by-country ("CbC") reporting filing requirement.

Unlike other programmes, such as advance pricing arrangements ("APA"), the ICAP process does not provide legal certainty to participating MNEs.  However, the process is designed to provide assurance to a MNE that the participating tax administrations consider the risks posed by the covered transaction(s) to be low.  A MNE can reasonably expect that participating tax administrations are unlikely to subject the covered transaction(s) to a domestic audit (assuming the underlying facts and circumstances do not materially change).   

In this way, although not legally binding, the process provides comfort to a participating MNE that it can with reasonable confidence focus resources elsewhere and on activities that are more complex which may warrant an APA.

The ICAP Process

The ICAP risk assessment process is divided into three stages:

(i) Selection stage:  At the selection stage a MNE interested in participating in the ICAP programme can submit a selection documentation package (including its most recent CbC report and transfer pricing master file) to the tax administrations it wants to participate, providing a summary of the transaction(s) relevant to the risks the MNE wants to have covered.  The tax administrations will, after considering the matter, confirm if they are able and willing to participate in the process and / or if certain proposed transactions are not suitable for the ICAP programme (eg, because they may be considered too complex). The Statistics note the average number of tax administrations involved in an ICAP risk assessment was five and the largest number participating was nine.

(ii) Risk assessment and issue resolution stage:  This is the core of the ICAP process during which participating tax administrations will assess the covered transactions and risks and discuss their findings.  This stage of the process can include multilateral meetings with the MNE itself, allowing the MNE address any questions the participating tax administrations may have and articulate its position as regards certain risks etc.  Where a tax administration cannot reach a conclusion that a covered transaction is low risk, there is the option at this stage to enter an issue resolution process whereby the MNE can address issues identified by a tax administration (eg, by agreeing a transfer pricing adjustment and corresponding adjustment). It may be the case that transactions that are not agreed as low risk are subsequently subject to an APA with the same participating jurisdictions, and in those cases the programme should ensure a more efficient and faster process.

(iii) Outcomes stage:  Following completion of the risk assessment and any issue resolution process, the participating tax administrations will issue the taxpayer with a letter confirming the outcome of their risk assessment and assurance as regards the covered risk(s).  Transactions will be considered low-risk where a tax administration does not anticipate that any further enquiries will be required for the periods covered by the risk assessment.

The specific periods to be covered by an ICAP risk assessment will be set out in the outcome letter issued at the outcomes stage but, in general, it can be expected that an ICAP risk assessment will cover the two most recent years for which necessary documentation, including the MNE's CbC report, is available.  There is also a possibility of rolling forward the risk assessment outcome to the two tax years immediately following the covered periods provided there is no material change in the fact profile in respect of the covered transaction(s).

The Statistics

The Statistics highlight the key risk areas focused on by participants in the ICAP cases to date and shows that the programme can deliver effective resolution of issues that could otherwise, potentially, lead to a protracted audit and mutual agreement procedure ("MAP") process.  

Some of the key takeaways from the Statistics are as follows:

(i) The average time taken from the start of an ICAP process to the issuing of risk assessment outcomes to an MNE group was 61 weeks which compares favourably to the timeframe to conclude a transfer pricing MAP with the Irish Competent Authority (which based on the latest OECD MAP statistics takes approximately 24.6 months) and the timeframe to complete an APA process;

(ii) The risk areas that received the highest proportion of low-risk outcomes from the five core risk areas of an ICAP risk assessment were (i) permanent establishments ("PE") (considered low-risk in 95% of instances where the issue arose for consideration), followed by (ii) transactions related to tangible property (90%), (iii) intragroup services (88%), (iv) financing (76%), and (v) transactions related to intangible property (75%).  Given that these are often key areas of focus on a domestic audit, the Statistics suggest that participating in ICAP can provide assurance in respect of those risks for suitable transactions and avoid a potentially protracted audit; and

(iii) 40% of MNE groups received only low-risk outcomes on all the core risk areas (ie, tangible goods, intangibles, services, financing and PE) covered by their risk assessment.  In addition, in approximately 33% of cases, at least one issue identified during a risk assessment was addressed within the ICAP process (as part of the issue resolution stage outlined above), avoiding audit and MAP.  These two statistics demonstrate that the programme can operate as an efficient and effective dispute prevention and resolution forum. 

It is expected that these figures will improve over time as MNEs and tax administrations become more familiar and comfortable with the process. Only 20 ICAP cases were completed by October 2023.

Key Takeaways

The Statistics demonstrate that the anticipated benefits of the ICAP programme, although still in its early stages, are materialising in practice.  

ICAP offers MNEs another useful tool to obtain assurance from tax administrations for certain transactions, therefore, enabling MNEs to optimally deploy their resources and avoid lengthy disputes. 

MNEs interested in participating in ICAP should consider engaging with the tax administration in which their group is headquartered to determine its suitability and be aware of the two annual application deadlines – 31 March and 30 September.

Please speak to your usual Matheson tax contact for more information.