With eight countries signed up to its pilot, the International Compliance Assurance Programme marks a shift towards a more multilateral approach to tax administration
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This article was first published in the June 2018 UK edition of Accounting and Business magazine.
Eight major economies, including the UK and US, have signed up to a voluntary pilot programme that will, in theory, give multinational groups greater certainty over tax liabilities based on their country-by-country (CbC) reports. The move is being led by the OECD’s Forum on Tax Administration (FTA) and forms part of the organisation’s base erosion and profit shifting (BEPS) project.
The voluntary International Compliance Assurance Programme (ICAP) will use CbC reports and other information to ease the way to open and cooperative discussions between multinational enterprises (MNEs) and tax administrations. The aim of the programme is to improve the effectiveness of current risk assessment processes, ensuring a faster, more efficient route to tax certainty through better coordination and use
It is hoped that ICAP will help tax administrations reach early decisions about the level of transfer pricing, permanent establishment and other international tax risks found in a group’s CbC reports. Working multilaterally, tax administrations should be able to build a comprehensive picture of a group’s cross-border activities and gain assurance that a group’s tax position is all above board and that any relevant tax risks have been identified. Any issues that cannot be agreed through ICAP will be handled via processes such as advance pricing agreements or, when deemed necessary, a tax audit.
The move is a direct result of BEPS Action 13 on transfer pricing and CbC reporting, which allows different administrations to work from the same data, supported by improved cooperation between the various tax administrations. Eight countries have joined the pilot: Australia, Canada, Italy, Japan, the Netherlands, Spain, the UK and the US. A number of other members of the FTA will act as observers to the pilot.
However, it is not clear how many multinational groups will be participating in the pilot scheme. It is understood that each group currently involved in the pilot was invited to participate by the tax authority of the jurisdiction in which it is headquartered.
A multilateral assessment of specific international tax risks posed by each multinational group in the pilot started in January. All risk assessments are expected to be completed within 18 months, as participating jurisdictions may have differing financial years. Some may take fewer than six months to complete if assurance is achieved during the first-level assessment.
The key point is that while ICAP does not provide an MNE group with legal certainty, it can give assurance where tax administrations participating in the programme consider risks to be low. Although the pilot focuses on low-risk taxpayers, the OECD hopes that taxpayers with higher risk profiles will enter the ICAP programme in the future.
Chris Sanger, global head of tax policy at EY welcomed the move, saying there has been a huge change in international tax regimes, especially around transfer pricing and permanent establishments. ‘One of the big concerns is that these changes bring a great deal of uncertainty, and that uncertainty brings disputes. This is the environment within which ICAP is being driven,’ he says. ‘There is an interesting range of countries involved, as some perspectives can be different.’
ICAP marks an important milestone in the international tax arena, reflecting a shift towards a more multilateral approach to the administration of tax, supporting and expanding the important role of other processes, such as bi- and multilateral advance pricing agreements.
At the moment, it is understood that each participating tax authority will nominate one group, perceived as low risk, to participate in the programme. However, EY warns that while ICAP is a voluntary programme, groups may be approached by their national tax administration in 2018 in order to gauge overall levels of interest regarding potential future participation. ‘MNE groups should, therefore, ensure that they are aware of ICAP’s workings, as well as the potential challenges and benefits of participation,’ the firm says in a global tax briefing document.
The OECD says that as a result of BEPS Action 13, countries can now work from the same dataset to assess transfer pricing and other BEPS-related risks across multiple tax administrations. ‘By enabling participating tax administrations to consult with each other and hold multilateral conversations with a [multinational] group, ICAP allows for a more robust and considered basis for risk assessment using this new data,’ the organisation says.
The OECD lists a number of benefits that will fall out of the pilot. These include a fully formed and targeted use of CbC report information, a more efficient use of resources, a more co-ordinated approach, and a faster and clearer route to multilateral tax certainty. Perhaps most importantly, the OECD argues that ICAP could see fewer disputes entering into mutual agreement procedures.
The OECD observes that cooperation among FTA member tax administrations has vastly increased in both depth and frequency in recent years, which will be complemented by ICAP.
The key, however, will rest with how multinational groups can show that they are low or at least only medium-risk taxpayers. As the OECD says: ‘ICAP can provide a pathway to greater international tax certainty for MNE groups and tax administrations alike, which is a positive BEPS-related outcome for MNEs wishing to be transparent and compliant. This also reflects the G20’s agenda on tax certainty that supplements the work
Philip Smith, journalist
CPD technical article
"Changes in tax regimes bring uncertainty, and uncertainty brings disputes. This is the environment in which ICAP is being driven"