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Will closer cooperation bring more tax certainty?

The pilot project International Compliance Assurance Programme is part of efforts to address the high level of tax uncertainty.

Businesses today find themselves facing an elevated tax risk landscape due to globalization, digitalization, and new transparency and anti-profit shifting initiatives. A new tool developed by the Organisation for Economic Co-operation and Development (OECD) aims to lessen some of that uncertainty.

In late January 2018, the OECD launched the International Compliance Assurance Programme (ICAP), a tax risk pilot project designed to be an effective and internationally coordinated way to review the activities and transactions of multinational enterprises (MNEs) while quickly isolating areas of risk requiring further attention.

“The ICAP process is intended to enable participating multinationals to talk through their CbC reports and to provide any additional clarity necessary to aid understanding of their cross-border activities.”

Paul Mulvihill, Ernst & Young LLP Canada Transfer Pricing Controversy Leader

ICAP is part of the OECD’s efforts to help address the high level of tax uncertainty arising from rapid, fundamental changes to cross-border taxation in recent years. ICAP supplements the OECD’s base erosion and profit shifting (BEPS) plan — a series of actions aimed at increasing transparency and curtailing tax-avoidance strategies — that is being implemented by jurisdictions around the world.

Achim Pross, Head of the International Co-operation and Tax Administration Division at the OECD Centre for Tax Policy and Administration and the key architect of ICAP, says the thinking behind the program “is to create a behavioral incentive beyond the tax function and at the level of management, to say: ‘Why aren’t we in this green space? Wouldn’t it be so much easier if we were in that range so we don’t need to worry so much about it, and we can just carry on with our business?’ How do we get there?”

While many businesses believe that increased transparency from BEPS and other initiatives will help tax administrations better assess tax liabilities, they are also concerned that it could lead to a greater level of tax inquiries and even double taxation.

For its part, the OECD hopes that ICAP will be able to help taxpayers transition to a post-BEPS world while also reducing the number of mutual agreement procedure (MAP) cases (where tax authorities are currently swamped) and catalyzing other bi- or multilateral dispute resolution opportunities such as joint audits, says Jeffrey Owens, Senior Tax Policy Advisor at Ernst & Young LLP.

“As tax administrations and MNE groups enter an era of increased transparency, new opportunities arise to use the increased flow of information to support open, cooperative relationships between taxpayers and tax administrations,” the OECD wrote in its ICAP pilot handbook.

Team effort

The ICAP pilot involves eight jurisdictions — Australia, Canada, Italy, Japan, the Netherlands, Spain, the UK and the US. Selected other member countries of the OECD’s Forum on Tax Administration (FTA) will participate in observer roles. A group of multinationals — all classified as low risk to help drive a successful pilot outcome — were invited to participate by the national tax authorities of their headquarters location.

Under the pilot, the participating multinationals will provide a package of documentation (including country-by-country (CbC) reports, master and local files and the company’s tax strategy) that will be reviewed by the covered tax administrations and then discussed with the company during a kickoff meeting. The tax administrations will then work together to analyze the transfer pricing and permanent establishment (PE) risks posed by the multinational.

“The ICAP process is intended to enable participating multinationals to talk through their CbC reports and to provide any additional clarity necessary to aid understanding of their cross-border activities,” says Paul Mulvihill, Ernst & Young LLP Canada Transfer Pricing Controversy Leader.

If an agreement is reached, the company will receive assurance letters that it will not receive further compliance interventions from the covered tax administrations for the covered risks for a period of two years at least, assuming such reports do not change materially. Any issues that cannot be agreed upon during the process will be handled outside of ICAP, via processes such as advance pricing agreements (APAs) or a tax audit when required.

“The program provides a very good opportunity for companies to have a multilateral dialogue about their risk profile,” adds Marlies de Ruiter, EY Global ITS Tax Policy Leader. “With multiple tax administrations in the room at one time, there should be far fewer differences in perceptions about facts. The outcome should be fewer disputes and more narrowly focused ones.”

Uncharted territory

There are some uncertain elements of the ICAP pilot. One area is legality. “To what extent is the interaction between tax administrations underpinned by existing law?” asks Owens. “Are taxpayers covered by provisions in double-taxation agreements? How would courts in the participating countries view any assurance provided by the program?”

It is also unclear how far the ICAP assurance letters extend. For example, Italy has two tax bodies: a civil tax authority and a tax police force. “Does a general assurance letter from the civil tax administration under ICAP mean a taxpayer will not receive a knock on their door from the tax police?” asks Davide Bergami, head of EY’s transfer pricing/supply chain practice in Italy.

It is also not known what might change if and when the pilot is expanded to include higher-risk taxpayers. Adding jurisdictions may also shift the dynamics; the eight countries in the pilot have worked with each other for many years, according to Owens.

In spite of such uncertainties, both companies and tax administrations have a very strong common interest in making the ICAP pilot work, says Owens. If it does succeed, Owens predicts it will go far beyond the current eight countries.

“As a result, companies should be following ICAP very, very carefully,” says Owens. “And they should be asking themselves: Would we meet the criteria to get into such a program? Do we have the transparency that’s required? Do we have a tax control framework in place? What would that mean for our global approach to tax?”

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