But companies should carefully consider the pros and cons before entering the program, and determine what international issues are significant enough to warrant the upfront investment for ICAP, a process that requires deep understanding and comprehensive analysis of the company’s global transfer pricing and international tax structure.
ICAP covers permanent establishment and transfer pricing issues, including transactions involving tangible property, intangible property, intragroup services, and financing. It’s important to understand what information will be provided in the ICAP process and to consider whether any privileged or other sensitive information will need to be provided.
Three-Phase Process
The ICAP process involves three phases: selection, risk assessment, and outcome. In the first phase, the company must provide the selection documentation package, which offers details to tax administrations that can help the government agency decide if they want to participate in the company’s ICAP.
The package includes basic information, including the proposed covered period, a list of proposed jurisdictions, the company’s main entity in those jurisdictions, and whether the information the tax administrator currently has is out of date because of a restructuring.
The package also includes an overview of each proposed covered transaction, including the category (such as license of intangible property); how each entity is involved (such as licensor receiving the payment or licensee making the payment); the value of each transaction in each jurisdiction; the latest country-by-country report; the master file; and any advance pricing agreement in place or in process. It’s important to carefully consider how tax administrators could use the disclosure of the value of different transactions in different jurisdictions.
One downside of ICAP is that all jurisdictions, even the ones that eventually decide not to participate in the company’s ICAP, receive the package. If a tax administration decides not to participate in the company’s ICAP, it doesn’t get any more ICAP information.
During the selection phase, the participating tax administrations agree on the scope. This usually covers the current taxable year and the previous taxable year and can have a two-year roll-forward if the facts don’t materially change.
The average timeframe for the selection phase is 10.4 weeks. The selection phase concludes when the lead tax administration (which is the IRS for US parented multinationals) communicates which, if any, transactions are accepted into the program, which jurisdictions will participate, and the details of the main documentation package. The main documentation package can include local files, intercompany agreements, financial statements, and permanent establishment documentation.
In the risk assessment phase, the tax administrations in the various participating jurisdictions discuss their findings until each reaches a low-risk outcome or determines that such a finding isn’t possible. Supplementary documentation can be requested at this time, including financial statements, intercompany agreements, local files for other jurisdictions, and copies of advance pricing agreements.
Generally, there is at least one call that includes the company. The average timeframe for the risk assessment phase is currently 42.4 weeks.
In the outcome phase, the lead tax administration issues a completion letter, and each participating jurisdiction produces an outcome letter. Transactions receive a low-risk outcome if the tax administration doesn’t anticipate any further enquiries on the transaction for the covered period. The average timeframe for the outcome phase is currently 8.3 weeks.
Benefits and Drawbacks
One concern with ICAP is that a low-risk outcome doesn’t necessarily guarantee that the jurisdiction won’t reevaluate an issue. To address this concern, the Organization for Economic Cooperation and Development states that some tax administrations have introduced domestic measures to ensure the low-risk outcome is maintained. This is an important but under-detailed ICAP development.
According to OECD data, for the 20 cases completed since the launch of the first ICAP pilot in January 2018 through October 2023, each company was able to obtain at least one low-risk outcome. In 40% of the cases, all the covered risk areas were considered low risk by all of the participating tax administrations.
One big benefit of the ICAP program is that companies can achieve increased tax certainty across several jurisdictions at once. As of October 2023, there are 22 tax administrations participating in ICAP, including several EU and Latin America countries, Australia, Canada, Japan, Singapore, and the US.
The largest ICAP risk assessment to date involved nine tax administrations and the average number is five. If fewer than three tax administrations (including the lead tax administration) agree to participate, then the ICAP process ends.
Another benefit of ICAP is that it is significantly faster than an advance pricing agreement—the average ICAP time was 61 weeks; the APA average timeframe is 53 months. ICAP also is economical; there is no fee to apply or participate. The US APA fees are generally $113,500, and the resources and adviser time involved can be significant.
To date, permanent establishment transactions have had the most favorable outcomes with 95% being low risk. For tangible property transactions, 90% were low risk. For intragroup services, 88% were low risk. For financing transactions, 76% were low risk. And for intangible property transactions, 75% were low risk.
ICAP can provide increased certainty across multiple jurisdictions efficiently and economically. Companies should evaluate their permanent establishment and transfer pricing transactions and evaluate whether participating in ICAP could benefit them.
