OECD’s Risk Assessment Tool Is a Good Fit for Certain Taxpayers

The OECD on Jan. 29 released the first set of comprehensive statistics on its International Compliance Assurance Program, which launched in 2021 after two pilot programs. Twenty-three jurisdictions currently participate in ICAP, including the US and many other Organization for Economic Cooperation and Development members.

The statistics cover the 20 cases that have been completed in the two pilot programs and the current program. They appear grim: Only 40% of participating taxpayers received a “low-risk” assessment by all tax authorities in all covered areas.

However, a closer look shows that the program may offer, at least in certain situations, a useful alternative to advance pricing agreements, or to risking audits and potential mutual agreement procedures.

ICAP is an application-based, voluntary risk-assessment program in which tax authorities from multiple participating jurisdictions review specific tax issues, agreed in advance by the taxpayer and tax authorities. The program is mainly designed to assess transfer pricing risk, but tax treaty or hybridity issues also may be considered.

Tax authorities may discuss the taxpayer’s facts, with the goal of greater consistency in the positions they take with respect to the taxpayer, and each participating jurisdiction issues a risk assessment.

At the end of the process, the taxpayer receives an outcome letter from each participating tax authority with that authority’s risk assessment. The risk assessments aren’t binding. Thus, a “low-risk” assessment wouldn’t protect a taxpayer from an adjustment by a participating jurisdiction, but participation in ICAP may influence audit issue selection and outcomes.

The statistics from the first 20 cases provide insight into which taxpayers may wish to apply for ICAP. Although only 40% of taxpayers received all “low-risk” assessments, an additional 40% received “not low-risk” assessments for only one or two of the covered issues. The remaining 20% of taxpayers in ICAP received “not low-risk” assessments for three or more issues examined in the program.

Each tax authority issues its own risk assessment. A “not low-risk” outcome was often due to the assessment of a small number of participating jurisdictions, with the remainder deeming the same issue to be “low-risk.” As further evidence of the usefulness of ICAP, about one-third of taxpayers were able to agree to an adjustment to the pricing of one or more “not low-risk” transactions through the ICAP process, avoiding an audit adjustment or the APA process.

To be sure, selection bias may play a part in these statistics: The most compliant taxpayers, who view their transfer pricing as low risk, are the most likely to apply to ICAP.

As many taxpayers have learned, APAs and MAPs can be time-consuming and costly. New bilateral APAs involving the US take, on average, 4 1/2 years from application to completion. If multiple bilateral APAs are needed, each must be individually negotiated, which can lead to different transfer pricing methodologies.

In contrast, per the recent statistics, ICAP cases take on average 14 months to complete and have involved between three and nine tax administrations.

ICAP gives taxpayers a relatively fast and cost-effective way to address a broad range of issues at a high level. The process can help taxpayers identify the transactions and jurisdictions where further analysis and resources are warranted, allowing taxpayers to focus on those jurisdictions rather than the jurisdictions offering a “low-risk” assessment.

In particular, the ICAP program may be a good option for taxpayers in the following circumstances:

• Taxpayers undergoing new transactions or updating their historic transfer pricing policies, such that they have limited audit history to self-assess transfer pricing risk.
• Taxpayers with repeat, global transactions that have been subject to adjustments in smaller jurisdictions for which APAs haven’t been negotiated—for example, due to the costs of an APA relative to the size of the transactions in that jurisdiction.
• Taxpayers in the US Compliance Assurance Process program, which has begun requiring that taxpayers with significant cross-border transactions pursue APAs to stay in the program. Taxpayers may suggest that participation in the ICAP program should provide sufficient assurance to the IRS of low transfer pricing risk for CAP taxpayers, making APAs unnecessary.
• Taxpayers with issues most routinely found to be low risk, based on the initial statistics—for example, 95% of permanent establishment issues, 90% of tangible property transactions, and 88% of services transactions were low risk, versus 76% of financing transactions, and 75% of intangible property transactions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lauren Ann Ross is special counsel at Covington & Burling, focusing on tax controversy matters and transfer pricing issues.

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