4 minute read 18 Dec 2023
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Why ICAP participation could help with BEPS 2.0 Pillar Two compliance

By EY Global

Ernst & Young Global Ltd.

4 minute read 18 Dec 2023

A voluntary tax-risk assessment program could become an important tool for managing cross-border tax controversy under Pillar Two. 

In brief
  • Voluntary participation in ICAP provides tax assurance that transfer pricing and other international tax rules are applied correctly and reduces tax controversy.
  • ICAP allows global businesses to proactively identify potential tax considerations with multiple jurisdictions.
  • ICAP helps to manage cross-border tax risk and build relationships with tax authorities.

Opting into the Organisation for Economic Co-operation and Development (OECD) International Compliance Assurance Program (ICAP) may help taxpayers prepare for new international tax rules that governments around the world are implementing, EY professionals say. 

The OECD/G20 Inclusive Framework project on addressing the tax challenges of the globalization of the economy (also commonly known as BEPS 2.0). It involves the development of a new set of rules for multinational enterprises (MNEs) around the allocation of taxing rights over global business income (Pillar One) and new global minimum tax rules (Pillar Two). ICAP is a tool for MNEs to request tax authorities to risk assess and provide tax assurance on the application of transfer pricing and other international tax rules. Although the application of ICAP with respect to Pillar Two has not yet been crystalized, developments in this area should be monitored by MNEs interested in seeking tax assurance regarding the application of the global minimum tax rules. 

Participation in ICAP is voluntary and currently available in only 22 countries, whereas more than 140 jurisdictions are members of the Inclusive Framework and many are poised to implement the Pillar Two rules. Still, the expansion of ICAP as Pillar Two rules are coming into effect creates opportunities for businesses interested in taking a more holistic approach to their tax compliance strategy.

"There is a real possibility that companies who volunteer for ICAP may well be able to use that process to assist with their Pillar Two compliance and potentially avoid future tax controversy," explains Astrid Vroom, Director, International Tax – Transfer Pricing at Ernst & Young LLP.

Measuring tax risk

Under ICAP, multiple revenue authorities come together to simultaneously risk-assess cross-border transactions entered into by MNE groups and offer a level of tax assurance in return.

According to the OECD's ICAP Handbook, the tax authorities’ risk assessment of an MNE should be completed and outcome letters issued within 24-28 weeks following the MNE’s submission of the main documentation package. This typically includes details of the covered transactions, the group's country-by-country report, local files, financial statements, tax strategy, value chain analysis and permanent establishment documentation. Note, this is a simplified description of the ICAP process, and additional documentation and calls or meetings may be required between the MNE and the tax authorities if any clarification is required.

During the OECD Tax Certainty Day held on 14 November 2023, the OECD Secretariat noted that the total timeframe for an ICAP risk assessment on average is 61 weeks. This timeframe is shorter than that generally observed for advance pricing agreements (APA) and tax audits focused on cross border issues, followed by a subsequent mutual agreement procedure (MAP) or procedures .

Ultimately, MNEs participating in ICAP are aiming to achieve a "low risk" outcome from participating authorities, providing tax assurance that no further local tax audits or other compliance interventions will be undertaken during the agreed period. The tax assurance provided is for a defined period, which typically includes one or two periods subject to the ICAP risk assessment and also a roll-forward period.

It's important to note that while ICAP gives MNEs the tax assurance that covered transactions are viewed as low risk by tax authorities, the outcome letter does not give legal certainty. As a result, ICAP isn't a substitute for an APA. The OECD's statistics presented during the 2023 Tax Certainty Day showed that most reviewed transactions were concluded as “low risk” (90% for tangible goods transactions, 75% for intangibles transactions, 88% for services transactions, 76% for financing transactions and 95% for permanent establishments) and the speakers noted that in practice this “low risk” outcome is being respected by the tax authorities.

"Where ICAP stands out for me, is that it gives businesses the opportunity to engage with a number of relevant tax authorities at the same time through a structured review process," says Joel L Cooper, EY Global International Tax and Transaction Services Controversy Leader. "This means that at the conclusion of the process the organization knows where it stands on their key cross-border transactions in the eyes of those authorities, and potentially whether future investigations may be on the way."

Business representatives at the 2023 OECD’s Tax Certainty Day agreed with this and noted that they found it particularly valuable to have the opportunity to be a part of the discussion with the various tax authorities as opposed to solely submitting information.

The intersection with BEPS 2.0 Pillar Two

For Cooper, this is what makes ICAP interesting from the perspective of complying with new Pillar Two rules. "Businesses have intra-group transactions that will be part of their Pillar Two calculations and if a tax administration forms a view that these transactions aren't consistent with the arm’s length principle, it could throw out those calculations," he explains.

"However, the idea that a number of relevant tax authorities can jointly examine the intra-group transactions and tell you whether they think your tax risk is high or low, is really interesting. And it happens in a relatively short period of time which is atypical in the tax world."

By engaging in cooperative discussions with tax authorities in multiple jurisdictions through ICAP, organizations can identify and resolve potential tax issues proactively – it may even flag risks that a group hadn't realized existed. This not only could prevent disputes from occurring but also puts businesses on the front foot when it comes to complying with other rules, such as those under Pillar Two.

As revealed in the 2023 EY Tax Risk and Controversy Survey, this proactivity can be critical for tax functions going forward. The survey results indicated three key actions that tax leaders should execute, one of which is that tax certainty should be at the heart of their tax controversy strategy. Indeed, 86% of respondents said that being more proactive in identifying and managing risks before they turn into a dispute would add value to their business.

"An ICAP assessment provides an opportunity to get some certainty on transfer pricing and matters," explains Luis Coronado, EY Global Tax Controversy Leader. "What's more, if taxpayers, from their outcome letters, have a good understanding of how the tax authorities perceive their transfer pricing, they could pivot toward one or more APAs – be that bilateral or multilateral – which would then be binding."

This could have significant implications when it comes to reporting for Pillar Two. Considering that 80% of survey respondents say they plan to secure one or more APAs in the coming two-year period, it also could be argued that participating in ICAP could be a gateway to achieving this.

Balancing effort and results

Because ICAP is not a binding outcome, businesses may question whether the outcome warrants the investment in time and resources, which, despite the relatively short timeframes, can still be substantial.

As Vroom points out, "It is quite labor intensive. Firstly, the documentation has to be pulled together. That shouldn't be too problematic as groups should already have that documentation; it's just gathering it all together that may take time. However, once discussions start, each tax authority will have a set of questions, which could be very detailed."

The decision to undertake an assessment may also be complicated by the fact that clarification is still needed around certain areas of ICAP. There are, for instance, still some discrepancies among tax authorities with regard to the information being requested to make a risk assessment. But hopefully over time, there will be more consistency and certainty across tax authorities.

There also remains a lack of clarity as to how ICAP would work between certain jurisdictions, for example where there is no double taxation treaty. And with only 22 countries currently participating in ICAP, its use in a Pillar Two context may be limited – however, it isn't unreasonable to expect that more countries will become involved.

It is worth noting that in the EY Tax Risk and Controversy Survey, the most common source of tax risk facing respondents' company or group was tax enforcement, in terms of either lack of tax certainty or potential impacts of tax enforcement (identified by 35% of respondents). Furthermore, 45% anticipate more focus on cross-border tax issues, including transfer pricing, while 42% expect an increase in the number or intensity of tax audits.

For Cooper, the whole paradigm for addressing tax certainty is changing. "APAs, ICAP and other cooperative compliance programs are giving organizations a number of tools," he says. "Considering the number of disclosure requirements, and the additional complexities of Pillar Two – if businesses aren't considering the way they think about these tools, then they could miss opportunities to proactively manage tax controversy risks."

So, while ICAP may not be the right fit for every MNE group and further improvements to ICAP may be welcomed, it should be one of the tools to be considered for managing cross-border tax risk.

As Vroom concludes: "ICAP should be carefully considered, even if it is merely the initial step in managing new cross-border disputes. At the very least, it should help build relationships between participating organizations and tax authorities, as well as potentially improving an MNE's reputation among the authorities."


ICAP can help MNEs prevent future tax controversies by providing structured reviews from multiple tax authorities. ICAP offers a fast and proactive way to risk-assess cross-border transactions and manage exposure to tax risks. Although ICAP requires considerable time and resources, it provides comfort by allowing companies to anticipate and manage tax risks, align with BEPS regulations, and foster relationships with tax authorities.

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By EY Global

Ernst & Young Global Ltd.