The Directorate General of Taxes (DGT) has revealed a fluctuating but overall rising trend in applications for mutual agreement procedures (MAP) and advance pricing agreements (APA) between 2021 and 2024.
In 2021, there were 43 MAP and APA cases. This figure declined to 37 in 2022, then climbed to 55 in 2023 and to 59 in 2024.
MAP is an administrative mechanism for resolving disputes under tax treaties, including those related to transfer pricing. APA, on the other hand, is an agreement between the DGT and taxpayers, or between competent authorities of partner countries, on the appropriate transfer pricing methodology in line with the arm’s length principle.
Despite their widespread use, both MAP and APA processes can be costly and time-intensive. As a result, the International Compliance Assurance Programme (ICAP) has emerged as a more efficient alternative.
What Is ICAP?
ICAP is a multilateral initiative developed by the OECD to enhance tax certainty for multinational enterprises (MNEs). It adopts a cooperative, voluntary approach involving multiple tax authorities, allowing companies to gain early certainty about cross-border tax risks without going through formal dispute-resolution processes.
In an increasingly globalized economy, ICAP plays a pivotal role in reducing uncertainty and mitigating the risk of double taxation.
Background and Objectives
ICAP was first introduced in 2018 as a pilot project under the OECD’s Base Erosion and Profit Shifting (BEPS) framework. It emphasizes transparency, cross-border information exchange, and a preventive approach to managing tax risks.
Rather than relying on traditional, reactive audits, ICAP is designed to address tax risks upfront, reflecting the growing complexity of cross-border business activities.
Focal Points and Principles
ICAP is not a tax audit. Instead, it is a joint risk assessment conducted by multiple tax authorities for multinational groups. Its core principles include:
- Voluntary participation: Companies choose whether to participate.
- Cooperative compliance: Active collaboration between taxpayers and tax authorities.
- Multilateral engagement: Involvement of more than one jurisdiction.
This framework enables businesses to identify potential risks early and significantly reduce the likelihood of future disputes.
How ICAP Works
The ICAP process generally consists of three stages:
Selection Stage
Companies are selected based on factors such as size, business complexity, and the level of transparency in their disclosures.
Risk Assessment Stage
Tax authorities assess main risk areas, including transfer pricing and exposure to permanent establishment.
Outcome Stage
The process concludes with a risk rating and recommendations for follow-up actions as needed.
The Role of BEPS Documentation
ICAP relies heavily on BEPS documentation, particularly Action 13 on transfer pricing. The main documents include the master file, the local file, and the country-by-country report (CbCR). The consistency and transparency of this documentation are critical to a successful ICAP review.
ICAP in Practice
One of ICAP’s main advantages is its efficiency. The process is typically completed within 6 to 12 months—significantly faster than MAP, which can take several years.
ICAP has already been adopted in several developed jurisdictions, including the United States, the United Kingdom, the Netherlands, and Australia. In these countries, it supports the management of multinational taxpayers through a horizontal monitoring approach, integrated with risk-based compliance strategies and, in some cases, APAs.
Opportunities and Challenges in Indonesia
In Indonesia, ICAP is still in its early stages of development. However, the DGT has begun incorporating main ICAP principles, such as risk-based supervision, greater transparency, and active participation in the OECD’s BEPS Inclusive Framework. Indonesia has also enforced its regulatory framework on transfer pricing documentation and information exchange through the AEOI.
That said, several challenges remain, including limited human resources, increasing data complexity, the need for stronger analytical capabilities, and the need to build mutual trust between taxpayers and tax authorities.
Despite these challenges, ICAP has the potential to become a strategic tool in Indonesia’s tax reform agenda. Its collaborative and transparent approach can enhance legal certainty, support foreign investment, and reduce the incidence of cross-border tax disputes.
For Indonesia, adopting ICAP is not merely an opportunity. It is becoming a necessity in navigating an increasingly complex global tax landscape.
Also Read:
https://ideatax.id/articles/updates-to-the-05-msme-final-income-tax-and-its-business-impact
https://ideatax.id/articles/article-26-withholding-tax-on-foreign-taxpayers
https://ideatax.id/articles/navigating-tax-payments-in-the-new-coretax-system
