Transfer pricing issues: tax certainty, tax uncertainty, and ICAP

The International Compliance Assurance Programme (ICAP) is a voluntary programme initiated by the OECD to facilitate a multilateral cooperative approach to international tax risk assessment and assurance. It involves collaboration between tax administrations and multinational enterprise (MNE) groups, focusing on transfer pricing and permanent establishment risks associated with cross-border intercompany transactions. The programme emphasises active taxpayer engagement with tax authorities. The risk assessment process, carried out uniformly among participating tax authorities, is designed to determine the risk rating of covered transactions: transactions classified as low risk are exempt from further inquiries. The foundation of this risk assessment is transfer pricing documentation, particularly country-by-country reporting data, applicable for groups exceeding the defined threshold.

Since its launch in 2018, the programme has undergone continuous enhancements. In December 2024, the OECD Forum on Tax Administration released updated ICAP FAQs, introducing three major updates aimed at streamlining the process:

• Flexible application timing – the revised guidelines allow MNEs to apply at any time, eliminating the previous biannual application deadlines.

• Extended timelines – the target timeframes for different stages of the programme have been adjusted to align with real-world experiences:

  • The selection stage – 8–12 weeks (up from 4–8 weeks);

  • The risk assessment stage – 30–45 weeks (up from 20 weeks); and

  • The outcome stage – 6–8 weeks (up from 4–8 weeks).

• Defining scope of assessment – MNEs can now propose a narrower scope for assessments, such as focusing on specific business lines, geographic areas, or functions across selected jurisdictions. However, even under a limited scope, taxpayers must submit comprehensive documentation, resulting in some uncertainty regarding how the gathered information will be used by participating tax authorities.

These updates aim to enhance taxpayer involvement and optimise the programme’s efficiency in providing tax certainty.

Recent OECD global statistics on mutual agreement procedures reveal a slight decline in the number of new cases and a significant increase in resolved cases compared with prior years. However, transfer pricing cases remain predominant.

Bilateral advance pricing arrangements (APAs) show growing efficiency and usage but remain time intensive, making them more suitable for complex and high-value cases. The rise of cooperative compliance programmes across various jurisdictions (for instance, Italy’s enhanced regime under recent tax reforms) underscores the importance of adhering to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022). For example, Italy’s new code of conduct for cooperative compliance taxpayers emphasises proper application of transfer pricing guidelines.

However, participation in cooperative compliance programmes does not preclude tax disputes in other jurisdictions involved in the same intercompany transaction. This stems from the dual objectives of transfer pricing: securing the appropriate tax base in each jurisdiction while avoiding double taxation. As transfer pricing often involves the taxing rights of multiple jurisdictions, no single mechanism can guarantee complete tax certainty. MNEs must strategically evaluate and combine various tools to mitigate risks of double taxation.

ICAP provides MNEs with a tool to achieve tax certainty in the ex ante phase, integrating ordinary tax audits. While it offers less certainty compared with bilateral and multilateral APAs, it is more time efficient and particularly useful for:

• Multilateral cases applying uniform transfer pricing models across multiple jurisdictions; and

• Centralised intragroup services.

ICAP also complements national cooperative compliance programmes, which are inherently unilateral, by enhancing their benefits. Moreover, confirming a transaction as low risk through ICAP may indirectly validate the same transfer pricing model across all participating jurisdictions.

Improvements to ICAP are a welcome development, as the programme offers strategic advantages for MNEs seeking tax certainty and minimising risks of double taxation related to transfer pricing and permanent establishments. Widespread adoption of ICAP could contribute significantly to enhancing multilateral tax certainty and reducing conflicts among tax administrations.