What goes around, comes around. Every action has an opposite reaction. Every legal right is matched by a corresponding legal obligation.
This is true in the area of international group structures and transfer pricing policies, as it is in every other area of life. For example, a distributor may be intended for TP purposes to be exposed to limited risks (e.g. inventory risk, credit risk, product liability risk etc), and may therefore be granted a contractual right to be indemnified against those risks. That right must correspond to a legally binding obligation on the part of the relevant principal or entrepreneur.
This means that if any of those risks actually materialise – for example, a significant product liability claim is actually incurred – the principal will ultimately be on the hook. In effect, the group will have forfeited the potential asset protection benefits of using a limited liability entity in the relevant market, as a way of ringfencing commercial risks.
One of our mantras at LCN Legal is that intercompany agreements and TP structures always need to be considered on a holistic basis, so that they make sense from a wider commercial perspective. We’re very fortunate to have a team of lawyers here at LCN Legal with practical experience gained from senior, in-house legal roles. If you’re helping a group to establish or redesign its transfer pricing structure to prepare for its next stage of growth, we will be very happy to work alongside you to bring that wider commercial and legal perspective, in addition to designing appropriate intercompany agreements. You can find an overview of our wider services, including our ‘virtual legal director’ service, here.
P.S. The photo is from the ‘White Horse Temple’ in Luoyang, which was established in AD 68 as the first Buddhist temple in China. One of my favourite temples to visit in China, and definitely recommended for a visit.