Sales agreements

Sales transactions

For the sales function within multinationals the following generic characterisations are often identified for transfer pricing purposes, according to the functional and risk profiles of the group companies: i) agent, ii) commissionaire, iii) limited risk distributor (“LRD”) and iv) full-fledged distributor.

A LRD is a distributor which acts in its own name and on its own behalf and takes legal title to the goods that it sells, but it does not take on all of the risks that a distributor might. Risks such as bad debt, holding excess stock and warranty are borne by another company (the principal) by virtue of the contractual arrangements. Since the LRD is acting on its own behalf, it does not bind the principal to the customer (ie, it does not allow the customer to sue, or be sued by, the principal).

A commissionaire arrangement is a civil law agency concept: in civil law countries it is possible for a commissionaire to enter into a sales contract with a customer in its own name, but on behalf of and at the risk of a principal company. Such an arrangement does not result in the commissionaire binding the principal to the customer (i.e., as with an LRD arrangement it does not allow the customer to sue or be sued by the principal). The closest equivalent to a commissionaire in common law countries, such as the UK, is an ‘undisclosed agent’ although the position that the commissionaire does not bind the principal can be less clear under common law compared with civil law. Unlike an LRD structure a commissionaire does not take legal title to the goods sold and hence the title passes directly from the principal to the third party.

In general, a full-fledged distributor undertakes all of the sales and distribution functions as well as the typical risk incurred in performing this function. It buys, holds and sells product/offerings, as appropriate. Additionally, the full-fledged distributor (marketer/distributor) holds some strategic and operational marketing responsibility.  These marketing functions include:  (i) conducting market research, such as building sales forecasts and consumer profiles; (ii) developing advertising materials or campaigns or hiring independent advertising professionals; and (iii) developing strategic marketing plans.  Because the full-fledged distributor undertakes both operational and entrepreneurial functions relating to the marketing, distribution, and sales activities, the marketer/distributor bears the risks associated with these activities, such as credit, inventory shrinkage, and market risk.  It also develops the associated marketing intangibles, including (i) customer relationships, (ii) recognition of a trademark/trade name, (iii) a third-party dealer network, and/or (iv) expertise in either technical or customer assistance.