In real life, a single clause (or even a single word) in a legal agreement can make a huge difference to the commerciality of an arrangement. Exclusive vs non-exclusive licenses. Recourse vs non-recourse factoring. One month vs 12-month subscription terms. Overdrafts are repayable at will vs term loans with no right of prepayment.

Intercompany transactions are no different, and the 2017 OECD Transfer Pricing Guidelines provide a worked example of the impact of a single clause on the pricing of transactions involving limited risk distributors. The clause is a very simple one: an obligation on the principal/supplier to buy back unsold stock. The provision has the effect of moving inventory risk from the distributor to the principal, and in the OECD’s worked example, the clause makes a 20% difference in the margin which the distributor can expect to achieve. You can see a slide with the relevant comments here.

This should be no surprise: the allocation of inventory risk is a key feature of a limited risk distribution arrangement, along with product liability risk, credit risk, and a guaranteed minimum return. Of course, for a clause like that to have any effect at all, it needs to be incorporated in a legally binding agreement, which is entered into in advance of the relevant transactions. Otherwise, it’s just an attempt to re-write history with no substance.