The term limited (or low) risk distributor (“LRD”) is widely used in transfer pricing discussions and analytics, and is understood to be a routine entity that earns low relatively constant returns in a multinational group. Further, it is widely acknowledged by most transfer pricing practitioners and tax authorities that an LRD can generally not lose money because of its relatively limited risks. One of the issues regarding the term LRD is that it has not been distinctly defined. Its definition does not specify what risks it bears, nor how to accurately benchmark its returns based on the risks it bears. Additionally, there is no consensus on whether it can generate operating losses in certain scenarios. This article seeks to establish some broad-based criteria to define LRDs and to more accurately describe how to appropriately benchmark the returns they ought to earn.
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