Transfer Pricing Alert

Transfer Pricing in the distributorship sector: Navigating relevance and regulatory challenges

16 Jun 2026 2 min read

Why transfer pricing matters now

Transfer pricing remains highly relevant for companies in the distributorship sector. In recent years, however, heightened scrutiny from tax authorities has made compliance increasingly complex and critical.

What was once treated as a routine compliance exercise is now a key area of focus during tax audits. Distributors, particularly those engaged in related-party transactions, are expected to demonstrate that their pricing arrangements are consistent with their functions, risks, and market conditions.

Why distributors are under scrutiny

Distributors are often viewed as lower-risk entities within a group, especially when characterised as “limited-risk distributors.” As a result, tax authorities generally expect limited-risk distributors to earn routine returns over the long term, unless commercial circumstances justify deviations.

In practice, however, many distributors perform a broader range of functions or assume risks that are not fully reflected in their transfer pricing policies. This creates potential misalignment between:

  • contractual arrangements, and
  • actual conduct

Such inconsistencies can raise red flags and increase the risk of adjustments during audits.

Key regulatory challenges

1. Benchmarking and comparability issues

One of the main challenges faced by distributors is identifying appropriate comparable companies. Differences in:

  • market conditions
  • geographic markets
  • product lines
  • functional profiles

can make benchmarking challenging and may affect the reliability of benchmarking results.

2. Inconsistent functional characterization

Another common issue is the mismatch between how a distributor is described in transfer pricing documentation and how it actually operates. For example, a distributor may be labeled as “limited-risk,” but in reality, performs marketing activities, manages inventory risks, or influences pricing decisions. This inconsistency may lead to challenges from tax authorities. 

3. Documentation and compliance requirements

Regulatory requirements for transfer pricing documentation continue to evolve. Distributors are now expected to maintain clear and well-supported documentation that explains:

  • their role within the group
  • the nature of their transactions
  • the basis for their pricing

Failure to do so may result in penalties, transfer pricing adjustments, or unfavorable audit outcomes.

Practical implications for distributors

The increasing focus on transfer pricing has several practical implications. Distributors must be able to:

  • clearly explain their business models and pricing policies
  • align their contracts with actual conduct
  • support their financial results with appropriate benchmarking

In addition, they should regularly review their transfer pricing positions to ensure that they remain consistent with current operations and evolving regulatory expectations.

(OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022; Revenue Regulations No. 2-2013; Revenue Memorandum Order No. 1-2019)

As regulatory scrutiny continues to intensify, transfer pricing will remain a critical area for the distributorship sector. Distributors should revisit their transfer pricing policies—not only to ensure compliance, but also to manage risk and sustain defensible positions during tax audits.