Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Well, thank you, Jen. It’s great to be back.

Jen: I’ve heard some headlines about transfer pricing. Can you give our viewers a little bit of an overview of what that actually is?

Frank: Yes, essentially when a multinational company is organized in a number of jurisdictions. So, for example – a simple example would be a company based in the U.S. with a U.K. subsidiary. It’s common for those entities to buy and sell goods from each other or perform services on behalf of one another. And so, it really is a concept to capture the arm’s length price of those transactions as if those transactions were taking place with a third-party as opposed to related parties.

Jen: Interesting. So, now we’ve talked about tax reform in previous segments; how is tax reform affecting transfer pricing?

Frank: There were a few additions in the Tax Jobs Act – otherwise known as Tax Reform – that impacted transfer pricing. Probably the most important was expanding the definition of intangible property so that the emotional thing of intangible property as IP or intellectual property developed from R&D activities for example. But there’s also intellectual property developed from things such as goodwill, customer base or a force in play.

Jen: Interesting.

Frank: So, for example, if you have a company that is – the synergies it has with its workforce, the training, the goodwill of the company – that’s also intellectual property.

Jen: Interesting.

Frank: And they include it in that definition.

Jen: Okay, so it really expanded the scope a little bit.

Frank: That’s right.

Jen: Now, how does transfer pricing affect some of the other international things we’ve talked about in other segments?

Frank: The definition of transfer pricing and some specifics within transfer pricing didn’t change per se, but there are some concepts that we’ve talked about that really kind of play towards some of that. For example, some of the provisions we’ve talked about, like GILTI – that’s the global taxed intangible income – uses concepts in transfer pricing, such as residual or routine activities and non-routine activities to perform computations. So, there is a little bit of a linkage with some of those tax reforms along with transfer pricing.

Jen: Great, well, we’ll get you back to talk some more about some international tax matters.

Frank: Thank you. I would love to come back.

Jen: Perfect. To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.