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.

Karen: This is PKF Texas: Entrepreneur’s Playbook, and I’m Karen Love, Director of Practice Growth. I’m here today with Frank Landreneau, one of Houston’s go-to international tax advisors. Welcome back to the Playbook, Frank.

Frank: Well, thanks, Karen. It’s great to be here again.

Karen: In our international landscape, Frank, I’ve heard a lot about transfer pricing. Can you tell us what is that?

Frank: Yes. Simply put, transfer pricing is really the concept that related party transactions among a company group should be at fair market value.

Karen: Okay, and why is that important?

Frank: Well, because recently the IRS has reorganized themselves specifically to focus on the middle market companies, where before it was really an issue just for the big guys.

Karen: Okay. Well, say a business owner is watching this right now and they hear about transfer pricing. What should they do if they think they have an issue?

Frank: Well, one thing they can do is call us here at PKF Texas and we can review all their intercompany transactions and determine whether there’s actually any exposure that they should be aware of.

Karen: Oh, wonderful. Well, that’s a good answer. Thank you for being with us today.

Frank: Appreciate it.

Karen: Appreciate it. For more information about our international capabilities, visit pkftexas.com/internationaldesk. This has been a Thought Leader production, brought to you by the PKF Texas: Entrepreneur’s Playbook. So tune in next week for another chapter.