University of Southern California
Global Investors, Inc.
Purpose of Case
This case was written to illustrate a transfer pricing problem in a service setting, here an investment management company. The issues and solutions are not as obvious as in a manufacturing setting where one division produces parts that are transferred to another division for further processing.
The case is a disguised version of a real conflict in which emotions were running high.
The case exposes students to a broad range of issues that can be raised when negotiating transfer pricing. These include cost allocation methods, managers’ interests and perceptions, organizational roles and conflicts, taxes, …show more content…
No justification was provided for the 50% royalty rate. This measurement method would make all the subsidiaries look hugely profitable.
That, in itself, would provide some tax savings for GI because the New York tax rates were higher than those GI faced in any other tax jurisdiction.
Alternative 3—Davis’ first proposal
Jack Davis, the corporate Operations VP, rejected Hoskins’ method. He argued that to a large extent the subsidiaries were just following instructions from headquarters. And, further, many of the funds the subsidiaries were managing belonged to New York clients. He proposed instead to allocate revenues based on the origin of the clients, not the current location providing the service. This transfer pricing method would cause all the subsidiaries to report large losses on their operating income line.
Alternative 4—Hoskins’ second proposal
Hoskins then did some industry benchmarking and found that the “industry standard” was to split fee revenues equally between Client Services and Investment Management. We inquired GI management as to the rationale behind this standard, and no one could explain it to us. The primary rationale seemed to be a general recognition that both functions created value, but that it was too difficult or too costly to