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Marshall School of Business University of Southern California Global Investors, Inc. Teaching Note 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…

Thus, on the operating income line, each subsidiary looks like it is earning a profit (see case Exhibit 5). The current measurement system provided some real advantages for GI. It ensured that the subsidiaries would look financially sound to local regulators and clients. It gave the impression to tax authorities that each subsidiary was earning a profit. And it was simple. But the current system had some drawbacks. Alistair Hoskins, CEO of the London subsidiary, was the most vocal in pressing for change. He seemed to have several concerns. He was concerned that if the London subsidiary was ever sold, it might be valued simply at a multiple of earnings or earnings before interest, tax, depreciation and amortization (EBITDA). He believed that the subsidiary generated more profit than it was given credit for. He was also concerned that GI would face serious consequences if the local regulatory authorities learned 130 © Pearson Education Limited 2007 Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition, Instructor’s Manual that the subsidiaries’ real profits were higher than were being reported. To date, GI had never had to undergo a tax audit, so the tax authorities had never detected this problem.1 The transfer pricing alternatives proposed, which are outlined in detail in the case, are

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