IRS, Glaxo agree on big settlement

0 Comments | Deseret News (Salt Lake City), Sep 12, 2006 | by Mary Dalrymple Associated Press

WASHINGTON -- Drug giant GlaxoSmithKline agreed to pay $3.4 billion in the largest tax settlement in IRS history, resolving a dispute from the 1980s over the multinational company's U.S. profits.

The disagreement concerned how much of the profits from certain drugs, particularly the ulcer and heartburn medication Zantac, should be attributed to U.S. subsidiaries of GlaxoSmithKline PLC and, therefore, subject to tax.

GlaxoSmithKline Holdings (Americas) Inc. agreed to pay $3.4 billion to settle taxes owed from 1989 through 2005, the Internal Revenue Service said Monday. After deductions for state and local taxes, the company will pay $3.1 billion in cash. Glaxo said it had set money aside for the dispute, and the settlement will not have a significant effect on its reported earnings.

The company also said drug prices for customers will not be affected.

As part of the settlement, Glaxo abandoned its claim for a $1.8 billion tax refund. Glaxo spokeswoman Patty Seif said the IRS had rejected the company's refund claim and held that Glaxo owed $8.3 billion for taxes due from 1989 through 2000.

That case had been scheduled for trial at the U.S. Tax Court in February.

Seif said the company calculated it could have owed $14 billion to $15 billion in taxes through 2005 if the IRS had prevailed in court.

The company said it was confident of its position but that "in view of the size of the potential financial exposure, as well as the continued level of resource being applied to the case, GSK concluded that it was in the best interests of its shareholders to reach this settlement, thereby removing the costs and uncertainty of future litigation."

The IRS has been looking more closely at multinational tax practices and the complex transactions that cross borders in the globalized economy. IRS Commissioner Mark Everson this summer told a Senate committee investigating offshore tax abuses that the complexities of globalization and cross-border transactions "create opportunities for aggressive tax planning."

IRS chief counsel Donald Korb said Monday that a "key focus" for tax collectors is transfer pricing, the issue involved in the Glaxo dispute, as one area where some multinational companies could take advantage of the global economy to move some profits to a country with lower or no taxes.

Transfer pricing describes the practice within companies for setting a price on goods, services and property when moving them among subsidiaries of a multinational company.

The questions in the Glaxo case concerned how much profits should be attributed to the U.S. based on sales and marketing done in the U.S. and intellectual property owned by the British parent corporation, as well as activities in other countries.

"We have consistently said that transfer pricing is one of the most significant challenges for us in the area of corporate tax administration," Everson said. "The settlement of this case is an important development and sends a strong message of our resolve to continue to deal with this issue going forward."