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The pharmaceutical company will pay $3.4 billion to the IRS to settle a long-standing dispute.
Helen Shaw, CFO.com | US
September 11, 2006
GlaxoSmithKline has agreed to pay the U.S. Internal Revenue Service $3.4 billion to settle a transfer pricing dispute that stretches back to the 1980s. The IRS says the agreement is the largest tax settlement payment in the history of the agency.
Transfer pricing rules require that related parties, typically units within the same company but in different countries and tax jurisdictions, charge each other at arms' length — the going market-rate — for services they perform for one another. The requirements are intended to prevent companies from using such intra-company chargebacks to evade taxes by inflating or deflating the profits of a particular unit.
At issue was a dispute over the amount of taxes owed under the transfer pricing method by Glaxo Wellcome, which merged with SmithKline Beecham in 2000, from 1989 to 2000, and taxes of the merged company through 2005.
Under an agreement to resolve the dispute for tax years 1989 through 2005, the pharmaceutical and healthcare company will pay approximately $3.4 billion to the IRS and abandon its claim seeking a refund of $1.8 billion in overpaid income taxes. Additionally, GlaxoSmithKline and the IRS reached an agreement on transfer pricing issues that arose in the tax years from 2001 through 2005. The case was set to go to trial at the United States Tax Court in February 2007.
In a statement, GlaxoSmithKline noted, "GSK was confident of the strength of its position, but 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 pharmaceutical company had reserved funds for the tax dispute, so the settlement will not have any significant impact on the company's reported earnings or tax rate, according to GlaxoSmithKline.
Tax disputes over transfer pricing methods are increasingly at the top of the IRS's enforcement agenda. In announcing GlaxoSmithKline's settlement, Donald Korb, IRS chief counsel, noted in a statement, "Transfer pricing that allocates an appropriate return to the U.S. affiliates of multinational groups is a key focus for the IRS."