GlaxoSmithKline (GSK), the UK-based pharmaceutical group, yesterday agreed to pay $3.1 billion (€2.44 billion) to settle a groundbreaking transfer pricing tax dispute with the US Internal Revenue Service (IRS).
The company's decision comes in the build-up to a trial set for February next year to consider the long-running tax feud which, combined with interest, could have levied as much as $15 billion.
Mark Atkinson, partner in charge of transfer pricing at Deloitte, the accountancy firm, said: "There will be a number of pharmaceutical companies keen to find out about the details because it will affect so many of them."
GSK never revealed precisely how much it had provisioned for the tax dispute, but its 2005 annual report showed tax credits of about $4.3 billion, much of which were from the IRS and which it will be able to use to offset the liability.
One Deutsche Bank analyst said yesterday: "Our view is neutral. This is more of a sigh of relief than anything," while adding that it would provide the pharmaceutical company with additional relief to offset pressure from generic competition in the months ahead.
News of the settlement, which was in line with market expectations, pushed up the shares modestly to close 14p higher at £14.83 yesterday.
The IRS claim centred around the tax treatment of profits and charges for Zantac, the gastro-intestinal drug that was the most important medicine for Glaxo Wellcome, a GSK forerunner company.
While the bulk of the revenues from the medicine were generated in the US, the pharma company maintained that most of the research and development and other costs for the drug had been incurred in the UK, arguing that it was justified in paying tax outside the US.
The IRS initially launched an action against Glaxo Wellcome seeking taxes for the period beginning in 1989. That action triggered lengthy discussions with the Inland Revenue in the UK, which declared itself satisfied with the company's treatment, but was eventually unable to agree on a common position with the IRS.
A series of claims was brought by the IRS for successive years, most recently last year for the period 1997-2000, and further claims could yet have been levied for the years since then.
Mr Atkinson said that the central issue was the tax assessment of the rights to market a drug compared with the value of its invention.
"There are massive amounts of tax at stake," he said.
He said that it was possible that GSK could now claim tax relief in the UK to avoid double taxation.
A GSK spokesman said that the company was "very pleased with the settlement", but did not want to speculate on any talks with the Inland Revenue.
- (Financial Times service)
