On September 11, GlaxoSmithKline (NYSE: GSK) agreed to a settlement with IRS which requires GSK to pay more than $3 billion in back taxes. Yes, billion. With a b.
The IRS has been pursuing a claim with GSK since 2001 when it sent the company a bill for $8.6 billion for back taxes and interest. The tax bill was largely due to a discrepancy in transfer pricing issues for certain drugs, specifically including the ulcer and heartburn medication Zantac.
Transfer pricing refers to setting a price on goods, services, and property when moving them among subsidiaries of a multinational company. The specific transfer pricing issue at GSK was whether the profit from Zantac and other drugs should be attributed to GSK and its US subsidiaries based on sales and marketing in the US and, thus, subject to tax, or whether profit could be properly attributed to intellectual property owned by the UK parent company, as well as sales and marketing in other countries.
GSK maintains that it correctly reported income on its returns, 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.”
As part of the settlement, GSK also withdrew its $1.8 billion tax refund claim, which had previously been rejected (not surprisingly) by IRS.
If the IRS had successfully been able to prove its transfer pricing case, scheduled to go before the Tax Court in February 2007, GSK estimated that it could have been on the hook for up to $15 billion in taxes. Again, with a b.
So, the issue is resolved with GSK – for now. However, the IRS is stepping up its efforts to review transactions involving multinational tax practices that cross global borders. Translation: more to come.
