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GSK moves to avoid $15bn bill

Firm agrees to pay settlement to resolve 17-year transfer pricing tax dispute

GlaxoSmithKline (GSK) admitted that it was `happy to pay' $3.1bn to the US Inland Revenue Service (IRS) in order to settle 17-year long transfer pricing tax dispute. It means that the case should not end up in court, as was scheduled for February 2007, which, were it to do so, might leave the firm facing a total bill of around five times the sum.

A GSK spokeswoman told PMLive that while the firm did not at any time anticipate that payment of up to $15bn would be demanded of it, there was scope for it to have been much greater than it was ultimately.

ìWe're happy in as much as we've settled within the provisions that we made for this financial year and that's why the market has responded well,î she said.

Key reports attribute the nudge upwards of 14p by close of market on September 11 to the settlement of the feud, which stems from the first case in 1989. In early 2004, the company vowed to fight its way out of the tax battle, a stand which saw its share price slide by 2 per cent at the time. Today, GSK says that resolution was found due to the ìsize of the potential financial exposure, as well as the continued level of resource being applied to the caseî.

The dispute centred on Zantac-related tax charges. While the firm developed the gastrointestinal drug in the UK, and paid its charges accordingly, the drug was marketed and sold with significant success in the vastly larger US market. In keeping with this transatlantic operation, the US IRS declared that tax should have been paid by GSK in the US to reflect its significant activities in the marketplace.

One mechanism used by companies in the industry with integrated supply chains to stop their tax bills from escalating is to transfer profits to low-tax countries, thereby reducing activities in high-tax countries. In a case such as GSK's, where the company argued that as it had already paid UK tax it should not be made to pay US tax in addition, it is normal for the situation to be resolved through negotiation between the respective countries' tax authorities.

However, while the UK authorities supported GSK's position, there was a reported ìwide difference of viewsî between it and the IRS in America.

The GSK spokeswoman indicated to PM that ìbasically this should have been resolved between the UK and US authorities, and it is because this was not resolved that GSK looked to bring it to a close sooner rather than later, before it ended up in courtî.

The company said it hopes that its action to clear the debt will draw a line under the matter.

30th September 2008

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