GSK pays $3.1bn to settle tax dispute with IRS

A long standing tax dispute between GlaxoSmithKline plc (GSK) and the U.S. government came to an end yesterday when the British pharmaceuticals company, GSK agreed to pay US$3.1 billion (£1.7bn) to settle a tax dispute with the U.S. Internal Revenue Service (IRS).

In a separate statement on Monday the U.S. government also announced that it has resolved a dispute over transfer pricing of pharmaceutical products with GSK.

The settlement resolves all the issues which were linked with dispute in this case. The agreed total cash cost to GSK that is nearly $3.1 billion, about a fifth of the $15bn tax bill it faced, would cover federal, state and local taxes, interest and also the benefit of tax relief on the payments made.

This 17-year-tax case, which is pending in the United States Tax Court, represents the largest tax dispute in the history of the IRS, which concerned transactions of products including Zantac, GSK's gastro-intestinal drug. The settlement wraps up the dispute for the period 1989-2000, which was scheduled to go to trial in February 2007, and also covers the subsequent years 2001-2005.

Under the settlement agreement, the GSK will abandon its claim seeking a refund of 1.8 billion dollars in overpaid income taxes.

The dispute originated from transfer pricing, by which companies move profits from one country to another, taking into account where most of the development and marketing of the products took place. The U.S. IRS alleged in January 2004 that GSK booked too much of the profit from its drugs, mainly the ulcer treatment Zantac, in Britain. However, at the same time the GSK insisted that it had already paid tax on UK profits and could not reclaim any money due to the IRS from the UK's Inland Revenue.

Mark W. Everson, commissioner of Internal Revenue said, "We have consistently said that transfer pricing is one of the most significant challenges for us in the area of corporate tax administration," adding that "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."

Zantac generated US$40bn in sales over the disputed 16-year period, but sales have become gradually less since 1997 when it went off patent.

GSK said it had earlier made provision for the dispute and that the settlement would not have any significant impact on the biologicals and healthcare firm's reported earnings or tax rate.

A GSK spokeswoman said, "We're very pleased with this settlement given the risks and uncertainty of litigation. Importantly, this will have no significant impact on our earnings or tax rate as payment will be made from the reserves already provided for by the company."

Soon after the statement the shares in GSK jumped 10p to £14.79, yesterday.