Glaxo to Pay $3.4 Billion to Resolve U.S. Tax Dispute

The Internal Revenue Service announced Monday that it had settled a dispute with GlaxoSmithKline under which the pharmaceutical giant would pay $3.4 billion in the largest tax dispute in IRS history.

The agreement covers a “transfer pricing” dispute for the tax years 1989 to 2000. IRS had said Glaxo owed $8.3 billion for those years. The company also settles tax issues covering 2001 to 2005.

The dispute involves intercompany transactions between Glaxo and certain of its foreign affiliates relating to various Glaxo pharmaceutical products.

Under the settlement, the company also would abandon its claim seeking a refund of $1.8 billion in overpaid income taxes, the IRS said.

“We have consistently said that transfer pricing is one of the most significant challenges for us in the area of corporate tax administration,” IRS Commissioner Mark W. Everson said. “The settlement of this case is an important development and sends a strong message of our resolve to continue to deal with this issue.”

Transfer pricing describes the practice within companies for setting a price on goods, services and property when moving them among subsidiaries of a multinational company.

The IRS said transfer pricing was an accounting method requiring that related parties engage in transactions at arm’s length to ensure the proper reporting of taxable income.

At issue in the Glaxo case, the IRS said, was the level of U.S. profit reported by the company’s U.S. subsidiary after making intercompany payments that took into account product intangibles developed by and trademarks owned by the British parent.

Glaxo said in a statement that the net cash cost to the company would be about $3.1 billion, covering federal, state and local taxes, interest and the benefit of tax relief on the payments made.

Glaxo said that it had made provision for the dispute and that the settlement would not have a significant effect on the company’s reported earnings or tax rate.