updated 9/11/2006 1:55:43 PM ET 2006-09-11T17:55:43

British drug maker GlaxoSmithKline PLC said Monday it agreed to settle its $3.4 billion “transfer pricing” tax dispute with the Internal Revenue Service.

The settlement covers the disputed taxes of Glaxo Wellcome — which merged in 2000 with SmithKline Beecham — from 1989 to 2000, and taxes of the merged company up to and including 2005. The case was due to go to trial in February.

The total cost to the company will be $3.1 billion after deducting state and local taxes and interest. As part of the settlement, GlaxoSmithKline will also abandon a claim to seek a refund of $1.8 billion in overpaid income taxes.

The IRS called the deal the largest single payment to settle a tax dispute ever.

Transfer pricing involves the pricing of products or services when they are transferred between one country and another within the same organization. The IRS and GlaxoSmithKline disagreed on taxes owed using this accounting method.

GlaxoSmithKline said the settlement will not affect earnings as funds have already been placed in reserve.

The company reported a reserve of 2.3 billion British pounds in its 2005 annual report, translating to about $4.28 billion under current exchange rates.

GlaxoSmithKline spokeswoman Patricia Seif said the reserve was set aside for taxes payable and for tax disputes, and that the company never disclosed a specific provision for the IRS settlement.

The company said it settled in the interest of shareholders because of the potential financial exposure and the level of resources being applied to the case.

American depositary shares of Glaxo SmithKline rose in afternoon trading on the New York Stock Exchange.

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