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Glaxo fights $5.2 billion U.S. tax claim

GlaxoSmithKline Plc, Europe's largest drugmaker, said on Wednesday that U.S. authorities wanted it to pay up to $5.2 billion in additional taxes and interest and the company would contest the claim.
/ Source: Reuters

GlaxoSmithKline Plc, Europe's largest drugmaker, said on Wednesday that U.S. authorities wanted it to pay up to $5.2 billion in additional taxes and interest and the company would contest the claim.

The firm, formed from the merger of Glaxo Wellcome and SmithKline Beecham three years ago, has received a tax bill for $2.7 billion, which the U.S. Internal Revenue Service (IRS) says is owed by Glaxo Wellcome for the years 1989 to 1996.

The company said it could also face interest charges of around $2.5 billion if the full claim by the IRS were successful.

The claim follows a long-running dispute over taxes on six top-selling drugs, including former blockbuster ulcer pill Zantac, which GSK had previously flagged in its annual report.

"GSK considers that the additional tax claim... is inconsistent with the treatment of other pharmaceutical companies, including GSK legacy company SmithKline Beecham," the group said in a statement.

"GSK plans to contest this claim for additional taxes by filing a petition in the U.S. Tax Court, where a trial is not expected until sometime in 2005-2006," it added.

The British-based concern said it expected to receive an additional assessment from U.S. authorities for the 1997-2000 period, as similar tax issues remained open.

Industry analysts said the relatively muted stock market reaction to news of the huge tax claim reflected the fact that the dispute -- if not the sum -- was already well known.

A GSK spokesman said the firm was not required to pay the amount immediately and pointed out that the company had been making provisions for tax liabilities during the past few years.

"We do not expect to make any additional provision for the liabilities related to this period. We believe our existing provision is sufficient," he said.

GSK's 2002 annual report revealed total provisions of 1.45 billion pounds for worldwide tax liabilities and charges but did not specify how much of this was to cover U.S. claims.

Deutsche Bank analysts played down the threat, arguing that any potential pay-out was unlikely before 2007 and pointing out that in the last dozen similar cases the company involved had settled at a sum less than the disputed amount.

Six companies settled owing nothing, four paid 25 percent and two paid 50 percent, the investment bank said.

"If they have to pay out a substantial chunk, my guess is it might slow down the share buyback programme," added Paul Diggle of Code Securities.

Standard & Poor's said its ratings and outlook on GSK would not be affected by the tax claim, given GSK's excellent liquidity and high free cash flow of about 2.0 billion pounds a year, with which it could fund liabilities.

The dispute with the IRS centres around allegations that GSK's U.S. subsidiary overpaid GSK in Europe for drugs, thereby reducing taxable profits in the United States. The practice is known as "transfer pricing" and is widely used in the drug industry, according to analysts.

Before receiving this latest notice from the IRS, GSK said it had attempted to resolve the dispute by referring it to negotiations between the U.S. and UK tax authorities.

"The company believes these discussions collapsed when the UK supported the GSK position that no additional taxes were due to the IRS," it said.

GSK has sought protection from the U.S. claims under a double-taxation agreement between London and Washington, arguing that the tax had already been paid in Britain.