Glaxo to contest $5.2bn US tax bill

Inland Revenue talks with American IRS break down after UK authority backs European drugs maker

GlaxoSmithKline, Europe's biggest drugs company, was hit with a $5.2bn (£2.9bn) tax bill yesterday from authorities in the United States in a dramatic transatlantic tax row that has dragged in the Inland Revenue, which is backing Glaxo over the dispute.

After receiving the claim on Tuesday, Glaxo immediately went on the offensive yesterday, announcing that it planned to take the American Internal Revenue Service (IRS) to court to contest the tax claim.

The UK's Inland Revenue was brought in by Glaxo late last year to help resolve the dispute, which relates to the seven years between 1989-1996. However, talks between IRS officials and the Inland Revenue collapsed after UK officials sided with the Glaxo view that no additional taxes were payable, according to the company's version of events. Neither the IRS nor the Inland Revenue would comment on the dispute, citing confidentiality rules surrounding individual tax cases.

What amounts to one of the biggest Anglo-American tax rows in history is likely to escalate as a second argument is brewing over Glaxo's US tax payments covering 1997-2000. GSK said it was expecting to receive an additional bill for this period from the IRS, although it refused to say what it expected this claim to total.

The tax claim detailed yesterday is equal to 52 per cent of Glaxo's last declared pre-tax profits of £5.5bn, after restructuring and merger costs.

The company, formed by the merger of Glaxo Wellcome and SmithKline Beecham three years ago, said it had made adequate provisions in the past for potential tax liabilities amounting to £1.45bn. However, it refused to say what proportion of this was earmarked to pay claims from the US. It also said the trial resulting from its decision to file a petition in the US tax court was not expected until sometime in 2005-2006.

The company's robust stance to the IRS claim initially reassured investors but yesterday Glaxo shares were down 27p, or 2.1 per cent, at 1,233p.

The row relates to how much tax Glaxo has paid on sales of its drugs in the US, including the ulcer treatment Zantac. The American authorities believe Glaxo has been using so called transfer pricing between its subsidiary companies to book profits made on US sales in other tax jurisdictions, including the UK, thus robbing the US Treasury of revenue.

For example, Glaxo would argue that profits from a drug developed and manufactured in Europe but then sold in the US should be taxed, at least in part, in the relevant European jurisdiction.

However, the US tax authorities are likely to argue that Glaxo should pay tax on profits from US sales in America and that its US subsidiaries have been deliberately overpaying for drugs made by sister companies in Europe. By doing this, a multinational such as Glaxo can reduce taxable profits in the US and transfer them to other jurisdictions with different tax rates. Yesterday's $5.2bn tax bill includes interest on the claim of $2.5bn. It has already paid £1.3bn in tax between 1989-1996.

Glaxo, which is headed by chief executive Jean-Pierre Garnier, said: "There continues to be a wide difference of views between GSK and the IRS. GKS considers that the additional tax claim by the IRS on Glaxo products is inconsistent with the treatment of other pharmaceutical companies, including GSK legacy company SmithKline Beecham. GSK also continues to believe that the profits reported by its US subsidiaries for the period 1989-2000, on which it has paid taxes in the US, are more than sufficient to reflect the activities of its US operations," it said.