AstraZeneca agrees to pay £505m to settle 15-year tax battle

AstraZeneca settled a long-running tax dispute with Her Majesty's Revenue and Customs (HMRC) yesterday, agreeing to pay £505m to end a dispute over the pharmaceutical group's transfer-pricing policies.

The Anglo-Swedish company said that the resolution would lead to a 2-percentage-point cut in its annual UK tax bill, which allowed it to increase 2010 earnings-per-share estimates from between $5.75 and $6.15, to between $5.90 and $6.30.

The agreement resolves claims made by HMRC between 1996 and 2010, and avoids the need for the two parties to go before an independent tribunal, set for later this year, to set the size of the bill.

The charge relates to transfer pricing – the practice of transferring assets such as licences and patents to overseas subsidiaries to avoid a jurisdiction's tax regime. Pharmaceutical companies typically hold a large number of intangible assets and can benefit hugely from the practice.

The market for transfer pricing is thought to worth as much as $16bn (£10bn) a year, with governments increasingly eager to tap the market as a source of revenue. AstraZeneca will pay £350m next month, with the balance to be settled in March 2011.

The announcement yesterday sent AstraZeneca's shares up slightly.

The group also faces a number of disputes over tax issues in other countries, however. "As at 2009 year-end, AstraZeneca had balance-sheet provisions of $2.3bn to cover potential tax liabilities for transfer pricing in a number of jurisdictions," Alexandra Hauber, an analyst at JP Morgan, said.

"As a result of this UK tax settlement being lower than initially provided for, AstraZeneca will release part of its provision to 2010 earnings."

The group said yesterday that the settlement was the result of detailed negotiations, but the agreement does not put in place a framework for future years. Market analysts were unmoved by yesterday's deal, saying that any tax benefit in the longer term was likely to be very small. "From our discussions with investor relations this morning, while in theory AstraZeneca could enjoy a slightly lower tax rate than expected going forwards, at this stage they have very little visibility what this could be," said Ms Hauber.

The UK's biggest drugs group, Glaxo-SmithKline, does not have any outstanding disagreement with HMRC, having settled disputed claims two years ago. It also reached agreements with the US Inland Revenue Service in 2006.

AstraZeneca last month unveiled plans for a five-year restructuring plan as it looks to tackle the loss of patent protection on a number of its leading treatments. The group is planning to cut as many as 8,000 jobs across its worldwide operations as treatments such as the breast cancer drug Arimidex and the asthma medicine Pulmicort Respules are opened to generic competition.