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GlaxoSmithKline pays $3.1bn to settle US tax dispute

Julia Kollewe,Pharmaceuticals Correspondent
Tuesday 12 September 2006 00:36 BST
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GlaxoSmithKline has settled a long-standing tax dispute with the US government for $3.1bn (£1.7bn), about a fifth of the $15bn tax bill it faced.

Europe's largest drug maker said it was pleased with the settlement, which covers the alleged underpayment of taxes between 1989 to 2005 by Glaxo Wellcome, which later merged with SmithKline Beecham to form GSK. The case was due to go to trial next February and could have cost GSK about $1bn if it had dragged on. A decision was expected by mid-2008.

Under the agreement, the final net cash cost to GSK will be about $3.1bn, which covers back federal, state and local taxes, interest and the benefit of tax relief on the payments made.

The dispute arose from transfer pricing, by which companies move profits from one country to another, taking into account where most of the development and marketing of the products took place. The US Internal Revenue Service alleged in January 2004 that GSK booked too much of the profit from its drugs, mainly the ulcer treatment Zantac, in Britain. GSK insisted at the time that it had already paid tax on UK profits and could not reclaim any money due to the IRS from the UK's Inland Revenue. Zantac generated $40bn in sales over the disputed 16-year period, but sales have dwindled since 1997 when it went off patent.

A GSK spokeswoman said: "We're very pleased with this settlement given the risks and uncertainty of litigation. Importantly, this will have no significant impact on our earnings or tax rate as payment will be made from the reserves already provided for by the company."

The drug maker set aside £2.3bn in its last set of accounts to cover any tax liabilities.

The IRS had slapped an $8.3bn tax bill on the group for the years 1989 to 2000. Adding on the expected equivalent claims for the following five years plus interest, the total tax bill is estimated to have amounted to $15bn. That means the settlement amounts to about 20 per cent of the claim, which is average for IRS settlements.

The drug maker said it "was confident of the strength of its position, but in view of the size of the potential financial exposure, as well as the continued level of resource being applied to the case, GSK concluded that it was in the best interests of its shareholders to reach this settlement". The shares rose 10p to 1,479p yesterday.

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