Is Glaxo A Tax Cheat?

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http://www.reuters.com/newsArticle.jhtml?type=topNews & storyID=4086133

 

UPDATE 4-Glaxo fights $5.2 billion U.S. tax claim

Wed January 07, 2004 07:55 AM ET

 

(Updates with S & P affirming ratings, paragraph 16)

By Santosh Menon and Ben Hirschler

LONDON, Jan 7 (Reuters) - GlaxoSmithKline Plc (GSK.L: Quote, Profile, Research)

, 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.

Shares in GSK -- which made a pre-tax profit of 6.52 billion pounds ($11.9

billion) in 2002 on sales of 21.21 billion -- were 1.6 percent lower at 12.39

pounds in a weaker London market by 1245 GMT.

 

PROVISIONS

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.

 

TRANSFER PRICING

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.

 

 

 

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