IRS Bills British Drug Company $2.7 Billion

Europe's largest pharmaceutical company, GlaxoSmithKline (GSK), said Wednesday that it will fight a tax bill that may total more than $5 billion.

The Internal Revenue Service (IRS) contends that Glaxo Wellcome, legacy company of GSK, owes $2.7 billion in additional taxes for the years 1989 to 1996, the company said in a statement. GSK estimates that the interest would add $2.5 billion to the bill, Reuters reported.

GSK was formed three years ago by the merger of Glaxo Wellcome and SmithKlineBeecham. The IRS, in a long-running tax dispute, said that Glaxo Wellcome owes the taxes on profits made by its U.S. units.

GSK said it considers the additional tax claim by the IRS "inconsistent with the treatment of other pharmaceutical companies, including GSK legacy company SmithKlineBeecham."

The matter was being negotiated between U.S. and U.K. tax authorities, but talks fell apart, as U.K. officials defended GSK’s claim that it did not owe extra taxes, the company said.

GSK believes that the taxes it has already paid "are more than sufficient to reflect the activities of its U.S. operations." The IRS, for its part, alleges an accounting maneuver known as "transfer pricing," in which multinational companies concentrate their profits where tax laws are favorable. The IRS contends that royalties paid by GSK’s American unit to its British parent were excessive because the company drastically overvalued the drugs' research-and-development costs in Britain, while undervaluing advertising and other marketing efforts in the U.S.

GSK, which is best known for Zantac, plans to take the case to U.S. Tax Court, but a trial is not expected until 2005 or 2006.

The tax bills may not be over, as the company may receive an additional assessment for 1997 to 2000.

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